Edgar Filing: CHINA MEDICINE CORP

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ____________ to ____________

Commission File Number 000-51379

CHINA MEDICINE CORPORATION

(Exact name of registrant as specified in its charter)

Nevada		51-0539830
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

2/F, Guangri Tower

No. 9 Siyounan Road, 1st Street

Yuexiu District

Guangzhou, China 510600

(Address of principal executive offices) (Zip Code)

(86-20) 8739-1718 and (86-20) 8737-8212

(Registrant 's telephone number, including area code)

Indicate by check mark whether the issuer (1) 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 ¨

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

Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 23,764,473 shares of common stock, par value $.0001 per share, were outstanding as of August 11, 2010.

TABLE OF CONTENTS

		Page

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets
	As of June 30, 2010 (Unaudited) and December 31, 2009	3

	Consolidated Statements of Income and Other Comprehensive Income (Loss)
	For the Three Months Ended June 30, 2010 and 2009 and for the Six Months Ended June 30, 2010 and 2009 (Unaudited)	4

	Consolidated Statement of Changes in Equity For the Year Ended December 31, 2009 and for the Six Months Ended June 30, 2010 and 2009 (Unaudited)	5

	Consolidated Statements of Cash Flows
	For the Six Months Ended June 30, 2010 and 2009 (Unaudited)	6

	Notes to Consolidated Financial Statements as of June 30, 2010 (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

Item 4.	Controls and Procedures.	46

PART II OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 6.	Exhibits	48

Signatures		49

Exhibits/Certifications		50

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2010		2009
	Unaudited

ASSETS

CURRENT ASSETS
Cash	$	9,004,104	$	471,769
Restricted Cash		53,889,986		1,760,400
Accounts receivable, trade, net of allowance for doubtful accounts of $157,725 and $157,083 as of June 30, 2010 and December 31, 2009, respectively		24,877,145		22,314,660
Inventories		3,883,201		2,731,097
Advances to suppliers		6,383,691		2,518,396
Other current assets		1,199,197		465,407
Total current assets		99,237,324		30,261,729

PLANT AND EQUIPMENT, NET		11,550,038		12,000,687

OTHER ASSETS
Long term prepayments		7,876,181		7,900,212
Intangible assets, net		16,479,014		16,681,854
Total other assets		24,355,195		24,582,066

Total assets	$	135,142,557	$	66,844,482

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Short term loans	$	4,873,052	$	9,506,160
Accounts payable, trade		2,523,532		1,324,269
Other payables and accrued liabilities		672,035		939,887
Customer deposits		690,122		483,358
Taxes payable		2,808,197		2,119,745
Liquidated damages payable		44,003		44,003
Total current liabilities		11,610,941		14,417,422

Fair value of warrant liabilities		634,659		6,918,068
Total liabilities		12,245,600		21,335,490

Commitments and contingencies

Redeemable convertible preferred stock, $0.0001 par value, 1,653,333 and Nil shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		49,600,000		-

SHAREHOLDERS' EQUITY
Common stock, $0.0001 par value; 90,000,000 shares authorized, 23,097,806 and 15,451,105 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		2,309		1,544
Stock Subscription		2,088,000		-
Paid-in capital		39,181,305		13,380,444
Statutory reserves		4,389,665		4,293,116
Retained earnings		22,536,568		22,875,987
Accumulated other comprehensive income		4,733,199		4,438,094
Total shareholders' equity		72,931,046		44,989,185

NONCONTROLLING INTERESTS		365,911		519,807

Total equity		73,296,957		45,508,992

Total liabilities and shareholders' equity	$	135,142,557	$	66,844,482

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	For Three Months Ended June 30,						For Six Months Ended June 30,
	2010			2009			2010			2009
REVENUES
Distribution products	$	15,153,848		$	14,553,440		$	24,708,356		$	24,199,863
Proprietary products		2,036,239			501,653			2,904,308			953,620
Medical technology		-			-			149,712			-
Total revenues		17,190,087			15,055,093			27,762,376			25,153,483

COST OF REVENUES
Distribution products		10,022,502			11,154,440			16,791,185			18,171,868
Proprietary products		1,060,143			371,426			1,616,361			672,760
Medical technology		-			-			-			-
Total cost of revenues		11,082,645			11,525,866			18,407,546			18,844,628

GROSS PROFIT		6,107,442			3,529,227			9,354,830			6,308,855

OPERATING EXPENSES
Research and development		344,517			432,764			708,924			763,506
Selling, general and administrative		1,974,259			1,318,152			3,610,912			1,999,474
Total operating expenses		2,318,776			1,750,916			4,319,836			2,762,980

INCOME FROM OPERATIONS		3,788,666			1,778,311			5,034,994			3,545,875

OTHER INCOME (EXPENSE):
Other income (expense), net		(46,257	)		(26,400	)		(166,960	)		(20,847	)
Change in fair value of warrant liabilities		1,371,780			(1,213,218	)		2,481,474			(1,971,907	)

INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS		5,114,189			538,693			7,349,508			1,553,121

PROVISION FOR INCOME TAXES		1,089,308			570,014			1,602,263			1,115,500

NET INCOME (CHINA MEDICINE CORPORATION AND NONCONTROLLING INTERESTS)		4,024,881			(31,321	)		5,747,245			437,621

Add: Net loss attributable to noncontrolling interests		78,444			73,317			153,885			154,457

NET INCOME ATTRIBUTABLE TO CHINA MEDICINE CORPORATION		4,103,325			41,996			5,901,130			592,078

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment		289,762			(277	)		295,105			(58,985	)
Foreign currency translation attributable to noncontrolling interests		15			68			(11	)		(1,065	)

COMPREHENSIVE INCOME	$	4,393,102		$	41,787		$	6,196,224		$	532,028

Less: Deemed preferred stock dividend		-			-			(6,144,000	)		-

NET INCOME (LOSS) AVAILABLE TO CHINA MEDICINE CORPORATION COMMON SHAREHOLDERS	$	4,103,325		$	41,996		$	(242,870	)	$	592,078

EARNINGS (LOSS) PER SHARE
Basic	$	0.19		$	-		$	(0.01	)	$	0.04
Diluted	$	0.10		$	-		$	(0.01	)	$	0.04

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic		21,885,645			15,231,214			20,419,738			15,228,966
Diluted		39,992,703			15,355,660			20,419,738			15,248,178

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

															Accumulated
										Retained Earnings					other
	Common Stock				Stock		Paid-in			Statutory					comprehensive			Noncontrolling
	Shares		Par Value		subscription		capital			reserves		Unrestricted			income			interests			Total

BALANCE, January 1, 2009		15,226,742	$	1,522	$	-		12,469,477		$	3,178,861	$	22,272,565		$	4,428,294		$	835,532			43,186,251

Net income (loss)													592,078						(154,457	)		437,621
Adjustment of statutory reserve																						-
Stock options exercised at $1.25		17,500		2				21,873														21,875
Stock option and warrant compensation								9,622														9,622
Foreign currency translation adjustments																(58,985	)		(1,065	)		(60,050	)

BALANCE, June 30, 2009 (Unaudited)		15,244,242		1,524		-		12,500,972			3,178,861		22,864,643			4,369,309			680,010			43,595,319

Net income (loss)													1,125,599						(161,074	)		964,525
Adjustment of statutory reserve											1,114,255		(1,114,255	)								-
Stock options exercised at $1.25		22,500		2				28,123														28,125
Warrants exercised in a cashless manner		184,363		18				729,844					-									729,862
Stock option and warrant compensation								121,505														121,505
Foreign currency translation adjustments																68,785			871			69,656

BALANCE, December 31, 2009		15,451,105		1,544		-		13,380,444			4,293,116		22,875,987			4,438,094			519,807			45,508,992

Net income (loss)													5,901,130						(153,885	)		5,747,245
Adjustment of statutory reserve											96,549		(96,549	)								-
Issuance of common stock		4,000,000		400				11,999,600														12,000,000
Redeemable convertible preferred stock - beneficial conversion feature								6,144,000														6,144,000
Redeemable convertible preferred stock - deemed dividend													(6,144,000	)								(6,144,000	)
Conversion of redeemable convertible preferred stock		2,666,667		267				7,999,733														8,000,000
Cash exercise of warrants at $2.43		440,475		44				2,095,734														2,095,778
Cashless exercise of warrants at $2.43		486,179		49				2,776,447														2,776,496
Cashless exercise of warrants at $0.85		53,380		5				(5	)													-
Stock option compensation								92,904														92,904
Stock subscription						2,088,000		(2,088,000	)													-
Financing related fees								(3,219,552	)													(3,219,552	)
Foreign currency translation adjustments																295,105			(11	)		295,094

BALANCE, June 30, 2010 (Unaudited)		23,097,806	$	2,309	$	2,088,000	$	39,181,305		$	4,389,665	$	22,536,568		$	4,733,199		$	365,911			73,296,957

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to China Medicine Corporation	$	5,901,130		$	592,078
Net loss attributable to noncontrolling interests		(153,885	)		(154,457	)
Net income		5,747,245			437,621
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization		929,154			433,934
Bad debt expense		118,848			-
Loss on sale of assets		-			27,816
Stock-based compensation		92,904			48,050
Change in fair value of warrants liabilities		(2,481,474	)		1,971,907
Change in operating assets and liabilities:
Accounts receivable, trade		(2,460,984	)		3,845,752
Inventories		(1,136,217	)		(3,288,910	)
Advances to suppliers		(3,957,879	)		(1,538,563	)
Other current assets		(729,086	)		39,706
Accounts payable, trade		1,188,906			139,758
Other payables and accrued liabilities		(269,764	)		(25,157	)
Customer deposits		203,939			157,601
Taxes payable		676,969			(717,560	)
Net cash provided by (used in) operating activities		(2,077,439	)		1,531,955

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of plant and equipment		(172,056	)		(381,321	)
Purchase of intangible assets		-			(234,512	)
Proceeds from sale of equipment		-			21,986
Advances on long-term prepayments		56,109			(1,934,767	)
Net cash used in investing activities		(115,947	)		(2,528,614	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of options and warrants		1,070,338			21,875
Repayments on short-term loans		(8,416,339	)		-
Proceeds from short-term loans		3,763,699			-
Proceeds from issuance of common stock		12,000,000			-
Proceeds from issuance of redeemable preferred stock		57,600,000			-
Payments on private placement related expenses		(3,219,552	)		-
Increase in restricted cash		(52,122,386	)		-
Net cash provided by financing activities		10,675,760			21,875

EFFECT OF EXCHANGE RATE ON CASH		49,961			(2,830	)

CHANGE IN CASH		8,532,335			(977,614	)

CASH, beginning of period		471,769			2,791,814

CASH, end of period	$	9,004,104		$	1,814,200

Supplemental disclosure of cash flows:
Cash paid interest	$	177,927		$	-
Cash paid income tax	$	742,846		$	1,092,747

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Note 1 - Organization

Principal Activities

China Medicine Corporation (“CMC” or the "Company") was incorporated on February 10, 2005. The Company, through its subsidiaries in the People’s Republic of China (“PRC” or “China”), engages in the research and development, manufacture, and wholesale distribution of prescription and over the counter medicines, traditional Chinese medicines, which are medicines derived from Chinese herbs, dietary supplements, medical instruments and the sales of medical technology in the PRC. The Company primarily operates through its wholly-owned subsidiaries, Guangzhou Konzern Medicine Co., Ltd. (“Konzern”) and Guangzhou LifeTech Pharmaceutical Co., Ltd (“LifeTech”). Both companies are organized under the laws of the PRC. All other subsidiaries are still in the development stage and either had not undertaken significant operating activities or had no activities as of June 30, 2010.

