Global Pharmatech, Inc. develops, manufactures and markets proprietary drugs and dietary supplements based on China's five millennia of clinical experience in traditional Chinese medicine and using modern pharmaceutical technologies. We also offer a full range of “start to finish” biotechnology services, including drug discovery (basic research leading to the detection of new drug candidates), preclinical research and clinical experimentation. We utilize unique extraction methods and innovative techniques that have been developed by our research and development team. Our core businesses are to license our patents and technologies relating to botanical/biological drugs to other pharmaceutical companies, and to manufacture and market our products in China and around the globe. Our operations are currently conducted, through our subsidiaries, in the People’s Republic of China (PRC), with sales distribution in China, the United States, Hong Kong, Malaysia, Singapore and Indonesia. Sales outside China are made either directly to foreign distributors or through a Hong Kong-based distributor, which sells on to those areas indicated above.
Global was incorporated in Delaware in 2001 under the name Autocarbon.com, Inc. On January 24, 2005, our company entered into a Share Purchase Agreement with Natural Pharmatech, Inc., a British Virgin Islands corporation (Natural Pharmatech), and its shareholders, under which, on February 9, 2005, we acquired all of Natural Pharmatech’s shares in exchange for 80% of our common stock, which was issued to Natural Pharmatech’s shareholders. Natural Pharmatech was formed in 2004 under British Virgin Islands law as a holding company to own the subsidiaries that make up our business operations. Its principal subsidiary, Natural Pharmatech (Jilin China) Co., Ltd. (Natural Pharmatech China) is located in Changchun in Jilin Province of China, where it originated as a research department within the Affiliated Hospital of Changchun Traditional Chinese Medicine College. It was organized as a separate private for-profit entity in February 2001.
Our principal executive offices in the People’s Republic of China are located at 509 Maoxiang St., Changchun, People’s Republic of China. Our telephone number there is +86-431-5541869. We also maintain an office at 89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6, where our telephone number is (905) 787-8225.
This prospectus relates to the resale of up to 3,247,308 shares of our common stock being offered by the selling stockholders. At December 28, 2005, there were 18,247,935 shares of our common stock issued and outstanding. As a result of this offering, there may ultimately be a significant increase in the Company’s public float, which may have a depressive effect on our stock price independent of our results of operations.
We will not receive any proceeds from any sale of shares of common stock by the selling stockholders.
Statements in this prospectus that are not descriptions of historical facts are forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations and assumptions underlying such plans and objectives and other forward-looking terminology such as “may,”“expects,”“believes,”“anticipates,”“intends,”“projects,” or similar terms, variations of such terms or the negative of such terms. Forward-looking statements are based on management’s current expectations. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth under “Risk Factors.”
Investing in our securities involves a great deal of risk. You should carefully consider the following factors as well as other information included in this prospectus before deciding to purchase our common stock. You should pay particular attention to the fact that we conduct a majority of our operations in China and are governed by a legal and regulatory environment that in some respects differs significantly from the environment that may prevail in other countries. Our business, financial condition or results of operations could be affected materially and adversely by any or all of these risks.
THE FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.
If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.
Our products must keep pace with developments in our industry or they may be displaced by competitors' products. Our industry is characterized by rapid product development, with significant competitive advantages gained by companies that introduce products that are first to market, deliver constant innovation in products and techniques, offer frequent new product introductions and have competitive prices. Our future growth partially depends on our ability to develop products that are more effective in meeting consumer needs. In addition, we must be able to manufacture and effectively market those products. The sales of our existing products may decline if a competing product is introduced by other companies.
The success of our new product offerings depends upon a number of factors, including our ability to accurately anticipate consumer needs, innovate and develop new products, successfully commercialize new products in a timely manner, price our products competitively, manufacture and deliver our products in sufficient volumes and in a timely manner and differentiate our product offerings from those of our competitors. If we fail to make sufficient investments in research and pay close attention to consumer needs or we focus on technologies that do not lead to more effective products, our current and future products could be surpassed by more effective or advanced products of others.
We have limited control over the activities of our distributors, which generally are not employed or otherwise controlled by us, are free to conduct their business at their own discretion and may be dedicated more to establishing their own reputations and business relationships than to promoting our products. By the same token, the simultaneous loss of a number of our distributors could have a material adverse effect on our business, financial condition and results of operations.
We compete for qualified professionals with a number of Chinese research institutions, some of which are more established than we are and have the ability to pay more cash and other compensation than we do. Competition for qualified individuals is intense, and we cannot be certain that our search for them will be successful. If we are unable to hire and retain skilled professionals, our business, financial condition, operating results and future prospects could be materially adversely affected. We do not have key-person insurance for any of our senior managers or employees.
We do not currently enter into forward exchange rate contracts to hedge some of the financial risks of international operations, but expect to do so in the future.
Our subsidiaries’ ability to remit funds to us may be limited by these restrictions. There can be no assurance that the relevant regulations in China will not be amended so as to adversely affect our ability to obtain funds from our subsidiaries.
If we are unable to raise capital when needed, our business growth strategy may slow, which could severely limit our ability to increase revenue, and we may be unable to take advantage of business opportunities or respond to competition.
As China changes its economy from planned to more market-oriented, uncertainties arise regarding governmental policies and measures. Although, in recent years, the Chinese government has implemented measures emphasizing the use of market forces for economic reform, reduction of state ownership of productive assets, and establishment of sound corporate governance practices, a substantial portion of productive assets in China are still owned by the Chinese government. For example, all lands are state owned and leased to business entities or individuals through governmental grants of state-owned land use rights. The grant process is typically based on government policies at the time of grant, which can be lengthy and complex and may adversely affect any expansion of our operations. The Chinese government also exercises significant control over China's economic growth through allocation of resources, foreign currency control and providing preferential treatment to particular industries or companies.
Products distributed outside China are subject to government regulations of different jurisdictions, which could be stricter than in China. In some developed countries, the government regulations for product approval could be stricter than in China, while in developing countries, government regulation could be uncertain.
As a result of these differences, the combined company’s operations may not develop in the same way or at the same rate as might be expected if the PRC economy were similar to those of OECD member countries.
We may be held liable if serious adverse reactions from the use of our products occur. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities and damage to our commercial reputation, or be required to limit commercialization of our products.
Our inability to obtain sufficient product liability insurance at acceptable cost against claims could prevent or inhibit commercialization of our products. We currently do not carry product liability insurance. We may not be able to obtain insurance at reasonable cost, if at all. If we obtain insurance in the future, it may not adequately compensate us for all losses that we may incur, which could have a material adverse effect on our business.
Our success depends in part on our ability to anticipate and respond to changes in consumer trends, and we may not respond in a timely or commercially appropriate manner to them. Because markets for our products differentiate geographically, we must accurately assess demand in each specific market into which we wish to make sales. If we fail to invest in extensive market research on consumer health needs in each market we target, we may face limited market acceptance of our products, which could have a material adverse effect on our sales and earnings. If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues, and our business will suffer.
In addition, even after approval, regulated products are subject to continuing review, reporting requirements and other compliance obligations. The discovery of previously unknown problems with our products, our own manufacturing or manufacturing by third parties, may result in restrictions on our products or in their manufacture, including withdrawal of the product from the market.
Internationally, our products are subject to regulatory requirements that vary by country. Obtaining approval to sell our products internationally involves complexities of dealing with a variety of governmental regulations. We have limited experience in dealing with the specific regulations that may be required to sell our products in certain international markets, which could delay our ability to obtain relevant regulatory approval for our products. In addition, our product sales in other countries are subject to product regulatory regimes of various degrees and direct marketing or distribution regulations. There can be no assurance that our current operations will not be adversely affected by compliance issues and changes in applicable laws and regulations in relevant jurisdictions.
If we are unable to obtain sufficient supplies of raw materials, if climatic or environmental conditions adversely affect them or if they increase significantly in price, our business would be seriously harmed. If any of our current or future third-party suppliers cease to supply products in the quantity and quality we need to manufacture our products, or if they are unable to comply with applicable regulations, the qualification of other suppliers could be a lengthy process, and there may not be adequate alternatives to meet our needs. As a result, we may not be able to obtain the necessary ingredients used in our products in the future on a timely basis, if at all. This would negatively affect our business.
Any significant disruption in our manufacturing operations for any reason, such as regulatory requirements and loss of certifications, power interruptions, fires, hurricanes, war or other force majeure, could adversely affect our sales and customer relationships.
Our patents, trade secrets, trademarks, service marks and similar intellectual property are critical to our success. We rely on patent, trademark and trade secret law, as well as confidentiality and license agreements with our employees, customers, partners and others, to protect our proprietary rights. We have received patent protection for certain of our products in the People's Republic of China. We have not applied for any patent or other protection in countries other than China. We cannot predict the degree and range of protection patents or other intellectual property rights will afford us against competitors, including whether third parties will find ways to invalidate or otherwise circumvent our patents, if and when patents will issue, whether or not others will obtain patents claiming aspects similar to ours, or if we will need to initiate litigation or administrative proceedings, which may be costly whether we win or lose.
Our success also depends on the skills, knowledge and experience of our employees, consultants, advisors, licensors and contractors. To help protect our proprietary know-how and inventions for which patents may be unobtainable or difficult to obtain, we rely on trade secret protection and confidentiality agreements. To this end, we require all of our employees, consultants, advisors and contractors to enter into confidentiality and, where applicable, grant-back agreements. These agreements may not provide adequate protection in the event of unauthorized use or disclosure or the lawful development by others of such information. If any of our intellectual property is disclosed, its value would be significantly impaired, and our business and competitive position would suffer.
We believe we do not infringe others’ proprietary rights. However, we cannot guarantee that no third party will claim infringement in the future. Resolving such issues traditionally has resulted, and could in our case result, in lengthy and costly legal proceedings, the outcome of which cannot be predicted accurately.
In particular, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock.
There are short selling activities in the Pink Sheets, where our stock is quoted. Short-selling is market selling a position not backed by any possession of the subject shares, generally in anticipation of a decline in a stock’s price. Short sales are often conducted by speculators, and may further depress our common stock price.
Because we became public by means of a reverse merger, we may not attract the attention of major brokerage firms, since there is little incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will want to conduct any secondary offerings on our behalf in the future.
The trading price of our common stock is expected to continue to fluctuate significantly, and, as is the case for Pink Sheets securities generally, is not published in newspapers. It is not necessarily a reliable indicator of our stock’s fair market value or fair value. There is a significant risk that the market price of our common stock will decrease in the future in response to variations in our quarterly operating results; announcements that our revenue or income are below analysts’ expectations; general economic slowdowns; changes in market valuations of similar companies; sales of large blocks of our common stock; announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; or fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of internationally-based companies.
Because of the concentration of ownership of our stock in its hands, Company management has the ability to exert significant control over our affairs requiring stockholder approval, including approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such change of control would benefit our other shareholders.
The price in this offering will fluctuate based on the prevailing market price of our common stock in the Pink Sheets. Accordingly, the price you pay in this offering may be higher or lower than the prices paid by other people participating in this offering.
To protect investors from this activity, the SEC has adopted regulations that generally define a “penny stock” to be any equity security having a market price (as defined) less than $5.00 per share, or an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, broker-dealers selling our common stock are subject to additional sales practices when they sell such securities to persons other than established clients and “accredited investors.” For transactions covered by these rules, before the transaction is executed, the broker-dealer must make a special customer suitability determination, receive the purchaser’s written consent to the transaction and deliver a risk disclosure document relating to the penny stock market. The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative taking the order, current quotations for the securities and, if applicable, the fact that the broker-dealer is the sole market maker and the broker-dealer’s presumed control over the market. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. “Penny stock” rules may restrict trading in our common stock.
We will not receive any proceeds from the sale of the shares of common stock by the selling stockholders.
Our common stock is quoted in the Pink Sheets under the symbol “GBLP.” The following table sets forth, for the calendar quarters indicated, the range of high and low bid prices of common stock reported by the Pink Sheets since February 9, 2005, the date of its acquisition of the business of its predecessor, Natural Pharmatech. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Prior to February 9, 2005, the Company, under different management and a different name, was either in other lines of business or was dormant, and Natural Pharmatech was a privately-held British Virgin Islands company based in the People’s Republic of China.
As of December 28, 2005, there were 137 record holders of our common stock. The total number of beneficial holders is unknown as they hold our common stock in street name, and such number is not provided to us by our Transfer Agent and Registrar.
We have not paid any cash dividends on our common stock, and we currently intend to retain any future earnings to fund the development and growth of our business.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
The following discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus. The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations, including but not limited to the following:
| | · | our ability to raise funds in the future through public or private financings; |
| | · | our ability to develop marketable products through our research and development efforts; |
| | · | our ability to protect our patents and technologies and related intellectual properties; |
| | · | customers’ acceptance of our products; |
| | · | our ability to compete against new companies entering the Chinese pharmaceutical market and larger, more established companies which have more resources than our company; |
| | · | our business expenses being greater than anticipated due to competitive factors or unanticipated developments; |
| | · | changes in political and economic conditions in China; |
| | · | changes in Chinese laws and regulations applicable to our business, including the Administration of Pharmaceuticals, the rules and regulations of the State Food and Drug Administration, the Good Supply Practice standards, and the inclusion of our products in the insurance catalogue of the Ministry of Industry and Social Security; |
| | · | our ability to retain management and key personnel; and |
| | · | our ability to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. |
Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,”“will,”“should,”“estimates,”“predicts,”“potential,”“continue,”“strategy,”“believes,”“anticipates,”“plans,”“expects,”“intends” and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results could differ materially from those anticipated in these statements as a result of a number of factors, including our good faith assumptions being incorrect, our business expenses being greater than anticipated due to competitive factors or unanticipated development or sales costs or our revenues not materializing in the manner anticipated. The forward-looking statements may also be affected by the additional risks faced by us as described in this prospectus and in our SEC filings. All forward-looking statements included in this prospectus are based on information available to us on the date hereof, and we assume no obligation to update any such forward- looking statements.
Background
Global Pharmatech, Inc. (Global Pharmatech,” the “Company,”“we,”“us” or “ours) was incorporated under the laws of the State of Delaware in 2001 under the name Autocarbon.com, Inc. On November 1, 2002, we filed a Certificate of Ownership with the Secretary of State of the State of Delaware whereby we merged with our wholly owned subsidiary and amended our Certificate of Incorporation changing our name to Autocarbon, Inc.
On January 24, 2005, our company entered into a Share Purchase Agreement with Natural Pharmatech, Inc., a British Virgin Islands corporation (Natural Pharmatech), and the shareholders of Natural Pharmatech. Under the terms of the Share Purchase Agreement, we agreed to acquire 100% of Natural Pharmatech’s shares in exchange for 80% of our common stock, to be issued to the Natural Pharmatech shareholders. Our acquisition of Natural Pharmatech was completed on February 9, 2005. In connection with this transaction, we amended our Certificate of Incorporation on January 31, 2005 changing our name to Global Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market proprietary drugs and nutritional supplements that are based on traditional Chinese medicine. We also offer a full range of “start to finish” biotechnology services, including research and development, testing, manufacturing drugs in liquid and solid dose forms, sales and marketing. We utilize unique extraction methods and innovative techniques that have been developed by our research and development team. Our core business is to license our patents and technologies for botanical/biological drug and nutritional supplements and to manufacture and market the products to China and the globe. Our operations are currently conducted in the People’s Republic of China with sales distribution in China, the United States, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. Sales outside China are made either directly to foreign distributors by our subsidiary, Jilin Ben Cao Tang Pharmacy Co., Ltd. (BCT Pharmaceuticals), or through China Ben Cao Tang International Development Ltd. (BCT Pharmaceuticals HK), which sells on to those areas indicated above.
