AOBI American Oriental Bioengineering Inc (CE)

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held on March 14, 2014

TO THE STOCKHOLDERS OF AMERICAN ORIENTAL BIOENGINEERING, INC:

The Special Meeting of the stockholders of American Oriental Bioengineering, Inc., a Nevada corporation (the “ Company, ” “ AOB, ” “ we, ” “ us ” or “ our ”), will be held on March 14, 2014, at 9:00 p.m. Beijing Standard Time (local time), which is equivalent to March 14, 2014, 2011 at 8:00 a.m. U.S. Eastern Standard Time (the “ Special Meeting ”), at 1 Liangshuihe First Avenue, Beijing E-Town Economic and Technology Development Area, E-Town, Beijing 100176, People’s Republic of China, for the following purpose:

The proposal to approve the Reverse Stock Split requires the vote of stockholders holding a majority of the voting power of the Company’s Common Shares. OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE REVERSE STOCK SPLIT.

The Board of Directors set February 14, 2014 as the record date (the “Record Date”) to determine those holders of common stock, par value $0.002 per share, of the Company (the “Common Stock”), and series A preferred stock, par value $0.001 per share, of the Company (the “Series A Preferred Stock”), who are entitled to notice of, and to vote at, the Special Meeting. A list of the stockholders entitled to vote at the meeting may be examined at the Company’s office at 1 Liangshuihe First Avenue, Beijing E-Town Economic and Technology Development Area, E-Town, Beijing 100176, People’s Republic of China during the 10-day period preceding the Special Meeting.

Your attention is directed to the Proxy Statement accompanying this Notice for a more complete statement of matters to be considered at the Special Meeting. Please read the attached proxy statement carefully. All stockholders are cordially invited to attend the meeting. Whether or not you expect to attend, you are respectfully requested by the Board of Directors to sign, date and return the enclosed proxy promptly, or submit your proxy by telephone or the Internet. Stockholders who execute proxies retain the right to revoke them at any time prior to the voting thereof. A return envelope is enclosed for your convenience.

On or about February 21, 2014, the Company shall mail to all stockholders of record, as of the Record Date, this Proxy Statement, proxy card and Annual Report for the Fiscal Year ended December 31, 2012 (the “Annual Report”). The Company will only deliver one Proxy Statement and Annual Report to multiple security holders sharing an address unless the Company has received contrary instructions from one or more of the security holders. Upon written or oral request, the Company will promptly deliver a separate copy of this Proxy Statement, Annual Report and any future annual reports, proxy statements and other information to any security holder at a shared address to which a single copy of this Proxy Statement and Annual Report was delivered, or deliver a single copy of this Proxy Statement, and Annual Report and any future annual reports, proxy statements and other information to any security holder or holders sharing an address to which multiple copies are now delivered. You should direct any such requests to the Company’s President at the address of the Company’s principal executive offices located at 1 Liangshuihe First Avenue, Beijing E-Town Economic and Technology Development Area, E-Town, Beijing 100176, People’s Republic of China, Telephone No. (86-10)-5982-2039.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTION DESCRIBED HEREIN, PASSED UPON THE MERITS OR FAIRNESS OF SUCH TRANSACTION OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT OR THE RELATED SCHEDULE 13E-3 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, AND IF GIVEN OR MADE, YOU SHOULD NOT RELY ON ANY SUCH INFORMATION OR REPRESENTATION AS HAVING BEEN AUTHORIZED BY THE COMPANY. ALL STOCKHOLDERS SHOULD CAREFULLY READ THIS PROXY STATEMENT AND ITS EXHIBITS IN THEIR ENTIRETY BEFORE MAKING ANY DECISION IN RESPECT OF OUR COMMON SHARES.

TABLE OF CONTENTS

EXHIBIT A: FAIRNESS OPINION OF ROTH CAPITAL PARTNERS, LLP

EXHIBIT B: DISSENTER’S RIGHTS UNDER NEVADA LAW

EXHIBIT C: MINUTES OF A MEETING OF BOARD OF DIRECTORS OF THE COMPANY

EXHIBIT D: COMPANY FINANCIAL PROJECTIONS

EXHIBIT E: PRECEDENT GOING PRIVATE ANALYSIS

EXHIBIT F: VALUATION ANALYSIS, DATED AUGUST 21, 2013

EXHIBIT G: VALUATION ANALYSIS, DATED OCTOBER 20, 2013

SUMMARY TERM SHEET

This summary term sheet highlights selected information from this Proxy Statement about the proposed Transaction. This summary term sheet may not contain all of the information that is important to you. For a more complete description of the Transaction, you should carefully read this Proxy Statement and all of its Exhibits in their entirety. For your convenience, we have directed your attention to the location in this Proxy Statement where you can find a more complete discussion of each item listed below.

As used in this Proxy Statement, “the Company,” “we,” “our” and “us” refers to American Oriental Bioengineering, Inc., and the “Transaction” refers, collectively, to the Reverse Stock Split, together with the related Cash Payment to the stockholders in lieu of the issuance of fractional shares of our Common Shares.

The Transaction is considered a “going private” transaction as defined in Rule 13e-3 promulgated under the Exchange Act, because it is intended to, and, if completed, will enable us to, terminate the registration of (or deregister) our Common Shares under Section 12(g) of the Exchange Act and suspend our duty to file periodic reports and other information with the SEC under Section 13(a) thereunder. In connection with the Transaction, we have filed with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3.

SPECIAL FACTORS

Material Terms

The Special Committee of our Board of Directors has authorized the Reverse Stock Split, in order to reduce the number of record holders of our Common Shares to fewer than 300. As a result of the Reverse Stock Split, stockholders holding fewer than 501 pre-Reverse Stock Split shares as of the effective date of the Reverse Stock Split will have no further interest in the Company, will no longer be stockholders of the Company. Stockholders holding 501 or more pre-Reverse Stock Split shares as of the effective date of the Reverse Stock Split will continue to be stockholders of the Company after the Reverse Stock Split.

In lieu of issuing any fractional shares otherwise issuable to stockholders who hold fewer than 501 pre-Reverse Stock Split shares, we will make the Cash Payment of $0.50 per pre-Reverse Stock Split share to such stockholders. Stockholders owning at least 501 pre-Reverse Stock Split shares, who after the Reverse Stock Split will continue as stockholders, but own a fractional share as the result of the Reverse Stock Split, will receive a Cash Payment based on the pre-Reverse Stock Split share equivalent of their fractional share. Although none of our officers and directors hold a number of shares evenly divisible by 501, they will not receive a Cash Payment for fractional shares and will continue to hold such fractional shares after the Transaction. All such fractional shares acquired by the Company in the Reverse Stock Split will be cancelled and returned to the status of authorized but unissued shares.

Purpose of the Transaction

The purpose of the Transaction is to reduce the number of record holders of our Common Shares to fewer than 300, thereby enabling us to deregister our Common Shares under the Exchange Act and suspend our duty to file periodic reports and other information with the SEC thereunder. This will enable us to terminate the Company’s status as a public reporting company with the SEC and reduce the financial and administrative costs incurred with respect to such status. The Transaction is an isolated transaction and is not pursuant to a plan to periodically increase a stockholder’s proportionate interest in our assets or earnings and profits.

In determining whether the number of our stockholders of record falls below 300 as a result of the Reverse Stock Split, we must count stockholders of record in accordance with Rule 12g5-1 under the Exchange Act. Rule 12g5-1 provides, with certain exceptions, that in determining whether issuers, including the Company, are subject to the registration provisions of the Exchange Act, securities are considered to be “held of record” by each person who is identified as the owner of such securities on the respective records of security holders maintained by or on behalf of the issuers.

As a result of the Reverse Stock Split, we anticipate that the number of shares of our Common Shares issued and outstanding will be reduced from 36,568,669 (the number outstanding as of February 14 , 2014) to approximately 58,007. After completion of the proposed acquisition of fractional shares, we anticipate that: (i) the total number of record holders of our Common Shares , which number includes those brokers who hold shares on behalf of beneficial holders, will be reduced from approximately 359 to 111; and(ii) the total number of holders holding our Common Shares in street name will be reduced from approximately 16,140 to 3,528.