Current Development

On January 7, 2010, the Company set up Konzern Company Limited (“Konzern Ltd.”) which is 100% owned by the Company. Konzern Ltd. was established in China under PRC law. Its business license is valid for 50 years from January 7, 2010. The registered capital of Konzern Ltd. is approximately $29.3 million (RMB 200 million) of which $13.5 million has been contributed as of June 30, 2010. To fulfill the requirement of the PRC local administrative affair, the remaining capital of approximately $15.8 million has to be invested in Konzern Ltd. within 2 years after the issuance date of the business license.

As of May 12, 2010, CMC completed reorganizing its PRC subsidiaries. All PRC subsidiaries are controlled by Konzern Ltd. On May 26, 2010, Konzern Ltd. changed its registered name to Konzern Group Ltd. (“Konzern Group”).

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements of the Company reflect its subsidiaries, Konzern Group, Konzern, Konzern US Holdings (“Konzern Holding”), Konzern Biotechnology Co., Ltd. (“Konzern Bio”), LifeTech, and LifeTech Medicine Technologies Co., Ltd (“LifeTech Technology”), all of which are directly or indirectly 100% owned subsidiaries. Guangzhou Co-Win Bioengineering Co., Ltd. (“Co-Win”) is a 70% owned subsidiary of Konzern. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All material inter-company transactions and balances have been eliminated in consolidation.

While management has included all normal recurring adjustments considered necessary to give a fair presentation of the operating results for the periods, interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the 2009 annual report filed on Form 10-K.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported period. For example, management estimates the fair value of its options and warrants as well as the amount of potentially uncollectible accounts. Management believes that the estimates utilized in preparing its consolidated financial statements are reasonable and prudent. Actual results could differ from those estimates.

Cash and Cash Equivalents

For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Cash includes cash on hand and demand deposits in accounts maintained with banks in the PRC and Hong Kong.

Restricted Cash

Restricted cash represents amounts set aside by the Company in accordance with the Company’s debt agreements with a financial institution and the Stock Subscription Agreement that was completed on January 29, 2010. As part of the Company’s loan agreements with a bank, the Company is expected to maintain certain compensating cash balances at the bank’s desires. Pursuant to the Stock Subscription Agreement, the use of funds has to be approved by the board of directors and to be used on certain acquisitions and capital expenditures.

Concentrations and Risks

Financial instruments, which subject the Company to concentration of credit risk, consist of cash. The Company maintains balances at financial institutions or state-owned banks within China, Hong Kong and U.S. which, from time to time, may exceed Federal Deposit Insurance Corporation insured limits for banks that are located in the Unites States. No deposits within the PRC are covered by insurance. As of June 30, 2010 and December 31, 2009, the Company had deposits in excess of federally insured limits totaling $62,023,916 and $2,232,169, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

The Company's operations may be adversely affected by significant political, economic and social uncertainties in China. Although the Chinese government has pursued economic reform policies in the past, there is no assurance that the Chinese government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting China's political, economic and social conditions. There is also no guarantee that the Chinese government's pursuit of economic reforms will be consistent or effective.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

For the six months ended June 30, 2010, two suppliers accounted for approximately 46% of the Company’s total purchases, individually accounting for 29% and 17%, respectively. One of the suppliers accounted for 24% of accounts payable as of June 30, 2010. The other supplier accounted for 18% of advances to suppliers as of June 30, 2010. For the six months ended June 30, 2009, five suppliers accounted for approximately 54% of the Company’s total purchases. Advances to those five suppliers represent 16% of the Company’s total advances to suppliers as of June 30, 2009. There were no accounts payable due to these suppliers as of June 30, 2009.

For the three months ended June 30, 2010, one supplier accounted for approximately 51% of the Company’s total purchases. The supplier accounted for 24% of accounts payable as of June 30, 2010. For the three months ended June 30, 2009, five suppliers represented 68% of the Company’s total purchase. Advances to these five suppliers represented 16% of the Company’s total advances to suppliers. There was no accounts payable due to these suppliers as of June 30, 2009.

For the six months ended June 30, 2010, two customers accounted for approximately 39% of the Company's total sales, individually accounting for 27% and 12%, respectively. The accounts receivable balances of these customers amounted to $7,907,718, representing 32% of the total accounts receivable as of June 30, 2010. For the six months ended June 30, 2009, five customers accounted for approximately 48% of the Company’s total sales. The accounts receivable balance of those five customers amounted to $9,720,386, representing 63% of the total accounts receivable as of June 30, 2009.

For the three months ended June 30, 2010, one customer accounted for approximately 25% of the Company’s total sales. The accounts receivable balance of this customer amounted to $6,071,435, representing 24% of the total accounts receivable as of June 30, 2010. For the three months ended June 30, 2009, five customers accounted for approximately 52% of the Company’s total sales. The accounts receivable balance of those five customers amounted to $9,720,386, representing 63% of the total accounts receivable as of June 30, 2009.

Three products accounted for approximately 31% and 24% of the Company’s total sales for the six months ended June 30, 2010 and 2009, respectively, and 29% and 21% for the three months ended June 30, 2010 and 2009, respectively.

Accounts Receivable, Trade

The Company extends unsecured credit to its customers in the ordinary course of business. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to determine if the allowance for doubtful accounts is adequate. An estimate for doubtful accounts is made when collection of the full amount is no longer probable. Account balances are written off after management has exhausted all collection efforts.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average method. Management reviews inventories for obsolescence or cost in excess of net realizable value periodically and records an inventory write-down and additional cost of goods sold when the carrying value exceeds net realizable value.

Advances to Suppliers

Advances on inventory purchases are down payments or deposits for inventory purchases. The inventory is normally delivered within one to two months after the payments have been made except for vendors who have an agency relationship with the Company. This amount is refundable and bears no interest. The Company has legally binding contracts with its vendors, which require the payments to be returned to the Company when the contract ends.

Related Party Transactions

As of June 30, 2010 and December 31, 2009, receivables from related parties amounted to $181,103 and $0, respectively, and are included in other current assets. The receivables were generated from cash receiving from customers. Due to banking restriction on these customers, such collection is deposited in a key executive’s personal bank account for ordinary course of business; the bank account is controlled by the Company.

Plant and Equipment

Plant and equipment are stated at the actual cost of acquisition less accumulated depreciation. Major additions and improvements are capitalized. Expenditures for maintenance and repairs are charged to earnings as incurred. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation is provided using the straight-line method for substantially all assets with a residual value of 5% of the actual cost and estimated lives as follows:

Buildings and leasehold improvements	50 years
Leasehold improvements	5 years
Production equipment	10 -12 years
Furniture, fixtures and office equipment	5 years
Motor vehicles	5 - 10 years

A majority of the construction in progress represents costs incurred in connection with the construction of equipment for manufacturing aflatonix-detoxifizyme (“rADTZ”). No depreciation is provided for construction in progress until such time as the assets are completed and placed into service.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Long Term Prepayments

Long term prepayments mostly represent partial payments or deposits on acquiring technology and exclusive distribution rights; these payments and deposits are refundable.

Intangible Assets

Intangible assets mainly include land use rights and patents. Intangible assets are stated at cost (actual costs or estimated fair value upon acquisition), less accumulated amortization. Amortization expense is recognized on the straight-line basis over the estimated useful lives of the assets as follows:

Intangible assets		Weighted average estimated useful lives
Land use rights		41-46 years
Manufacturing patents		16 years
rADTZ patent		11 years

All land in the PRC is government owned. However, the government grants “land use rights.” Lifetech acquired land use rights in 2002 and 2007 and has the right to use the land for 50 years. The rights are amortized on a straight line basis over the weighted average useful lives.

The Company acquired manufacturing patents through the acquisition of LifeTech and LifeTech Technology. Acquired patents were measured based on their fair values. Generally, the manufacturing patents in PRC are being amortized on a straight-line basis over a period of 20 years from the application date. The weighted average remaining life of the acquired patents was 16 years on the date of the acquisition.

Beginning in 2007, the Company acquired technology to manufacture rADTZ. The major costs of intangibles includes patent and technology acquired and related final experiment costs required by the government. The Company will begin amortizing costs once manufacturing begins. In 2009, the Company made trial production to meet government requirements and is in the process of applying the government permit to allow the Company to manufacture rADTZ. The Company expects to obtain the permit in 2010.

Under the FASB’s accounting standard for goodwill and other intangible assets, all goodwill and certain intangible assets determined to have indefinite lives will not be amortized but will be tested for impairment at least annually. Intangible assets other than goodwill will be amortized over their useful lives and reviewed for impairment at least annually or more often whenever there is an indication that the carrying amount may not be recovered.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Impairment of Long-Lived Assets

Per FASB’s accounting standards, long-lived assets are analyzed for impairment. The Company tests for impairment of long-lived assets at least annually or more often whenever there is an indication that the carrying amount of the asset may not be recovered. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows generated by those assets to the assets' net carrying value. The amount of impairment loss, if any, is measured as the difference between the net book value of the assets and the estimated fair value of the related assets.

Management evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such flows of certain long-lived assets are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. As of June 30, 2010, the Company believes that there were no impairments of long-lived assets.

Fair Value of Financial Instruments

The accounting standards regarding fair value of financial instruments and related fair value measurements defines financial instruments and requires fair value disclosures of those financial instruments. The fair value measurement accounting standard defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow:

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

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

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

Determining the category into which an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates the hierarchy disclosures each quarter. Liabilities measured at fair value on a recurring basis are summarized as follows:

	Carrying Value as of June 30, 2010		Fair Value Measurements at June 30, 2010 Using Fair Value Hierarchy
	(Unaudited)		Level 1	Level 2		Level 3
Warrant liabilities	$	634,659		$	634,659

A discussion of the valuation techniques used to measure fair value for the liabilities listed above and activity for these liabilities for the six and three months ended June 30, 2010, is provided elsewhere in the footnotes.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a non-recurring basis. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. For the six and three months ended June 30, 2010, there were no impairment charges.

Redeemable Convertible Preferred Stock

In accordance with ASC 480-10-S99, the Company’s preferred stock is classified as mezzanine equity. The preferred stock holder can request redemption at the liquidation value in the event of a material adverse effect; however, such condition is not considered mandatory.

At the issuance date, the Company allocated the gross proceeds received between preferred stocks and common stocks. Based on the initial carrying value, a beneficial conversion feature in the amount of $6.1 million was recognized, which was credited to additional paid-in-capital. As preferred stocks can be converted at any time at the option of the holder and is immediately convertible, the entire beneficial conversion feature was recognized immediately as a deemed dividend to the investors of the preferred stock.