Natural Pharmatech was formed on February 2, 2004 under the laws of the British Virgin Islands. Natural Pharmatech was formed as a holding company to own the five subsidiaries that make up Natural Pharmatech’s business operations. Natural Pharmatech (Jilin China) Co., Ltd. (Natural Pharmatech China) is a wholly owned subsidiary of Natural Pharmatech located in Changchun in Jilin Province of China. Natural Pharmatech China originated as a research department within the Affiliated Hospital of Changchun Traditional Chinese Medicine College. It was organized as a separate private for-profit entity in February 2001.
Natural Pharmatech China has four subsidiaries: BCT Pharmaceuticals, Jilin Yi Cao Tang Pharmacy Co., Ltd. (YCT Pharmaceuticals), Jilin Tian Yao Drug Safety Evaluation Co., Ltd. (Jilin Evaluation) and Changchun Traditional Chinese Medicine (TCM) Technology Service Company, Ltd. (formed in 2005). Natural Pharmatech China owns 75% of the shares of BCT Pharmaceuticals, which was established in September 2002 as a Sino-foreign joint venture with BCT Pharmaceuticals HK, a Hong Kong distributor of natural drugs. BCT Pharmaceuticals is principally engaged in the manufacture and sale of Chinese medicine of the solid dose type, and is capable of manufacturing 15 drugs in three forms. Our solid dose and capsule manufacturing, pre-manufacturing and extraction plants received a national GMP (Good Manufacturing Practice) certificate in April 2004.
Natural Pharmatech China owns 95% of the shares of YCT Pharmaceuticals, which was established in September 2003. It is engaged in the manufacturing and sales of Chinese and Western medicine. YCT Pharmaceuticals obtained a national GMP certificate in July 2004, and is capable of manufacturing 78 drugs in eight forms.
Natural Pharmatech China owns 99.5% of the shares of Jilin Evaluation, which was established in April 2003. It is engaged in pharmacology, safety pharmacology, and short and long term toxicology studies. Jilin Evaluation obtained a national GLP (Good Laboratory Practice) certificate in December 2004.
Natural Pharmatech China owned 51% of the shares of Jilin Mai DiXing Medication Development Co. Ltd, which was established in July 2003. Jilin Development focused on research and development, and technique consulting. Natural Pharmatech China sold Jilin Development in December, 2005.
On March 17, 2005, we established a new wholly-owned subsidiary, Global Health System Inc. (GHS), in New York, which will sell our products principally in the United States. GHS has not yet commenced operations.
On May 13, 2005, we changed our fiscal year end from March 31 to December 31. Natural Pharmatech’s (and its subsidiaries’) fiscal year end is December 31, and we elected to change our fiscal year end to match our operating companies’ fiscal year end.
Since inception, our revenues have been mainly generated from technical related services, including the sale of patents and research services. We have recently sought to increase revenues from sales of goods, through the operations of our two manufacturing subsidiaries, BCT Pharmaceuticals and YCT Pharmaceuticals.
Results of Operations for the Nine Months Ended September 30, 2005
Revenue. Sales for the current nine months were $2,263,868, an increase of $1,146,925, or 103%, compared with revenue in the same period of 2004. These revenues were derived as follows: revenue from goods sold was $1,047,824, contract revenue earned from the transfer of technology was $1,031,630, and revenue derived from experiments, research and related ancillary services was $184,414.
Sales of goods principally increased from YCT Pharmaceuticals, which attained its GMP attestation from the Chinese government in the middle of 2004, and increased its operations in the beginning of 2005. For the nine months ended September 30, 2005, revenue from goods sold from YCT Pharmaceuticals increased $579,464, or 124%, compared with revenue from YCT Pharmaceuticals goods sold in the same period of 2004, which totaled $468,360. For all our subsidiaries for the period, revenue from goods sold increased $563,875, or 117%, compared with the same period of 2004, which totaled $483,949. The main reason for the increase is that there were a total of 28 products offered by YCT Pharmaceuticals during this period.
Contract revenue earned from the transfer of technology increased $451,219, or 78%, compared with contract revenue in the same period of 2004, which totaled $580,411. The main reason is a contract for approximately $1,000,000 signed in 2005. According to the terms of the contract, $843,000 was booked as revenue during the period.
Cost of Sales. Cost of sales for the nine months ended September 30, 2005 was $1,056,899, an increase of $709,093 (204%) from $347,806 for the corresponding period of 2004. The increase is directly associated with the corresponding increase in revenues generally and those from sales of goods, which have higher costs of sales than our other revenue streams.
Gross Profit. Gross profit for the nine months ended September 30, 2005 was $1,206,969, an increase of $437,842 (57%) from $769,137 for the corresponding period of 2004. Gross profit percentage for the nine months ended September 30, 2005 was 53%, compared to 69% for the same period of 2004. The decrease is due to the larger proportion of revenues from the sale of goods in 2005. This is a lower profit activity compared to research services, which accounted for a greater proportion of revenues in 2004. Based on our knowledge of the industry, we believe that our gross profit percentage for the nine months ended September 30, 2005 approximates the industry standards in China.
Advertising and Selling Expenses. Advertising and selling expenses were $276,796, or 12% of net sales, for the nine months ended September 30, 2005, as compared to $42,195, or four percent of net sales, for the corresponding period of 2004. The increase was due to the establishment of our own sales team with advertising expenses increasing $158,674.
General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2005 increased $447,187, or 85%, over such expenses for the same period of 2004, due principally to stock issue expenses related to the Company going public (amounting to approximately $276,400), bad debts (approximately $120,800), and salary increases of approximately $50,000.
Research and development expenses. Research and development (R&D) expenses decreased $144,581, or 36%, from such expenses for the same period of 2004. R&D expenses vary during the different stages of research projects. In 2004 most of our research projects were in the intermediary stage, requiring a greater amount of personnel and other expenditures than other stages. We expect that most of those projects will be finished and filed for review in 2005. Other projects in our pipeline are in their early developmental stages, when overall expenditures are smaller.
Miscellaneous income. Miscellaneous income is government grants. Each year, the Chinese government provides allowances to help companies doing business in medical pharmaceuticals research and development. These payments vary according to the projects we are engaged in and the priorities of the government in funding particular efforts. In 2005, government grants were $256,448, $122,835, and $40,517 in first three quarters, respectively. For the corresponding periods of 2004, grants were $0, $12,082 and $22,160, respectively.
Results of Operations For the Three Months Ended September 30, 2005
Revenue. Revenue for the three months ended September 30, 2005 was $252,607, an increase of $7,694, or three percent, over the same period last year. For the current quarter, revenues were derived as follows: revenue from goods sold was $53,147, contract revenue earned from the transfer of technology was $123,911, and revenue derived from experiments, research and related ancillary services was $75,549.
Since the third quarter is a low season for drug sales, the sales were similar to those in the corresponding period of 2004. Revenue from goods sold, mainly by BCT Pharmaceuticals and YCT Pharmaceuticals, decreased $290 (1%) from the corresponding period of 2004. Revenue for transfer of technology, by Natural Pharmatech China, increased $111,820 (925%) from the corresponding period. Revenue from research services, from Jilin Evaluation, decreased $103,836 (58%) from the corresponding period.
Cost of Sales. Cost of sales for the three months ended September 30, 2005 was $187,192, an increase of $9,600 (5%) from $177,592 for the corresponding period of 2004. The increase is directly associated with the increase in revenues generally and those from sales of goods, which have higher costs of sales than our other revenue streams.
Gross Profit. Gross profit for the three months ended September 30, 2005 was $65,415, a decrease of $1,906 (3%) from $67,321 for the corresponding period of 2004. Gross profit percentage for the third quarter was 26% in 2005 and 27% in 2004.
Advertising and Selling Expenses. Advertising and selling expenses were $66,130, or 26% of net sales, for the three months ended September 30, 2005, as compared to $18,264, or seven percent of net sales, for the corresponding period of 2004. The increase is a result of the Company beginning to create its own selling team, and strengthening the marketing of its products.
General and administrative expenses. General and administrative expenses for the three months ended September 30, 2005 increased $13,599, or seven percent, over the corresponding period of 2004, due principally to an increase in consulting fees of $6,400 and an increase in depreciation expense of $7,200.
Research and development expenses. Research and development expenses for the three months ended September 30, 2005 decreased $83,788, or 69%, from such expenses for the corresponding period of 2004. R&D expenses vary during the different stages of research projects. In 2004 most of our research projects were in the intermediary stage, requiring a greater amount of personnel and other expenditures than other stages. We expect that most of those projects will be finished and filed for review in 2005. Other projects in our pipeline are in their early developmental stages, when overall expenditures are smaller.
Liquidity and Capital Resources
At September 30, 2005, we had cash of $611,359 and working capital of $1,141,721, and for the nine months then ended, we earned a net profit of $55,082. During the nine months then ended, we used cash of $1,734,263 in our operating activities. The significant reasons for the use of cash are:
| | · | the increase in accounts receivable of $1,131,768, which is a function of increased sales which have not yet been converted to cash; |
| | · | an increase in other current assets of $425,242, which is from the increase of unrelated parties’ cash borrowing of approximately $400,000; |
| | · | an increase in inventory of $224,521, which is a function of increased sales; |
| | · | a decrease in other payables and accruals of $235,097, due to the settlement of outstanding invoices; |
| | · | an increase in related party receivables of $121,338; and |
| | · | a decrease in related party payables of $171,576. |
These cash uses were partially offset by an increase in accounts payable and accrued expenses of $183,040, and an increase in cash advances from customers of $94,709.
During the nine months ended September 30, 2005, we invested cash of $441,665 towards the purchase of fixed assets, with the main payment being for a building for YCT Pharmaceuticals. We borrowed $370,737 from Agriculture Bank in the form of a long-term loan, and the Commercial Bank of Chang Chun extended us a short-term loan of $895,619. We also sold our common shares for cash of $368,007 in the first quarter and $960,000 in the third quarter.
We believe we will be able to renew our short-term bank facilities aggregating approximately $2,200,000, which mature during the next 60 days, on terms substantially similar to those applicable to the existing loans.
For the quarter ended September 30, 2005, cash increased by $275,970 over June 30, 2005. The main source of cash was the sale of common shares for $960,000. This cash receipt was partially offset by an increase in other current assets of $425,242 and a net operating loss of $230,360.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Results of Operations for the Year 2004
Revenue. Sales for the year were $1,555,670, a decrease of $165,242, or 9.6%, compared with revenue in 2003. Revenue from goods sold was $942,000, compared to $229,000 for 2003, an increase of $713,000, or 311%; contract revenue earned from the transfer of technology was $476,000, compared to $1,313,000 for 2003, a decrease of $837,000, or 63.7%; and revenue derived from experiments, research and related ancillary services was $137,670, compared to $178,912 for 2003, a decrease of $41,242, or 23.1%.
Sales of goods principally increased because YCT Pharmaceuticals obtained GMP approval from the Chinese government in the middle of 2004, permitting it to commence manufacture and sale of Huangzhihua Oral Liquid and Zhuangjinxugu pill. Sales of these two drugs contributed to the increase in sales of goods.
Contract revenue earned from the transfer of technology decreased $837,000, or 63.7%, compared with contract revenue in 2003. Contract revenue earned from the transfer of technology can vary from year to year with the number of patents sold in the period, which is not easily predicted. In 2003 we sold more patents than we did in 2004.
The decrease in revenue from research services of $41,242 resulted from the signing of new service contracts in 2004 providing for aggregate revenues less than the revenues attributable to projects completed in 2003.
Cost of Sales. Cost of sales for 2004 was $533,770, an increase of $316,532, or 145.7%, from $217,238 for 2003. The increase is directly associated with the corresponding increase in revenues from the sale of goods, which have higher costs of sales than our other revenue streams.
Gross Profit. Gross profit for 2004 was $1,021,900, a decrease of $481,774, or 32%, from $1,503,674 for 2003. The gross profit percentage for 2004 was 65.7%, compared to 87.4% for 2003. The decrease was due to the larger proportion of revenues from the sale of goods in 2004, a lower margin activity than research services, which accounted for a greater proportion of revenues in 2003. Based on our knowledge of the industry, we believe that our gross profit percentage for 2004 approximates the industry standards in China.
Advertising and Selling Expenses. Advertising and selling expenses were $58,634, or 3.8% of net sales, for 2004, as compared to $168,184, or 9.8% of net sales, for 2003. In 2004, the Company decreased advertising expense from 2003 levels after concluding the prior year’s expenditure was excessive in comparison to sales levels and perceived efficacy.
General and administrative expenses. General and administrative expenses for 2004 increased $81,605, or 10.1%, over such expenses for 2003, due principally to the increase in salary expense.
Research and development expenses. Research and development (R&D) expenses increased $81,199, or 19%, from such expenses for 2003, resulting from an increased number of research projects in 2004 over 2003.
Miscellaneous income. Miscellaneous income consists of government grants. Each year, the Chinese government provides allowances to companies doing business in medical pharmaceuticals research and development. These payments vary according to the projects we are engaged in and the priorities of the government in funding particular efforts. In 2004, government grants were $892,845. For 2003, grants were $313,020.
Liquidity and Capital Resources
At December 31, 2004, we had cash of $206,648 and working capital of $(451,436), and for the year 2004, we earned a net profit of $310,085 and cash increased by $37,100. During the year 2004, we generated cash of $1,168,982 from our operating activities. The significant sources for the generation of cash were a decrease in related party receivable of $151,130; a increase in related party payable of $280,052; a decrease in other assets of $860,063; and an increase in accounts payable of $341,002. These cash uses were partially offset by an increase in inventory of $463,091 and accounts receivable of $154,496.
During 2004, we invested cash of $964,973 towards the purchase of fixed assets, with the main purchase being new facilities for YCT Pharmaceuticals in order to obtain its GMP certificate.
Short-term borrowings decreased $465,080 in 2004 as a result of satisfaction of the short-term loan from Bank of Communications. Capital contributions came from BCT Global, a minority shareholder of our subsidiary BCT Pharmaceuticals, which completed its 25% investment in BCT Pharmaceuticals. We also issued 50,000 common shares ($0.01 per share) of Natural Pharmatech to an existing shareholder for $500.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
DESCRIPTION OF BUSINESS
Introduction
Global Pharmatech, Inc. develops, manufactures and markets proprietary drugs and dietary supplements based on China's five millennia of clinical experience in traditional Chinese medicine and using modern pharmaceutical technologies. We also offer a full range of “start to finish” biotechnology services, including drug discovery (basic research leading to the detection of new drug candidates), preclinical research and clinical experimentation. We utilize unique extraction methods and innovative techniques that have been developed by our research and development team. Our core businesses are to license our patents and technologies relating to botanical/biological drugs to other pharmaceutical companies, and to manufacture and market our products in China and around the globe. Our operations are currently conducted, through our subsidiaries, in the People’s Republic of China, with sales distribution in China, the United States, Hong Kong, Malaysia, Singapore and Indonesia. Sales outside China are made either directly to foreign distributors or through a Hong Kong-based distributor, which sells on to those areas indicated above.
Global was incorporated in Delaware in 2001 under the name Autocarbon.com, Inc. Under previous management, the Company engaged in several businesses, now discontinued, that were unrelated to our current one. In early 2005, the Company entered into a share purchase agreement with Natural Pharmatech, Inc. and its shareholders, under which we acquired all of Natural Pharmatech’s shares in exchange for 80% of our common stock issued to Natural Pharmatech’s shareholders. As a result of this transaction, we are now controlled by Natural Pharmatech’s shareholders, and our business is now the Natural Pharmatech business.