The cash-out of fractional stockholder interests represents the anticipated cancellation of 7,507,160 pre-Reverse Stock Split shares, or approximately 20.5% of our outstanding pre-Reverse Stock Split shares.

We estimate that the total cash to be paid to stockholders will be approximately $3.7 million. In addition, the expenses incurred to effect the Transaction are estimated to be approximately $400,000. The cash to be paid to stockholders and for expenses are expected to be paid out of our currently available cash. The fractional shares acquired in the Transaction will be cancelled and returned to the status of authorized but unissued shares of our Common Shares.

Upon the filing of the Form 15, our obligation to file periodic reports under the Exchange Act will be immediately suspended. Deregistration of our Common Shares will be effective 90 days after filing of the Form 15. Upon deregistration of our Common Shares, our obligation to comply with the requirements of the proxy rules and to file proxy statements under Section 14 of the Exchange Act will also be terminated. We will not be required to file periodic reports with the SEC in the future unless we subsequently file a registration statement under the Securities Act of 1933, as amended or again have record holders of our Common Shares in excess of 300 on the first day of a subsequent fiscal year.

Background of the Transaction

We have been a publicly reporting company since 2000. As a public reporting company, we expected to be able to leverage our public company equity to raise capital and pursue acquisitions to help grow our business and expand our operations; however, in recent years, we have been unable to raise significant capital and have derived only minimal benefits from being a public reporting company. In addition, as a result of the delisting of our Common Shares from the NYSE in May 2012, we have been quoted in the Over-the-Counter Market on the Pink Sheets resulting in low trading volume of our Common Shares and our low market capitalization have reduced the traditional liquidity benefits of being a public reporting company to our stockholders. Our Common Shares have failed to attract significant interest from institutional investors or market analysts, which could have created a more active and liquid market for our Common Shares. We do not presently intend to raise capital through sales of our securities in a public offering or to acquire other businesses or entities using our securities as consideration.

As a result of the foregoing, we are not likely to make use of the advantages for raising capital, effecting acquisitions or other purposes that our status as a public reporting company may offer.

In July 2013, we began evaluating the advantages and disadvantages of being a public reporting company, including the costs with respect to filing reports and other information with the SEC, complying with certain of the rules and regulations under the Sarbanes-Oxley Act of 2002, and complying with applicable corporate governance requirements. We began to consider various alternatives to pursue that may enable us to continue to remain as a publicly listed company, but that would provide capital for us to continue operating our business. Prior to this time, there had been no contacts, meetings or negotiations undertaken by the Board regarding a going private transaction. At a meeting of the Board of Directors on July 17, 2013, at which all of the Company directors and legal counsel for the Company attended via teleconference. Mr. Liu and Ms. Li discussed the Company’s current operational status and situation and what had been the source of the challenges the Company was facing and the impact those challenges had on the Company. They explained that due to the China Medicare Reform, retail prices for Essential Drugs have been reduced a number of times over the last few years, to the point of approaching manufacturing costs. The Company has a large portfolio of drugs that are included in the National Essential Drug List, so it has been very difficult to generate profit from Essential Drugs without scales of economy. In addition, the price of raw material (herbs) for Traditional Chinese Medicine has been increasing, as well as the labor cost. As a result, profit margins have been reduced. Finally, in order to be in compliance with the SDFA's new Good Manufacturing Practices standard, the Company has been upgrading its facilities, which requires significant capital investment. These upgrades have contributed to a decrease in revenue due to a reduction in production, and in some cases a halt in production, to accommodate the work being performed. Ms. Li discussed preliminary options that the Board could consider, such as selling the Company’s assets, soliciting strategic investors to leverage the Company’s assets by forming a joint venture or going private. It was decided that a valuation analysis would be helpful in determining the best course of action. The independent directors were tasked to seek a third party professional valuation of the Company’s assets. Subsequent to the July Board meeting, Mr. Liu and Ms. Li had discussions via telephone with the Company’s legal counsel, about the process and timeline in the event the Board decided the Company should go private.The independent directors entered into an engagement agreement with Roth on July 17, 2013, pursuant to which Roth would provide a fairness opinion. After discussion with Roth, in August 2013, our independent directors amended its engagement with Roth to include a valuation analysis of the Company. The purpose of the valuation analysis was for the Board to use the information to assist it in determining if there were other viable strategic alternatives other than going private. Although Roth provided the valuation analysis, Roth was not retained for the purpose of proposing alternative transactions and did not propose or provide advice or information with respect to any other alternatives. At a Board meeting held via teleconference on August 19, 2013 at which the Company’s legal counsel attended, Mr. Liu described the continuing financial and business challenges of the Company. Ms. Li advised that the Company had tried to sell assets and solicit strategic investors, or sell the company, but there had been no offers due to the current operational status of the Company, so those options did not materialize. As a result the Board determine to further pursue the options of effecting a reverse split of the Company’s Common Shares.

Reasons for the Transaction

Although we have been a public reporting company since 2000, we believe that now we can derive only minimal benefits from being a public reporting company. Benefits of being a public reporting company (“Public Company Benefits”) typically include:

Our Common Shares were delisted from the NYSE in May 2012, and since then have been quoted in the Over-the-Counter Market on the Pink Sheets. Even prior to our delisting our Common Shares had failed to attract significant interest from institutional investors or market analysts. This has resulted in a relatively low trading volume and market capitalization, which has limited the liquidity benefit to our stockholders. In addition, the legal requirements of public reporting companies create large administrative and financial costs for us. As a small company with limited managerial resources, we believe that these financial resources and this time could more effectively be devoted to other purposes. We considered de-registering since the delisting of our Common Shares from the NYSE. However, for a period of time, due to the change in auditors and the minimal support staff in our financial and accounting department, we were not current with our periodic report filings. As of August 2013 we were current in all of our required filings at the time, which is why we determined it was the best time to undertake the Reverse Stock Split.

Our Board of Directors believes that consummating a “going private” transaction is a necessary step to reduce corporate overhead costs by eliminating the costs associated with being a public reporting company, including with respect to filing reports with the SEC, complying with certain of the rules and regulations under the Sarbanes-Oxley Act of 2002, and complying with applicable corporate governance requirements. Furthermore, our Board of Directors has determined that the costs of being a public reporting company currently outweigh the Public Company Benefits and, thus, that it is no longer in the best interests of the Company or its stockholders, creditors, or other stakeholders, including unaffiliated stockholders, for the Company to remain a public reporting company, for the reasons described below. The primary purpose of the Transaction is to reduce the number of record holders of our Common Shares to fewer than 300 to enable us to elect to deregister our Common shares under the Exchange Act and suspend our duty to file periodic reports and other information with the SEC thereunder. The Board believes that the Transaction provides the most certainty for the Company to achieve this purpose.

While we presently have no specific plans to do so, we may, periodically, send stockholders financial and/or other information. We anticipate that our consolidated financial statements will be subject to audit only to the extent required by applicable law and covenants in any credit or financing agreement which we may enter. We expect that, in connection with any pending litigation, contractual, regulatory and general business issues, we will, from time to time, engage and confer with outside counsel, as needed.

In addition, the Board of Directors believes that the Transaction and subsequent deregistration of our Common Shares and the suspension of our duty to file periodic reports and other information with the SEC, will allow our management and employees to devote more time and effort to improving our operations.

Other Public Company Benefits which exist for the benefit of public stockholders include: (i) the rights and protections afforded stockholders by the federal securities laws; (ii) the substantive requirements of the federal securities laws, including the Sarbanes-Oxley Act of 2002, which are imposed on public companies; and (iii) limitations and reporting requirements imposed on officers and directors of public companies, including restrictions on short-swing trading and the reporting obligations of officers and directors. These benefits were not considered to outweigh the Public Company Costs due to the small size of the Company, its limited staffing and the lack of a liquid trading market for our Common Shares. Accordingly, our Board of Directors has determined that the Public Company Costs, currently and in the foreseeable future, will continue to outweigh the Public Company Benefits and, thus, it is no longer in the best interests of the Company or its stockholders, creditors, or other stakeholders, including its unaffiliated stockholders, for the Company to remain a public reporting company.