Noncontrolling Interest

Noncontrolling interest consists of the 30% interest which the Company owns in Co-Win. Effective on January 1, 2009, the Company adopted the FASB’s standard regarding noncontrolling interests in consolidated financial statements. Certain provisions of this statement are required to be adopted retrospectively for all periods presented. Such provisions include a requirement that the carrying value of noncontrolling interests (previously referred to as minority interests) be removed from the mezzanine section of the balance sheet and reclassified as equity; and consolidated net income to be recast to include net income attributable to the noncontrolling interest.

Revenue Recognition

The Company recognizes revenue when all four of the following criteria are met: (1) persuasive evidence has been received that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. The Company follows the accounting standard regarding revenue recognition which sets forth guidelines in the timing of revenue recognition based upon factors such as passage of title, installation, payments and customer acceptance. Any amounts received prior to satisfying the Company's revenue recognition criteria is recorded as deferred revenue. The Company requires its customers to deposit monies with the Company when they place an order. The Company does not pay interest on these amounts.

Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company's products that are sold in the PRC are subject to a Chinese VAT at a rate of 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished product.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Output VAT on sales and input VAT on purchases amounted to $4,702,893 and $3,069,675, respectively, for the six months ended June 30, 2010, and $4,269,713 and $3,756,118, respectively, for the six months ended June 30, 2009 and $2,931,364 and $1,860,594 for the three months ended June 30, 2010 and $2,553,286 and $1,975,868 for the three months ended June 30, 2009, respectively. Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.

Research and Development Costs

Research and development costs are expensed as incurred. The costs of material and equipment that are acquired or constructed for research and development activities, and have alternative future uses, either in research and development or sales and marketing, are classified as equipment and depreciated over their estimated useful lives.

Shipping and Handling Costs

Shipping and handling costs related to costs of goods sold are included in selling, general and administrative costs and totaled $394,513 and $312,052 for the six months ended June 30, 2010 and 2009, and totaled $255,849 and $187,973 for the three months ended June 30, 2010 and 2009.

Advertising Costs

The Company expenses the cost of advertising as incurred in selling, general and administrative costs. For the six months ended June 30, 2010 and 2009, advertising expenses amounted to $153,284 and $312,459, respectively. For the three months ended June 30, 2010 and 2009, advertising expenses amounted to $139,783 and $282,288, respectively.

Foreign Currency Translation

The reporting currency of the Company is the US dollar. The Company uses its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in the Consolidated Statements of Shareholders’ Equity. Because cash flows are also translated at average exchange rates, amounts reported on the Consolidated Statements of Cash Flows will not necessarily agree with changes in the corresponding balances on the Consolidated Balance Sheets.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Asset and liability accounts at June 30, 2010 and December 31, 2009 were translated at RMB 6.79 and RMB 6.82 to $1.00, respectively. Equity accounts were stated at their historical rate. The average exchange rates applied to income and cash flow statements for the six months ended June 30, 2010 and 2009, were RMB 6.82 to $1.00, respectively.

Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred. No material transaction gains and losses were recognized during the six months ended June 30, 2010, and 2009. Historically, the Company has not entered into any currency trading or hedging transactions, although there is no assurance that the Company will not enter into such transactions in the future.

Income Taxes

The Company records income taxes pursuant to FASB’s accounting standards for income taxes. The provision consists of the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between the income tax basis and financial reporting basis of assets and liabilities. The provision for income taxes consists of taxes currently due plus deferred taxes.

The charge for taxation is based on the results for the six months as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantially enacted as of the balance sheet date.

The deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

The deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Under FASB’s accounting standards, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the year incurred. No significant penalties or interest relating to income taxes have been incurred during the six months ended June 30, 2010 and 2009. GAAP also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Stock-Based Compensation

The Company records and reports the employee stock-based compensation in accordance with FASB’s accounting standards for share-based payments. This accounting standard requires a public entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which services are received. Stock compensation for stock granted to non-employees is determined in accordance with FASB’s accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services, as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.

Earnings Per Share

The Company reports earnings per share in accordance with FASB’s accounting standards for earnings per share, which requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share are computed by dividing net income (loss) available to common stockholders by the weighted average common shares outstanding during the period using the two-class method. Under the two-class method, net income (loss) is allocated between common stock and redeemable convertible preferred stock as it is deemed to be a participating security based on its participation rights. Diluted earnings per common share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock. Diluted loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common and potential dilutive securities outstanding during the period if the effect is dilutive. The numerator of diluted earnings per share is calculated by starting with income allocable to common stock under the two-class method and adding back income allocable to preferred stock to the extend they are dilutive.

Business Combination

Effective January 1, 2009, we account for business combinations using the acquisition method of accounting. The acquisition method requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. The provisions of the acquisition method related to income tax adjustments apply to all business combinations regardless of consummation date.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, we may be required to record assets which we do not intend to use or sell (defensive assets) and/or to value assets at fair value measures that do not reflect our intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Segment Reporting

The Company uses a “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. The Company has determined that it has two reportable segments: LifeTech and Konzern, which includes all the other subsidiaries.

Recently Issued Accounting Pronouncements

In December 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity 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. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company adopted this standard and the standard did not have material effect on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-01, Accounting for Distributions to Shareholders with Components of Stock and Cash. The amendments in this Update clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in this update are effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company adopted this standard and the standard did not have material effect on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for decreases in ownership of a subsidiary. Under this guidance, 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. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. This ASU clarifies the scope of the decrease in ownership provisions, and expands the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets. This ASU is effective beginning in the first interim or annual reporting period ending on or after December 31, 2009. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

In January 2010, FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure to include transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. Further, this update clarifies existing disclosures on level of disaggregation and disclosures about inputs and valuation techniques. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities and should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company is currently evaluating the impact of this ASU; however, the Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09. ASU 2010-09 primarily rescinds the requirement that, for listed companies, financial statements clearly disclose the date through which subsequent events have been evaluated. Subsequent events must still be evaluated through the date of financial statement issuance; however, the disclosure requirement has been removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective immediately upon issuance and was adopted in February 2010.

In April 2010, the FASB issued Accounting Standards Update 2010-13, “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in currency of a market in which a substantial porting of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the adoption of ASU 2010-17 to have a significant impact on its consolidated financial statements.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Reclassification

The Company reclassified the following items in the prior year’s consolidated statement of income and other comprehensive income to conform to the classification used in the current year: $293,370 and $147,508 for the six and three months ended June 30, 2009 were reclassified from selling, general and administrative expenses to research and development; $953,620 and $501,653 for the six and three months ended June 30, 2009 were reclassified from distribution products sales to proprietary products; and $672,760 and $371,426 for the six and three months ended June 30, 2009 were reclassified from distribution products cost of revenues to proprietary products cost of revenue.

Note 3 – Accounts Receivable

Accounts receivable consisted of the following:

	June 30, 2010			December 31, 2009
	(Unaudited)
Trade accounts receivable	$	25,034,870		$	22,471,743
Allowance for doubtful accounts		(157, 725	)		(157,083	)
Trade accounts receivable, net	$	24,877,145		$	22,314,660

	June 30, 2010		December 31, 2009
	(Unaudited)
Beginning allowance for doubtful accounts	$	157,083	$	96,609
Additions charged to bad debt expense		-		60,474
Foreign currency translation adjustments		642		-
Ending allowance for doubtful accounts	$	157,725	$	157,083

Note 4 – Inventories

Inventories consisted of the following:

	June 30, 2010		December 31, 2009
	(Unaudited)
Raw materials	$	339,656	$	328,586
Work in progress		323,551		389,346
Finished goods		3,219,994		2,013,165
Total	$	3,883,201	$	2,731,097

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Note 5 – Plant and Equipment

Plant and equipment consisted of the following:

	June 30, 2010			December 31, 2009
	(Unaudited)
Buildings and leasehold improvements	$	5,110,692		$	5,089,384
Production equipment		7,234,878			7,025,291
Furniture, fixture and office equipment		324,950			270,661
Motor vehicles		463,685			409,396
Construction in progress		2,948,357			3,051,360
Total		16,082,562			15,846,092
Less accumulated depreciation		(4,532,524	)		(3,845,405	)
Buildings and equipment, net	$	11,550,038		$	12,000,687

A majority of the construction in progress represents the costs incurred in connection with the construction of equipment for manufacturing aflatonix-detoxifizyme “rADTZ”. Management expects the equipment will be completed in 2010 and has outstanding commitments of approximately $762,000 as of June 30, 2010.

In November 2009, the Company entered into a construction design contract for expansion of LifeTech. The Company made a prepayment of $1.1million. Refer to Note 6 for further discussion.

Depreciation expense amounted to $668,618 and $433,893 for the six months ended June 30, 2010 and 2009, respectively, and $336,626 and $217,718 for the three months ended June 30, 2010 and 2009, respectively.

Note 6 – Long Term Prepayments

Long term prepayments consisted of the following:

	June 30, 2010		December 31, 2009
	(Unaudited)
Prepayment for exclusive distribution rights	$	883,800	$	880,200
Advances to suppliers		1,281,492		1,276,272
Long term deferred expense		35,720		71,150
Deposit for exclusive distribution rights		2,182,686		2,225,140
Deposit for technology know-how		2,356,800		2,347,200
Deposit for construction design project		1,135,683		1,100,250
Total long term prepayment	$	7,876,181	$	7,900,212

In 2008, the Company entered into two separate contracts to acquire distribution rights to a multivitamin pack and manufacturing of the multivitamin pack and to self-develop various types of herbal tea. The Company prepaid $880,200 for ten years of exclusive distribution rights, which will begin to be amortized once the products are ready for commercial sale. The total contractual term of the exclusive distribution rights is 15 years. As of June 30, 2010, the Company was in the process of applying for government approval. The Company also advanced the bio-technological company approximately $1.52 million as payment for future inventory purchase, of which approximately $1.28 million was included in advances to suppliers – long term as of June 30, 2010 and December 31, 2009.

Long term deferred expense represents prepayment for the research and development of rADTZ. The decrease was due to amortization over the term of the contract.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

As of June 30, 2010 and December 31, 2009, the Company had made long term deposits in the aggregate of $2,182,686 and $2,225,140, respectively to secure its position to purchase national exclusive distribution rights for various products. Deposits are refundable upon the termination or signing of the contracts.

In November 2009, the Company entered into a construction design contract for expansion of LifeTech. The Company made a prepayment of $1.1 million related to designing the plant. As of June 30, 2010, the construction had not yet commenced. The Company expects the project to be completed in the third quarter of 2011.