Natural Pharmatech was formed in 2004 under British Virgin Islands law as a holding company to own the subsidiaries that make up our business operations. Its principal subsidiary, Natural Pharmatech (Jilin China) Co., Ltd. (Natural Pharmatech China) is located in Changchun, Jilin Province of China, where it originated as a research department within the Affiliated Hospital of Changchun Traditional Chinese Medicine College. It was organized as a separate private for-profit entity in February 2001.
Our principal executive offices are in the People’s Republic of China, located at 509 Maoxiang St., Changchun, People’s Republic of China. Our telephone number there is +86-431-5541869. We also maintain an office at 89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6, where our telephone number is (905) 787-8225.
Organizational History and Corporate Structure
Natural Pharmatech was formed on February 2, 2004 in the British Virgin Islands as a holding company to own the subsidiaries that make up our business operations. Its principal subsidiary, Natural Pharmatech China, has four subsidiaries: (1) Jilin Ben Cao Tang Pharmacy Co., Ltd. (BCT Pharmaceuticals); (2) Jilin Yi Cao Tang Pharmacy Co., Ltd. (YCT Pharmaceuticals); (3) Jilin Tian Yao Drug Safety Evaluation Co., Ltd. (Jilin Evaluation); and (4) Changchun Traditional Chinese Medicine (TCM) Technology Service Company, Ltd. (Changchun TCM). A former subsidiary, Jilin Mai Di Xing Medication Development Co., Ltd., was sold in December, 2005.
Natural Pharmatech China owns 75% of BCT Pharmaceuticals, which was established in September 2002 as a joint venture with China Ben Cao Tang, a Hong Kong distributor of natural drugs. BCT Pharmaceuticals is principally engaged in the manufacture and sale of Chinese medicine in solid dose form.
Natural Pharmatech China owns 95% of YCT Pharmaceuticals, established in September 2003 and principally engaged in the manufacture and sale of Chinese medicine in liquid dose form and in commissioned processing of health food.
Natural Pharmatech China owns 99.5% of Jilin Evaluation, established in April 2003 and principally engaged in performing toxicity research, including acute toxicity testing and long-term toxicity observations, for different kinds of new drugs.
Natural Pharmatech China owns 80% of Changchun TCM, which was established in 2005 with Changchun Science and Technology Enterprise Service Center, and focuses on research and development.
On March 17, 2005, we established a new wholly-owned subsidiary, Global Health System Inc. (GHS), in New York, which will sell our products principally in the United States. GHS has not yet commenced operations.
Traditional Chinese Medicine (TCM)-Based Botanical Drug Products
We use the phrase “Traditional Chinese Medicine” to refer to a range of medical materials used in China for the treatment of human disease over the past five millennia, including botanical materials, minerals and materials prepared from animals. Our company is focusing on the development of botanical drug products based on China's five millennia of clinical experience in traditional Chinese medicine and using modern pharmaceutical technologies. As currently practiced in China, botanical drug products are used as prescription drugs or complements to Western medicines.
Traditional Chinese Medicine is a significant part of the public health care system in China. TCM products are sold over-the-counter and via prescription, and their cost to consumers is covered by China’s medical care systems. Since 2000, Natural Pharmatech, through its operating subsidiaries, has been identifying the active ingredients used in botanical medical materials, isolating those ingredients, testing them, and selling development rights to other manufacturers.
Our Current Products
Our product line consists of more than 90 products, primarily TCM-based prescription drugs, over-the-counter drugs and dietary supplements, including several western medicines and bio-medicines. We sell our products through distributors and directly to consumers through our own sales team. We currently have three principal drugs that are patented in China and approved for sale by the Chinese State Food & Drug Administration (SFDA):
Qingxuan Anti-Hypertension Tablet is an SFDA-approved over-the-counter drug product indicated for the treatment of hypertension and high serum cholesterol level. The drug substance of Qingxuan is extracted from a single Chinese medical herb, radish seed. The extract contains methyl mercaptan, erucic acid, octadecatrienoic acid, nC13, Glycerol sinapate, raphanin, cyanidin and coumarin. Pharmacology experiments showed that Qingxuan may reduce blood pressure in several animal models. In a three-month toxicity study, after Qingxuan was orally given to mice at ten to 40 times greater than human clinical dose (based on body surface areas), no mortality or organ toxicity was observed in the animal tested. As an over-the-counter drug product, these tablets can be marketed in China without prescription.
The Jutai Soft Capsule is an SFDA-approved dietary supplement. Substances of this product are extracted from ginseng and echinacea purpurea, a plant originally grown in North America. This dietary supplement and energy provider was developed by Global Pharmatech. As reported previously in the literature, echinacea purpurea may increase the concentration of blood leukocyte and enhance human immunity. In addition, Jutai is approved for sale to combat fatigue.
Huangzhihua Oral Liquid is an SFDA-approved prescription drug for the treatment of common cold, especially for children. The drug substances of Huanzhihua are extracted from several Chinese herbs. Natural Pharmatech developed this product based upon the written experience of more than a thousand years of Chinese medical practice. Pharmacology studies illustrated that Huangzhihua can inhibit the growth of various bacterium in vitro, and inhibit the proliferation of influenza virus in mouse lungs in vivo and has been shown to have anti-inflammatory benefits in animal models. Long-term toxicology studies showed that orally administered Huangzhihua drug substance at 25 or 50 g/kg/day (several times greater than the human clinical dose) did not induce significant organ toxicity in rats. A clinical study demonstrated that Huangzhihua could significantly reduce symptom of common cold in a randomized, comparator controlled clinical trial. Stability studies showed that the drug product was stable within 3 years testing period. According to Chinese regulations, Huangzhihua has been granted a seven-year administrative market protection by the SFDA.
In addition to these patented products, Natural Pharmatech manufactures and sells other proprietary drugs, generics and dietary supplements used to treat symptoms ranging from headaches, coughing and dry mouth to infections and numbness of limbs.
Research and Development
Our own R&D efforts result in new drug patents which form the basis for some of our products. We sell patented technology to other drug manufactures when we are unable to manufacture ourselves due to lack of appropriate manufacturing facilities or choose not to because they are incompatible with or duplicative of our current product mix or lack required profitability criteria. We also provide research services, primarily through contracts with other drug manufacturers which lack their own R&D capabilities.
Our R&D capabilities conduct almost all our pre-clinical trial research and develop products according to consumer requirements, distinguishing us from many of our competitors. R&D expenditures were US$426,379 for 2003 and US$507,578 for 2004.
We currently have 26 patents and 15 trademarks, and are not a party to any license, royalty or franchise contacts.
We are currently focusing our development efforts on two proposed drugs:
The XS capsule (Xin-Shu) is indicated for the treatment of angina and other coronary disease. It has been developed by using modern biotechnologies. Based on clinical experience, we believe our product formulation could improve the efficacy of this drug. The drug substances of XS were extracted from six Chinese medical herbal materials. Safety and efficacy of these drug substances and their combination were tested in previous clinical trials conducted in China. The XS capsule is currently under SFDA review and evaluation. Approval of this product by the Chinese government is expected in early 2006.
HLB tablet (Huo-Li-Bao) is composed of drug substances extracted from American ginseng and echinacea purpurea. Based on data from previous preclinical and clinical studies, HLB could enhance human immunity, and may have efficacy in combating fatigue. Approval of this product by the Chinese government is expected in the latter half of 2006.
We conduct research and development of products by a variety of means, including two methods we believe are used exclusively by us. The first is a method of analyzing the components of Traditional Chinese Medicines in a serum to determine the chemical structure and bioactivity of the effective compounds absorbed into the blood. The second method is analyzing the chemical structure of polypeptides, or specialized proteins, of Traditional Chinese Medicine in animals, and using bioengineering methods to produce polypeptide preparations.
Manufacturing
The Company’s 14,533-sq.m. manufacturing plant contains manufacturing capacity for over 300 million capsules, 200 million pills and tablets, 50 million bags of granules, 50 million vials of liquid dosage form drugs and 200 tons of pilular (orally-administered) drugs annually. Its facilities are certified as compliant with Chinese Current Good Manufacturing Practices, which are governmentally-established current, scientifically sound methods, practices and principles that are implemented and documented during product development and production to ensure consistent and uniform manufacture of safe products. Current Good Manufacturing Practices require the design and implementation of standard operating procedures for each step in the manufacturing process, beginning with the selection of raw materials suppliers and ending with storage and shipment.
Our principal capsule supplier is Zhejiang Huaguang Capsule Co., Ltd. Shenzhen Dongyangguang Development Co., Ltd. is our principal source for medicine wrappers. We have a number of other smaller suppliers of raw materials and other materials. We believe that a loss of any of these suppliers could be compensated for through arrangements with alternative sources of supply.
We believe we are in material compliance with all Chinese environmental laws. In each of 2002 and 2004, we spent approximately US$140,000 to purchase equipment for processing production wastes, and we spend approximately US$78,000 annually on maintenance and other compliance expenses.
Current and Proposed Marketing and Operating Strategies
Natural Pharmatech has historically generated revenue from transferring technology during various stages of development to other pharmaceutical companies, in which it retains no ownership interest and for which it receives lump-sum payments based on pre-established milestones rather than royalties or other compensation. We plan to continue to do so with certain drugs, primarily in cases where products are requested and selected by pharmaceutical companies that do not have their own research facilities. For example, Natural Pharmatech currently provides services to medium-sized pharmaceutical companies in northern China that have mature manufacturing capacities and sales channels, but do not have similar research and development capabilities.
We also plan to increase our focus in the future on manufacturing in-house developed medicines in our own production facilities. We intend to target the urban consumer market in China. Currently, sales are mainly through distributors, such as wholesale companies and chain store representatives. We also target the sale of our products to medical institutions, such as hospitals and clinics.
Geographically, Natural Pharmatech focuses its sales efforts in Beijing, Anhui, Shandong, Shanxi, Liaoning, Heilongjiang, Jilin, Chongqing, Shenzhen and other provinces in China.
Our principal customers include Jilin Aodong Pharmaceutical Group, which utilizes our research services and has acquired technology from us, resulting in aggregate revenue of approximately US$500,000; the Shanghai Hutchison Pharmaceutical subsidiary of Hutchison Whampoa Ltd., a diversified public company with global operations, to which we sold approximately US$100,000 of products during 2004; Changchun Xinyu Pharmaceuticals Co., Ltd., our major client for technology transfers, from which we derived approximately US$843,000 during 2005; and Jiuzhoutong Group Co., Ltd., one of the three largest pharmaceutical companies in China and our largest distributor, to which we sold approximately US$10,000 of products during 2005. We do not believe that the loss of any of these our customers would have a material adverse effect on our business.
Competition
The Chinese pharmaceuticals market is highly fragmented and competitive. Market entry is generally not controlled, although regulatory and technological hurdles, significant start-up costs and limited available facilities may deter inexperienced or undercapitalized entrants. We anticipate that competition in this market will continue to intensify. Our competitors include national and regional pharmaceutical promotion companies, independent pharmaceutical research and development companies and pharmaceutical distributors. We anticipate substantial new competition from foreign and domestic competitors entering the Chinese pharmaceutical marketing and distribution market.
Some of our competitors are more established, and have significantly greater financial, technical, marketing and other resources than we do. Many also have greater name recognition and a larger customer base. Our competitors may be better able than we are to respond to new or changing opportunities and customer requirements, undertake more extensive research and development, manufacturing and distribution activities, offer more attractive terms to customers, and adopt more aggressive pricing policies.
We believe we best compete with other pharmaceutical companies in China on the basis of our modern facilities, talented research and development professionals and comprehensive research and development and production resources. We believe our facilities approach or meet Western standards and have sufficient capacity to meet our research and development and production needs for the foreseeable future. In contrast, we believe many Chinese pharmaceutical companies rely on outdated equipment, inadequate facilities and/or less stringent quality control measures.
Governmental Regulation
The law of China on the Administration of Pharmaceuticals was promulgated on September 20, 1984 by the Executive Committee of the National People’s Congress and amended effective December 1, 2001. This law sets out the basic legal framework for administration of pharmaceutical production and sale in China, covering manufacture, distribution, packaging, pricing and advertising. The Implementation Rules on the Administration of Pharmaceuticals were promulgated effective September 15, 2002 to set out detailed implementation rules.
The State Drug Administration was established in 1998 as the Chinese pharmaceutical regulatory authority, to assume supervisory and administrative functions previously carried out by the Ministry of Health, the State Administration Bureau for Pharmaceuticals and the State Administration Bureau for Traditional Chinese Medicine. In March 2003, China’s SFDA was established to assume the functions previously carried out by the SDA. The SFDA’s primary responsibilities include:
| | · | formulating and supervising the implementation of regulations and policies concerning drug administration; |
| | · | promulgating standards for pharmaceutical products and medical appliances; |
| | · | categorizing drugs and medical appliances for regulatory purposes; |
| | · | registering and approving new drugs, generic drugs and imported and Chinese medicines; |
| | · | granting approvals for the production of pharmaceutical products and medical appliances; and |
| | · | approving the manufacture and distribution of pharmaceutical products. |
Before any pharmaceutical distribution enterprise, including any wholesaler or retailer, can distribute pharmaceutical products in China, it must obtain a Pharmaceutical Distribution Permit issued by the relevant provincial or county level SFDA where the enterprise is located. Issuance of a Permit is subject to inspection of the facilities, warehouse, hygiene environment, quality control systems, personnel and equipment of the enterprise and, when granted, the Permit is valid for five years. Enterprises must apply for Permit renewal no later than six months prior to expiration, subject to reassessment by the relevant authority. Pharmaceutical distribution enterprises must also obtain a business license from the relevant administration bureau for industry and commerce to commence business.
Good Supply Practice standards have been established in China regulating pharmaceutical wholesale and retail enterprises to ensure quality distribution of pharmaceutical products. Currently applicable GSP standards, passed by the SDA effective July 1, 2000, require wholesale and retail enterprises to implement strict control of staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management and quality control in order to obtain a GSP certificate to conduct business. GSP certificates are valid for five years, after a one-year certification for newly established enterprises. Renewal applications must be made no later than three months prior to expiration, subject to reassessment by the relevant authority.
Pursuant to the Decision of the State Council on the Establishment of the State Basic Medical Insurance System for Urban Employees and relevant Implementation Measures, the Chinese Ministry of Labor and Social Security established a Catalogue listing medicines covered by social insurance (the Insurance Catalogue). The Insurance Catalogue is divided into Parts A and B. Part A medicines are qualified for general application, and their content may not be changed by local authorities. Provincial level authorities may make limited changes to Part B medicines, resulting in some regional variations. Patients purchasing Part A medicines are entitled to reimbursement of their costs from the social medical fund in accordance with relevant regulations. Patients purchasing Part B medicines are required to pay a predetermined proportion of their costs.
Medicines included in the Insurance Catalogue are selected by the Chinese government authorities based on factors including treatment requirements, frequency of use, effectiveness and price, and are subject to government price control. The Insurance Catalogue is revised every two years. In connection with each revision, relevant provincial drug authorities collect proposals from relevant enterprises, and the SFDA makes final revisions based on the preliminary opinions suggested by the provincial drug administrations.
Medicine products included in the Insurance Catalogue and those whose production or trading will constitute monopolies are also subject to government price control. Maximum prices for these products are periodically revised by state and provincial administration authorities. Prices for medicines not subject to price control are determined by the pharmaceutical manufacturers, subject in some cases to providing notice to provincial pricing authorities. Price controls are set to create reasonable profit margins for pharmaceutical enterprises after taking into account the type and quality of the products, their production costs, prices of substitute products and other similar factors.