Effects of the Transaction

Effects of the Transaction on our Unaffiliated Stockholders. Based on information available to us, we estimate that the Transaction will reduce the total number of record holders of our Common Shares from approximately 359 to approximately 111. The reduction in the number of our record stockholders below 300 will enable us to deregister our Common Shares under the Exchange Act and suspend our duty to file periodic reports and other information with the SEC thereunder, which will substantially reduce the information required to be furnished by us to the public, including our stockholders.

We intend to apply for deregistration of our Common Shares and suspension of our duty to file periodic reports and other information as soon as practicable following completion of the Transaction. See “Special Factors - Purpose of the Transaction.” However, the Special Committee reserves the right, in its discretion, to abandon, postpone or modify the Transaction prior to the effective date of the Reverse Stock Split if it determines that doing so is in our best interests and the best interests of our stockholders. See “Special Factors - Structure of the Transaction - Reservation” beginning on page 29.

The Reverse Stock Split will apply to all stockholders the same, whether or not they are unaffiliated, because the ratio will be the same for all stockholders. There is no class of stockholder of common stock who will not be impacted by the split. However, only unaffiliated stockholders with fractional shares will receive a Cash Payment. Although none of our officers and directors own a number of shares evenly divisible by 501, so that they will all own fractional shares after the Reverse Stock Split, none of these affiliates will receive the Cash Payment. Upon the consummation of the Transaction, they will continue to hold fractional shares. The Board and the Special Committee did not believe that it would be in the best interests of the unaffiliated stockholders for affiliates to receive the Cash Payment, given the Company’s limited cash position Instead, funds that would have been used to pay the Cash Payment for affiliate fractional shares, will be available for the Cash Payment to unaffiliated holders. The Special Committee and the Board believed that under these circumstances, the decision not to make Cash Payments to affiliated stockholders was fair to unaffiliated stockholders. 

Depending upon the number of shares held by an unaffiliated stockholder, they may or may not remain as a stockholder of the Company after the Transaction is completed. Only those unaffiliated stockholders who have fewer than 501 shares will no longer be stockholders of the Company. Any unaffiliated stockholder who owns more than 501 shares will continue as a stockholder of the Company after the Transaction. We believe that the Transaction is fair to the unaffiliated stockholders who will remain as stockholders of the Company after the Transaction. We believe the Transaction is fair because all unaffiliated holders’ shares will be impacted the same by the Reverse Stock Split and all unaffiliated holders who have fractional shares as a result of the Reverse Stock Split will receive the Cash Payment. Those unaffiliated stockholders who own more than 501 shares have the ability to sell their shares in advance of the Transaction to reduce their holdings below 501 if they don’t wish to remain as stockholders. Ultimately, this is fair because the Company does not have the funds necessary to effect a reverse split that would allow all unaffiliated stockholders to no longer be holders of the Company after the Transaction. The Company has offered a solution that allows all unaffiliated stockholders the ability to partake in the Reverse Stock Split and receive the Cash Payment. Those stockholders who remain will have the benefit of potential future growth of the Company’s business once it’s able to reduce its costs associated with being public and focus solely on building the business.

When the Transaction is consummated, unaffiliated stockholders owning fewer than 501 pre-Reverse Stock Split shares will no longer have any equity interest and will not participate in our future earnings or any increases in the value of our assets or operations. Such unaffiliated stockholders owning fewer than 501 pre-Reverse Stock Split shares will, following the Transaction, have their pre-Reverse Stock Split shares cancelled and converted into the right to receive the Cash Payment. As soon as practicable after the effective date of the Reverse Stock Split, we will send these unaffiliated stockholders a letter of transmittal with instructions as to how such stockholders will be paid the Cash Payment. The letter of transmittal will include instructions on how to surrender stock certificates to our exchange agent.

If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the beneficial owner of shares held in “street name” with respect to those shares. Your broker or other nominee is considered, with respect to those shares, the stockholder of record. Although the Transaction is designed to reduce the number of stockholders of record, we intend to treat stockholders holding Common Shares in street name held through a broker or other nominee in the same manner as stockholders whose shares are registered in their names for purposes of the Transaction. Nominees will be instructed to effect the Transaction for their beneficial owners. However, nominees may have different administrative procedures with respect to how they communicate with beneficial owners, and stockholders owning shares in street name should contact their nominee(s).

Effects of the Transaction on our Affiliates. As of February 12 , 2014, our officers and directors held an aggregate of 8,352,073 shares of our Common Shares and vested options for 439,469 shares of our Common Shares. All of our affiliates own more than 501 shares of our Common Shares and, therefore, will continue to hold our Common Shares after the Transaction. Although none of our officers and directors hold a number of shares evenly divisible by 501, they will not receive a Cash Payment for fractional shares and will continue to hold such fractional shares after the Transaction. Additionally, none of our officers and directors will continue to be subject to the reporting requirements of Section 16 of the Exchange Act or be subject to the short-swing profit recapture provisions thereunder. Stockholders acquiring more than 5% of our common shares will no longer be required to report their beneficial ownership under the Exchange Act. The beneficial ownership percentage and the reduction in the number of Common Shares outstanding following the Transaction may increase or decrease depending on purchases, sales, and other transfers of Common Shares by our stockholders prior to the effective time of the Reverse Stock Split, and the number of shares that are actually cashed-out in the Transaction. The beneficial ownership percentage of shares of our Common Shares held by our officers and directors and the beneficial ownership percentage of the stockholders who will continue to hold our Common Shares after the Transaction, may increase or decrease as a result of such purchases, sales and other transfer of shares of our Common Shares by our stockholders prior to the effective time of the Reverse Stock Split, and depending on the number of shares that are actually cashed-out in the Transaction.

As a result of the Reverse Stock Split, Mr. Liu and each of the officers and directors will have an increase in the percentage of their voting power. The table below reflects the pre-Reverse Stock Split and post- Reverse Stock Split ownership of the officers and directors:

Potential Disadvantages of the Transaction to Stockholders. While we believe that the Transaction will result in the benefits described above, several disadvantages should also be noted:

Financial Effects of the Transaction. Completion of the Transaction will require us to spend approximately $400,000, which includes legal, financial and other fees and costs related to the Transaction. This estimate does not include the cost of the aggregate cash payment to Discontinued Stockholders, which we estimate will be approximately $3.7 million. These costs will be offset by the costs we would otherwise incur as a public reporting company to comply with SEC reporting requirements, which we estimate to be approximately $3,000,000 per year.

Trading Market for Our Common Shares. Our Common Shares are currently quoted in the Over-the-Counter market on Pink Sheets. The Pink Sheets is a listing service that offers financial and other information about issuers of securities, and collects and publishes quotes of market makers for over-the-counter securities through its website at www.pinksheets.com. The Pink Sheets is not a stock exchange, and we do not have the ability to control whether our shares are quoted on the Pink Sheets. Trading opportunities in the Pink Sheets will be dependent upon whether any broker-dealers commit to make a market for our Common Shares. Accordingly, we do not guarantee or anticipate whether our Common Shares will continue to be quoted on the Pink Sheets. We give no assurance, however, that there will be any Pink Sheets quotations after the Transaction or that they will continue for any length of time.

Fairness of Transaction

The Board of Directors established the Special Committee and delegated to it the authority to review, analyze and evaluate the fairness of the Transaction, present its conclusion and make a recommendation to the Board, after which the Board could determine whether to adopt the Special Committee’s conclusion on fairness or undertake its own evaluation. The Special Committee fully reviewed and considered the terms, purpose, alternatives and effects of the Transaction and has determined that the Transaction is in the best interests of the Company and is substantively and procedurally fair to the stockholders of the Company, including: (i) our stockholders who will be cashed-out as a result of the Transaction and (ii) our stockholders who will continue to hold our Common Shares after the Transaction. After studying the Transaction and its anticipated effects on our stockholders, the Special Committee unanimously approved the Transaction and deemed it procedurally and substantively fair to all of the Company’s stockholders and to the Company and recommended to the Board of Directors that it approve the Transaction.

The Board of Directors has fully reviewed and considered the terms, purpose, alternatives and effects of the Transaction, together with the analysis of the Special Committee described in this section “Fairness of the Transaction,” and has unanimously adopted the determination and recommendation of the Special Committee regarding the fairness of the Transaction.