Note 7 – Intangible Assets

Intangible assets consisted of the following:

	June 30, 2010			December 31, 2009
	(Unaudited)
Land use rights	$	11,918,410		$	11,877,954
Patents		5,082,593			5,063,202
Total		17,001,003			16,941,156
Less: accumulated amortization		(521,989	)		(259,302	)
Intangible assets, net	$	16,479,014		$	16,681,854

Amortization expense amounted to approximately $260,536 and $41 for the six months ended June 30, 2010 and 2009, respectively, and $130,299 and $21 for the three months ended June 30, 2010 and 2009, respectively. As of June 30, 2010, future amortization expense for each of the years ending December 31, are as follows:

		2010				2011				2012				2013				2014				Thereafter
Amortization expense		$	328,546			$	657,091			$	657,091			$	657,091			$	657,091			$	13,522,104

Note 8 – Short-Term Loans

Short term loans represent amounts due to various banks and are normally due within one year. The principal is due at maturity and can be renewed with the banks. The short-term loans consisted of the following:

	June 30, 2010		December 31, 2009
	(Unaudited)
Two loans with Industrial and Commercial Bank of China due on August 13, 2010 with an annual interest rate of 5.31%, secured by the Company's properties	$	-	$	5,838,660

Four loans under a facility with Bank of China, due on December 1, 2010 with an annual interest rate of 5.31%, guaranteed and secured by Co-Win and the Company’s officers (a)		2,958,152		3,667,500

One loan with Bank of China, due on July 4, 2010 with an annual interest rate of 4.37%, secured by $2.5M of cash (b)		1,914,900		-
Total – bank loans	$	4,873,052	$	9,506,160

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

	(a)	The Chinese government refunded a partial amount of interest paid by the Company as grants. For the six months ended June 30, 2010, the Company received refunds of $6,049 which was recognized as a reduction of interest expense. The effective interest rate of these loans was 4.63% for the six months ended June 30, 2010. These loans are a credit facility in the amount of $3.7 million. The four loans would be due on August 31, 2010, September 27, 2010, October 25, 2010 and November 22, 2010, respectively.

(b)

Due to the currency exchange limitation imposed by the PRC government, the Company pledged $2.5 million funds available from the Stock Subscription Agreement to obtain the loan for working capital purpose. The $2.5 million is classified as restricted cash as of June 30, 2010 and was subsequently released.

For the six months ended June 30, 2010 and 2009, total interest expenses incurred amounted to $177,927 and $0, respectively. For the three months ended June 30, 2010 and 2009, total interest expenses incurred amounted to $83,714 and $0, respectively.

Note 9 - Taxes

The United States of America

The Company and its subsidiaries file separate income tax returns. The Company is incorporated in the U.S., and is subject to a graduated U.S. federal corporate income tax of 15% to 35% if the Company has taxable income.

PRC

The Company conducts all its operating business through its operating subsidiaries in China. The operating subsidiaries are governed by the income tax laws of the PRC and do not have any deferred tax assets or deferred tax liabilities under the income tax laws of the PRC because there are no temporary differences between financial statement carrying amounts and the tax bases of existing assets and liabilities.

The Company’s subsidiaries are governed by the Income Tax Law of the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and various local income tax laws (the Income Tax Laws). Beginning January 1, 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises (“FIEs”).

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

The key changes are:

a.	The new standard EIT rate of 25% replaced the 33% rate currently applicable to both DES and FIEs, except for High Tech companies who pay a reduced rate of 15%;

Companies established before March 16, 2007 will continue to enjoy tax holiday treatment approved by local government for a grace period of either the next 5 years or until the tax holiday term is completed, whichever is sooner. These companies will pay the standard tax rate as defined in point “a” above when the grace period expires.

The Company and its subsidiaries were established before March 16, 2007 and therefore are qualified to continue enjoying the reduced tax rate as described above.

All of the Company’s subsidiaries except for Konzern Holding are located and doing business in China. Konzern was approved as a foreign joint-venture enterprise in 2004 and as a wholly-owned foreign enterprise in 2006. All of the subsidiaries except for LifeTech were subject to an effective tax rate of 25% for the periods ended as of June 30, 2010 and 2009.

LifeTech was approved as a wholly owned foreign enterprise in 2006 and was established before March 16, 2007 and therefore was qualified to continue enjoying the reduced tax rate as described above. The exemption commences from the first profitable year. LifeTech became profitable in 2007; thus, LifeTech was exempt from corporate income tax for the years ended December 31, 2008 and 2007 and is entitled to a 50% reduction of the income tax rate of 25% (or a rate of 12.5%) from 2009 through 2011.

The estimated tax savings for the six and three months ended June 30, 2010 amounted to $61,473. The net effect on earnings per share if the income tax had been applied would decrease earnings per share from ($0.01) to ($0.01) for the six months and from $0.10 to $0.10 for the three months ended June 30, 2010. There were no tax savings for the six and three months ended June 30, 2009. The provision for income taxes consisted of the following:

	For the six months ended June 30,					For the three months ended June 30,
	2010			2009		2010			2009
	(Unaudited)					(Unaudited)
Provision for China income tax		$	1,602,263	$	1,115,500		$	1,089,308		$	570,014
Provision for local tax			-		-			-
Tax provision – PRC		$	1,602,263	$	1,115,500		$	1,089,308		$	570,014

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

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

	For the six months ended June 30,						For the three months ended June 30,
	2010			2009			2010			2009
	(Unaudited)						(Unaudited)
U.S. statutory rates		34.0	%		34.0	%		34.0	%		34.0	%
Foreign income not recognized		(34.0	)		(34.0	)		(34.0	)		(34.0	)
China tax rates		25.0			25.0			25.0			25.0
China income tax exemption		-			-			-			-
Other items		(3.2	)		46.8			(3.7	)		80.8
Effective income tax rates		21.8	%		71.8	%		21.3	%		105.8	%

The other items represent losses incurred by Chinese subsidiaries that are under development stage and have no operations currently and losses from non-Chinese entities; all were not subjected to PRC income taxes.

Taxes payable consisted of the following:

	June 30, 2010		December 31, 2009
	(Unaudited)
Income taxes payable	$	1,529,955	$	664,248
Value added tax		1,218,827		1,451,693
Other taxes		59,415		3,804

Total	$	2,808,197	$	2,119,745

The Company was incorporated in the United States and has incurred net operating losses for income tax purposes for the six months ended June 30, 2010 and 2009, respectively. The estimated net operating loss carry forwards for United States income taxes amounted to $3,248,859 and $3,532,086 as of June 30, 2010 and December 31, 2009, respectively, which may be available to reduce future years’ taxable income. These carry forwards will expire, if not utilized, from 2025 and 2030. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset benefit to reduce the asset to zero. The valuation allowance at June 30, 2010 was approximately $1,105,000. The net change in the valuation allowance for the year ended December 31, 2009 was a decrease of approximately $96,000. Management will review this valuation allowance periodically and make adjustments as warranted.

The Company has cumulative undistributed earnings of foreign subsidiaries of approximately $43.6 million as of June 30, 2010, which was included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Note 10 - Retirement Benefit Plans

Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees. The contribution is based on a percentage required by the local government and the employees' current compensation. The Company contributed $91,667 and $38,636 for the six months ended June 30, 2010 and 2009, respectively, and $42,768 and $19,887 for the three months ended June 30, 2010 and 2009.

Note 11 - Commitments and Contingencies

In 2008, the Company entered into agreements to acquire distribution rights to a multivitamin pack and manufacturing of the multivitamin pack and to self-develop various types of herbal tea. The total contractual term of the exclusive distribution rights is 15 years. The Company prepaid approximately $880,000 for ten years of exclusive distribution rights, with the remaining $440,000 to be fulfilled starting in 2019.

On January 7, 2010, the Company set up Konzern Company Limited (“Konzern Ltd.”) which is 100% owned by the Company. Konzern Ltd. was established in China under PRC law. The registered capital of Konzern Ltd. is approximately $29.3 million (RMB 200 million) of which $13.5 million has been contributed as of June 30, 2010. To fulfill the requirement of the PRC local administrative affair, the remaining capital of approximately $15.8 million has to be invested in Konzern Ltd. within 2 years after the issuance date of the business license.

The Company leases its facilities under short-term and long-term, non-cancelable operating lease agreements expiring through November 2013. The non-cancelable operating lease agreement states for various lease periods that the Company pays certain monthly operating expenses applicable to the leased premises.

The future minimum annual lease payments required are as follows:

For the year ended December 31,	Amount
2010	$	84,832
2011		82,044
2012		10,099
2013		1,264
Thereafter		-
Total	$	178,239

For the six months ended June 30, 2010 and 2009, total rental expense amounted to $85,613 and $71,788, respectively. For the three months ended June 30, 2010 and 2009, total rental expense amounted to $42,524 and $38,339, respectively.

Note 12 – Redeemable Convertible Preferred Stock

On December 31, 2009, the Company entered into a Stock Subscription Agreement for an equity private placement (the "Subscription Agreement") with an accredited investor. This agreement became effective on January 29, 2010. According to the Subscription Agreement, the investor purchased 4,000,000 shares of the Company's common stock at $3.00 per share and 1,920,000 shares of the Company's preferred stock at $30.00 per share, for an aggregate purchase price of $69.6 million, of which $57.6 million is required to be placed in escrow. Each share of Redeemable Convertible Preferred Stock is initially convertible into ten shares of common stock and is entitled to receive dividends and have voting rights based on the number of shares of common stock into which such share is convertible.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

The terms of the Subscription Agreement also required the Company to issue to the investor additional shares of Common Stock in the event the Company fails to achieve certain revenue targets in 2010 and 2011. However, the aggregate of all such issuances of additional shares will not cause the Investor’s ownership percentage to be greater than 75%.

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (“Liquidation Event”), the holders of shares of redeemable convertible stock are entitled to be paid out of the assets of the Company available for distribution ratably with holders of common stock and any class or series of stock ranking on parity on liquidation with the redeemable convertible preferred stock, after payment to the holders of any other class or series of stock ranking senior on liquidation but before any payment to the holders of any class or series of stock of the Corporation ranking junior on liquidation, an amount (the “Preference Amount”) equal to ((1.042)a * US$30) (where a is a fraction, the numerator of which is the number of days passed since the closing of the Subscription Agreement to the date of determination and the denominator of which is 365) per share of redeemable convertible preferred stock then outstanding plus any accrued but unpaid dividends thereon (whether or not declared). If upon any such Liquidation Event the remaining assets of the Corporation available for distribution are insufficient to pay the full Preference Amount, the holders of shares of redeemable convertible preferred stock and any class or series of stock ranking on parity on liquidation with the redeemable convertible preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation.

In April 2010, 266,667 shares of preferred stock were converted to 2,666,667 shares of common stock, and $8,000,000 was released from the escrow account to strengthen the working capital and to fund the LifeTech’s facility expansion plan in 2010.

Note 13 - Statutory Reserves

The laws and regulations of the PRC require that before an enterprise distributes profits to its partners, it must first satisfy all tax liabilities, provide for losses in previous years, and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserve. The statutory reserves include the surplus reserve fund and the enterprise fund and represents restricted retained earnings.

Surplus Reserve Fund

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

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

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

All of the PRC subsidiaries are subject to the statutory surplus reserve. The required reserve, 50% of the Company’s total registered capital, approximated to $23.0 million (RMB 161.7 million). As of June 30, 2010, Konzern and LifeTech had appropriated $4.3 million and $79,000, respectively, as allocations to the statutory surplus reserve. The other subsidiaries were still in the development stage and had not allocated any contribution to the statutory surplus reserve. As of June 30, 2010, the Company needs to contribute an additional $18.7 million from future earnings to the statutory reserve.

Enterprise Fund

The enterprise fund may be used to acquire plant and equipment or to increase the working capital available to spend on production and operation of the business. No minimum contribution is required and the Company did not make any contribution to this fund for the six and three months ended June 30, 2010 and 2009, respectively.