Employees
The Company currently has 397 full-time employees and no part-time employees. None of our employees is covered by a collective bargaining agreement. We consider relations with our employees to be good.
Description of Property
The Company, either directly or through its subsidiaries, operates under 50-year ground leases acquired from the Chinese government for lump-sum payments, (1) an office building and factory located at 509 Maoxiang St., Changchun (approximately 9,300 and 5,600 sq.m., respectively), including the 20,800 sq.m. of land on which they are situated; and (2) an office building, factory and storage facility located at 44 Xinghuanan St., Kuaitong, Tongyu (approximately 2,800, 3,331 and 2,600 sq.m., respectively), including the 20,800 sq.m. of land on which they are situated. The Changchun and Tongyu ground leases expire in 2050 and 2053, respectively. The Company owns the buildings and improvements on the properties, which will revert to the Chinese government at the end of the relevant lease term in the absence of extension.
Legal Proceedings
We are not currently a party to, nor is any of our property currently the subject of, any pending legal proceeding.
Periodic Reporting and Audited Financial Statements
We have reporting obligations, including the requirement to file annual, quarterly and current reports with the SEC. In accordance with the requirements of the Exchange Act, our annual reports contain financial statements audited and reported on by our independent accountants.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names of the directors, executive officers and key employees of the Company as of January 1, 2006:
Name | | Age | | Position |
Lianqin Qu | | 49 | | Chairman of the Board of Directors |
Xiaobo Sun | | 47 | | President, Chief Executive Officer and Director |
Tom Du | | 49 | | Director and Chief Technology Officer |
Joseph J. Levinson | | 29 | | Chief Financial Officer |
Pursuant to the Company’s bylaws, directors are elected at the annual meeting of stockholders and each director holds office until his successor is elected and qualified. Officers are elected by the Board of Directors and hold office until an officer’s successor has been duly appointed and qualified unless an officer sooner dies, resigns or is removed by the Board. There are no family relationships among any of the Company’s directors and executive officers.
Background of Executive Officers and Directors
Lianqin Qu is currently the Chairwoman and General Manager at Dongyuan Investment Consultancy, H.K. Limited in Hong Kong. She has held her current position since August 9, 2001. From December 12, 1999 to December 30, 2003, she was Chairwoman and General Manager of Jilin Dongyuan Strategy Consulting Co., Ltd., located in Jilin province, Northeast part of China. Over the past five years, she worked as a financial advisor for both Jilin Province Huinan Changlong Bio-pharmacy Co., Ltd. and Changchun Da Xing Pharmaceutical Company Ltd., which are listed on the Growth Enterprise Market of the Hong Kong Stock Market. Ms. Qu has many years of experience in financial research, financing practice and corporate management, having advised more than 30 companies with restructuring transactions. Ms. Qu is also Chairwoman of Changchun Da Xing Pharmaceuticals Ltd, a Hong Kong listed company (Sticker symbol: 8067) and chairwoman of Dongyuan Investment Consultancy (H.K.) Limited. She received her MBA degree from Asia International Open University (Macau).
Xiaobo Sun, Ph.D., is the President of Natural Pharmatech (Jilin China) Co., Ltd. From 2002 to May 2004, Dr. Sun worked as a Senior Director, R&D, Hutchison Medipharma - a Hutchison Whampoa Company. From 1999 to 2002, Dr. Sun was the President of the JATCM, a Traditional Chinese Medicine research institute with over 700 scientists, physicians and employees. Dr. Sun has extensive experience in the Chinese pharmaceutical industry and medical community, and has worked as an expert consultant for the State Food and Drug Administration (SFDA), Chinese regulatory authority. Dr. Sun is also a member of various national scientific and technology committees. In addition, Dr. Sun has published five books and over 90 articles in national scientific journals in China and Dr. Sun is an associate editor of several Chinese medical journals.
Tom Du, M.D., Ph.D. has held his current position with the Company since February, 2005, and is currently Vice President, Regulatory Affairs, for Humphairs Industries Ltd., a global pharmaceutical consulting company. Dr. Du has held this position since October 2004. Prior to joining Humpharis, Dr. Du worked as Senior Director, Clinical and Regulatory Affairs, for Hutchison Medipharma, a Hutchison Whampoa Company from 2002 to July 2004. From 2001 to 2002, Dr. Du worked as Acting Managing Director, China operation, at Ingenix Pharmaceutical Services, a UnitedHealth Group Company. From 1994 to 2000, Dr. Du worked as a reviewing officer for the U.S. Food and Drug Administration.
Joseph J. Levinson, CPA joined the company in January, 2006, and since 2004 has been Chief Financial Officer of BDL Media, a closely-held China-based media holding company. From 2001 to 2003, he was Vice President, Business Development for Chengdu Environmental Control Incorporated in southwest China, and from 2000 to 2001 he was a manager in the New York office of Deloitte and Touche. During the 1990s, Mr. Levinson was Corporate Development Officer at Hong Kong-listed China Strategic Holdings, an Asian mergers and acquisitions company led by Asian businessman Oei Hong Leong, where his major responsibilities included the company's subsidiary, China Tire, one of the first Mainland Chinese companies to list on the New York Stock Exchange. Mr. Levinson has been a U.S. Certified Public Accountant since 1996.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate compensation awarded to, earned by or paid to the chief executive officer during 2004. No executive officer’s annual cash compensation exceeded $100,000 in either of the fiscal years ended December 31, 2003 and 2004.
Summary Compensation Table
| | | | | | | | | |
| | | | | | Long Term | | |
| | Annual Compensation | | Compensation Awards | Payouts | |
| | | | | Other | Restricted | Securities | | All |
| | | | | Annual | Stock | Underlying | LTIP | Other |
Name and Principal Position | Year | Salary | Bonus | Compensation | Award(s) | Options | Payouts | Compensation |
| | | ($) | ($) | ($) | (#) | (#) | ($) | ($) |
| Xiaobo Sun(1) | 2004 | 15,000 | - | - | - | - | - | - |
| | | | | | | | | |
(1) Mr. Sun joined the Company on June 24, 2004.
Employment Contracts, Termination Of Employment And Change-In-Control Arrangements
On February 8, 2005, the Company entered into an Executive Services Contract with Lianqin Qu, pursuant to which Lianqin Qu has agreed to act as a Director and Chairperson of the Company’s Board of Directors. Lianqin Qu’s salary under the Executive Services Contract is US$3,000 per month. In addition, the Company agreed to grant Lianqin Qu an option to purchase 100,000 shares of the Company’s common stock upon the achievement of working goals as determined by the Board. During the term of Madam Qu’s appointment, unless the relevant competition is made known to the public and (if required) approved by relevant regulatory authorities, she has agreed not to engage in any business in competition with the Company, or seek any position from any company or individual who competes in business with the Company or any subsidiary or branch of the Company. Lianqin Qu has also agreed to certain confidentiality covenants regarding information obtained from the Company and any of its subsidiaries and branches. The Executive Services Contract may be terminated upon any of the following events, unless otherwise determined by the Board of Directors: (a) Lianqin Qu is prohibited by any laws, regulations or rules from acting in any of her positions or she is no longer qualified to act in any position; (b) Lianqin Qu is unable to perform her duties for a period of three months due to health reasons; (c) Lianqin Qu commits a material breach and/or repeated and/or continual breach of her obligations under the Executive Services Contract; (d) Lianqin Qu is guilty of any serious misconduct or serious neglect in the discharge of her duties; (e) Lianqin Qu’s actions or omissions bring the name or reputation of the Company or any subsidiary or branch of the Company into serious disrepute or prejudice; (f) Lianqin Qu is or becomes of unsound mind or becomes a patient for the purpose of any laws relating to mental health; (g) Lianqin Qu is sued for criminal liability or convicted of any criminal offense other than an offense which in the reasonable opinion of the Board of Directors does not affect her position with the Company; (h) Lianqin Qu is removed from her position by the Board of Directors; (i) Lianqin Qu leaves the service of the Company in accordance with the Company’s Certificate of Incorporation; or (j) Lianqin Qu fails to attend three consecutive meetings of the Board of Directors. There is no expiration date of the Executive Services Agreement.
On February 8, 2005, the Company entered into an Executive Employment Contract with Xiaobo Sun, pursuant to which Xiaobo Sun has agreed to act as the Company’s Chief Executive Officer, President and as a member of the Company’s Board of Directors. Xiaobo Sun’s salary under the Executive Employment Contract is US$5,000 per month. In addition, the Company agreed to grant Xiaobo Sun an option to purchase 200,000 shares of the Company’s common stock upon the achievement of working goals as determined by the Board. During his term of employment, unless the relevant competition is made known to the public and (if required) approved by relevant regulatory authorities, Xiaobo Sun has agreed not to engage in any business in competition with the Company, or seek any position from any company or individual who competes in business with the Company or any subsidiary or branch of the Company. Xiaobo Sun has also agreed to certain confidentiality covenants regarding information obtained of the Company and any of its subsidiaries and branches. The Executive Employment Contract may be terminated upon any of the following events, unless otherwise determined by the Board of Directors: (a) Xiaobo Sun is prohibited by any laws, regulations or rules from acting in any of his positions or he is no longer qualified to act in any position; (b) Xiaobo Sun is unable to perform his duties for a period of three months due to health reasons; (c) Xiaobo Sun commits a material breach and/or repeated and/or continual breach of his obligations under the Executive Employment Contract; (d) Xiaobo Sun is guilty of any serious misconduct or serious neglect in the discharge of his duties; (e) Xiaobo Sun’s actions or omissions bring the name or reputation of the Company or any subsidiary or branch of the Company into serious disrepute or prejudice; (f) Xiaobo Sun is or becomes of unsound mind or becomes a patient for the purpose of any laws relating to mental health; (g) Xiaobo Sun is sued for criminal liability or convicted of any criminal offense other than an offense which in the reasonable opinion of the Board of Directors does not affect his position with the Company; (h) Xiaobo Sun is removed from his position by the Board of Directors; (i) Xiaobo Sun leaves the service of the Company in accordance with the Company’s Certificate of Incorporation; or (j) Xiaobo Sun fails to attend three consecutive meetings of the Board of Directors. There is no expiration date of the Executive Employment Agreement.
On February 14, 2005, the Company entered into a Director and Chief Technology Officer Service Contract with Tom Du, pursuant to which Mr. Du has agreed to act as the Company’s Chief Technology Officer and as a member of the Company’s Board of Directors. Mr. Du’s salary under the Director and Chief Technology Officer Service Contract is US$4,000 per month. In addition, the Company agreed to grant Mr. Du an option to purchase 50,000 shares of the Company’s common stock upon the achievement of working goals as determined by the Board. During his term of employment, Mr. Du agreed not to engage in any business that individually develops any of the products developed by the Company, including all products approved by the SFDA, products marketed by the Company prior to, during, or under development during the employment period. Mr. Du has also agreed to certain confidentiality covenants regarding information obtained of the Company and any of its subsidiaries and branches. The Director and Chief Technology Officer Service Contract may be terminated upon any of the following events, unless otherwise determined by the Board of Directors: (a) Tom Du is prohibited by any laws, regulations or rules from acting in any of his positions or he is no longer qualified to act in any position; (b) Mr. Du is unable to perform his duties for a period of three months due to health reasons; (c) Mr. Du commits a material breach and/or repeated and/or continual breach of his obligations under the Director and Chief Technology Officer Service Contract; (d) Mr. Du is guilty of any serious misconduct or serious neglect in the discharge of his duties; (e) Mr. Du’s actions or omissions bring the name or reputation of the Company or any subsidiary or branch of the Company into serious disrepute or prejudice; (f) Mr. Du is or becomes of unsound mind or becomes a patient for the purpose of any laws relating to mental health; (g) Mr. Du is sued for criminal liability or convicted of any criminal offense other than an offense which in the reasonable opinion of the Board of Directors does not affect his position with the Company; (h) Mr. Du is removed from his position by the Board of Directors; (i) Mr. Du leaves the service of the Company in accordance with the Company’s Certificate of Incorporation; or (j) Mr. Du fails to attend three consecutive meetings of the Board of Directors. In addition, Mr. Du may terminate the Director and Chief Technology Officer Service Contract with one-month notice for good cause arising from impossibility of performance and/or conflict of interest. There is no expiration date of the Director and Chief Technology Officer Service Contract.
On January 1, 2006, the Company entered into a Chief Financial Officer service contract with Joseph J. Levinson, pursuant to which Mr. Levinson has agreed to act as the Company’s Chief Financial Officer. Mr. Levinson’s salary under the Executive Employment Contract is US$1,205 per month. During his term of employment, unless the relevant competition is made known to the public and (if required) approved by relevant regulatory authorities, Mr. Levinson has agreed not to engage in any business in competition with the Company, or seek any position from any company or individual who competes in business with the Company or any subsidiary or branch of the Company. Mr. Levinson has also agreed to certain confidentiality covenants regarding information obtained of the Company and any of its subsidiaries and branches. The Executive Employment Contract may be terminated upon any of the following events, unless otherwise determined by the Board of Directors: (a) Mr. Levinson is prohibited by any laws, regulations or rules from acting in any of his positions or he is no longer qualified to act in any position; (b) Mr. Levinson is unable to perform his duties for a period of three months due to health reasons; (c) Mr. Levinson commits a material breach and/or repeated and/or continual breach of his obligations under the Executive Employment Contract; (d) Mr. Levinson is guilty of any serious misconduct or serious neglect in the discharge of his duties; (e) Mr. Levinson’s actions or omissions bring the name or reputation of the Company or any subsidiary or branch of the Company into serious disrepute or prejudice; (f) Mr. Levinson is or becomes of unsound mind or becomes a patient for the purpose of any laws relating to mental health; (g) Mr. Levinson is sued for criminal liability or convicted of any criminal offense other than an offense which in the reasonable opinion of the Board of Directors does not affect his position with the Company; (h) Mr. Levinson is removed from his position by the Board of Directors; (i) Mr. Levinson leaves the service of the Company in accordance with the Company’s Certificate of Incorporation; or (j) Mr. Levinson fails to attend three consecutive meetings of the Board of Directors. There is no expiration date of the Executive Employment Agreement.
Certain Relationships and Related Transactions
As of September 30, 2005, the Company had the amounts due from and to related parties set forth in the following table arising, in the case of transactions with Company stockholders, out of borrowings by the stockholders from the Company, and, in the case of BCT Global Development, from its services as southeast Asia distributor for the Company’s products. Advances due from BCT Global are inventory receivables, and advances due to BCT Global reflect prepayments by it for the Company’s products.
| | | | |
Advances due from related parties | | | |
| Dong Yuan Investment (HK) Limited | | $ | 108,443 | |
| BCT Global Development Limited | | | 18,228 | |
Stockholders: | | | | |
| Wang Ben Ji | | | 37,131 | |
| Qu Lianqin | | | 11,122 | |
| Xu Dong Ming | | | 23,480 | |
Total | | $ | 198,404 | |
| | | | | |
Advances due to related parties | | | | |
Stockholders: | | | | |
| Xia Lian Zhen | | $ | 42,897 | |
| Li Yuqi | | | 7,168 | |
| BCT Global Development Limited | | | 83,786 | |
Total | | $ | 133,851 | |
These balances have no stated terms for repayment and are not interest bearing.
Dong Yuan Investment (HK) Limited (DYI) is a British Virgin Island company. Lianqin Qu, Chair of the Company’s Board of Directors, is the chairperson of both DYI and Natural Pharmatech China, and majority shareholder of DYI. DYI does not hold any shares of Natural Pharmatech China; neither does Natural Pharmatech China hold any shares of DYI.