Fairness of the Substance of the Transaction . In determining the fairness of the Transaction, the Special Committee considered the factors discussed below, in addition to the alternative transactions discussed in “Special Factors – Background of the Transaction” beginning on page 11. In light of these factors, the Special Committee believes that the Transaction is substantively fair to the Company’s stockholders, including our stockholders who will be cashed-out as a result of the Transaction and our stockholders who will continue to hold our Common Shares after the Transaction. The Special Committee did not assign specific weight to the factors set forth below in a formulaic fashion. Moreover, in their considerations, individual directors may have given differing weights to different factors. However, the Special Committee did place special emphasis on the significant cost and time savings we expect the Company to realize from deregistration of our Common Shares under the Exchange Act and the suspension of our duty to file periodic reports and other information with the SEC thereunder.

Significant Cost and Time Savings . By deregistering our Common Shares and suspending our duty to file periodic reports with the SEC, we expect to realize recurring annual cost savings of approximately $3,000,000, which represents our Public Company Costs and includes savings from personnel expense relating to the time spent by our management to prepare and review our reports required to be filed with the SEC under the Exchange Act. In addition, the Special Committee has determined that the Public Company Costs, currently and in the foreseeable future, will continue to outweigh the Public Company Benefits and, thus, it is no longer in the best interests of the Company or its stockholders, creditors, or other stakeholders, including its unaffiliated stockholders, for the Company to remain a public reporting company. See the “Special Factors - Purpose of the Transaction” and “Special Factors - Reasons for the Transaction” beginning on pages 10 and 11, respectively.

Opportunity to Remain a Holder of, or to Liquidate, Common Shares . Another factor considered by the Special Committee in determining the fairness of the Transaction to holders of our Common Shares is the opportunity the Company’s stockholders have to remain stockholders or to liquidate their Company holdings. Current holders of fewer than 501 shares of our Common Shares can either remain Company stockholders by acquiring additional shares so that they own at least 501 shares of our Common Shares immediately before the effective date of the Reverse Stock Split or be cashed out in the Reverse Stock Split. If a stockholder purchases additional shares of our Common Shares, then the stockholder may incur brokerage fees or commissions. Holders of fewer than 501 shares of our Common Shares at the effective time of the Reverse Stock Split will have their fractional post-Reverse Stock Split shares purchased by the Company at a premium price without paying any brokerage fees or commissions. The Special Committee did not quantify the consideration of brokerage fees and commissions paid for having such fractional shares cashed out in the Reverse Stock Split since such fees, if any, vary significantly depending upon the method used to acquire or dispose of shares. Conversely, stockholders who own 501 shares or more and who desire to liquidate their shares in connection with the Transaction at the premium price offered can reduce their holdings to less than 501 shares by selling or gifting shares prior to the effective date of the Reverse Stock Split. The Special Committee did not place undue emphasis on this factor due to the limited trading market for our common shares. See “Special Factors - Reasons for the Transaction” and “Special Factors - Structure of the Transaction” beginning on pages 11 and 29, respectively.

Recent and Historical Trading Prices . The Special Committee considered recent and historical trades of our Common Shares. Since May 2012, our Common Shares have been quoted in the Over-the-Counter market on the Pink Sheets.

The recent and historical trading of our Common Shares relates to the fairness of the Transaction to unaffiliated stockholders because it provides some insight into how the market has historically valued our Common Shares. Since Discontinued Stockholders will no longer be able to directly participate in the financial success of the Company, the Cash Payment paid to these stockholders as a result of the Reverse Stock Split represents the final opportunity to obtain value for their investment. Although not a perfect measure, the trends over time in the market price of our Common Shares reflect market perceptions about the Company’s intrinsic value.

Based on the foregoing, the Special Committee determined that a Cash Payment based on the historical trading prices of our Common Shares would be an appropriate method of determining the fair value of shares of our Common Shares being cashed out in the Transaction. In its deliberations concerning the fairness of the Transaction, the Special Committee considered:

The higher historical prices were achieved on the NYSE. If the Company’s Common Shares were still on NYSE, the Company believes the fair price would be significantly different. As part of the process in determining the Cash Payment, the Special Committee and the Board looked at the volume weighted average price of the Company’s Common Shares over a 30 day trading period, which provided a much more accurate depiction of our trading history. Due to the low trading volume any sales of stock could lead to a significant spike in our historical pricing which is not truly indicative of our value.

The Cash Payment to stockholders of $0.50 per share represents a 16.3% premium to the volume weighted average closing price of our Common Shares during the 30-trading day period ended October 21, 2013, which was $0.43. The Cash Payment to our stockholders of $0.50 represents a premium of approximately 28.2% over the $0.39 closing price of our Common Shares on October 21, 2013. The Special Committee determined that, as a result these premiums, the Cash-Out Price was a fair price for the shares our Common Shares being cashed out in the Transaction in light of the factors considered by the Special Committee.

Net Book Value of Our Common Shares. Net book value is based upon the historical cost of the Company’s assets less the value of recorded liabilities, and generally ignores the current value of the Company unless such current value is less than the recorded value. Our net book value per outstanding share of our Common Shares as of: (i) December 31, 2011 and 2012 was $9.38 and $8.58, respectively, and (ii) September 30, 2013 was $7.44. The accounting value of the assets based on the net book value does not necessarily equate to the fair market value of the assets. It is very difficult to determine the market value of the Company’s assets located in China. If the Company’s assets had to be liquidated quickly the Company may not be able to realize the value of the assets based on the net book value. As reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, we have incurred substantial operating losses in our past two fiscal years, and expect to continue to incur future losses. For the year ended December 31, 2012, we recorded a loss from operations of $86,331,001 and utilized cash in operations of $46,453,319. As of December 31, 2012, we had a working capital deficit of $10,763,083. As operating losses increase, net book value decreases because either assets have to be used or liabilities have to be increased to cover such losses. Although generally important in a valuation discussion, the Special Committee does not believe that net book value is a good indicator of the fairness of the price for the Company, because of the operating losses that have been incurred. For the nine months ended September 30, 2013, we incurred substantial operating losses and expect that such losses will continue, which will continue to deteriorate actual net book value.

Liquidity of Our Common Shares. The Special Committee discussed the lack of an active trading market for our common shares, the lack of any market analyst coverage of the Company and our inability to access the public capital markets as some of the indications that our stockholders are not receiving the typical Public Company Benefits. Specifically, the Special Committee considered that our Common Shares had an average daily trading volume over the nine-month period ended September 30, 2013 of approximately 25,113 shares, respectively. The Special Committee determined that the lack of liquidity of our common shares was an additional indication of fairness to the Discontinued Stockholders. See “Special Factors - Reasons for Transaction” beginning on page 11.

Equal Treatment of Affiliated and Unaffiliated Holders of Our Common Shares. The Transaction will not affect holders of our Common Shares differently on the basis of affiliate status. The sole determining factor in whether a stockholder will no longer hold our Common Shares after the Transaction or will continue as a holder of our Common Shares as a result of the Transaction is the number of shares of our Common Shares held by the stockholder as of the effective date of the Reverse Stock Split.

Minimal Effect on Voting Power. The Transaction will have a minimal effect on the voting power of the Company’s stockholders. The voting and other rights of our Common Shares will not be affected by the Transaction. The only effect of the Transaction on the Company’s voting power will be a slight change in the overall ownership percentage of the stockholders who continue to hold our Common Shares following the Transaction.

The Special Committee also considered the following possible disadvantages of effecting the Transaction:

Reduction of Market for Our Common Shares. After the completion of the Transaction and the deregistration of our Common Shares and suspension of our duty to file periodic reports and other information with the SEC, and our stockholders may experience reduced liquidity for their shares of our Common Shares, even if our Common Shares continue to be quoted in the Pink Sheets. See “Special Factors - Effects of the Transaction” beginning on page 13 for more information.

Possible Decline in Price of Our Common Shares. After the completion of the Transaction, our stockholders may experience reduced liquidity for their shares of our Common Shares. This reduced liquidity may adversely affect the market price of our Common Shares. See “Special Factors - Effects of the Transaction” beginning on page 13 and “Termination of Publicly Available Information about the Company” immediately below.

Termination of Publicly Available Information About the Company. After deregistration of our Common Shares and suspension of our duty to file periodic reports and other information with the SEC, information regarding our operations and financial results that is currently available to the general public and our stockholders will no longer be readily available, and stockholders seeking information about us will have to contact us directly to receive such information. We may or may not provide stockholders with information, upon request or otherwise, that we are not required by law to provide. The Special Committee believes that the overall benefits to the Company of no longer being a public reporting company substantially outweigh the disadvantages associated with a lack of publicly available information about the Company. See “Special Factors - Effects of the Transaction” beginning on page 13.

Sarbanes-Oxley Act and Other Reporting and Disclosure Provisions Will No Longer Apply to the Company. After the completion of the Transaction and the deregistration of our Common Shares and suspension of our duty to file periodic reporting and other information with the SEC, we will no longer be subject to the provisions of the Sarbanes-Oxley Act or the liability provisions of the Exchange Act that apply to public companies, including the requirement that the chief executive officer and the chief financial officer certify the accuracy of the financial statements contained in our Exchange Act filings. In addition, our officers, directors and 10% or greater stockholders will no longer be subject to the short-swing profit recapture provisions and reporting requirements of Section 16 of the Exchange Act. See “Special Factors - Effects of the Transaction” beginning on page 13.

The Company Will No Longer Have the Potential Benefits Normally Associated with Public Reporting Company Status. Another potential disadvantage of the Transaction is that we will no longer have the Public Company Benefits, such as better access to the capital markets for issuances of securities. We would still have access to capital markets, but if we were to conduct a public offering of our securities, we would have to again become a reporting company, and the expenses that we are seeking to eliminate would then be reinstated. We believe that the cost savings from ceasing to be a public reporting company outweigh the drawbacks of losing more ready access to the capital markets.

Certain Stockholders Will Not Participate in Future Increases in Our Value. Following the Transaction, stockholders who own less than 501 pre-Reverse Stock Split shares will no longer have an equity interest in the Company and will not participate in our future earnings or any increases in the value of our assets or operations. See “Special Factors - Effects of the Transaction” beginning on page 13.

Although potentially relevant to a determination of fairness of the Transaction, the factors listed below, for the reasons given, were determined by the Special Committee to not be applicable to the Company and were not considered or were not given any weight by the Special Committee.

Liquidation Value. The Special Committee viewed the liquidation value of the Company to be an inappropriate measure for the purpose of evaluating the fairness of the Cash Payment. There is no present intention of liquidating the Company. Further, the Transaction will only result in the termination of an equity interest by the stockholders reduced to fractional shares as a result of the Reverse Stock Split. The total of all such shares represents approximately 20.5% of our outstanding pre-Reverse Stock Split shares. A liquidation process would also involve additional legal fees, costs of sale and other expenses that would reduce any amounts that stockholders might receive upon a liquidation. Given the other factors considered by the Special Committee as described in this Proxy Statement, the Special Committee did not pursue a liquidation value approach.

No Firm Offers. We have not received during the last two years any firm, unconditional offers for a merger or consolidation with or into another company, or vice versa, or the sale or transfer of all or substantially all of our assets to another company, or a purchase of our securities by another person that would involve a change in our control on terms satisfactory to the Company.

The Special Committee believes that all of the factors mentioned above, both favorable and unfavorable, when viewed together support a conclusion that the Transaction is substantively fair to the unaffiliated stockholders, including those stockholders who will be cashed out as a result of the Transaction and those who will continue to be stockholders of the Company after the Transaction. Based upon the updated valuation analysis provided to the Special Committee by Roth as of October 21, 2013, the Special Committee determined the amount of the Cash Payment to be fair based on the factors described above, and in particular, the premium that the Cash Payment represents over the historic trading prices as discussed above.

Fairness Opinion of Roth . The Special Committee considered the financial analyses reviewed and discussed with the Special Committee by representatives of Roth and the opinion of Roth delivered on October 24, 2013 with respect to the fairness, from a financial point of view, of the Cash Payment. The Special Committee interviewed different professional firms and made comparisons among candidates. The Special Committee chose Roth because Roth has a team located in China that was able to do their due diligence more expeditiously and their fee was more reasonable given the workload they estimated. Roth also is familiar with the Company, the Company’s industry and with U.S.-listed Chinese companies, and has excellent qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions. Other than the services provided by Roth pursuant to its engagement letter with the Special Committee, including the fairness opinion and a related valuation analysis prepared by Roth at the request of the Special Committee in August 2013, there has been no material relationship between the Company and Roth during the last two years, nor is there any material relationship mutually understood to be contemplated in the future.

Procedural Fairness of the Transaction . In addition to the fairness of the substance of the Transaction, the Special Committee believes that the process by which decisions were made regarding the Transaction is fair to the Company’s unaffiliated stockholders. The approval of the Reverse Split by holders of a majority of the voting power, was structured so that approval of at least a majority of unaffiliated stockholders was not required.

The Special Committee noted that, although trading is limited, stockholders can still purchase, subject to availability, prior to the effective date of the Reverse Stock Split, such additional shares of our Common Shares through the market in order to make their holdings of our Common Shares exceed 501 shares, thereby avoiding the result of fractional shares from the Reverse Stock Split.

The Special Committee has not granted unaffiliated stockholders access to our corporate files nor has it extended the right to retain counsel or appraisal services at our expense and no one has retained any unaffiliated representative to act solely on behalf of unaffiliated stockholders for any purpose. With respect to unaffiliated stockholders’ access to our corporate files, the Special Committee believes that this Proxy Statement, together with our other filings with the SEC, provide adequate information for unaffiliated stockholders. In deciding not to adopt these additional procedures, the Special Committee also took into account factors such as our size and financial capacity and the costs of such procedures.

Summary of Valuation Analysis

Pursuant to an engagement letter dated August 21, 2013, the Special Committee retained Roth to provide a valuation analysis of the Company or render a fairness opinion to the Special Committee.

On August 21, 2013, Roth delivered a valuation analysis to the Special Committee, which valuation analysis was updated and delivered on October 20, 2013. Roth’s valuation analysis provided only a range of implied values for the Company’s stock. Roth’s valuation analysis was not an opinion or recommendation to the Special Committee, Board of Directors, any stockholder or other person as to the value of the Company or its stock price.

In arriving at its valuation analysis, Roth:

For its analysis, Roth assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to it by the Company, and further relied upon the assurances of the management of the Company that information furnished by them for purposes of its analysis did not contain any material omissions or misstatements of material fact. With respect to the Financial Projections, Roth was advised by the management of the Company and assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of the Company of the future financial performance of the Company, and Roth expressed no view as to the assumptions on which they are based. The Financial Projections formed the primary basis for Roth’s discounted cash flows analysis of the Company. The Financial Projections that were material to such analysis are disclosed in the summary of the Discounted Cash Flows set forth below. The complete Financial Projections are attached as Exhibit D to this Proxy Statement.

Roth did not make any independent valuation or appraisal of the assets or liabilities (fixed, contingent or otherwise) of the Company, nor was it furnished with any such valuations or appraisals. Roth did not evaluate the solvency of the Company under any law of any jurisdiction relating to bankruptcy, insolvency or similar matters.

Roth is not a legal, tax, accounting or regulatory advisor. Roth is a financial advisor only and has relied upon, without independent verification, the assessment of the Company and its legal, tax, accounting and regulatory advisors with respect to legal, tax, accounting and regulatory matters.

Summary of Material Financial Analysis

The following is a summary of the material financial analyses performed by Roth in connection with Roth’s valuation analysis.  In performing its analyses, Roth made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. Roth does not assume any responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below.

Selected Publicly Traded Comparable Companies. 

In order to assess how the public market values shares of publicly traded companies similar to the Company, Roth reviewed and compared certain financial information relating to the Company with selected companies, which, in the exercise of its professional judgment and based on its knowledge of the industry, Roth deemed relevant to the Company. In selecting comparable companies, Roth considered U.S.-listed pharmaceutical products companies primarily focused on the China market with an enterprise value greater than $10M and less than $200M. Roth chose an enterprise value range of $10M to $200M because companies significantly smaller or larger than the Company may be valued differently and not as comparable as companies of a similar size. Roth did not exclude any company that met the criteria considered. Although none of the selected companies is identical to the Company, Roth selected these companies because they had publicly traded equity securities and were deemed to be similar to the Company in one or more respects including the nature of their business, size, financial performance, geographic concentration and listing jurisdiction. The selected comparable companies were:

For the Company and each of the selected companies, Roth calculated and compared various financial multiples and ratios of the Company and the selected comparable companies based on each respective company’s public filings for historical information and third-party research estimates from Capital IQ for forecasted information.

In its review of the selected companies, Roth considered, among other things, (i) market capitalizations (computed using closing stock prices as of August 16, 2013), (ii) enterprise values (“EV”), (iii) EV as a multiple of reported revenue for the latest twelve-month period (“LTM”), (iv) EV as a multiple of reported earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the LTM estimated EBITDA, and (v) price as a multiple of reported earnings for the LTM. This information and the results of these analyses are summarized in the following table: 

1)           All EV/EBITDA multiples below 0x and above 50x are considered “NM”.

2)           All P/E multiples below 0x and above 50x are considered “NM”.

Roth considered that although the selected companies were used for comparison purposes, no business of any selected company was either identical or directly comparable to the Company’s business. Accordingly, Roth’s comparison of selected companies to the Company and analyses of the results of such comparisons was not purely mathematical, but instead necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the selected companies and the Company.

Selected Precedent Transaction Analysis.  Roth reviewed and compared the purchase prices and financial multiples paid in selected other transactions that occurred between 08/20/2008-08/20/2013 for companies that manufacture and sell pharmaceutical products in China where the enterprise value was between $10 million and $200 million and where there was a change of control. Roth chose an enterprise value range of $10M to $200M because companies significantly smaller or larger than the Company may be valued differently and the resulting valuation multiples not as comparable as companies of a size similar to the Company. Roth did not exclude any transaction that met the selection criteria except for transactions where there were no transaction multiples to compare against. For each of the selected transactions, Roth reviewed the enterprise value in the transaction as a multiple of LTM revenue and LTM EBITDA and reviewed the price to earnings in the transaction as a multiple of the LTM price to earnings. Such multiples for the selected transactions were based on publicly available information at the time of the relevant transaction. The selected transactions analyzed are set out in the following table:

Roth compared the Company's implied enterprise value as a multiple of LTM revenue and LTM EBITDA to the corresponding multiples for the selected transactions described above. Roth also compared the Company’s implied LTM price to earnings multiple to the LTM price to earnings multiples for the selected transactions.

Discounted Cash Flow Analysis . Roth performed a discounted cash flow analysis on the Company by calculating ranges of the estimated net present value of the unlevered, after-tax free cash flows attributable to shareholders of the Company that the Company forecasted to generate from August 16, 2013 through fiscal year 2018. All of the information used in Roth’s analysis was based on publicly available sources and the Financial Projections provided by the Company’s management. The following table sets forth are the free cash flows and implied price per share calculations used in Roth’s analysis:

In performing its discounted cash flow analysis, Roth calculated ranges of the estimated present values of the Company’s unlevered, after-tax free cash flows attributable to shareholders of the Company that the Company forecasted to generate for partial year 2013 to year 2018 by applying discount rates ranging from 11.6% to 15.6%, reflecting Roth’s estimates of the Company’s weighted-average cost of capital. The weighted-average cost of capital was calculated by adding (a) the market value of equity as a percentage of the total market value of the Company’s capital multiplied by the Company’s estimated cost of equity, and (b) the market value of debt as a percentage of the total market value of the Company’s capital multiplied by the Company’s estimated after-tax market cost of debt. The Company’s estimated cost of equity was calculated using the Capital Asset Pricing Model which took into account the Company’s beta, betas of comparable companies, the risk-free rate, a historical equity market risk premium, a historical small capitalization risk premium, which risk premiums were sourced from the Ibbotson SBBI 2012 Valuation Yearbook, and a country risk premium. Following is the calculation for the Company’s weighted-average cost of capital:

Roth used the following companies to calculate the portfolio beta:

Roth calculated an implied price per share for the Company’s Common Stock based on two estimations of the terminal value for the Company. First, Roth calculated the ranges of estimated terminal value amounts for the Company by applying a range of terminal EBITDA multiples of 4x to 8x to the Company’s estimated terminal year EBITDA. The range of terminal EBITDA multiples utilized in Roth’s discounted cash flow analysis was based on the EBITDA multiples of precedent transactions. The range of estimated present values of these estimated terminal value amounts was then calculated by applying discount rates ranging from 11.6% to 15.6%. Combining the total present value of the estimated unlevered free cash flows and the present value of the terminal values resulted in a range of implied enterprise values for the Company. Roth then deducted outstanding debt and added outstanding cash and cash equivalents from the Company balance sheet as of July 31, 2013 to determine a range of implied equity values of the Company. The discounted cash flow analysis implied a negative equity value for the Company across all ranges.

Second, Roth calculated the ranges of estimated terminal value amounts for the Company by applying a range of terminal revenue multiples of 0.5x to 1.5x to the Company’s estimated terminal year revenue. The range of terminal revenue multiples utilized in Roth’s discounted cash flow analysis was based on the revenue multiples of precedent transactions. The range of estimated present values of these estimated terminal value amounts was then calculated by applying discount rates ranging from 11.6% to 15.6%. Combining the total present value of the estimated unlevered free cash flows and the present value of the terminal values resulted in a range of implied enterprise values for the Company. Roth then deducted outstanding debt and added outstanding cash and cash equivalents from the Company balance sheet as of July 31, 2013 to determine a range of implied equity values of the Company. The discounted cash flow analysis implied a per share price of negative $0.80, with a range from negative $2.31 to positive $1.10.

Summary of Fairness Opinion

On October 24, 2013, Roth delivered its opinion to the Special Committee that, as of October 21, 2013, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in the opinion, the Cash Payment represents a fair price, from a financial point of view, for our Common Shares.

The full text of Roth’s written opinion, dated October 24, 2013, is attached as Exhibit A and is incorporated by reference herein. Stockholders of the Company are urged to read the entire opinion carefully and in its entirety to learn about the assumptions made, procedures followed, matters considered and limits on the scope of the review undertaken by Roth in rendering its opinion. The analysis performed by Roth should be viewed in its entirety; none of the methods of analysis should be viewed in isolation when reaching a conclusion on whether the consideration was fair. The opinion addresses only the fairness of the Cash Payment, from a financial point of view, for the value of our Common Shares as of October 21, 2013, and does not address the Company’s underlying business decision to proceed with or effect the Transaction or the likelihood of consummation of the Transaction. Roth’s opinion was directed to the Special Committee in connection with its consideration of the Transaction and was not intended to be, and was not, a recommendation as to the Special Committee, Board of Directors, any stockholder or other person should vote or act with respect to any matters relating to the Transaction.

In arriving at its opinion, Roth:

For its opinion, Roth assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to it by the Company, and formed a substantial basis for its opinion and further relied upon the assurances of the management of the Company that information furnished by them for purposes of its analysis did not contain any material omissions or misstatements of material fact. With respect to the Financial Projections, Roth was advised by the management of the Company and assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of the Company of the future financial performance of the Company, and Roth expressed no view as to the assumptions on which they are based. The Financial Projections formed the primary basis for Roth’s discounted cash flows analysis of the Company. The Financial Projections that were material to such analysis are disclosed in the summary of the Discounted Cash Flows set forth below. The complete Financial Projections are attached as Exhibit D to this Proxy Statement. Roth did not consider or pass upon, in any respect, any required corporate, government or third party approvals that may be required in connection with the Reverse Stock Split nor whether the terms of the Reverse Stock Split would be held by a court of competent jurisdiction to be consistent with the duties of the directors of the Company to the Company's stockholders. Roth assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed Reverse Stock Split, no delays, limitations, conditions or restrictions will be imposed that would have an adverse effect on the Company.

Roth did not make any independent valuation or appraisal of the assets or liabilities (fixed, contingent or otherwise) of the Company, nor was it furnished with any such valuations or appraisals. Roth did not evaluate the solvency of the Company under any law of any jurisdiction relating to bankruptcy, insolvency or similar matters.

Roth is not a legal, tax, accounting or regulatory advisor. Roth is a financial advisor only and has relied upon, without independent verification, the assessment of the Company and its legal, tax, accounting and regulatory advisors with respect to legal, tax, accounting and regulatory matters. Roth’s opinion did not address the underlying business decision of the Company to effect the Reverse Stock Split or the relative merits of the Reverse Stock Split as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or are available.

Roth’s opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it, as of October 21, 2013. Events occurring after such date may affect the opinion and the assumptions used in preparing it, and Roth did not assume any obligation to update, revise or reaffirm the opinion.

Roth’s opinion addressed only the fairness of the Cash Payment, from a financial point of view, for the value of the Company’s Common Shares as of October 21, 2013. The issuance of Roth’s opinion was approved by a fairness opinion committee of Roth. 

Summary of Material Financial Analysis

The following is a summary of the material financial analyses performed by Roth in connection with Roth’s opinion relating to the Cash Payment in connection with the Transaction. The rendering of an opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, this summary does not purport to be a complete description of the analyses performed by Roth. The order of analyses described below does not represent the relative importance or weight given to those analyses by Roth. Some of the summaries of the financial analyses include information presented in tabular format. In order to fully understand Roth’s financial analyses, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Roth’s financial analyses.

In performing its analyses, Roth made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. Roth does not assume any responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below.

Selected Publicly Traded Comparable Companies. 

In order to assess how the public market values shares of publicly traded companies similar to the Company, Roth reviewed and compared certain financial information relating to the Company with selected companies, which, in the exercise of its professional judgment and based on its knowledge of the industry, Roth deemed relevant to the Company. In selecting comparable companies, Roth considered U.S.-listed pharmaceutical products companies primarily focused on the China market with an enterprise value greater than $10M and less than $200M. Roth chose an enterprise value range of $10M to $200M because companies significantly smaller or larger than the Company may be valued differently and not as comparable as companies of a similar size. Roth did not exclude any company that met the criteria considered. Although none of the selected companies is identical to the Company, Roth selected these companies because they had publicly traded equity securities and were deemed to be similar to the Company in one or more respects including the nature of their business, size, financial performance, geographic concentration and listing jurisdiction. The selected comparable companies were:

For the Company and each of the selected companies, Roth calculated and compared various financial multiples and ratios of the Company and the selected comparable companies based on each respective company’s public filings for historical information and third-party research estimates from Capital IQ for forecasted information.

In its review of the selected companies, Roth considered, among other things, (i) market capitalizations (computed using closing stock prices as of October 17, 2013), (ii) enterprise values (“EV”), (iii) EV as a multiple of reported revenue for the latest twelve-month period (“LTM”), (iv) EV as a multiple of reported earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the LTM estimated EBITDA, and (v) price as a multiple of reported earnings for the LTM. This information and the results of these analyses are summarized in the following table: 

1)           All EV/EBITDA multiples below 0x and above 50x are considered “NM”.

2)           All P/E multiples below 0x and above 50x are considered “NM”.

Roth considered that although the selected companies were used for comparison purposes, no business of any selected company was either identical or directly comparable to the Company’s business. Accordingly, Roth’s comparison of selected companies to the Company and analyses of the results of such comparisons was not purely mathematical, but instead necessarily involved complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the relative values of the selected companies and the Company.

Selected Precedent Transaction Analysis.  Roth reviewed and compared the purchase prices and financial multiples paid in selected other transactions that occurred between 08/20/2008-10/17/2013 for companies that manufacture and sell pharmaceutical products in China where the enterprise value was between $10 million and $200 million and where there was a change of control. Roth chose an enterprise value range of $10M to $200M because companies significantly smaller or larger than the Company may be valued differently and the resulting valuation multiples not as comparable as companies of a size similar to the Company. Roth did not exclude any transaction that met the selection criteria except for transactions where there were no transaction multiples to compare against. For each of the selected transactions, Roth reviewed the enterprise value in the transaction as a multiple of LTM revenue and LTM EBITDA and reviewed the price to earnings in the transaction as a multiple of the LTM price to earnings. Such multiples for the selected transactions were based on publicly available information at the time of the relevant transaction. The selected transactions analyzed are set out in the following table:

Roth compared the Company's implied enterprise value as a multiple of LTM revenue and LTM EBITDA to the corresponding multiples for the selected transactions described above. Roth also compared the Company’s implied LTM price to earnings multiple to the LTM price to earnings multiples for the selected transactions.

Discounted Cash Flow Analysis . Roth performed a discounted cash flow analysis on the Company by calculating ranges of the estimated net present value of the unlevered, after-tax free cash flows attributable to shareholders of the Company that the Company forecasted to generate from October 17, 2013 through fiscal year 2018. All of the information used in Roth’s analysis was based on publicly available sources and the Financial Projections provided by the Company’s management. The following table sets forth are the free cash flows and implied price per share calculations used in Roth’s analysis:

In performing its discounted cash flow analysis, Roth calculated ranges of the estimated present values of the Company’s unlevered, after-tax free cash flows attributable to shareholders of the Company that the Company forecasted to generate for partial year 2013 to year 2018 by applying discount rates ranging from 10.6% to 16.6%, reflecting Roth’s estimates of the Company’s weighted-average cost of capital. The weighted-average cost of capital was calculated by adding (a) the market value of equity as a percentage of the total market value of the Company’s capital multiplied by the Company’s estimated cost of equity, and (b) the market value of debt as a percentage of the total market value of the Company’s capital multiplied by the Company’s estimated after-tax market cost of debt. The Company’s estimated cost of equity was calculated using the Capital Asset Pricing Model which took into account the Company’s beta, betas of comparable companies, the risk-free rate, a historical equity market risk premium, a historical small capitalization risk premium, which risk premiums were sourced from the Ibbotson SBBI 2012 Valuation Yearbook, and a country risk premium. Following is the calculation for the Company’s weighted-average cost of capital:

Roth used the following companies to calculate the portfolio beta:

Roth calculated an implied price per share for the Company’s Common Stock based on two estimations of the terminal value for the Company. First, Roth calculated the ranges of estimated terminal value amounts for the Company by applying a range of terminal EBITDA multiples of 4x to 8x to the Company’s estimated terminal year EBITDA. The range of terminal EBITDA multiples utilized in Roth’s discounted cash flow analysis was based on the EBITDA multiples of precedent transactions. The range of estimated present values of these estimated terminal value amounts was then calculated by applying discount rates ranging from 10.6% to 16.6%. Combining the total present value of the estimated unlevered free cash flows and the present value of the terminal values resulted in a range of implied enterprise values for the Company. Roth then deducted outstanding debt and added outstanding cash and cash equivalents from the Company balance sheet as of July 31, 2013 to determine a range of implied equity values of the Company. The discounted cash flow analysis implied a negative equity value for the Company across all ranges.

Second, Roth calculated the ranges of estimated terminal value amounts for the Company by applying a range of terminal revenue multiples of 0.5x to 1.5x to the Company’s estimated terminal year revenue. The range of terminal revenue multiples utilized in Roth’s discounted cash flow analysis was based on the revenue multiples of precedent transactions. The range of estimated present values of these estimated terminal value amounts was then calculated by applying discount rates ranging from 10.6% to 16.6%. Combining the total present value of the estimated unlevered free cash flows and the present value of the terminal values resulted in a range of implied enterprise values for the Company. Roth then deducted outstanding debt and added outstanding cash and cash equivalents from the Company balance sheet as of July 31, 2013 to determine a range of implied equity values of the Company. The discounted cash flow analysis implied a per share price of negative $0.31, with a range from negative $1.93 to positive $1.52.

Analyses of Implied Premia.  Roth analyzed the implied premia based on cash out price of $0.50 per share as compared to the following:

Roth used the share prices listed above as the most appropriate time frame for comparison in its analysis. The results of this analysis are summarized in the following table:

General 

The summary set forth above does not contain a complete description of the analyses performed by Roth, but does summarize the material analyses performed by Roth in rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Roth believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses, would create an incomplete view of the processes underlying the analyses set forth in the Roth opinion. In arriving at its opinion, Roth considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Instead, Roth made its determination as to fairness on the basis of its experience and financial judgment after considering the results of all of its analyses. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any other analysis. In addition, the ranges of valuations resulting from any particular analysis described above should not be taken to be Roth’s view of the actual value of the Company.

Roth is a full service securities firm with offices throughout the United States and in Hong Kong, and is engaged in securities trading and brokerage activities, as well as providing investment banking and other financial services. The Company’s Special Committee selected Roth because of its familiarity with the Company, the Company’s industry and with U.S.-listed Chinese companies, as well as its qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions. Other than the services provided by Roth pursuant to its engagement letter with the Special Committee, including the fairness opinion and a related valuation analysis prepared by Roth at the request of the Special Committee in August 2013, there has been no material relationship between the Company and Roth during the last two years, nor is there any material relationship mutually understood to be contemplated in the future.

Pursuant to its engagement letter with Roth, the Company has agreed to pay Roth $200,000 within 10 days of delivery of its valuation analysis or fairness opinion to the Special Committee. Roth’s fee is not contingent upon the Transaction closing. This fee was determined by Roth and proposed to the Special Committee. In addition, the Company has agreed to reimburse Roth for certain out of pocket expenses and to indemnify Roth for certain liabilities that may arise out of its engagement by the Special Committee and the rendering of Roth’s valuation analysis or fairness opinion. In the ordinary course of business, Roth and its affiliates may acquire, hold or sell, for its and its affiliates’ own accounts and for the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) of the Company and the other parties to the transaction, and, accordingly, may at any time hold a long or a short position in such securities. Roth and its affiliates may in the future provide investment banking and other financial services to the Company and their respective affiliates for which Roth would expect to receive compensation.

Structure of the Transaction

The Transaction consists of a Reverse Stock Split (with a cash payment in lieu of receipt of a fractional share by stockholders. The Reverse Stock Split is expected to occur no later than March 25, 2014, pending approval by the stockholders of the proposal set forth in this Proxy Statement. On the effective date of the Reverse Stock Split each stockholder of record will receive one share of common shares for every 501 pre-Reverse Stock Split shares held in his or her account as of such date. Any stockholder of record who holds fewer than 501 pre-Reverse Stock Split shares in his or her account at the time of the Reverse Stock Split will receive a Cash Payment Price of $0.50 per pre-Reverse Stock Split share and will no longer be a stockholder of the Company after the Transaction. Any stockholder who after the Reverse Stock Split will continue as stockholders, but own a fractional share, will receive a Cash Payment on the pre-Reverse Stock Split equivalent to their fractional share.

We intend for the Transaction to treat stockholders holding Common Shares in street name through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are held of record in their own names, and nominees will be instructed to effect the Transaction for their beneficial holders. However, nominees may have different procedures and stockholders holding shares in street name should contact their nominees.

In general, the Transaction can be illustrated by the following examples:

Example 1 . A stockholder holds 500 shares of our Common Shares in his account before the effective date of the Reverse Stock Split. Instead of receiving a fractional share of our Common Shares immediately after the Reverse Stock Split, the stockholder’s shares will be converted into the right to receive cash. The stockholder would receive $250 ($0.50 x 500 shares). Note : If the stockholder wants to continue the investment in the Company, before the effective date of the Reverse Stock Split, the stockholder can buy at least one more share. The stockholder would have to act far enough in advance of the Reverse Stock Split so that the purchase is completed and the additional share or shares are credited in his account by the effective date.

Example 2. A stockholder holds 501 shares of our Common Shares as of the effective date of the Reverse Stock Split. After the Reverse Stock Split, the stockholder will hold one share of Common Shares.

Example 3 . A stockholder has two separate accounts. As of the effective date of the Reverse Stock Split, the stockholder holds 250 shares of our Common Shares in one account and 251 shares of Common Shares in the other. If we can determine that the two separate accounts belong to the same person (based upon the name of the account or the social security number or address associated with the account), then we will treat the two accounts as a single account. Accordingly, the stockholder will be treated as having 501 pre-Reverse Stock Split shares. In the Reverse Stock Split, the stockholder’s stock will be converted into one share of our Common Shares.

If, however, we are unable to determine that the two separate accounts belong to the same person, then the stockholder will receive cash payments equal to the Cash Payment of the Common Shares in each account instead of receiving fractional shares. In this case, the stockholder would receive two checks totaling $250.50 ($0.50 x 250 shares; $0.50 x 251 shares). Note: If the stockholder wants to be certain to continue as a stockholder in the Company, the stockholder can consolidate or transfer two accounts before the effective date of the Reverse Stock Split into an account with at least 501 pre-Reverse Stock Split shares. Alternatively, the stockholder can buy at least 251 more shares for the first account and 250 more shares for the second account, and hold them in such stockholder’s respective accounts. The stockholder would have to act far enough in advance of the Reverse Stock Split so that the consolidation or the purchase is completed by the effective date.

Example 4. A stockholder holds 500 shares of our common shares in street name in a brokerage account as of the effective date of the Reverse Stock Split. We intend for the Transaction to treat stockholders holding shares of our Common Shares in street name through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their names. Nominees will be instructed to effect the Transaction for their beneficial holders. If this occurs, the stockholder will receive, through the stockholder’s broker, a check for $250 ($0.50 x 500). However, nominees may have a different procedure and stockholders holding shares of our Common Shares in street name should contact their nominees.

Exchange of Certificates for Cash Payment .

Computershare N.A. has been appointed as the Exchange Agent to carry out the exchange of certificates for the cash payment of $0.50 per pre-Reverse Stock Split share.

As soon as practicable after the effective date, holders of fewer than 501 shares will be notified and sent a letter of transmittal and instructed how to transmit their certificates representing Common Shares to the Exchange Agent. Upon proper completion and execution of the letter of transmittal, and the return of the letter of transmittal and accompanying share certificate(s) to the Exchange Agent, each stockholder entitled to receive payment will receive payment from the Exchange Agent as outlined in the letter of transmittal. Stockholders should allow for approximately five business days after mailing for the Exchange Agent to receive the letter of transmittal and accompanying stock certificate and approximately 10 business days following receipt of properly completed materials by the Exchange Agent for payment to be made. In the event we are unable to locate a stockholder, or if a stockholder fails to properly complete, execute and return the letter of transmittal and accompanying stock certificate to the Exchange Agent, any funds payable to such stockholder pursuant to the Transaction will be held in escrow until a proper claim is made, subject to applicable abandoned property laws. Holders of fewer than 501 Common Shares on the effective date of the Reverse Stock Split will receive in exchange a cash payment in the amount of $0.50 per pre-Reverse Stock Split share. Holders of at least 501 common shares will continue to hold Common Shares, with no cash payment.

No service charges will be payable by stockholders in connection with the exchange of certificates for cash. All such expenses will be borne by us except for expenses, if any, imposed by your nominee. In the event that any certificate representing Common Shares is not presented, the applicable cash payment will be administered in accordance with the relevant state abandoned property laws. Until the cash payments have been delivered to the appropriate public official pursuant to the abandoned property laws, such payments will be paid to the holder of the eligible certificate or his, her or its designee, without interest, at such time as the common shares have been properly presented for exchange.

Reservation

Although the Special Committee has approved the Transaction and subsequent termination of registration of our Common Shares under the Exchange Act and suspension of our duty to file periodic reports and other information with the SEC thereunder, the Special Committee reserves the right to abandon, postpone or modify the Transaction and such termination and suspension at any time before they are consummated for any reason. A number of factors or circumstances could cause our Board of Directors to abandon, postpone or modify the Transaction and such deregistration and suspension, including, without limitation, the following:

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

This Proxy Statement contains certain statements that are “forward-looking statements.” Those statements may include statements regarding the intent, belief or current expectations of the Company or its officers with respect to: (i) the Company’s strategic plans and ability to complete and benefit from the Transaction; (ii) the expenses associated with the Transaction and the subsequent deregistration of our Common Shares under the Exchange Act and suspension of our duty to file periodic reports and other information with the SEC thereunder; (iii) the number of stockholders following the Reverse Stock Split; and (iv) the Company’s financial condition, results of operations, capital resources and business prospects following the Transaction. These forward-looking statements are based on a number of assumptions and currently available information, and are subject to a variety of risks and uncertainties. Although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. There is no assurance that the forward-looking statements contained in this Proxy Statement will prove to be accurate. The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that its objectives will be achieved. The “safe-harbor” provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act do not apply to going-private transactions.