Note 14- Shareholders’ Equity

Stock-Based Compensation

In January 2006, the Company created the 2006 Long-Term Incentive Plan (“2006 Plan). This plan authorized the issuance of 1,575,000 shares of the Company’s common stock. All grants have been at prices which approximate the fair market value of the Company’s common stock at the date of grant. The contractual term is generally 5 years. On May 27, 2010, the 2006 Plan was amended where the exercise price on awards granted to newly elected independent director approximates to the greater of the fair market value on the date of grant or $3.00.

On June 2, 2009, the Company granted a total of 15,000 stock options to three of its independent directors. The options become exercisable for 7,500 shares of common stock six months from the grant date and the remaining 7,500 options, eighteen months from the grant date. The grant date fair value was $1.41 per share. On April 30, 2010, an amendment was provided to extend the exercise period for awards granted to three directors. The incremental compensation cost resulting from the modification was approximately $27,000.

On August 25, 2009, the Company granted 240,000 shares of stock options to the Company’s former chief financial officer (“CFO”). The options become exercisable for 60,000 shares of common stock one year from the grant date, and the remaining 180,000 options will become exercisable on the second anniversary of the grant date at a rate of 15,000 shares per quarter. The grant date fair value was $1.10 per share. The CFO resigned in December 2009; all 240,000 options were forfeited in accordance with the employment agreement.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

On April 30, 2010, the Company granted a total of 15,000 stock options to one of its independent directors and two of its former independent directors. The options become exercisable for 7,500 shares of common stock six months from the grant date and the remaining 7,500 options, eighteen months from the grant date. The grant date fair value was $2.40 per share.

On May 27, 2010, the Company granted a total of 150,000 stock options to three of its new independent directors. The options become exercisable for 75,000 shares of common stock six months from the grant date and the remaining 75,000 options, eighteen months from the grant date. The grate date fair value was $1.90 per share.

The fair value of the options was estimated on the date of grant using a Black-Scholes Option Pricing model using the following assumptions:

	2010			2009
Annual dividend yield		-			-
Expected life (years)		5.00			4.00 - 5.00
Risk-free interest rate		2.18% - 2.52	%		1.52% - 2.02	%
Expected volatility		87.6% - 88.0	%		88.0% - 90.0	%

The Company expensed $75,904 and $9,622 related to the stock options and warrants for the six months ended June 30, 2010 and 2009, respectively, and $72,990 and $8,373 for the three months ended June 30, 2010 and 2009, respectively.

Summary of option activity:

	Outstanding Options			Weighted Average Exercise Price		Average Remaining Contractual Term (Year)		Exercisable Options			Weighted Average Exercise Price		Intrinsic Value
12/31/2008		380,000		$	1.35				372,500		$	1.34	$	-
Granted		255,000			1.67				15,000			1.81
Exercised		(40,000	)		1.25				(40,000	)		1.25		29,825
Forfeited		(240,000	)		1.70							- -		-
12/31/2009		355,000			1.39				347,500			1.38		1,033,050
Granted		165,000			3.04				-			-		-
Exercised		-			-							-		-
Forfeited		-			-				-			-		-
6/30/2010 (unaudited)		520,000		$	1.91		2.46		347,500		$	1.38	$	372,550

Exercisable at 6/30/2010							1.24						$	371,625

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

On April 30, 2010, the Company agreed to issue to 120,000 shares of common stock to its CFO during the term of a-four-year employment agreement, which would vest in four equal installments of 30,000 shares on the date after each anniversary of the employment. The trading value of the common stock on April 30, 2010 was $3.40 per share for a total value of $408,000. These shares were not vested as of June 30, 2010. Compensation expense is recognized on a straight-line basis over the vesting period. Total compensation expense of $17,000 was charged to general and administrative expenses for the six and three months ended June 30, 2010.

Warrants

Contemporaneously with the reverse acquisition, the Company entered into a Preferred Stock Purchase Agreement (“PSPA”), dated February 8, 2006, with Barron Partners L.P., Ray and Amy Rivers, JTROS, Steve Mazur and William Denkin pursuant to which the Company issued and sold 3,120,000 shares of its Series A convertible preferred stock, a newly-created series of preferred stock, and warrants to purchase 3,694,738 shares of common stock at $1.75 per share and 3,694,738 shares of common stock at $2.50 per share. On April 23, 2007, the Company and the holders of the warrants executed a Waiver and Agreement that reduced the conversion price for the preferred stock and the exercise price of the warrants by 3% from the original conversion amounts. The warrants have a term of five years and are exercisable by the holder at any time within the term.

Effective January 1, 2009, the Company adopted the provisions of an accounting standard regarding whether an instrument (or embedded feature) is indexed to an entity’s own stock. This accounting standard specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. It provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the scope exception within the standards.

As a result of adoption, 3,348,686 warrants previously treated as equity pursuant to the derivative treatment exemption are no longer afforded equity treatment because the strike price of the warrants is denominated in US dollars, a currency other than the Company’s functional currency, the Chinese Renminbi. As a result, the warrants are not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.

These common stock purchase warrants do not trade in an active securities market, and as such, we estimate the fair value of these warrants using the Black-Scholes Option Pricing Model using the following assumptions:

	June 30, 2010			December 31, 2009
	(Unaudited)
Annual dividend yield		-			-
Expected life (years)		0.61			1.10
Risk-free interest rate		0.22	%		0.54	%
Expected volatility		61	%		95	%

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Expected volatility is based on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the warrants.

For the six months ended on June 30, 2010, several investors exercised of 440,475 Series B warrants for cash, for an aggregate price of $1,070,354. The Company valued the conversion on the exercise date and recorded an aggregate of $37,482 income from changes in fair value of warrant liabilities.

For the six months ended on June 30, 2010, several investors performed cashless exercises of 1,026,474 Series B warrants, which were converted into 486,179 shares of common stock. The Company valued the conversion on the exercise date and recorded an aggregate of $299,485 losses from changes in fair value of warrant liabilities.

For the six months ended on June 30, 2010, a vendor performed a cashless exercise of 70,000 Series C warrants, which were converted in 53,380 shares of common stock.

Summary of warrant activity:

	Outstanding			Weighted Average Exercise Price		Average Remaining Contractual Term (Years)

December 31, 2008		3,418,686		$	2.35		2.17
Granted		70,000
Exercised		(485,422	)
Forfeited		-
December 31, 2009		3,003,264		$	2.38		1.15
Granted		-
Exercised		(1,536,949	)
Forfeited		-
June 30, 2010 (Unaudited)		1,466,315		$	2.41		0.64

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

Note 15 – Earnings (Loss) Per Share

The following is a reconciliation of the basic and diluted earnings per share computations:

	For the six months ended June 30,						For the three months ended June 30,
For the six months ended	2010				2009		2010		2009
		(Unaudited)					(Unaudited)
Net income		$	5,901,130		$	592,078	$	4,103,325		$	41,996
Less: Deemed preferred stock dividend			(6,144,000	)		-		-			-
Net income (loss) available to common shareholders		$	(242,870	)	$	592,078	$	4,103,325		$	41,996

Shares of common stock and common stock equivalents:
Weighted average common shares used in basic computation			20,419,738			15,228,966		21,885,645			15,231,214
Diluted effect of convertible preferred stock, stock options and warrants			-			19,212		18,107,058			124,446
Weighted average common shares used in diluted computation			20,419,738			15,248,178		39,992,703			15,355,660

Earnings per share:
Basic		$	(0.01	)	$	0.04	$	0.19		$	0.003
Diluted		$	(0.01	)	$	0.04	$	0.10		$	0.003

For the six months ended June 30, 2010, all options and warrants outstanding were excluded from the earnings per share calculation due to net loss available to common shareholders. Therefore, there was no dilutive effect. For the six months ended June 30, 2009, 3,418,686 warrants whose exercise price was between $1.70 to $2.43 and 15,000 options whose exercise price was $3.00 were excluded from the calculation because of their anti-dilutive nature.

For the three months ended June 30, 2010, 70,000 warrants whose exercise price was $3.86 and 180,000 options whose exercise price was between $3.00 to $3.40 were excluded from the earnings per share calculation because of their anti-dilutive nature. For the three months ended June 30, 2009, 3,039,738 warrants whose exercise price was between $2.26 to $2.43 and 22,500 options whose exercise price is between $2.01 and $3.00 were excluded from the calculation because of their anti-dilutive nature.

Note 16 – Business Combination

In 2009, Konzern entered into an Equity Ownership Transfer Agreement with Sinoform Limited (“Sinoform”) to acquire 100% of Sinoform’s equity interests in LifeTech. LifeTech was founded in 1992 and is a developer and manufacturer of pharmaceutical products with a focus on vascular medicines, anti-inflammatory medicines, women’s health and other general health traditional Chinese medicines. Concurrently, Konzern entered into a separate agreement with Mcwalts Investment Holdings Limited (“Mcwalts”) to acquire 100% of Mcwalts ownership in LifeTech Technology. LifeTech Technology was in the development stage and had no operations as of December 31, 2009. LifeTech and LifeTech Technology were under common control and ownership of Mcwalts. The two acquisitions were considered as one acquisition and are referred to as the “Acquisition” below. Konzern gained control of LifeTech and LifeTech Technology on October 26, 2009.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

The purchase price of the Acquisition included cash payments of approximately $8.2 million (RMB 55,775,000). In connection with the acquisition, an independent third party appraiser which is a certified public appraiser under the laws of PRC was engaged by Konzern to perform an appraisal of certain of the assets of entities to be acquired. The assets evaluated included fixed assets (equipment and buildings) and intangible assets (land-use rights and patents). The appraiser conducted an on-site visit, inspected each item, conducted market research and investigation, followed some asset evaluation policies and regulations issued by the Chinese government, and provided an evaluation report. The Company’s management also performed an internal evaluation; taking into account of the PRC certified public appraiser’s evaluation report, to determine the fair value of these assets reported in the financial statements. Fair value of other assets acquired and liabilities assumed approximated their book value. Net assets acquired after the fair value measurement exceeded the purchase consideration. Management reviewed the procedures and methodologies used to measure the fair value of fixed assets and intangibles and determined to reduce the excess to the value of intangible assets.

The following table summarizes the net book value and the fair value of the assets acquired and liabilities assumed at the date of acquisition:

	Fair value			Book value

Cash and cash equivalent	$	165,945		$	165,945
Other current assets		2,271,310			2,271,310
Buildings and equipment		5,778,383			4,155,122
Intangible assets		15,278,544			1,474,346
Total assets		23,494,182			8,066,723
Total liabilities		(15,306,412	)		(15,306,412	)
Net Assets	$	8,187,770		$	(7,239,689	)

For the six months ended June 30, 2010, LifeTech and LifeTech Technology’s revenue and net income included in the Company’s consolidated income statement was approximately $2,843,000 and $82,000, respectively. For the three months ended June 30, 2010, LifeTech and LifeTech Technology’s revenue and net income included in the Company’s consolidated income statement was approximately $2,003,000 and $355,000, respectively.

Pro Forma

The following unaudited pro forma condensed income statement for the six and three months ended June 30, 2010 and 2009 were prepared under generally accepted accounting principles, as if the acquisition of LifeTech and LifeTech Technology had occurred the first day of the respective periods. The pro forma information may not be indicative of the results that actually would have occurred if the acquisition had been in effect from and on the date indicated.