BCT Global owns 25% of Natural Pharmatech China’s subsidiary BCT Pharmaceuticals. Lianqin Qu is the chairperson of BCT Global.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On February 11, 2005, the board of directors unanimously approved the dismissal of Russell Brennan as its then certifying accountant and notified Mr. Brennan that it was terminating his services. The Company dismissed Mr. Brennan after it was advised by the SEC staff on December 26, 2004 that Mr. Brennan had not applied for registration with the Public Company Accounting Oversight Board. On the same date, the Company engaged its former accountant, Aaron Stein CPA, to serve as its independent registered public accountant to review the Company's financial statements for the periods ended June 30, September 30 and December 31, 2004.
During the period from September 28, 2004 through February 11, 2005 when Mr. Brennan was retained by the Company, (i) there were no disagreements between the Company and Mr. Brennan on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to Mr. Brennan’s satisfaction, would have caused him to make reference to the matter in his reports on the Company's financial statements, and (ii) Mr. Brennan's reports on the Company's financial statements did not contain an adverse opinion or disclaimer of opinion, and were not modified as to uncertainty, audit scope or accounting principles. During the period of Mr. Brennan’s engagement, there were no reportable events described in Item 304(a)(1)(iv) of Regulation S-B.
During the two fiscal years ended December 31, 2003 and 2002, and until September 28, 2004, Mr. Stein was retained as the Company's principal accountant to audit and review the Company's financial statements during such periods. During those two fiscal years and through February 12, 2005, the Company did not consult with Mr. Stein regarding any matter or event described in Item 304(a)(2)(i) or (ii) of Regulation S-B.
On February 24, 2005, the Company provided Mr. Brennan with a copy of the foregoing disclosure, and requested that he furnish it with a letter addressed to the SEC stating whether he agrees with the above statements. Such letter has been filed with the SEC and incorporated by reference in the registration statement of which this prospectus is a part.
On April 20, 2005, the Company dismissed Mr. Stein, which dismissal was effective immediately and was approved by the board of directors on that date. Mr. Stein had been most recently engaged by the Company from February 11, 2005, and had previously been engaged by the Company as its principal independent accountant for the fiscal years ended December 31, 2002 and 2003, and through September 28, 2004.
On the same date, the Company engaged Moore Stephens, P.C. as its new principal independent accountants, which engagement was effective immediately and was approved by the Company's Board of Directors on that date.
During his 2005 engagement period, Mr. Stein reviewed the Company's consolidated financial statements as of and for the interim periods ended June 30, September 30 and December 31, 2004 in connection with the Company's filing or amended filings of Quarterly Reports on Form 10-QSB for such periods. During that engagement, Mr. Stein did not issue a report containing any adverse opinion or disclaimer of opinion or that was qualified or modified as to uncertainty, audit scope or accounting principles. There were also during that engagement no disagreements between the Company and Mr. Stein on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to Mr. Stein's satisfaction, would have caused him to make reference to the subject matter of the disagreement in connection with his report. None of the reportable events described under Item 304(a)(1)(iv) of Regulation S-B occurred within the two most recent fiscal years of the Company ended December 31, 2004.
The Company has provided Mr. Stein of with a copy of the foregoing disclosures, and he has furnished a letter, addressed to the SEC stating that he agrees with the foregoing statements, which has been filed with the SEC and incorporated by reference in the registration statement of which this prospectus is a part.
During the two most recent fiscal years of the Company, and through the date of the engagement of Moore Stephens on April 20, 2004, the Company did not consult with Moore Stephens regarding any of the matters or events set forth in Item 304(a)(2)(i) or (ii) of Regulation S-B.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 28, 2005, the number of shares of our common stock beneficially owned by (i) each person who is known by us to be the beneficial owner of more than five percent of the Company’s common stock; (ii) each director; (iii) each of the named executive officers in the Summary Compensation Table; and (iv) all directors and executive officers as a group. Unless otherwise indicated, the stockholders listed in the table have sole voting and investment power with respect to the shares indicated.
Name and Address of Beneficial Owner(1) | | Number of Shares Beneficially Owned(2) | | % of Common Stock Beneficially Owned(3) |
| Lianqin Qu(4) | | 13,712,176(5) | | 75.1 |
| Xiaobo Sun | | 0 | | 0 |
| Tom Du | | 0 | | 0 |
| Joseph J. Levinson | | 0 | | 0 |
| Yuqi Li | | 1,125,000(6) | | 6.2 |
| Dongyuan Investment Consultancy, H.K. Limited(7) | | 1,024,687 | | 5.6 |
| Donghai Zhang | | 1,024,686(6) | | 5.6 |
| Dachun Xu | | 937,500(6) | | 5.14 |
| Yunpeng Min | | 937,500(6) | | 5.14 |
| Yingli Di | | 937,500(6) | | 5.14 |
| All officers and directors as a group (four persons) | | 1,024,687 | | 5.6 |
| (1) | Except as otherwise indicated, the address of each beneficial owner is c/o Global Pharmatech, Inc., 89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6. |
| (2) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to the shares shown. Except where indicated by footnote and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of voting securities shown as beneficially owned by them. |
| (3) | Based on 18,247,935 shares outstanding. |
| (4) | Shares are owned by Donguyan Investment Consultancy, H.K. Limited, of which Lianqin Qu is a control person. |
| (5) | Includes 12,687,489 shares as to which Ms. Qu holds irrevocable proxies given by stockholders who acquired shares of our common stock in the acquisition of Natural Pharmatech, and as to which Ms. Qu disclaims beneficial ownership. |
| (6) | This person has given Lianqin Qu an irrevocable proxy to vote these shares. |
| (7) | Lianqin Qu may be deemed to be the control person of Donguyan Investment Consultancy, H.K. Limited. |
SELLING STOCKHOLDERS
The following table sets forth as of December 28, 2005, information regarding the current beneficial ownership of our common stock by the persons identified, based on information provided to us by them, which we have not independently verified. Although we have assumed for purposes of the table that the selling stockholders will sell all of the shares offered by this prospectus, because they may from time to time offer all or some of their shares under this prospectus or in another manner, no assurance can be given as to the actual number of shares that will be resold by the selling stockholders (or any of them), or that will be held after completion of the resales. In addition, a selling stockholder may have sold or otherwise disposed of shares in transactions exempt from the registration requirements of the Securities Act or otherwise since the date he or she provided information to us. The selling stockholders are not making any representation that the shares covered by this prospectus will be offered for sale.
Except as set forth below, no selling stockholder has held any position nor had any material relationship with us or our affiliates during the past three years.
The selling stockholders identified in the following table acquired shares of our common stock pursuant to the Share Purchase Agreement, dated as of January 24, 2005, among the Company, Natural Pharmatech, Inc. and Natural Pharmatech’s stockholders, providing for the acquisition of Natural Pharmatech by the Company in a private offering of common stock pursuant to Regulation S under the Securities Act. Each of these selling stockholders has given Lianqin Qu an irrevocable proxy to vote the shares.
Name of Selling Stockholder | | Shares Beneficially Owned Prior to Offering | | Maximum Number of Shares to be Sold | | Shares Beneficially Owned After Offering | | Percentage Ownership After Offering | |
| Yingli Di | | | 937,500 | | | 937,500 | | | 0 | | | 0 | % |
| Dezhen Ding | | | 678,125 | | | 678,125 | | | 0 | | | 0 | % |
| Xiangyun Yu | | | 552,500 | | | 552,500 | | | 0 | | | 0 | % |
Total | | | 2,168,125 | | | 2,168,125 | | | 0 | | | 0 | % |
The selling stockholders identified in the following table acquired shares of our common stock pursuant to Subscription Agreements, dated as of March 14, 2005, between the Company and such stockholders in a private offering of common stock pursuant to Regulation S under the Securities Act.
Name of Selling Stockholder | | Shares Beneficially Owned Prior to Offering | | Maximum Number of Shares to be Sold | | Shares Beneficially Owned After Offering | | Percentage Ownership After Offering | |
| Xie Dong Hong | | | 100,000 | | | 100,000 | | | 0 | | | 0 | |
| Yu Ya Fang | | | 10,000 | | | 10,000 | | | 0 | | | 0 | |
| Wen Jian Bo | | | 21,367 | | | 21,367 | | | 0 | | | 0 | |
| Lin Shao Yue | | | 21,367 | | | 21,367 | | | 0 | | | 0 | |
| Zhong Zhao Fen | | | 48,076 | | | 48,076 | | | 0 | | | 0 | |
| Ye Yun Hua | | | 16,025 | | | 16,025 | | | 0 | | | 0 | |
| Kwok Po Chun | | | 9,615 | | | 9,615 | | | 0 | | | 0 | |
| Wu Zi Qun | | | 20,683 | | | 20,683 | | | 0 | | | 0 | |
| Li Lin Ho | | | 20,683 | | | 20,683 | | | 0 | | | 0 | |
| Wong Po Ling | | | 21,367 | | | 21,367 | | | 0 | | | 0 | |
Total | | | 279,183 | | | 279,183 | | | 0 | | | 0 | |
The selling stockholder identified in the following table acquired shares of our common stock pursuant to a Subscription Agreement, dated as of August 18, 2005, between the Company and such stockholder in a private offering of common stock pursuant to Regulation S under the Securities Act.
Name of Selling Stockholder | | Shares Beneficially Owned Prior to Offering | | Maximum Number of Shares to be Sold | | Shares Beneficially Owned After Offering | | Percentage Ownership After Offering | |
| Empower Investment (H.K.) Limited | | 800,000 | | 800,000 | | 0 | | 0 | |
Total | | | 800,000 | | | 800,000 | | | 0 | | | 0 | |
| | | Shares Beneficially Owned Prior to Offering | | Maximum Number of Shares to be Sold | | Shares Beneficially Owned After Offering | | Percentage Ownership After Offering | |
Total for all Selling Stockholders | | | 3,247,308 | | | 3,247,308 | | | 0 | | | 0 | |
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the above selling stockholders. As used in this prospectus, the term “selling stockholders” includes pledgees, transferees or other successors-in-interest selling shares received from the selling stockholders as pledgors, assignees, borrowers or in connection with other non-sale-related transfers after the date of this prospectus. This prospectus may also be used by transferees of the selling stockholders, including broker-dealers or other transferees who borrow or purchase the shares to settle or close out short sales of shares of common stock. The selling stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale or non-sale related transfer. We will not receive any of the proceeds of sales by the selling stockholders.
The common stock may be sold by the selling stockholders from time to time in one or more transactions at or on any stock exchange, market or trading facility on which shares are traded or in private transactions. Sales may be made at fixed or negotiated prices, and may be effected by means of one or more of the following transactions (which may involve cross or block transactions):
| | · | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
| | · | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| | · | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| | · | an exchange distribution in accordance with the rules of the applicable exchange; |
| | · | privately negotiated transactions; |
| | · | settlement of short sales; |
| | · | transactions in which broker-dealers may agree with one or more selling stockholders to sell a specified number of such shares at a stipulated price per share; |
| | · | a combination of any such methods of sale; |
| | · | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or |
| | · | any other method permitted pursuant to applicable law. |
The selling stockholders may also sell shares under Rule 144 of the Securities Act, if available, rather than under this prospectus. To the extent required, this prospectus may be amended and supplemented from time to time to describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchase of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
In connection with sales of common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of common stock short and deliver these shares to close out those short positions, or lend or pledge common stock to broker-dealers that in turn may sell such securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions for the creation of one or more derivative securities requiring the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus, as supplemented or amended to reflect such transaction.
The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act and any profit on the sale of such securities and any discounts, commissions, concessions or other compensation received by any such underwriter, broker-dealer or agent may be deemed to be underwriting discounts and commissions under the Exchange Act. The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute the common stock.
Pursuant to registration rights agreements with the selling stockholders, all fees and expenses incurred by us incident to the registration of the common stock will be paid by us, including, without limitation, SEC filing fees. Those selling stockholders will be indemnified by us against certain losses, claims, damages and liabilities, including certain liabilities under the Securities Act. We will be indemnified by those selling stockholders severally against certain civil liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith.
The selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, which provisions may limit the timing of purchases and sales of common stock by them. The foregoing may affect the marketability of such securities.
To comply with the securities laws of certain jurisdictions, if applicable, the common stock will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers.
DESCRIPTION OF SECURITIES
Our current authorized capital stock consists of 95,000,000 shares of common stock, par value $.0001 per share, of which 18,247,935 shares were issued and outstanding as of December 28, 2005, and 5,000,000 shares of preferred stock, par value $.0001 per share, none of which were issued and outstanding as of that date.
Common Stock
Holders of common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. Subject to the preferential rights of the preferred stock, holders of common stock are entitled to receive, when and if declared by the board of directors, out of the assets of the corporation which are by law available therefor, dividends payable in cash, property or shares of capital stock. In the event of our liquidation, dissolution or winding up, after distribution in full of the preferential amounts, if any, to be distributed to holders of preferred stock, holders of common stock shall be entitled to received all of the remaining assets of the Company of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of common stock held by them.
Holders of common stock, as such, have no preemptive, preferential or subscription right to any stock of the Company or to any obligations convertible into, or warrants or options for the purchase of, stock of the Company, except to the extent provided by written agreement with the Company.
Preferred Stock
Under our Certificate of Incorporation, as amended, the Board of Directors is authorized, subject to any limitations prescribed by the laws of the State of Delaware, but without any further action by our stockholders, to provide for the issuance of up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in such series, to fix the designations, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, and to increase or decrease the number of shares of any such series. The board of directors may authorize and issue preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of holders of common stock.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Florida Atlantic Stock Transfer, Inc.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our articles of incorporation provide that none of our directors will be personally liable to the Company or any of our shareholders for monetary damages arising from the director’s breach of fiduciary duty as a director, with certain limited exceptions.
Pursuant to Delaware corporation law, every Delaware corporation has the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation or is or was serving in such a capacity at the request of the corporation for another corporation, partnership, joint venture, trust or other enterprise, against any and all expenses, judgments, fines and amounts paid in settlement and reasonably incurred in connection with such action, suit or proceeding. The power to indemnify applies only if such person acted in good faith and in a manner such person reasonably believed to be in the best interests, or not opposed to the best interests, of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the corporation as well, but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment or settlement of the claim itself, and with the further limitation that in such actions no indemnification shall be made in the event of any adjudication of negligence or misconduct unless the court, in its discretion, believes that in light of all the circumstances indemnification should apply. Our articles of incorporation contain provisions authorizing it to indemnify our officers and directors to the fullest extent permitted by Delaware corporation law.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or controlling persons pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for us by Loeb & Loeb LLP, New York, New York.
EXPERTS
Our audited financial statements for the periods ended December 31, 2004 and 2003, have been included in this prospectus in reliance upon the report of Moore Stephens, P.C., independent auditors, appearing in this registration statement, and their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file all documents required to be filed pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act with the SEC through the Electronic Data Gathering, Analysis and Retrieval system (EDGAR), and is publicly available through the SEC’s website located at http://www.sec.gov.. This Amendment on Form SB-2, including all exhibits and schedules and amendments, has been filed with the SEC through EDGAR. You may also inspect this Amendment on Form SB-2, including all exhibits, without charge at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain copies of these materials from the SEC’s Public Reference Room at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, upon the payment of prescribed fees. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
This prospectus is only part of a registration statement on Form SB-2 that we have filed with the SEC under the Securities Act of 1933 and therefore omits certain information contained in the registration statement. We have also filed exhibits and schedules to the registration statement that are excluded from this Prospectus, and you should refer to the applicable exhibit or schedule for a complete description of any statement referring to any contract or other document. You may inspect or obtain a copy of the registration statement, including the exhibits and schedules, as described in the previous paragraph at no charge from us.
INDEX TO FINANCIAL STATEMENTS
Interim Financial Statements for the periods ending September 30, 2005 and 2004 | Q-1 to Q-10 |
Audited Financial Statements for the periods ending December 31, 2004 and 2003 | F-1 to F-15 |
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Unaudited Consolidated Balance Sheet as of September 30, 2005 | Q-2 |
Unaudited Consolidated Statements of Operations for the nine months and three months ended September 30, 2005 and 2004 | Q-3 |
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 | Q-4 to 5 |
Notes to Unaudited Consolidated Financial Statements | Q-6 to 10 |
Global Pharmatech, Inc.
Consolidated Balance Sheet
| | | September 30, 2005 (Unaudited) | |
Assets | | | |
Current Assets | | | |
| Cash and cash equivalents | | $ | 611,359 | |
| Accounts receivable | | | 1,775,988 | |
| Related party receivables | | | 198,404 | |
| Inventories | | | 1,263,304 | |
| Prepaid expenses | | | 18,377 | |
| Other current assets | | | 997,012 | |
Total Current Assets | | $ | 4,864,444 | |
| | | | | |
| Property, plant and equipment, net | | | 6,509,243 | |
| Land lease, net | | | 446,164 | |
| Intangible assets, net | | | 127,368 | |
| | | | | |
Total Assets | | $ | 11,947,219 | |
| | | | | |
Liabilities and Stockholders’ Equity | | | | |
Current liabilities | | | | |
| Short term borrowings | | | 2,224,419 | |
| Accounts payable and accrued expenses | | | 696,947 | |
| Related party payables | | | 133,851 | |
| Advances from customers | | | 206,338 | |
| Other payables and accruals | | | 423,140 | |
| Other current liabilities | | | 38,028 | |
Total Current Liabilities | | | 3,722,723 | |
| | | | | |
| Long term borrowings | | | 370,737 | |
| | | | | |
Total Liabilities | | | 4,093,460 | |
| | | | | |
| Minority Interest | | | 700,479 | |
| | | | | |
Stockholders’ Equity | | | | |
| Preferred stock, par value $0.0001 per share, 5,000,000 shares authorized, no shares issued and outstanding | | | - | |
| Common stock par value $0.0001 per share, 95,000,000 shares authorized; 18,247,935 shares issued and outstanding | | | 1,825 | |
| Additional paid-in capital | | | 6,811,288 | |
| Retained earnings | | | 365,167 | |
| Subscription receivable | | | (25,000 | ) |
Total Stockholders’ Equity | | | 7,153,280 | |
Total Liabilities and Stockholders’ Equity | | $ | 11,947,219 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Global Pharmatech, Inc.
Consolidated Statements of Operations
(Unaudited)
| | | | | | |
| | | Nine Months Ended September 30, | | Three Months Ended September 30, | |
| | | 2005 | | 2004 | | 2005 | | 2004 | |
Sales | | $ | 2,263,868 | | $ | 1,116,943 | | $ | 252,607 | | $ | 244,913 | |
Cost of Sales | | | 1,056,899 | | | 347,806 | | | 187,192 | | | 177,592 | |
| | | | | | | | | | | | | | |
Gross Profit | | | 1,206,969 | | | 769,137 | | | 65,415 | | | 67,321 | |
| | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | |
| Advertising | | | 167,296 | | | 8,622 | | | 9,970 | | | - | |
| Research and development | | | 260,883 | | | 405,464 | | | 38,526 | | | 122,314 | |
| Selling expenses | | | 109,500 | | | 33,573 | | | 56,160 | | | 18,264 | |
| General and administrative expenses | | | 970,821 | | | 523,634 | | | 220,437 | | | 206,838 | |
| | | | | | | | | | | | | | |
Loss from Operations | | | (301,531 | ) | | (202,156 | ) | | (259,678 | ) | | (280,095 | ) |
| | | | | | | | | | | | | | |
Other Income (Expenses) | | | | | | | | | | | | | |
| Miscellaneous income | | | 419,800 | | | 34,241 | | | 40,517 | | | 22,160 | |
| Interest expense | | | (127,352 | ) | | (101,989 | ) | | (46,564 | ) | | (26,812 | ) |
| | | | | | | | | | | | | | |
Loss Before Income Taxes and Minority Interest | | | (9,083 | ) | | (269,904 | ) | | (265,725 | ) | | (284,747 | ) |
| Income Taxes - Current | | | 6,603 | | | 5,864 | | | - | | | 5,743 | |
| | | | | | | | | | | | | | |
Loss Before Minority Interest | | | (15,686 | ) | | (275,768 | ) | | (265,725 | ) | | (290,490 | ) |
| Minority Interest | | | (70,768 | ) | | (13,193 | ) | | (35,365 | ) | | (3,918 | ) |
Net Income (Loss) | | $ | 55,082 | | $ | (262,575 | ) | $ | (230,360 | ) | $ | (286,572 | ) |
| | | | | | | | | | | | | | |
Earnings (Loss) Per Common Share | | | | | | | | | | | | | |
| Basic and Diluted | | $ | 0.00 | | $ | (0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding | | | 17,474,031 | | | 17,126,811 | | | 17,830,544 | | | 17,142,665 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Global Pharmatech, Inc.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
| | | 2005 | | 2004 | |
Cash flows from operating activities | | | | | |
| Net income (loss) | | $ | 55,082 | | $ | (262,575 | ) |
| Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | | | | | |
| Minority interest | | | (70,768 | ) | | (13,193 | ) |
| Depreciation | | | 334,922 | | | 287,727 | |
| Amortization of land lease and intangible assets | | | 16,839 | | | 16,839 | |
| Changes in operating assets and liabilities: | | | | | | | |
| Decrease (Increase) in operating assets: | | | | | | | |
| Accounts receivable | | | (1,131,768 | ) | | (116,686 | ) |
| Related party receivable | | | (121,338 | ) | | 161,839 | |
| Inventories | | | (224,521 | ) | | (110,862 | ) |
| Prepaid expenses | | | 40,024 | | | 67,881 | |
| Other current assets | | | (425,242 | ) | | 143,489 | |
| Increase (Decrease) in operating liabilities: | | | | | | | |
| Accounts payable and accrued expenses | | | 183,040 | | | 115,709 | |
| Related party payable | | | (171,576 | ) | | 48,448 | |
| Advances from customers | | | 94,709 | | | 263,656 | |
| Other payables and accruals | | | (235,097 | ) | | 19,552 | |
| Other current liabilities | | | (78,569 | ) | | (98,204 | ) |
| | | | | | | | |
Net cash provided (used) by operating activities | | | (1,734,263 | ) | | 523,620 | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | |
| Purchase of fixed assets | | | (441,665 | ) | | (475,386 | ) |
| | | | | | | | |
Net cash used by investing activities | | | (441,665 | ) | | (475,386 | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | |
| Net change in short term borrowings | | | 895,619 | | | (422,544 | ) |
| Common shares issued | | | 1,328,007 | | | 0 | |
| Capital contributions from minority interests | | | 0 | | | 297,990 | |
| Long-term borrowing | | | 370,737 | | | 0 | |
Net cash provided (used) by financing activities | | | 2,594,363 | | | (124,554 | ) |
Net increase (decrease) in cash and cash equivalents | | | 418,435 | | | (76,320 | ) |
Cash and cash equivalents, beginning of period | | | 192,924 | | | 169,547 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 611,359 | | $ | 93,227 | |
Supplemental disclosures | | | | | | | |
| Interest paid | | $ | 127,352 | | $ | 101,989 | |
| Income taxes paid | | $ | 6,603 | | $ | 5,846 | |
| | | | | | | | |
Noncash investing and financing transactions | | | | | | | |
| Global Pharmatech, Inc. merged into Natural | | | | | | | |
| Pharmatech, Inc. on February 9, 2005 by | | | | | | | |
| issuing 13,703,125 of its common shares for | | | | | | | |
| all of the outstanding shares of Natural | | | | | | | |
| Pharmatech, Inc. | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
1. The Company
Global Pharmatech, Inc. (Global” or the “Company) was incorporated in Delaware on June 26, 2001 under the name Autocarbon.com, Inc. After engaging, under prior management, in several businesses unrelated to its current one, on February 9, 2005, Global acquired Jilin Tian Yao Science and Technology Limited Company (Natural Pharmatech China), by acquiring Natural Pharmatech China’s parent, Natural Pharmatech, Inc. (Natural), through the issuance to Natural’s shareholders of 13,703,125 of its common shares for all of the outstanding common shares of Natural. Located in Changchun, China, Natural Pharmatech China is a Chinese limited liability company, organized on February 7, 2001, which, together with its subsidiaries, is principally engaged in the discovery and development of modernized traditional Chinese medicine and bio-pharmacy, the sale of this technology and the manufacture and sale of Chinese medicine and vitamins throughout China. Natural was incorporated in the British Virgin Islands on February 2, 2004, and acquired Natural Pharmatech China on June 15, 2004 by issuing 43,800,000 of its common shares for all of the outstanding common shares of Natural Pharmatech China.
Under generally accepted accounting principles, these acquisitions are considered in substance to be capital transactions rather than business combinations. In each case, for accounting purposes, the acquired company is deemed to have issued its stock for the net monetary assets of the acquiring company. Each transaction is accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill is recorded. Under reverse takeover accounting, the comparative historical financial statements are primarily those of Natural Pharmatech China.
In March 2005, Global Pharmatech, Inc. organized a wholly owned subsidiary, Global Health System Inc. (GHS) in New York. The main business of GHS will be selling Chinese medicine products, principally within the United States. GHS has not yet commenced operations.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Regulation S-B promulgated by the Securities and Exchange Commission and do not include all the information and footnotes required by generally accepted accounting principals in the United States of America for complete financial statements. In the opinion of management, these interim unaudited consolidated financial statements include all adjustments necessary in order to make the financial statements not misleading. The results of operations for such interim periods are not necessarily indicative of results for a full year. The unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of Natural for the year ended December 31, 2004 as reported by Global in a Form 8-K/A filing on April 25, 2005.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Global and its majority-owned subsidiaries as of September 30, 2005; for the nine months then ended, the accounts include Natural and its majority-owned subsidiaries for the whole period and Global from February 9, 2005, the date of Global’s acquisition of the subsidiaries. The comparative consolidated financial statements for the nine months ended September 30, 2004 are those of Natural Pharmatech China and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.
Inventory
Inventories are stated at the lower of cost or market. Substantially all inventory costs are determined using the first-in, first-out (FIFO) method. Inventory costs do not exceed net realizable value.
Revenue Recognition
Contract revenues earned from the transfer of technology (licensing arrangements) are recognized in accordance with contract terms. Such revenues were $1,031,630 and $580,411 for the nine months ended September 30, 2005 and 2004, respectively.
Revenue derived from experiments, research and related ancillary services is recognized when the customer accepts the service. Such revenues were $184,414 and $52,583 for the nine months ended September 30, 2005 and 2004, respectively.
Revenue from goods sold is recognized when title has passed to the purchaser, which generally is at the time of delivery. Such revenues were $1,047,824 and $483,949 for the nine months ended September 30, 2005 and 2004, respectively.
Government grants are recognized as other income upon receipt. Such revenues were $419,800 and $34,242 for the nine months ended 2005 and 2004, respectively.
Foreign Currency Translation
The functional currency of Natural Pharmatech China and its subsidiaries is the Chinese Yuan (RMB) and their reporting currency is the US dollar. Natural Pharmatech China’s consolidated balance sheet accounts are translated into US dollars at the period-end exchange rate and all revenue and expenses are translated into U.S. dollars at the average exchange rate prevailing during the period in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in shareholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations affecting transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation gains and losses were immaterial for the periods ended September 30, 2005 and 2004.
The Chinese government imposes significant exchange restrictions on fund transfers out of China that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Appropriated retained earnings
In accordance with Chinese regulations, the Company’s Chinese subsidiaries must appropriate 15% of their annual profits as computed under Chinese generally accepted accounting principles, which is reflected in the consolidated financial statements as appropriated retaining earnings and which, at September 30, 2005, had a $0 balance.
3. Inventory
Inventory is comprised of the following:
| | | | |
| | | September 30, | |
| | | 2005 | |
| Raw materials | | $ | 417,764 | |
| Work in progress | | | 479,605 | |
| Finished goods | | | 341,632 | |
| Others | | | 24,303 | |
| Total | | $ | 1,263,304 | |
4. Other Current Assets
Other current assets consist of approximately $184,000 advanced to vendors for purchasing materials and $813,000 advanced to employees and unrelated parties. These advances do not have any repayment terms.
5. Property and Equipment
Property and equipment is comprised of the following:
| | | Estimated Useful Life In Years | | September 30, 2005 | |
| Buildings and improvements | | | 20-40 | | $ | 2,561,457 | |
| Building pledged as security to creditor | | | 20-40 | | | 2,189,000 | |
| Machinery and equipment | | | 5-10 | | | 2,886,699 | |
| Vehicles | | | 10 | | | 135,783 | |
| Office equipment and other | | | 5-10 | | | 388,674 | |
| Total at cost | | | | | | 8,161,613 | |
| Accumulated depreciation and amortization | | | | | | 1,652,370 | |
| Total | | | | | $ | 6,509,243 | |
Depreciation and amortization expense for the nine months ended September 30, 2005 and 2004 was $351,761 and $304,566, respectively. Depreciation and amortization expenses included in research and development, general and administrative expenses and cost of production were approximately $101,600, $75,700, and $174,400, respectively, for 2005. For 2004, such expenses were approximately $97,400, $59,400, and $147,700, respectively.
6. Income Taxes
The Company and each of its subsidiaries file separate income tax returns. Natural Pharmatech China qualified as a joint venture in 2004, which entitled it to an exemption from PRC income tax for two years beginning with its first profitable year. The same exemption applies to its subsidiary, Jilin BCT Pharmacy Company, Ltd (BCT Pharmaceuticals). Natural Pharmatech China’s other Chinese subsidiaries, Jilin Yi Cao Tang Pharmacy Co., Ltd., Jilin Mai Di Xing and Jilin Tian Yao Drug Safety Evaluation Co., Ltd are not entitled to the same exemption and are subject to income taxes at the rate of 15%.
The Company is also subject to value added tax (VAT), business tax and surtax totaling ten percent of gross sales.
7. Concentrations and Credit Risk
The Company operates principally in China and grants credit to customers located there. Although China is considered economically stable, it is possible that unanticipated events there or in foreign countries could disrupt the Company’s operations.
At September 30, 2005, the Company has a credit risk exposure of uninsured cash in banks of approximately $611,000. The Company does not require collateral or other securities to support financial instruments that are subject to credit risk.
For the nine months ended September 30, 2005, three customers accounted for $845,600 (37%), $319,249 (14%) and $318,988 (14%) of total sales, respectively. For the corresponding period in 2004, three other customers accounted for $$241,600 (22%), $120,800 (11%) and $112,152 (10%) of total sales, respectively.
8. Debt
The Company had two individual short-term loans from two financial institutions totaling approximately $2,224,419 at September 30, 2005. The loans carry an annual interest rate of approximately seven percent, and mature on December 5, 2005 and January 10, 2006, respectively. The weighted average interest rate of these loans at September 30, 2005 was approximately seven percent. Natural Pharmatech China’s office building secures one of the loans.
The Company had one individual long-term loan from a financial institution of approximately $370,000 at September 30, 2005. The loan carries an annual interest rate of approximately six percent and matures on December 23, 2009. Minimum annual principal payments on the loan for each of the following calendar years are as follows:
Year | | Amount |
| 2005 | | $19,000 |
| 2006 | | 49,000 |
| 2007 | | 67,000 |
| 2008 | | 93,000 |
| 2009 | | 142,000 |
Interest expense and related service charges were $127,352 and $101,989 for the nine months ended September 30, 2005 and 2004, respectively.
9. Related Party Transactions
As of September 30, 2005, the Company has the following amounts due from and to related parties:
| | | | |
Advances due from related parties | | | |
| Dong Yuan Investment (HK) Limited | | $ | 108,443 | |
| BCT Global Development Limited | | | 18,228 | |
Stockholders: | | | | |
| Wang Ben Ji | | | 37,131 | |
| Qu Lianqin | | | 11,122 | |
| Xu Dong Ming | | | 23,480 | |
Total | | $ | 198,404 | |
| | | | | |
Advances due to related parties | | | | |
Stockholders: | | | | |
| Xia Lian Zhen | | $ | 42,897 | |
| Li Yuqi | | | 7,168 | |
| BCT Global Development Limited | | | 83,786 | |
Total | | $ | 133,851 | |
These balances have no stated terms for repayment and are not interest bearing.
Dong Yuan Investment (HK) Limited (DYI) is a British Virgin Island company. Lianqin Qu, Chair of the Company’s Board of Directors, is the chairperson of both DYI and Natural Pharmatech China, and majority shareholder of DYI. DYI does not hold any shares of Natural Pharmatech China; neither does Natural Pharmatech China hold any shares of DYI.
BCT Global Development Limited (BCT Global) owns 25% of Natural Pharmatech China’s subsidiary BCT Pharmaceuticals. Lianqin Qu is the chairperson of BCT Global.
10. Minority Interest
In March 2004 and May 2004, respectively, Natural Pharmatech China terminated its investments in Hainan Gong An Detoxification and Rehabilitation Center (HGAR) and Hainan Gong An Health-care Products Co., Ltd. (HGA), each effective as of January 1, 2004. These terminations resulted in a decrease in minority interest of approximately $162,000.
11. Unregistered Sales of Equity Securities
On August 18, 2005, the Company entered into a subscription agreement with a non-U.S. entity pursuant to which the Company issued 800,000 shares of common stock for gross proceeds of $960,000. These shares were issued under an exemption from U.S. registration requirements, and are currently not registered.
NATURAL PHARMATECH, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
NATURAL PHARMATECH, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm | F-2 |
Consolidated Balance Sheet as of December 31, 2004 | F-3 |
Consolidated Statements of Operations for the years ended December 31, 2004 and 2003 | F-4 |
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004 and 2003 | F-5 to 6 |
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 | F-7 to 8 |
Notes to the Consolidated Financial Statements | F-9 to 15 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Natural Pharmatech Inc.
We have audited the accompanying consolidated balance sheet of Natural Pharmatech Inc. and Subsidiaries as of December 31, 2004 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Natural Pharmatech Inc. and Subsidiaries as of December 31, 2004 and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 in conformity with United States generally accepted accounting principles.
| | /s/ Moore Stephens, P.C. Moore Stephens, P.C. Certified Public Accountants |
February 4, 2005
NATURAL PHARMATECH INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current Assets | | | |
| Cash | | $ | 192,924 | |
| Accounts receivable | | | 644,219 | |
| Related party receivable | | | 77,066 | |
| Inventories | | | 1,038,783 | |
| Other current assets | | | 571,770 | |
| Prepaid expenses | | | 58,401 | |
| Total Current Assets | | | 2,583,163 | |
| | | | | |
Property, Plant & Equipment, net | | | 6,395,485 | |
| | | | | |
Land Lease, net | | | 452,726 | |
| | | | | |
Intangible Assets | | | 137,645 | |
| | | | 6,985,856 | |
Total Assets | | $ | 9,569,019 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities | | | |
| Short term borrowings | | $ | 1,328,800 | |
| Accounts payable and | | | | |
| accrued expenses | | | 513,907 | |
| Related party payable | | | 305,427 | |
| Advance from customers | | | 111,629 | |
| Other payables and accruals | | | 658,239 | |
| Taxes payable | | | 60,359 | |
| Other current liabilities | | | 56,238 | |
| Total Current Liabilities | | | 3,034,599 | |
| | | | | |
Minority Interest | | | 729,280 | |
| | | | | |
Stockholders’ Equity | | | | |
| Common stock par value$ 0.01 per share; 43,850,000 shares authorized, issued and outstanding | | | 438,500 | |
| Additional paid-in capital | | | 5,056,557 | |
| Appropriated retained earnings | | | | |
| Unappropriated retained Earnings | | | 310,085 | |
| Total Stockholders’ Equity | | | 5,805,142 | |
| | | | | |
| Total Liabilities and | | | | |
| Stockholders’ Equity | | $ | 9,569,019 | |
The accompanying notes are an integral part of these consolidated financial statements.
NATURAL PHARMATECH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
| | | 2004 | | 2003 | |
Sales | | $ | 1,555,670 | | $ | 1,720,912 | |
Cost Of Sales | | | 533,770 | | | 217,238 | |
Gross Profit | | | 1,021,900 | | | 1,503,674 | |
| | | | | | | | |
Operating Expenses | | | | | | | |
| Advertising | | | 17,802 | | | 95,738 | |
| Research And Development | | | 507,578 | | | 426,379 | |
| Selling Expenses | | | 40,832 | | | 72,446 | |
| General And Administrative Expenses | | | 886,528 | | | 804,923 | |
| | | | 1,452,740 | | | 1,399,486 | |
| | | | | | | | |
Income (Loss) From Operations | | | (430,840 | ) | | 104,188 | |
| | | | | | | | |
Other Income (Expenses) | | | | | | | |
| Miscellaneous Income | | | 892,845 | | | 313,020 | |
| Interest Expense | | | (129,609 | ) | | (111,595 | ) |
| | | | 763,236 | | | 201,425 | |
Income Before Taxes And Minority Interest | | | 332,396 | | | 305,613 | |
| | | | | | | | |
Provision For Taxes | | | | | | | |
| Current | | | 17,776 | | | 89,223 | |
| Deferred | | | -- | | | 6,257 | |
| | | | 17,776 | | | 95,480 | |
| | | | | | | | |
Income Before Minority Interest | | | 314,620 | | | 210,133 | |
Minority Interest | | | (4,535 | ) | | 88,646 | |
Net Income | | $ | 310,085 | | $ | 298,779 | |
Earnings Per Common Share: | | | | | | | |
| Basic And Diluted | | | 0.01 | | | 0.01 | |
| | | | | | | | |
Weighted Average Common Shares Outstanding | | | 43,850,000 | | | 43,800,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
NATURAL PHARMATECH INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
| | | Common Stock | | | | | |
| | | Shares | | Amount | | Paid-in Capital | | Comprehensive Income | |
| | | | | | | | | | |
| Balance at December 31, 2002 | | | 43,800,000 | | | 5,291,040 | | | (363,753 | ) | | 272,152 | |
| | | | | | | | | | | | | | |
| Exchange of common stock | | | (43,800,000) | ) | | (5,291,040 | ) | | | | | | |
| | | | | | | | | | | | | | |
| Issuance of common stock | | | 43,850,000 | | | 438,500 | | | 5,056,557 | | | | |
| | | | | | | | | | | | | | |
| Equipment contributed by stockholder | | | | | | | | | 100,963 | | | | |
| | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | 298,779 | |
| | | | | | | | | | | | | | |
| Earnings Appropriated in accordance with Chinese law | | | | | | | | | -- | | $ | 298,779 | |
| | | | | | | | | | | | | | |
| Balance at December 31, 2003 | | | 43,850,000 | | $ | 438,500 | | $ | 4,793,767 | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Reimbursed dividend paid in 2002 through additional paid-in capital | | | | | | | | | 262,790 | | | | |
| | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | 310,085 | |
| | | | | | | | | | | | | | |
| Earnings Appropriated in accordance with Chinese law | | | | | | | | | | | | -- | |
| | | | | | | | | | | | | | |
| Balance at December 31,2004 | | | 43,850,000 | | $ | 438,500 | | $ | 5,056,557 | | | | |
| | | Appropriated Retained Earnings | | Unappropriated Retained Earnings | | Stockholders’ Equity | |
| | | | | | | | |
| Balance at December 31,2002 | | | 167,528 | | | -- | | | 5,094,814 | |
| | | | | | | | | | | |
| Exchange of common stock | | | | | | | | | (5,291,040 | ) |
| | | | | | | | | | | |
| Issuance of common stock | | | | | | | | | 5,495,057 | |
| | | | | | | | | | | |
| Equipment Contributed by Stockholder | | | | | | | | | 100,963 | |
| | | | | | | | | | | |
| Net income | | | | | | 298,779 | | | 298,779 | |
| | | | | | | | | | | |
| Earnings Appropriated in accordance with Chinese law | | | 225,338 | | | (225,338 | ) | | -- | |
| | | | | | | | | | | |
| Balance at December 31, 2003 | | $ | 392,866 | | $ | 73,441 | | $ | 5,698,573 | |
| | | | | | | | | | | |
| Reimbursed dividend paid in 2002 through additional paid-in capital | | | | | | (262,790 | ) | | -- | |
| | | | | | | | | | | |
| Net income | | | | | | | | | 310,085 | |
| | | | | | | | | | | |
| Earnings Appropriated in accordance with Chinese law | | | (392,866 | ) | | 189,349 | | | (203,517 | ) |
| | | | | | | | | | | |
| Balance at December 31,2004 | | $ | -- | | $ | -- | | $ | 5,805,142 | |
The accompanying notes are an integral part of these consolidated financial statements.
NATURAL PHARMATECH INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
| | | 2004 | | 2003 | |
| | | | | | |
Cash Flow From Operating Activities | | | | | |
| Net income | | $ | 310,085 | | $ | 298,779 | |
| | | | | | | | |
| Adjustments to reconcile net income to net cash used by operating activities: | | | | | | | |
| Minority interest | | | 4,535 | | | (88,646 | ) |
| Depreciation | | | 394,607 | | | 305,897 | |
| Amortization of land lease and intangible assets | | | 22,027 | | | 8,558 | |
| Grant of fixed assets | | | (567,187 | ) | | -- | |
| Grant of land lease | | | (60,139 | ) | | -- | |
| | | | | | | | |
| Changes in operating assets and liabilities | | | | | | | |
| | | | | | | | |
| Decrease (Increase) in operating assets: | | | | | | | |
| Accounts receivable | | | (154,496 | ) | | (487,624 | ) |
| Related party receivable | | | 151,130 | | | (206,451 | ) |
| Inventories | | | (463,091 | ) | | (556,592 | ) |
| Other receivables | | | 860,063 | | | (661,249 | ) |
| Prepaid expenses | | | 12,116 | | | (36,607 | ) |
| | | | | | | | |
| Increase (Decrease) in operating liabilities: | | | | | | | |
| | | | | | | | |
| Accounts payable and accrued expenses | | | 341,002 | | | 170,162 | |
| Related party advance | | | 280,852 | | | 24,574 | |
| Advance from customers | | | 27,420 | | | 84,209 | |
| Other payables and accruals | | | 50,286 | | | 229,158 | |
| Income taxes payable | | | (48,405 | ) | | 44,598 | |
| Other liabilities | | | 8,177 | | | 46,193 | |
| | | | | | | | |
| Net Cash Provided/Used) by Operating Activities | | | 1,168,982 | | | (825,041 | ) |
| | | | | | | | |
Cash Flows From Investing Activities | | | | | | | |
| Purchase of fixed assets | | | (964,973 | ) | | (459,420 | ) |
| Purchase of intangible assets | | | -- | | | (150,154 | ) |
| Construction in progress | | | -- | | | (99,816 | ) |
| | | | | | | | |
| Net Cash Used by Investing Activities | | | (964,973 | ) | | (709,390 | ) |
| | | | | | | | |
Cash Flows From Financing Activities | | | | | | | |
| | | | | | | | |
| Net change in short term Borrowings | | | (465,080 | ) | | 181,200 | |
| | | | | | | | |
| Contributions from minority Interest | | | 297,671 | | | 122,008 | |
| Sales of common stock | | | 500 | | | -- | |
| | | | | | | | |
| Net Cash Provided/(Used)by Financing Activities | | | (166,909 | ) | | 303,208 | |
| | | | | | | | |
Net Increase (Decrease) in Cash | | | 37,100 | | | (1,231,223 | ) |
Cash, beginning of year | | | 169,548 | | | 1,400,771 | |
| | | | | | | | |
Cash, end of year | | $ | 206,648 | | $ | 169,548 | |
| | | | | | | | |
Supplemental Disclosures | | | | | | | |
| Interest paid | | $ | 129,609 | | $ | 112,757 | |
| Income taxes paid | | $ | -- | | $ | -- | |
| | | | | | | | |
Noncash Investing and Financing Transactions | | | | | | | |
During the year ended December 31, 2003, the Company received a contribution of fixed assets of $ 100,963.
The accompanying notes are an integral part of these consolidated financial statements.
NATURAL PHARMATECH, INC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Natural Pharmatech, Inc. (“Natural” or the “Company”) was incorporated on February 2, 2004 in the British Virgin Islands, to hold 100% of the outstanding common stock of Jilin Tian Yao Science and Technology Limited Company (Natural Pharmatech China), which is located in Changchun, China. Natural merged with Natural Pharmatech China on June 15, 2004 by issuing 43,800,000 of its common shares for all of the outstanding common shares of Natural Pharmatech China. Under generally accepted accounting principles, the acquisition is considered to be a capital transaction in substance, rather than a business combination. That is, the acquisition is equivalent to the issuance of stock by Natural Pharmatech China for the net monetary assets of Natural, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill is recorded. Under reverse takeover accounting, the comparative historical financial statements of the “legal acquiror,” Natural, are those of the “accounting acquiror,” Natural Pharmatech China.
Natural Pharmatech China was organized as a Chinese limited liability company on February 7, 2001 in China. Natural Pharmatech China and its subsidiaries are principally engaged in research and development of modern Chinese medicine and bio-pharmacy, the sale of this technology, and the manufacture and sale of Chinese medicine and vitamins throughout China.
In October 2002, Natural Pharmatech China reached an agreement with Ms. Xie Xiao, General Manager of Hainan Gong and Detoxification and Rehabilitation Centre (HGAR), to jointly invest in the establishment of Hainan Gong and Health-care Products Co., Ltd. (HGA). The registered capital of Gong An is $120,800 (RMB1,000,000), in which Natural Pharmatech China has an 80% interest.
In May 2004, Natural Pharmatech China and HGAR agreed to cancel the investment agreement, effective as of December 31, 2003, by transferring the investment to Mr. Zhang Ping for approximately $71,660, which represents the original investment of $96,640 less the losses of $24,980 allocated to Natural Pharmatech China in 2002 and 2003. Natural Pharmatech China therefore recognized no gain or loss on the transfer. The actual payment to be received from Mr. Zhang is approximately $24,550, and it is due by June 30, 2005. The balance of approximately $47,110 represents a liability of Natural Pharmatech China to HGAR, which will be offset against the transfer price of $71,660.
In November 2002, Natural Pharmatech China invested approximately $217,500 to acquire 51% ownership of HGAR, an approved medical organization of detoxification and rehabilitation in Hainan, in order to jointly develop detoxification and rehabilitation services.
In March 2004 Natural Pharmatech China and HGAR agreed to cancel the investment agreement, effective as of January 1, 2004, by having HGAR pay Natural Pharmatech China $149,900, which represents the original investment of $217,500 less the losses of $ 67,600 allocated to Natural Pharmatech China in 2002 and 2003. As the payment is equal to the investment, there is no gain or loss on disposal. The payment is to be received in two installments of approximately $72,500 in 2004 and $77,400 in 2005.
2. | Summary of Significant Accounting Policies |
Principles of Consolidation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Natural and its majority owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Operations for all periods are primarily those of Natural Pharmatech China (see Note 1).
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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 periods. Significant estimates include depreciation and allowance for doubtful accounts receivable. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2004 the Company did not have any cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Substantially all inventory costs are determined using the first-in, first-out (FIFO) method. Inventory costs do not exceed net realizable value.
Property and Equipment, Net
Property and equipment is stated at cost. Depreciation and amortization is provided principally by use of the straight-line method over the useful lives of the related assets. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting Standards (`SFAS) No. 109, “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Revenue Recognition
Contract revenues earned from the transfer of technology are recognized in accordance with contract terms. Such revenues are approximately $476,000 and $1,313,000 in 2004 and 2003, respectively.
Revenue derived from experiments, research and related ancillary services is recognized when the customer accepts the service. Such revenues are approximately $137,000 and $178,000 in 2004 and 2003, respectively
Revenue from goods sold is recognized when title has passed to the purchaser, which generally is at the time of delivery. The revenues earned are approximately $942,000 and $229,000 in 2004 and 2003, respectively.
Government grants are recognized as other income upon receipt. These revenues are approximately $892,000 and $255,000 in 2004 and 2003, respectively.
Impairment
In accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” the Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized.
Foreign Currency Translation
The Company’s functional currency is the Chinese Yuan (RMB) and its reporting currency is the US dollar. The Company’s balance sheet accounts are translated into US dollars at the year-end exchange rates and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation gains and losses were immaterial for the years ended December 31, 2004 and 2003.
The Chinese government imposes significant exchange restrictions on fund transfers out of China that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments. These transactions are deemed immaterial for the years presented
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Values of Financial Instruments,” requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts, related party and other receivables, accounts payable, other payables and accrued expenses and short term debt, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising costs for each of the years ended December 31, 2004 and 2003 are approximately $17,800 and $95,700, respectively.
Earnings Per Share
Basic earnings per share is computed by dividing the earnings for the year by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including stock options and warrants, in the weighted average number of common shares outstanding for a period, if dilutive.
At December 31, 2004 and 2003, there were no common stock equivalents.
Allowance for Doubtful Accounts
The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectability. Bad debt reserves are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. As of December 31, 2004, the allowance for doubtful accounts was $0.
Appropriated Retained Earnings
In accordance with Chinese regulations, the Company must appropriate fifteen percent of its annual profits as computed under Chinese generally accepted accounting principles.
Inventory is comprised of the following:
| | | December 31, 2004 | |
| Raw materials | | $ | 313,100 | |
| Work in progress | | | 322,500 | |
| Finished goods | | | 327,300 | |
| Other | | | 75,900 | |
| | | $ | 1,038,800 | |
The account is comprised of the following: a) approximately $295,000 advanced to vendors for purchasing equipment, to an agency for marketing new products and to a contractor for construction; b) approximately $138,000 advanced to employees and unrelated parties and c) approximately $138,800 as a refund of investment on HGA and HGAR.
5. | Property and Equipment, Net |
Property and equipment is comprised of the following:
| | | Estimated Useful Life In Years | | December 31, 2004 | |
| Buildings and improvements | | | 20-40 | | $ | 2,457,000 | |
| Building pledged as security | | | | | | | |
| to creditor | | | 20-40 | | | 2,189,000 | |
| Machinery and equipment | | | 5-10 | | | 2,677,000 | |
| Vehicles | | | 10 | | | 136,000 | |
| Office equipment and other | | | 5-10 | | | 214,000 | |
| Total at cost | | | | | | 7,673,000 | |
| Accumulated depreciation and Amortization | | | | | | 1,278,000 | |
| | | | | | $ | 6,395,000 | |
| | | | | | | | |
Depreciation and amortization expense for each of the years ended December 31, 2004 and 2003 was approximately $392,000 and $281,800, respectively. The depreciation and amortization expenses are included in research and development and general and administrative expenses of approximately $326,000 and $66,000, respectively, for 2004. For 2003, the expenses are approximately $120,800 and $161,000, respectively.
The Company’s intangible assets of approximately $154,000 consist primarily of purchased technology of $127,000 and a self-developed patent of $27,000 to produce vitamins and medicine. Neither asset has any significant residual value. Both assets have an estimated useful life of twenty years but the legal rights are limited to ten years by the Chinese government. Amortization expense was approximately $13,400 and $2,600 for 2004 and 2003, respectively.
At December 31, 2004 the accumulated amortization was approximately $14,850 and $3,150 for the purchased technology and patent, respectively. Amortization for each of the next five years is estimated to be $15,400 each year.
7. | Investment in Land Lease |
As of December 31, 2004 the Company has a parcel of land leased from the Chinese government. The term of the lease is fifty years. The consideration under the agreement amounts to approximately $488,000. The Company classifies the leases as operating and therefore amortizes the cost using the straight-line method over the life of the lease. Rent expense is approximately $8,600 for the years ended December 31, 2004 and 2003, respectively. Accumulated amortization at December 31, 2004 was approximately $35,300. The estimated amount of amortization expense for each of the five succeeding fiscal years is $9,800 annually.
In 2003, Natural Pharmatech China contracted to receive, without consideration, assets of approximately $658,000 from Jilin Tong Yu County Assets Administrative Office (Tong Yu), a state entity. These assets were to be part of Natural Pharmatech China’s contribution, in return for 95% of the capital, to a subsidiary, Jilin Yi Cao Tang Pharmacy Co. Ltd., which was established in 2003. The contract gives Tong Yu the right to reclaim the assets if Natural Pharmatech China does not receive certain government certifications. In August 4, 2004, Natural Pharmatech China received the government certifications and recognized the grant as miscellaneous income of approximately $658,000 in the statement of operations for the year ended December 31, 2004. Natural Pharmatech China also received approximately $234,000 of government grants in cash in 2004.
The deferred tax liability as of December 31, 2004 is immaterial and is included with other liabilities.
Pursuant to the relevant laws and regulations in the Peoples’ Republic of China (PRC), Natural Pharmatech China is recognized as a New and High Technology Enterprise and is entitled to a reduced income tax rate of 15% in 2003. Natural Pharmatech China qualified as a joint venture in 2004, which entitled it to an exemption from PRC income tax for two years beginning with its first profitable year. The same exemption applies to its subsidiary, Jilin BCT Pharmacy Company, Ltd.
A reconciliation between taxes computed at the statutory rate of 15% and the Company’s effective tax rate is as follows:
| | | December 31, | | | |
| | | 2004 | | 2003 | |
| Income tax on pretax income | | | | | |
| at statutory rate | | $ | 49,900 | | $ | 45,800 | |
| Effect of 2004 income tax exemption | | | (32,124 | ) | | 0 | |
| Effect of subsidiary losses not | | | | | | | |
| consolidated for income tax purposes | | | 0 | | | 49,680 | |
| Income tax at effective rate | | $ | 17,776 | | $ | 95,480 | |
The Company is also subject to value added tax (VAT), business tax and surtax.
10. | Concentrations and Credit Risk |
The Company operates principally in China and grants credit to its customers in this geographic region. Although China is considered economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company’s operations.
At December 31, 2004 the Company has a credit risk exposure of uninsured cash in banks of approximately $193,000. The Company does not require collateral or other securities to support financial instruments that are subject to credit risk.
For the year ended December 31, 2004, two customers accounted for approximately $513,000 (31%) of total sales as follows: Customer A at $338,000 (20%) and Customer B at $175,000 (11%). For the year ended December 31, 2003, one customer accounted for approximately $1,255,700 (74%) of total sales.
The Company has one short-term loan payable from a financial institution totaling approximately $1.3 million at December 31, 2004. The loan carries an annual interest rate of approximately 7% and matures on December 5, 2005.
One of the Company’s buildings collateralizes one of the loans. Interest expense was approximately $129,000 and $112,000 for the years ended December 31, 2004 and 2003, respectively.
The Company is required by statutory Chinese employment laws to fund certain government sponsored retirement plans. The expense incurred by the Company for the years ended December 31, 2004 and 2003 is immaterial.
13. | Related Party Transactions |
As of December 31, 2004, the Company has the following amounts due from and to related parties:
| Advances due from related parties | | | | | |
| BCT Global Development Limited | | | | | $ | 18,000 | |
| Stockholders: | | | | | | | |
| Wang Ben Ji | | $ | 36,000 | | | | |
| Qu Dong Ming | | | 23,000 | | | 59,000 | |
| Total | | | | | $ | 77,000 | |
| Advances due to related parties | | | | | | | |
| Dong Yuan Investment (HK) Limited | | | | | $ | 148,000 | |
| Stockholders: | | | | | | | |
| Fang De Wen | | $ | 81,000 | | | | |
| Xie Lian Zhen | | | 77,000 | | $ | 158,000 | |
| Total | | | | | | 306,000 | |
These balances have no stated terms for repayment and are not interest bearing.
The Company has approximately $0 and $115,700 of sales made to BCT Global Development Limited (a shareholder of BCT Pharmaceuticals) in 2004 and 2003, respectively.
14. | New Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment, an Amendment of SFAS No. 123” SFAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective beginning in the Company’s first quarter of fiscal 2006. The Company believes that the adoption of this standard will have no material impact on its financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets.” The Statement is an amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The Company believes that the adoption of this standard will have no material impact on its financial statements.
15. | Subsequent Event (Unaudited) |
On February 9, 2005, the Company entered into a share exchange agreement with Global Pharmatech, Inc. For accounting purposes, the combination is a reverse acquisition recapitalization, with the Company as the acquiror. Pro forma information is not presented as the transaction is not considered a business combination. The combined entity will be presented in the March 2005 financials.
3,247,308 Shares of Common Stock
GLOBAL PHARMATECH, INC.
PROSPECTUS
_______________, 2006
DEALER PROSPECTUS DELIVERY OBLIGATION
Until __________, 2006 (90 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that to the fullest extent permitted by the Delaware General Corporation Law, directors of the registrant shall not be liable to it or its stockholders for monetary damages for breach of fiduciary duty as a director. The Company is also subject to Section 145 of the Delaware General Corporation Law, set forth below.
“Section 145. Indemnification of officers, directors, employees and agents; insurance.
“(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.
“(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
“(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.
“(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.
“(e) Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.
“(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.
“(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.
“(h) For purposes of this section, references to (the corporation) shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.
“(i) For purposes of this section, references to (other enterprises) shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.
“(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
“(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).”
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the issuance and distribution of the securities being registered are as follows:
| SEC Registration Fee | | $ | 765 | |
| Printing Expenses | | $ | 2,000 | |
| Legal Fees and Expenses | | $ | 125,000 | |
| Accounting Fees and Expenses | | $ | 10,250 | |
| Total | | $ | 138,015 | |
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On February 20, 2004, as reported in its Form 8-K filed with the SEC on July 13, 2004, the Company authorized the issuance of 31,295,000 shares of its common stock to the shareholders of New Concepts Nutraceuticals, Inc. in exchange for all of the issued and outstanding common shares of New Concepts. The offering was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof.
On January 24, 2005, the Company entered into a Share Purchase Agreement with Natural Pharmatech, Inc. and Natural Pharmatech’s stockholders, providing for the acquisition by the Company of all of Natural Pharmatech’s issued and outstanding capital stock in exchange for a total of 13,703,125 shares of its common stock. The offering was made pursuant to Regulation S under the Securities Act; resales of these securities are being registered under this registration statement.
On March 14, 2005, the Company entered into subscription agreements with ten non-U.S. persons pursuant to which the Company issued 279,183 shares of common stock for gross proceeds of US$368,025. The offering was made pursuant to Regulation S under the Securities Act; resales of these securities are being registered under this registration statement.
On August 18, 2005, the Company entered into a subscription agreement with a non-U.S. entity pursuant to which the Company issued 800,000 shares of common stock for gross proceeds of $960,000. The offering was made pursuant to Regulation S under the Securities Act; resales of these securities are being registered under this registration statement.
ITEM 27. EXHIBITS
3(i) Certificate of incorporation of the registrant. Incorporated by reference to Exhibit 3.1 to the Company’s registration statement on Form SB-2 filed with the SEC on August 17, 2001.
3(ii) By-laws of the registrant. Incorporated by reference to Exhibit 3.2 to the Company’s registration statement on Form SB-2 filed with the SEC on August 17, 2001.
5 Opinion of Loeb & Loeb LLP.*
10.1 Share Purchase Agreement, dated as of January 24, 2005, by and among Autocarbon, Inc., Natural Pharmatech, Inc. and the shareholders of Natural Pharmatech, Inc. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the SEC on January 28, 2005.
10.2 Executive Employment Agreement dated February 8, 2005 with Xiaobo Sun. Incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on February 15, 2005.
10.3 Executive Services Agreement dated February 8, 2005 with Lianqin Qu. Incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on February 15, 2005.
10.4 Director and Chief Technology Officer service contract dated February 14, 2005 with Tom Du. Incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed with the SEC on February 15, 2005.
10.5 Chief Financial Officer service contract dated January 1, 2006 with Joseph J. Levinson. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on January 5, 2006.
10.6 Executive Employment Agreement dated February 8, 2005 with Zhuojun Li. Incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on February 15, 2005.
16.1 Letter of Russell Brennan, dated February 11, 2005. Incorporated by reference to Exhibit 16.1 to the Company’s Form 8-K filed with the SEC on February 28, 2005.
16.2 Letter of Aaron Stein, dated April 25, 2005. Incorporated by reference to Exhibit 16.1 to the Company’s Form 8-K dated April 20, 2005, filed with the SEC on April 25, 2005.
21. Subsidiaries of the registrant.
23.1 Consent of Loeb & Loeb LLP. Included in Exhibit 5.*
23.2 Consent of Moore Stephens, P.C.
_____________
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
Undertaking Required by Item 512 of Regulation S-B.
(a) The undersigned registrant will:
(1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) include any additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(b) For determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, the registrant undertakes that in a primary offering of securities of the registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and has authorized this registration statement to be signed on its behalf by the undersigned in the City of Changchun, People’s Republic of China, on January 13, 2006.
| | GLOBAL PHARMATECH, INC. By: /s/ Xiaobo Sun Name: Xiaobo Sun Title: Chief Executive Officer and President By: /s/ Joseph J. Levinson Name: Joseph J. Levinson Title: Chief Financial Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Xiaobo Sun and Joseph J. Levinson, and each of them, his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this registration statement and any and all related registration statements pursuant to Rule 462(b) of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated:
| Name | | Title | | Date |
| | | | | |
| /s/ Lianqin Qu | | Director and Chair of the Board | | January 13, 2006 |
| Lianqin Qu | | | | |
| | | | | |
| /s/ Xiaobo Sun | | Principal Executive Officer | | January 13, 2006 |
| Xiaobo Sun | | and Director | | |
| | | | | |
| /s/ Joseph J. Levinson | | Principal Financial and | | January 13, 2006 |
| Joseph J. Levinson | | Principal Accounting Officer | | |
| | | (Controller) | | |