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

	Six months ended			Three months ended
	June 30, 2009			June 30, 2009
	(Unaudited)			(Unaudited)
Sales	$	27,625,188		$	16,502,643
Cost of sales		20,054,762			12,199,972
Gross profits		7,570,426			4,302,671
Operating expenses		3,373,384			1,978,450
Income from operations	$	4,197,042		$	2,324,221
Other Income (expense) net		(1,997,818	)		(924,983	)
Income tax		(1,115,500	)		(570,014	)
Net income before noncontrolling interest	$	1,083,724		$	829,224
Net income attributable to controlling interest	$	1,238,181		$	902,541

Note 17 – Segment Information

Based on its internal reporting and management structure, the Company has determined that it has two reportable segments: LifeTech and Konzern, which includes all the other subsidiaries except LifeTech. LifeTech derives its revenue exclusively from proprietary products and Konzern derives its revenue primarily from distribution products, but it also derives its revenue from proprietary products and medical technology.

The Company evaluates segment performance and allocates resources based on segment gross profit and segment operating income. The table below illustrates analysis of reportable segments (management information):

For the six months ended June 30, 2010 (a):

	LifeTech		Konzern		Elimination			Total
	(Unaudited)
Revenues		2,843,182		24,980,919		(61,725	)		27,762,376
Gross Profit		1,240,380		8,114,450		-			9,354,830
Operating income (loss)		230,618		4,804,376		-			5,034,994
Capital expenditures		158,148		13,908		-			172,056

CHINA MEDICINE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

(Unaudited)

For the three months ended June 30, 2010 (a):

	LifeTech		Konzern		Elimination			Total
	(Unaudited)
Revenues		2,002,637		15,249,175		(61,725	)		17,190,087
Gross Profit		950,635		5,156,807		-			6,107,442
Operating income (loss)		43,188		3,745,478		-			3,778,666
Capital expenditures		96,296		11,743		-			108,039

(a)	Since the LifeTech was acquired in October 2009, there is no comparable operating information for the six and three months ended June 30, 2009.

	Total Assets
	LifeTech		Konzern		Elimination			Total
As of June 30, 2010 (Unaudited)		26,805,414		194,739,414		(86,509,193	)		135,065,635
As of December 31, 2010		25,385,141		114,721,802		(73,262,461	)		66,844,482

Note 18 – Subsequent Events

Conversion of Preferred Stock

On July 7, 2010, $2 million of the escrowed proceeds was released pursuant to the stock Subscription Agreement. On July 15, 2010, 666,667 shares of common stock were issued upon the conversion of 66,667 shares of redeemable convertible preferred stock.

Stock Repurchase Plan

On June 30, 2010, the Company's board of directors approved a stock repurchase program for up to $2.0 million. The program is valid through July 2011 and allows the Company to repurchase shares of the Company’s common stock from time to time on the open market or in privately negotiated transactions. As of August 10, 2010, the Company had repurchased 73,062 shares with the purchase cost totaling approximately $192,282.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING INFORMATION - Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") includes "forward-looking statements". All statements, other than statements of historical facts, included in this report regarding the Company's financial position, business strategy and plans and objectives of management of the Company for future operations are forward-looking statements. These forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors, many of which are outside of the Company's control, which could cause actual results to materially differ from such statements. While the Company believes that the assumptions concerning future events are reasonable, it cautions that there are inherent difficulties in predicting certain important factors, especially, the prospects for future acquisitions; the possibility that a current customer could be acquired or otherwise be affected by a future event that would diminish their medicine products requirements; the competition in the medical product market and governmental price policy on medical products and the impact of such factors on pricing, revenues and margins; and the cost of attracting and retaining highly skilled personnel.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes and the other financial information appearing in Part I, Item 1 and elsewhere in this report, and the financial statements and notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

China Medicine Corporation (“we,” “us” or the “Company”), operating through Guangzhou Konzern Medicine Co., Ltd. (“Konzern”), our wholly owned subsidiary organized under the laws of the People’s Republic of China (the “PRC” or “China”), is a distributor of approximately 1,243 pharmaceutical products in China. Through Guangzhou LifeTech Pharmaceutical Co., Ltd. (“LifeTech”), a wholly owned subsidiary of the Company, we are a manufacturer of Traditional Chinese Medicines and lyophilized powder of injection in China. Through Guangzhou Co-Win Bioengineering Co., Ltd. (“Co-Win”), a 70%-owned subsidiary of Konzern organized under the laws of PRC, the Company is a developer and manufacturer of Aflatoxin Detoxifizyme (“rADTZ”).

Our revenues are derived from three sources: the resale of pharmaceutical products and medicine devices purchased from suppliers (“distribution products”); the manufacture, distribution and sale of the Company’s products under its own brand names (“proprietary products”) and the royalty or techniques income derived from customers for research and development of new or improved drug formulas and production techniques (“medical technology”).

Our distribution products include prescription and over-the-counter drugs, Chinese herbs, Traditional Chinese Medicines (“TCM”) made from Chinese herbs, nutritional supplements, dietary supplements and medical instruments. The most significant of our distribution products is Iopamidol Injection, a prescription medicine that is used for angiography & CT scanning.

Our proprietary products consist primarily of products acquired through our acquisition of LifeTech. The most significant products include Shuangdan Capsules, a prescription Traditional Chinese Medicine that is used for the treatment of thoracic obstruction and cardialgia, and Hoerhuan Capsules, a prescription Traditional Chinese Medicine that is used to treat upper respiratory infection, acute laryngopharyngitis, acute tonsillitis and acute enterogastritis.

Our medical technology revenues typically consist of sales of technologies that are either self-developed or initially acquired in an undeveloped state from other companies and that are then sold to drug manufacturers after we have made improvements to the technologies.

Following the completion of the LifeTech acquisition in December 2009, we have transitioned from a pharmaceutical distributor to a vertically-integrated pharmaceutical enterprise that combines nationwide pharmaceutical distribution with significant research and development and manufacturing capabilities. The Company would spend more resources and effort on the LifeTech’s products in the future. The addition of LifeTech’s product portfolio has enabled us to expand our portfolio of proprietary products, which typically have higher gross margins than our distribution products. As we continue to reposition and integrate LifeTech into our operations, we expect significant gross margin improvement through the increased sale of proprietary products. We also expect further gross margin improvement by strategically focusing more on the sale of products with exclusive national and regional exclusive distribution rights and reducing our sales of lower margin generic distribution products.

During the six months ended June 30, 2010, our revenues were up approximately 10.3% as compared to the corresponding period in the prior year. Our revenues during the period in review was affected by (i) the aforementioned strategic reduction in the sale of generic distribution products; (ii) the limited production capacity of LifeTech; (iii) the re-positioning of LifeTech’s products in the market in terms of pricing and marketing strategy and (iv) the final integration of LifeTech with our existing businesses. In an effort to alleviate our manufacturing capacity constraints, the board of directors has approved the capacity expansion of LifeTech’s manufacturing facilities and construction is expected to be completed in the third quarter of 2011.

Current Group Structure

On June 30, 2010, the group structure is as follows:

Results of Operations

The following table sets forth our statements of operations for the three months and the six months ended June 30, 2010 and 2009, in U.S. dollars:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenue	$	17,190,087		$	15,055,093		$	27,762,376		$	25,153,483
Costs of goods sold		11,082,645			11,525,866			18,407,546			18,844,628
Gross profit		6,107,442			3,529,227			9,354,830			6,308,855
R&D expenses		344,517			432,764			708,924			763,506
Selling, general and administrative expenses		1,974,259			1,318,152			3,610,912			1,999,474
Income from operations		3,788,666			1,778,311			5,034,994			3,545,875
Other income (expense), net		(46,257	)		(26,400	)		(166,960	)		(20,847	)
Change in fair value of warrants liabilities		1,371,780			(1,213,218	)		2,481,474			(1,971,907	)
Income before income taxes and noncontrolling interest		5,114,189			538,693			7,349,508			1,553,121
Provision for income taxes		1,089,308			570,014			1,602,263			1,115,500
Net income (loss) before noncontrolling interest		4,024,881			(31,321	)		5,747,245			437,621
Add: net income attributable to noncontrolling interest		78,444			73,317			153,885			154,457
Consolidated net income attributable to CHINA MEDICINE CORPORATION	$	4,103,325		$	41,996		$	5,901,130		$	592,078

THE THREE MONTHS ENDED JUNE 30, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2009

Revenues

Total revenues for the three months ended June 30, 2010 was $17,190,087, an increase of $2,134,994, or 14.2%, from total revenues of $15,055,093 for the three months ended June 30, 2009.

Our revenues are derived from the sale of distribution products, proprietary products and medical technology. The following table sets forth the revenues and percentage of revenues derived from each of these types of products.

	Three Months Ended June 30,
	2010				2009				$ Increase		% Increase
Distribution products	$	15,153,848	88.2	%	$	14,553,440	96.7	%	$	600,408		4.1	%
Proprietary products		2,036,239	11.8	%		501,653	3.3	%		1,534,586		305.9	%
Medical technology		-	-			-	-			-		-
Total revenues	$	17,190,087	100.0	%	$	15,055,093	100.0	%	$	2,134,994		14.2	%

Distribution products. Distribution products revenues for the three months ended June 30, 2010 were $15,153,848, an increase of $600,408, or 4.1%, from total revenues of $14,553,440 for the three months ended June 30, 2009. The small increase was primarily due to the change of the distribution products portfolio, we focused on the high profit margin products and reduced certain low profit margin products. The most significant of these products is Iopamidol Injection, a prescription medicine that is used for angiography and CT scanning. For the three months ended June 30, 2010 and 2009, our total revenues from sale of this product amounted to $3,967,639 and $2,505,158, respectively, which were 23.1% and 16.6% of our total revenues, respectively. Our top 5 distribution products generated revenues of $7,197,200 or 41.9% of our total revenues for the three months ended June 30, 2010.

Our distribution products revenues can be further categorized as follows:

	Three Months Ended June 30,
	2010				2009

Western prescription products		10,089,061	66.6	%		8,831,869	60.7	%

Western Over-the-Counter products		1,328,984	8.8	%		1,817,777	12.5	%

TCM prescription products		1,962,024	13.0	%		1,808,275	12.4	%

TCM Over-the-Counter products		874,709	5.8	%		1,628,241	11.2	%

Other products		899,070	5.9	%		467,278	3.2	%

Total distribution products		15,153,848	100.0	%		14,553,440	100.0	%

Proprietary products. Proprietary products revenues for the three months ended June 30, 2010 were $2,036,239, an increase of $1,534,586, or 305.9%, from total revenues of $501,653 for the three months ended June 30, 2009. The increase was primarily due to the additional revenues from LifeTech’s products, and there was no comparable revenue in the corresponding period in prior year.

Our Proprietary products revenues can be further categorized as follows:

	Three Months Ended June 30,
	2010				2009

Western prescription products		96,080	4.7	%		475,108	94.7	%

Western Over-the-Counter products		-	-	%		-	-	%

TCM prescription products		1,644,093	80.7	%		2,093	0.4	%

TCM Over-the-Counter products		278,244	13.7	%		-	-	%

Other products		17,822	0.9	%		24,452	4.9	%

Total proprietary products		2,036,239	100.0	%		501,653	100.0	%

Medical technology. There was no medical technology revenue for the three months ended June 30, 2010 and 2009.

Cost of Revenues and Gross Profit

	Three Months Ended June 30
	2010			2009			$ Increase			% Increase
Distribution products
Revenues	$	15,153,848		$	14,553,440		$	600,408			4.1	%
Cost of revenues		10,022,502			11,154,440			(1,131,938	)		(10.1	)%
Gross profit	$	5,131,346		$	3,399,000		$	1,732,345			51.0	%
Gross margin %		33.9	%		23.4	%

Proprietary products
Revenues	$	2,036,239		$	501,653		$	1,534,586			305.9	%
Cost of revenues		1,060,143			371,426			688,717			185.4	%
Gross profit	$	976,096		$	130,226		$	845,870			649.5	%
Gross margin %		47.9	%		26.0	%

Total
Revenues	$	17,190,087		$	15,055,093		$	2,134,994			14.2	%
Cost of revenues		11,082,645			11,525,866			(443,221	)		(3.8	)%
Gross profit	$	6,107,442		$	3,529,227		$	2,578,215			73.1	%
Gross margin %		35.5	%		23.4	%

Gross profit for distribution products for the three months ended June 30, 2010 was $5,131,346, an increase of $1,732,345, or 51.0%, from $3,399,000 for the three months ended June 30, 2009. Our gross margin of distribution products for the three months ended June 30, 2010 was 33.9%, as compared with 23.4% for the three months ended June 30, 2009. This increase was due to the increase of the higher gross margin products.

Gross profit for proprietary products for the three months ended June 30, 2010 was $976,096, an increase of $845,870, or 649.5%, from $130,226 for the three months ended June 30, 2009. Our gross margin of proprietary products for the three months ended June 30, 2010 was 47.9%, as compared with 26.0% for the three months ended June 30, 2009. This increase was due to the revenues of the higher gross margin of LifeTech’s products.

Research and Development Expenses

Research and development expenses were $344,517 for the three months ended June 30, 2010, as compared with $432,764 for the three months ended June 30, 2009. Research and development expenses consisted primarily of the depreciation of $148,810 and $147,508 of Co-Win, for the testing and technology optimization of rADTZ for the three months ended June 30, 2010 and 2009 respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1,974,259 for the three months ended June 30, 2010, an increase of $656,107 from $1,318,152 for the three months ended June 30, 2009. The increase was mainly due to: (i) combined headcounts of LifeTech upon acquisition and hiring of new officers, (ii) allowance for the advances to a supplier of Konzern,, (iii) amortization and depreciation of LifeTech, especially revaluation upon acquisition, (iv) office fees for establishing the group, and (v) freight expenses for the sales of the goods.

Other Income (Expense), net

Other expense primarily consists of interest expense on the short-term loans, including interest expense of $77,663 for Konzern’s loans and the interest revenue of $31,215 from the escrow fund.

Due to the change in the market price of our common stock from $3.44 on March 31, 2010 to $2.42 on June, 2010, there was a fair value gain on warrant liabilities of $1,371,780 for the three month ended June 30, 2010.

Income Taxes

The provision for income taxes was $1,089,308 for the three months ended June 30, 2010, compared with $570,014 for the three months ended June 30, 2009. The income tax rate is 25% based on the tax law of PRC.

Net Income Attributable to China Medicine Corporation

Net income attributable to China Medicine Corporation for the three months ended June 30, 2010 was $4,103,325, an increase of $4,061,329, or 9,670.8% from $41,996 for the three months ended June 30, 2010. The increase was mainly due to the increase of the income from operations and the change in the fair value of warrant liabilities.

We use non-GAAP adjusted net earnings to measure the performance of our business internally by excluding non-cash charges related to the warrants. We believe that the non-GAAP adjusted financial measure allows us to focus on managing business operating performance because the measure reflects our essential operating activities and provides a consistent method of comparison to historical periods. We believe that providing the non-GAAP measures that we use internally is useful to investors for a number of reasons. The non-GAAP measure provides a consistent basis for investors to understand our financial performance in comparison to historical periods without variation of non-recurring items and non-operating related charges. In addition, it allows investors to evaluate our performance using the same methodology and information as that used by our management. Non-GAAP measures are subject to inherent limitations because they do not include all of the expenses included under GAAP and because they involve the exercise of judgment regarding which charges are excluded from the non-GAAP financial measure. However, we compensate for these limitations by providing the relevant disclosure of the items excluded.

The following table provides a non-GAAP financial measure and a reconciliation of that non-GAAP measure to the GAAP net income:

	Three Months Ended
	June 30,
	2010			2009
Net Income available to common shareholders	$	4,103,325		$	41,996
Change in fair value of warrant liabilities		(1,371,780	)		1,213,218
Adjusted Net Income	$	2,731,545		$	1,255,214

Diluted EPS	$	0.10		$	0.00
Add back (Deduct):
Change in fair value of warrant liabilities		(0.03	)		0.08
Adjusted EPS	$	0.07		$	0.08
Diluted weighted average common shares outstanding		39,992,703			15,355,660

Excluding this non-cash expenses adjusted net income of the three months ended June 30, 2010 was approximately $2.7 million, or $0.07 per fully diluted share. Earnings per share was calculated using a diluted weighted average common share count of 40.0 million shares for the three months ended June 30, 2010 and 15.4 million shares for the three months ended June 30, 2009.

THE SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2009

Revenues

Total revenues for the six months ended June 30, 2010 was $27,762,376, an increase of $2,608,893, or 10.4%, from total revenues of $25,153,483 for the six months ended June 30, 2009.

	Six months ended June 30,
	2010				2009				$ Increase		% Increase
Distribution products	$	24,708,356	89.0	%	$	24,199,863	96.2	%	$	508,493		2.1	%
Proprietary products		2,904,308	10.5	%		953,620	3.8	%		1,950,688		204.6	%
Medical technology		149,712	0.5	%		-	-	%		149,712		100.0	%
Total revenues	$	27,762,376	100.0	%	$	25,153,483	100.0	%	$	2,608,893		10.4	%

Distribution products. Distribution products revenues for the six months ended June 30, 2010 were $24,708,356, an increase of $508,493, or 2.1%, from total revenues of $24,199,863 for the six months ended June 30, 2009. The most significant of these products is Iopamidol Injection, a prescription medicine that is used for angiography and CT scanning. For the six months ended June 30, 2010 and 2009, our total revenues from sale of this product amounted to $6,758,909 and $4,193,092, respectively, which were 24.4% and 16.7% of our total revenues, respectively. Our top 5 distribution products generated revenues of $12,525,761 or 45.1% of our total revenues.

Our distribution products revenues can be further categorized as follows:

	Six Months Ended June 30,
	2010				2009

Western prescription products	$	17,744,453	71.8	%	$	13,695,554	56.6	%

Western Over-the-Counter products		1,689,196	6.8	%		2,180,711	9.0	%

TCM prescription products		2,999,286	12.1	%		4,330,201	17.9	%

TCM Over-the-Counter products		1,040,711	4.2	%		3,429,207	14.2	%

Other products		1,234,710	5.0	%		564,190	2.3	%

Total distribution products	$	24,708,356	100.0	%	$	24,199,863	100.0	%

Proprietary products. Proprietary products revenues for the six months ended June 30, 2010 were $2,904,308, an increase of $1,950,688, or 204.6%, from total revenues of $953,620 for the six months ended June 30, 2009. The increase was primarily due to the additional revenues from LifeTech’s products, and there was no comparable revenue in the corresponding period in prior year.

Our proprietary products revenues can be further categorized as follows:

	Six Months Ended June 30,
	2010				2009

Western prescription products	$	204,265	7.0	%	$	923,998	96.9	%

Western Over-the-Counter products		-	-	%		-	-	%

TCM prescription products		2,236,468	77.1	%		4,098	0.4	%

TCM Over-the-Counter products		445,643	15.3	%		-	-	%

Other products		17,932	0.6	%		25,524	2.7	%

Total Proprietary products	$	2,904,308	100.0	%	$	953,620	100.0	%

Medical technology. Medical technology revenues for the six months ended June 30, 2010 were $149,712, and there was no revenue for the six months ended June 30, 2009. The cost of developing medical technology was expensed when incurred, therefore, there was no direct cost related to such sale.

Cost of Revenues and Gross Profit

	Six months ended June 30,
	2010			2009			$ Increase			% Increase
Distribution products
Revenues	$	24,708,356		$	24,199,863		$	508,493			2.1	%
Cost of revenues		16,791,185			18,171,868			(1,380,683	)		(7.6	) %
Gross profit	$	7,917,171		$	6,027,995		$	1,889,176			31.3	%
Gross margin %		32.0	%		24.9	%

Proprietary products
Revenues	$	2,904,308		$	953,620		$	1,950,688			204.6	%
Cost of revenues		1,616,361			672,760			943,601			140.3	%
Gross profit	$	1,287,947		$	280,860		$	1,007,087			358.6	%
Gross margin %		44.3	%		29.5	%

Total
Revenues	$	27,762,376		$	25,153,483		$	2,608,893			10.4	%
Cost of revenues		18,407,546			18,844,628			(437,082	)		(2.3	) %
Gross profit	$	9,354,830		$	6,308,855		$	3,045,975			48.3	%
Gross margin %		33.7	%		25.1	%

Gross profit for distribution products for the six months ended June 30, 2010 was $7,917,171, an increase of $1,889,176, or 31.3%, from $6,027,995 for the six months ended June 30, 2009. Our gross margin of distribution products for the six months ended June 30, 2010 was 32.0%, as compared with 24.9% for the six months ended June 30, 2009. This increase was due to the increase of the higher gross margin products.

Gross profit for proprietary products for the six months ended June 30, 2010 was $1,287,947, an increase of $1,007,087, or 358.6%, from $280,860 for the six months ended June 30, 2009. Our gross margin of proprietary products for the six months ended June 30, 2010 was 44.3%, as compared with 29.5% for the six months ended June 30, 2009. This increase was due the higher gross margin of LifeTech’s products.

Research and Development Expenses

Research and development expenses were $708,924 for the six months ended June 30, 2010, as compared with $763,506 for the six months ended June 30, 2009. Research and development expenses consisted primarily of the depreciation of $295,681 and $293,370 of Co-Win, for the testing and technology optimization of rADTZ for the six months ended June 30, 2010 and 2009 respectively.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3,610,912 for the six months ended June 30, 2010, an increase of $1,611,438 from $1,999,474 for the six months ended June 30, 2009. The increase was mainly due to: (i) combined headcounts of LifeTech upon acquisition and hiring of new officers, (ii) amortization and depreciation of LifeTech, especially revaluation upon acquisition, (iii) allowance for the advances to a supplier of Konzern, (iv) office fees for establishing the group, and (v) consulting fee,.

Other Income (Expense), net

Other expense primarily consists of interest expense on the short-term loans, including interest expense of $100,442 for Konzern’s loans, and the interest expense of $87,837 for LifeTech’s loans, and the interest revenue of $31,215 from the escrow fund.

Due to the change in the market price of our common stock from $4.30 on December 31, 2009 to $2.42 on June 30, 2010, there was a fair value gain on warrant liabilities of $2,481,474 for the six month ended June 30, 2010.

Income Taxes

The provision for income taxes was $1,602,263 for the six months ended June 30, 2010, compared with $1,115,500 for the six months ended June 30, 2009. The income tax rate is 25% based on the tax law of PRC.

Net Income Attributable to China Medicine Corporation

Net income attributable to China Medicine Corporation for the six months ended June 30, 2010 was $5,901,130, an increase of $5,309,052, or 896.7% from $592,078 for the six months ended June 30, 2010. The increase was mainly due to the increase of the income from operations and the change in the fair value of warrant liabilities.

Deemed Preferred Stock Dividend

Pursuant to the Stock Subscription Agreement (“Subscription Agreement”) dated on December 31, 2009 between the Company and OEP, 1,920,000 shares of convertible preferred stock, which can be converted into 19,200,000 shares of common stock, were issued at the price of $30.00 per share on January 29, 2010, using the conversion price of our common stock on January 29, 2010 of $3.00. Using the closing price of our common stock on January 29, 2010 of $3.32, the beneficial conversion feature was accounted for at $6,144,000, and was treated as a deemed preferred stock dividend in the income statement in accordance with SAB No.98.

Net Loss Available to Common Shareholders

After the beneficial conversion feature was included, the net loss available to common shareholders was $242,870 for the six months ended June 30, 2010, compared to net income available to common shareholders of $ 532,028 for the six months ended June 30, 2009.

The following table provides a non-GAAP financial measure and a reconciliation of that non-GAAP measure to the GAAP net income:

	Six Months Ended
	June 30
	2010			2009
Net income (loss) available to common shareholders	$	(242,870	)	$	592,078
Add back (deduct):
Deemed preferred stock dividend		6,144,000
Change in fair value of warrant liabilities		(2,481,474	)		1,971,907
Adjusted net income	$	3,419,656		$	2,563,985

Diluted EPS	$	(0.01	)	$	0.04
Add back (deduct):
Deemed preferred stock dividend		0.30
Change in fair value of warrant liabilities		(0.12	)		0.13
Adjusted EPS	$	0.17		$	0.17
Diluted weighted average common shares outstanding		20,419,738			15,248,178

Excluding these non-cash expenses, adjusted net income of the six months ended June 30, 2010 was approximately $3.4 million, or $0.17 per fully diluted share. Earnings per share were calculated using a diluted weighted common share count of 20.4 million shares for the six months ended June 30, 2010 and 15.2 million shares for the six months ended June 30, 2009.

Liquidity and Capital Resources

As of June 30, 2010, we had $62.9 million in cash and cash equivalents, which included the restricted cash. We have historically funded our working capital needs from operations, advance payments from customers, bank borrowings, and capital from shareholders. Our working capital requirements are influenced by the level of our operations, seasonal factors, the progress of our contract execution, and the timing of accounts receivable collections.

Pursuant to the Subscription Agreement, on January 29, 2010, the Company completed an equity private placement with OEP, and 4,000,000 shares of the Company's common stock at $3.00 per share and 1,920,000 shares of the Company's redeemable convertible preferred stock at $30 per share, were issued for an aggregate purchase price of $69.6 million. Each share of redeemable convertible preferred stock is initially convertible into 10 shares of common stock.

At the closing, $57,600,000 of the proceeds was placed in an escrow account. In April 2010, $8,000,000 of the escrowed proceeds was released to strengthen the working capital and fund the LifeTech’s facility expansion plan. In July 2010, $2,000,000 of the escrowed proceeds was released to fund the Repurchase Plan.

Operating Activities

Net cash used in operating activities was $2,077,439 for the six months ended June 30, 2010, a decrease of $3,609,394 from net cash of $1,531,955 provided by our operations for the six months ended June 30, 2009. The decrease in net cash provided by operating activities was largely due to the increase in accounts receivable, and advances to suppliers.

As of June 30, 2010, we had working capital of $87,626,383, an increase of $71,782,076 or 453.0%, from $15,844,307 as of December 31, 2009. The increase was mainly due to the cash and the restricted cash coming from completed placement under the Subscription Agreement with OEP.

To present the results of operations exactly, the Company calculated the days sales outstanding (“DSO”), days inventory outstanding (“DIO”), days payable outstanding (“DPO”), and cash conversion cycle (“CCC”) in accordance with the definitions below: (i) the advances to suppliers and costomer deposits on June 30, 2010 and 2009, respectively, were included in the calculation of DIO, (ii) the revenues and cost of revenues in the period of annual circle were used.

For the six months ended June 30, 2010 and 2009, DSO was 134 days and 97 days, respectively, DIO was 87 days and 128 days, DPO was 20 days and 2 days, repectively, and CCC was 202 days and 223 days, respetively. Please note that the data of LifeTech wasn’t consolidated in the calculation of the aforesaid indicators for 2009.

The following table sets forth the changes in certain balance sheet items, in U.S. dollars and percentages, comparing June 30, 2010 and December 31, 2009.

Balance Sheet Caption	Change in US dollars 12/31/09 to 6/30/10		Percentage Change 12/31/09 to 6/30/10
Accounts receivable		2,460,984		11.0	%
Inventories		1,136,217		41.6	%
Advances to suppliers		3,957,879		157.2	%
Accounts payable, trade		1,188,906		89.8	%
Customer deposits		203,939		42.2	%

The changes in these balance sheet captions reflect the nature of the cash requirements of our business. Comparing June 30, 2010 and December 31, 2009, our inventories increased $1,136,217 or 41.6%.

Our accounts receivable increased $2,460,984 or 11.0% from December 31, 2009 to June 30, 2010. The increase was attributed to a change in the sales network and extending the credit period of several customers. As of June 30, 2010, our net accounts receivable totaled approximately $24,877,145.

In the course of our business, we must make significant deposits with our suppliers when we place orders. Our advances to suppliers increased $ 3,957,879 or 157.2% from December 31, 2009 to June 30, 2010. The increase was intended to obtain for the Company better purchase prices from our suppliers. As of June 30, 2010, our advance payments to our suppliers totaled approximately $6,383,691.

In addition, our customer deposits increased $203,939 or 42.2 % comparing June 30, 2010 and December 31, 2009, which reflects our strategy change on the sales policy of LifeTech’s products to obtain more market share. As of June 30, 2010, our customer deposits totaled approximately $690,122.

Investing Activities

Net cash used in investing activities was $115,947 during the six months ended June 30, 2010, an decrease of $2,412,667, from net cash $2,528,614 used by investing activities during the six months ended June 30, 2009.

Financing Activities

Net cash provided by financing activities was $10,675,760 during the six months ended June 30, 2010. Net cash provided by financing activities consisted of $69,600,000 in gross proceeds from the issuance of common stock and convertible preferred stock to OEP, $1,070,338 in proceeds from exercise of warrants and options, $8,416,339 in payments on short-term loans of LifeTech and Konzern and $3,763,699 in loan proceeds, and was offset by payments on private placement related expenses of $3,219,552 and an increase in restricted cash of $52,122,386.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies." Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Revenues Recognition

We recognize revenues when all four of the following criteria are met: (1) persuasive evidence has been received that an arrangement exists; (2) delivery of the products and/or services has occurred; (3) the selling price is fixed or determinable; and (4) collectibility is reasonably assured. We follow the provisions of the SEC’s Staff Accounting Bulleting No. 104, which sets forth guidelines for the timing of revenues recognition based upon factors such as passage of title, installation, payments and customer acceptance. Any amounts received prior to satisfying our revenues recognition criteria are recorded as deferred revenues.

Sales revenues represent the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products, which are sold exclusively in the PRC, are subject to a Chinese value-added tax at a rate of 13% to 17% of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing their finished products.

Research and Development Costs

Research and development costs are expensed as incurred. To the extent that research and development services are performed for us by third parties, these costs are expensed when the services are performed by the third party. The costs of material and equipment that are acquired or constructed for research and development activities, and have alternative future uses, either in research and development, marketing, or sales, are classified as property and equipment or depreciated over their estimated useful lives.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the amounts reported in the combined financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.

Inventories

We record reserves against our inventory in our warehouse to provide for estimated obsolete or unsalable inventory based on assumptions about future demand for our products and market conditions. If future demand and market conditions are less favorable than management's assumptions, additional reserve could be required. Likewise, favorable future demand and market conditions could positively impact future operating results if previously reserved inventory is sold.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, management concluded that our disclosure controls and procedures were not effective as of June 30, 2010, due principally to a material weakness in internal control over financial reporting because of significant deficiencies in our U.S. GAAP expertise and internal audit functions. We are working to enhance the effectiveness of our disclosure controls and procedures. We recently hired a Chief Financial Officer who has extensive experience in internal control and certain level of knowledge on U.S. GAAP reporting compliance, to take charge of the financial reporting process and training of the accounting staff. On May 27, 2010, a new Audit Committee was formed with experienced non-executive independent directors who possess extensive knowledge and experience in US GAAP, internal control, accounting, healthcare management and biochemistry. In particular, Mr. Ian Robinson, a former senior partner of Ernst & Young Hong Kong, was selected as Chairman of the Audit Committee and brings 30-years of financial and accounting experience to the Company. To enhance our financial reporting and internal control function, we recruited a senior internal audit manager in July, 2010. In addition, on July 7, 2010, the Company entered into a consultanting agreement with Ernst & Young (China) Advisory Limited for advisory services with respect to compliance with SOX 404. The project will be completed in first quarter of 2011. We expect that these enhancements, will improve the effectiveness of our disclosure controls and procedures and remediate the ineffectiveness of certain controls and procedures that existed as of June 30, 2010.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the most recent quarter of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On May 11, 2010, we issued 2,666,667 shares of common stock to OEP CHME Holdings, LLC upon the conversion of 266,666.7 shares of redeemable convertible preferred stock.

On July 15, 2010, we issued an additional 666,667 shares of common stock to OEP CHME Holdings, LLC upon the conversion of 66,666.7 shares of redeemable convertible preferred stock.

These transaction were exempt from registration pursuant to Section 3(a)(9) of the Securities Act.

The following table sets forth information regarding shares of our common stock that we repurchased during the three months ended June 30, 2010.

Issuer Purchases of Equity Securities

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April1 to April 30, 2010		—		—		—	$	N/A
May 1 to May 31, 2010		—		—		—		N/A
June 1 to June 30, 2010		—		—		—		2,000,000
Total		—		—		—		2,000,000

(1)

On June 30, 2010 our board of directors authorized the repurchase and retirement of up to $2,000,000 worth of our common stock in open market transactions or in privately negotiated transactions. No repurchases where made in the quarter ended June 30, 2010. As of August 10, 2010, 73,062 shares of common stock have been repurchased under the repurchase program.

Item 6.

Exhibits

The exhibits required by this item are set forth on the Exhibit Index attached hereto.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA MEDICINE CORPORATION

Date: August 12, 2010	By:	/s/ Senshan Yang
		Senshan Yang
		President and Chief Executive Officer (Principal Executive Officer)

Date: August 12, 2010	By:	/s/ Fred W. Cheung
		Fred W. Cheung
		Chief Financial Officer (Principal Financial Officer and Accounting officer)

Exhibit Index

Exhibit Number		Exhibit Title

31.1 *		Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 *		Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 *		Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 *		Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith