As filed with the Securities and Exchange Commission on March 24, 2006
Registration No. ____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
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(Name of small business issuer in its charter)
Delaware 2834 13-2949462
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
Suite 1601, Building A, Jinshan Tower No. 8, Shan Xi Road
Nanjing, Jiangsu, China
TEL. (86) 25 8320 5758
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(Address and telephone number of principal executive offices)
Suite 1601, Building A, Jinshan Tower No. 8, Shan Xi Road
Nanjing, Jiangsu, China
TEL: (86) 25 8320 5758
- --------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
- --------------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
-------------------------------------
Copies to:
Howard H. Jiang, Esq.
Baker & McKenzie
1114 Avenue of the Americas
New York, New York 10022
Tel. (212) 626-4100
-------------------------------------
Approximate date of proposed sale to the public: From time to time
after the effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
1
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
TITLE OF EACH CLASS OF NUMBER OF SHARES TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE BE REGISTERED OFFERING PRICE PER AMOUNT AGGREGATE REGISTRATION FEE (8)
REGISTERED SECURITY (1) OFFERING PRICE(1)
Shares of common 1,229,155 $1.49 $1,831,441 $196
stock, $0.01 par value
per share (2)
Shares of common 2,725,000 $1.49 $4,060,250 $435
stock, par value $0.01
per share (3)
Shares of common 131,250 $1.49 $195,563 $21
stock, par value $0.01
per share (4)
Shares of common 2,000,000 $1.49 $2,980,000 $319
stock, par value $0.01
per share (5)
Shares of common 13,663,367 $1.49 $20,358,417 $2,179
stock, par value $0.01
per share (6)
Shares of common 285,989 $1.49 $426,124 $46
stock, par value $0.01
per share (7)
Total 20,034,761 $1.49 $29,851,794 $3,196
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) of the Securities Act of 1933, as amended (the
"Securities Act") based upon the average of the bid and asked prices of the
common stock on the OTC Bulletin Board on March 23, 2006, which was $1.49.
(2) Represents: (i) 750,835 shares issued by us upon conversion of our
convertible notes on December 31, 2005 and (ii) 478,320 shares of our common
stock issuable as of February 28, 2006 upon exercise of the warrants issued in
January 2005.
(3) Represents: (i) 1,362,500 shares of common stock issuable as of
February 28, 2006 upon conversion of our Series A Preferred Stock issued in a
private placements in June 2005, including 272,500 shares of common stock
issuable because of penalty and (ii) 1,362,500 shares of our common stock
issuable as of February 28, 2006 upon exercise of the warrants issued in June
2005, including 272,500 shares of common stock issuable because of penalty.
(4) Represents: (i) 65,625 shares of common stock issuable as of
February 28, 2006 upon conversion of our Series A Preferred Stock issued in a
private placement in October 2005, including 3,125 shares of common stock
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issuable because of penalty and (ii) 65,625 shares of our common stock issuable
as of February 28, 2006 upon exercise of the warrants issued by us in October
2005, including 3,125 shares of common stock issuable because of penalty.
(5) Represents: (i) 1,000,000 shares of common stock issued in a
private placement in January 2006 and 1,000,000 shares of common stock issuable
upon exercise of the warrants issued by us in January 2006.
(6) Represents: (i) 6,831,683 shares of common stock issued in a
private placement in March 2006 and 6,831,684 shares of common stock issuable
upon exercise of the warrants issued by us in March 2006.
(7) Represents: (i) 65,000 shares of common stock and 37,332 shares of
common stock issuable as of February 28, 2006 upon exercise of the warrants we
issued to WestPark Capital Inc. ("WestPark") and designees for services in the
private placement of January 2005, including 10,666 shares of common stock
issuable because of penalty (ii) 76,500 shares of common stock and 95,625 shares
of common stock issuable as of February 28, 2006 upon exercise of the warrants
we issued to WestPark and designees for services as our placement agents in the
private placement of June 2005, including 19,125 shares of common stock issuable
because of penalty and (iii) 5,625 shares of common stock and 5,907 shares of
common stock issuable upon exercise of the warrants we issued to WestPark and
designees for services as our placement agents in the private placement of
October 2005, including 281 shares of common stock issuable because of penalty.
(8) Calculated using $107.00 per million dollars.
We hereby amend this registration statement on such date or dates as
may be necessary to delay its effective date until we shall file a further
amendment which specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.
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Subject to Completion, dated March 21, 2006
PROSPECTUS
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
The Resale of 20,034,761
Shares of Common Stock
We are registering 20,034,761 shares of our common stock, par value $0.01 per
share, on behalf of the selling shareholders identified under the heading
"Selling Shareholders" in this prospectus. The selling shareholders may sell the
stock from time to time in the over-the-counter market or any exchange on which
our company may be listed in the future at the prevailing market price or in
negotiated transactions.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from the resale of our common stock
pursuant to this offering. We have received proceeds from the sale of our
convertible notes under private placements in January 2005, our Series A
Preferred Stock in June, 2005 and October, 2005, our common stock on February 2,
2006 and March 10, 2006, as described in this prospectus. We may also receive
proceeds from the exercise of certain warrants held by some of the selling
shareholders, of which the underlying shares are also being registered hereby,
if the selling shareholders exercise those warrants through a cash exercise.
Our shares are currently quoted on the over-the-counter bulletin board
(the "OTC Bulleting Board") under the symbol CHBP.OB.
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD INVEST IN OUR COMMON STOCK ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE
INVESTMENT. FOR A DISCUSSION OF SOME OF THE RISKS INVOLVED, SEE "RISK FACTORS"
BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS MARCH __, 2006
The following table of contents has been designed to help you find
important information contained in this prospectus. We have included subheadings
to aid you in searching for particular information to which you might want to
return. You should, however, read the entire prospectus carefully.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................6
THE OFFERING..................................................................12
RISK FACTORS..................................................................13
USE OF PROCEEDS...............................................................22
SELLING SHAREHOLDERS..........................................................23
PLAN OF DISTRIBUTION..........................................................27
MANAGEMENT....................................................................33
BUSINESS DESCRIPTION..........................................................42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................................54
CRITICAL ACCOUNTING POLICIES..................................................54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................61
EXPERTS.......................................................................62
TRANSFER AGENT................................................................63
ADDITIONAL INFORMATION........................................................63
FINANCIAL STATEMENTS.........................................................F-1
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PROSPECTUS SUMMARY
This prospectus summary contains information about our company, our
business, our products and our recent private placements that we believe is most
important. This summary is qualified in its entirety by the more detailed
information on these and other topics appearing elsewhere in this prospectus,
including the information under the heading "Risk Factors" and the information
contained in the Financial Statements. This summary is not complete and does not
contain all of the information you should consider before investing in our
common stock. You should read the entire prospectus carefully for a complete
understanding of our business. Federal and state securities laws require that we
include in this prospectus all the important information that you will need to
make an investment decision.
Unless otherwise indicated, all share and per share data in this
prospectus do not give effect to shares issuable upon exercise of outstanding
options and warrants. Certain financial information included in this prospectus
has been derived from data originally prepared in Renminbi (RMB), the currency
of the People's Republic of China. For purposes of this prospectus, a conversion
rate of US$1.00 to RMB8.30 was utilized. There is no assurance that RMB amounts
could have been or could be converted into US dollars at that rate.
As used in this prospectus, unless the context otherwise requires,
"we", "us", "our", "the Company", "our company" refers to China
Biopharmaceuticals Holdings, Inc. and all of its subsidiaries and affiliated
companies.
OUR COMPANY
We are a vertically integrated bio-pharmaceutical company focused on
developing, manufacturing and distributing innovative drugs in the People's
Republic of China ("China" or PRC").
We, a Delaware corporation, were originally organized as a corporation
under the laws of the state of New York on August 6, 1976 under the name of
Globuscope, Inc. On August 7, 1984, its name was changed to Globus Growth Group,
Inc., which was its name until it was merged into China Biopharmaceuticals
Holdings, Inc. (CBH), its wholly owned subsidiary in the state of Delaware on
August 28, 2004 through an internal re-organizational merger. Effective August
28, 2004, CBH completed the acquisition of China Biopharmaceuticals Corp.
("CBC"), a British Virgin Islands corporation as the parent, the management
company and holder of 90% of the ownership interest in its then only operating
subsidiary and asset, NanJing Keyuan Pharmaceutical R&D Co., Ltd., doing
business in English a.k.a. Nanjing Chemsource Pharmaceutical R&D Co. Ltd,
("Keyuan" or "Chemsource"), a company established in China and engaged in the
discovery, development and commercialization of innovative drugs and related
bio-pharmaceutical products in China. Nanjing Keyuan Pharmaceutical R&D Co.,
Ltd. was established in March 2000 in Nanjing City of Jiangsu Province, China.
It was founded and spear-headed by graduates from China Pharmaceutical
University to engage in new drug research and discovery and in the development
of new drug screening technologies.
On February 27, 1986, our stockholders approved the divestiture and
sale of those assets of our company as pertained to its then camera
manufacturing and photography operations as well as the sale of certain shares
of stock in a photographic related company owned by it and its interest in our
then owned premises. The sale was consummated as of February 28, 1986. After
such divestiture, our activities consisted of the holding of interests in
various companies and the seeking out of acquisition and joint-venture
opportunities in various fields of business endeavor. On May 27 1988, we filed
with the Securities and Exchange Commission (the "SEC") a notification of
election to be treated as a "Business Development Company" ("BDC") as that term
is defined in the Investment Company Act of 1940 (the "1940 Act"). The decision
to become a BDC was made primarily to better reflect our anticipated future
business and development relationships. A BDC is an investment company designed
to assist eligible portfolio companies with capital formation. As a result of
the reorganization the acquisition of CBC pursuant to the Exchange Agreement, we
are no longer a BDC and are now an operating company.
On August 4, 2004, we filed Definitive Information Statement
("Information Statement") pursuant to Section 14(c) of the Securities Exchange
Act of 1934, as amended, notifying its shareholders the execution and pending
implementation of an Agreement and Plan of Merger was signed by and between
Globus Growth Group, Inc., a New York corporation ("Globus Growth") and the
predecessor of our company and its wholly owned subsidiary in the State of
Delaware under the name of China Biopharmaceuticals Holdings, Inc.("CBH"). The
Agreement and Plan of Merger Agreement provided for a tax-free reorganization
pursuant to the provisions of Section 368 of the Internal Revenue Code,
according to which Globus Growth merged with and into our company, ceasing its
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corporate existence and having CBH as the surviving corporation of the merger
(the "Merger"). In the Merger, all issued and outstanding shares of the common
stock of Globus Growth have been converted into shares of our common stock. On
August 28, 2004, the internal reorganizational Merger was completed with Globus
Growth merging into CBH as the surviving entity.
Pursuant to a share exchange agreement ("Exchange Agreement") between
CBH, CBC, Keyuan, and MAO Peng as the sole shareholder of CBC, we received all
of the issued and outstanding common stock of CBC in exchange for 20,842,779
shares of restricted (as defined in Rule 144 of the Securities Act of 1933, as
amended) our common stock, par value $0.01 per share, representing approximately
90% of the issued and outstanding common capital stock of our company following
the time of the issuance. As of March 15, 2006, there were 36,848,400 issued and
outstanding shares of our common stock and 336 holders of record.
On September 29, 2004, we signed a purchase agreement which was amended
on December 31, 2004 to acquire approximately 75.8% ownership interest of Suzhou
Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a Chinese company
established in Suzhou, China for 1,200,000 of common shares and additional
$1,600,000 as additional contribution into the acquired Hengyi for working
capital and/or expansion purposes. The cash contribution is to be made in
installments.
On June 11, 2005, we signed a purchase agreement, which was amended on
August 3, 2005 under which, we acquired controlling ownership interest
(approximately 51%) in Suzhou Erye Pharmaceutical Limited Company ("Erye"), a
company established in Suzhou, China. Total consideration paid by us to acquire
51% ownership interest in Erye is $3,000,000 cash to be paid in installments,
and 3,300,000 of common shares valued at $1.00 per share or $3,300,000. Out of
the $3,000,000 to be paid in cash, $2,200,000 will be contributed to the
acquired Erye for working capital and/or expansion purposes.
On December 31, 2005, our wholly owned subsidiary, CBC, entered into an
Agreement with four shareholders of Chengdu Tianyin Pharmaceutical Limited
Company, a pharmaceutical company located in the city of Chengdu, Sichuan
Province, China ("Tianyin") to immediately assume operation control of Tianyin
in all aspects of its business operations and to acquire a 51% ownership
interest in Tianyin. Pursuant to the Agreement, we are to issue 3 million shares
of its common stock to existing shareholders of Tianyin or their designees and
also agreed to invest an amount of US$2 million into Tianyin operations.
Additional 300,000 shares of our common stock will be issued to the existing
shareholders of Tianyin or their designees, if Tianyin's after tax audited
profit for the year ended December 31, 2005 reaches at least US$3,000,000.
The shares of our common stock are quoted on the Over the Counter
Bulletin Board ("OTC Bulletin Board") under the symbol CHBP.OB.
Although to date we have been successful in developing our business and
products, we face many challenges typically faced by a growing company,
including limited access to capital, competition, research and development
risks, among many other risks. Our inability to overcome these risks could have
an adverse effect on our operations, financial condition and prospects.
Investments in our company may also be materially and adversely affected by the
fluctuation of the Renminbi.
BUSINESS DESCRIPTION
Our business is composed of three parts: Research & Development, Raw
Materials, and Manufacturing.
Research & Development
We, through our indirectly held subsidiary Keyuan, have a robust
research and development ("R&D") team focused on discovering new small and large
molecule drugs as well as developing generic and improved drugs based on
existing products already on the market and traditional Chinese medicine
products. Keyuan has developed a solid discovery and development platform with
advanced R&D capabilities based on post genome era technological advances to
enable rapid drug discovery and development. Keyuan also has a rich existing
product pipeline. The technological backbone of the Keyuan advanced R&D
capabilities is a Drug Screening and Testing System--an advanced drug screening
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and testing system based on certain bio-technologies that have only recently
been made possible by rapid technological advances in the Post-Genomics Era.
This proprietary gene-level technology platform enables Keyuan to deliver the
next generation of drugs--which are more effective and have fewer side effects
in a much shorter period than by traditional pharmaceutical developmental
routes. The technology team is lead by capable drug research scientists and
development experts China. Keyuan has a product pipeline containing
approximately forty major products, including eight new drugs that are ready for
commercialization in China. Keyuan also offers contractual research and
development products by licensing the access to its proprietary screening and
testing platforms to other pharmaceutical companies. Keyuan has built a Library
of Targeted Drug Candidates ("LTDC") with 20,000 chemical compounds. Drug
candidates undergo screening to reveal their potential to become new drugs.
Keyuan collaborates with China Pharmaceutical University in enhancing the
resources of chemical compounds in LTDC. Keyuan builds LTDC to both accelerate
its own drug discovery and to generate revenue in the form of access fees paid
by other pharmaceutical companies. We charge access fee of US$60,000 per access.
We spent $302,042 in year 2003 and $326,205 in year 2004, respectively,
on our research and development.
Raw Materials
Our subsidiary Hengyi specializes in research and development,
production and sales of chemicals and intermediaries used in pharmaceutical
products as well as pharmaceutical products. Hengyi has extensive product
pipeline containing twenty six major products that are raw material and
intermediaries for making pharmaceutical products. More than 90% of Hengyi's
products are exported to North America, South America and European countries
with large, multi national pharmaceutical companies as end user customers..
Hengyi can manufacture and provide most of the raw materials for our production
pipeline, enabling us to lower our production cost and gain competitive
advantages.
Manufacturing
Our subsidiary, Erye, specializes in research and development,
production and sales of pharmaceutical products as well as chemicals used in
pharmaceutical products. The acquisition of 51% of the ownership interest of
Erye, adds new drug products our pipeline, manufacturing capabilities that
comply with China Good Manufacturing Practices (GMP) standard set by the State
Food and Drug Administration ("SFDA") of China and marketing network that covers
25 provinces in China. Erye has obtained production certificates for 68 drug
items, among which 33 are in production, mainly antibiotics drugs such as
Cefotaxime Sodium for injection, Ceftriaxone Sodium for injection, Amoxicillin
for injection, and Compound Amoxicillin for injection. Erye's sales exceeded $20
million in 2004, with raw material Acetylspiramycin per oral taking 15% of
domestic market share, and Cloxacillin Sodium taking 80% of domestic market
share.
Our recently acquired subsidiary, Tianyin, is a pharmaceutical company
specializing in research and development, production and sales of pharmaceutical
products as well as traditional Chinese medicine products, integrating China's
natural medicinal resources with modern high technology.
Tianyin has established sophisticated management team organization
system and distribution channel, and was titled as Provincial Good
Pharmaceutical Enterprise in Sichuan Province. Tianyin has seven production
lines, including oral liquid line, syrup line, granule line, capsule line,
tablet line, complex line, oral solution line, and all of them have passed GMP
certification on August 2003. Tianyin's products include both traditional
Chinese medicines and Chemical medicines, such as Qing Re Jie Du Kou Fu Ye, Xue
Lian Chong Cao He Ji, Hu Gan Ning Pian, Fen Tong An Jiao Nang, Wei Kang Ling
Jiao Nang, for the treatment of cold, kidney problem, impotence, hepatitis,
arthritis, gastritis respectively.
ABOUT OUR PRODUCTS
Our products can be divided into three categories; new drugs through
R&D, drug materials & intermediates and commercialized drugs:
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New drug:
We, through our subsidiary Keyuan, have a product pipeline of about
forty major new drugs for the treatment of diseases such as cardiovascular and
infectious diseases. We intend to commercialize or license eight drugs during
the years 2006. We plan to commercialize the majority of its drugs and license
and sell the remaining of its drugs.
Drug Materials & Intermediates
Our subsidiary, Hengyi, manufactures 24 major products all sold abroad
such as US and European countries. Below is the list of products that Hengyi
manufactures.
Commercialized Drugs
Erye and Tianyin, our subsidiaries manufacture drug products all sold
in the market of China.
OUR RECENT PRIVATE PLACEMENTS
Private placement closed in January, 2005 (the "Notes Private
Placement")
In January, 2005, we raised a gross proceeds of $500,000 through the
sales of promissory note , pursuant to a subscription agreement, to which we
refer as the Notes Subscription Agreement, which we entered into with twenty
(20) accredited investors, to which we collectively refer as the Notes
Subscribers. Pursuant to the Notes Subscription Agreement, the Notes Subscribers
received convertible notes ("Notes" or "Convertible Notes") for a total
aggregate amount of $500,000 with a maturity date of 180 days from the Notes
issuance (the "Maturity"), bearing an interest rate on the principal balance of
the Notes of 7% per annum payable at Maturity or upon satisfaction or discharge
of the Note. Holder of the Note has a right to convert all, but not less than
all, of the Notes into shares of our common stock (each a "Share") at one dollar
per share. In September, 2005, sixteen of the Notes Subscribers have agreed to
extend the maturity date of the Notes until December 31, 2005. As of December
31, 2005, all of the Notes have been either converted into Shares or have been
redeemed. In addition, as an inducement for the Notes Subscribers to extend the
maturity date, we have issued 42,500 additional shares to these Notes Holders
who agreed to grant us the extension as described above,
Upon the execution of the Notes Subscription Agreement, we also issued
to the Notes Subscribers one (1) warrant for every one (1) Share that the
convertible notes can convert into under the Notes Subscription Agreement (the
"Notes Warrants"). The exercise price of the majority of Notes Warrants is $1.50
per share. Pursuant to the Notes Warrants, the Notes Subscribers are entitled to
purchase an aggregate amount of 341,657 Shares. The Notes Warrants may be
exercised only in full. The Notes Warrants will expire three (3) years from
issue date of the Notes Warrants. See also "Selling Shareholders."
WestPark Capital Inc. ("WestPark") acted as our placement agent in the
private placement described above. In consideration of WestPark's services, we
issued to WestPark or its designees 65,000 Shares in consideration of its
service as our private placement agent and 26,666 warrants representing the
right to purchase up to 26,666 Shares under the same terms as described in the
preceding paragraph.
Pursuant to the Notes Subscription Agreement, we are required to file
with the Securities and Exchange Commission ("SEC") a registration statement
within 120 days after the issuance date of the Notes and the Notes Warrants,
which registers all the Shares to which the Notes may be converted and the
shares underlying the Notes Warrants issued or issuable to the Notes Subscribers
and WestPark in the private placement. In addition, pursuant to the Notes
Subscription Agreement, we are required to pay a penalty of 5% per month if the
registration statement has not become effective before required date.
Private placement closed in June, 2005 (the "Initial Preferred A
Private Placement")
In June, 2005, we entered into a June subscription agreement, to which
we refer as the Initial Preferred A Subscription Agreement, with each of twenty
eight (28) accredited investors, to which we collectively refer as the Initial
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Preferred A Subscribers. Pursuant to the Initial Preferred A Subscription
Agreement, the Initial Preferred A Subscribers received shares of our Series A
Convertible Preferred Stock ("Series A Convertible Preferred Stock"), face value
$1.00 per share, purchase price US$1.00 per share convertible at a ratio of 1:1
into Shares. For more information on Series A Convertible Preferred Stock, see
"Description of Securities."
Upon the execution of the Initial Preferred A Subscription Agreements,
we also issued to the Initial Preferred A Subscribers one (1) warrant for every
one (1) share of Series A Convertible Preferred Stock subscribed under the
Initial Preferred A Subscription Agreements ("Initial Preferred A Warrants").
The exercise price of the Initial Preferred A Warrants is $2.00 per Share.
Pursuant to the Initial Preferred A Warrants, the Initial Preferred A
Subscribers are entitled to purchase an aggregate amount of 1,090,000 Shares.
The Initial Preferred A Warrants may be exercised only in full. The Initial
Preferred A Warrants will expire three (3) years from the issue date of the
Initial Preferred A Warrants.
WestPark acted as our placement agent in the private placement
described above. In consideration of WestPark's services, we issued to WestPark
or its designees 76,500 Shares in consideration of its service as our private
placement agent and 76,500 Initial Preferred A Warrants representing the right
to purchase up to 76,500 Shares under the same terms as described in the
preceding paragraph.
Private placement closed on October 19, 2005 (the "Subsequent Preferred
A Private Placement")
On October 19, 2005, we entered into a subscription agreement, to which
we refer as the Subsequent Preferred A Subscription Agreement (together with the
Initial Preferred A Subscription Agreement, the "Preferred A Subscription
Agreement"), with each of three (3) accredited investors, to which we
collectively refer as the Subsequent Preferred A Subscribers (together with the
Initial Preferred A Subscribers, the "Preferred A Subscribers"). Pursuant to the
Subsequent Preferred A Subscription Agreement, the Subsequent Preferred A
Subscribers received 62,500 shares of our Series A Convertible Preferred Stock.
Upon the execution of the Subsequent Preferred A Subscription
Agreement, we also issued to the Subsequent Preferred A Subscribers one (1)
warrant for every one (1) share of Series A Convertible Preferred Stock
subscribed under the Subsequent Preferred A Subscription Agreement ("Subsequent
Preferred A Warrants", and together with the Initial Preferred A Warrants, the
"Preferred A Warrants"). The Subsequent Preferred A Warrants has the same terms
as of those of the Initial Preferred A Warrants and the Subsequent Preferred A
Subscribers are entitled to purchase an aggregate amount of 62,500 Shares.
WestPark acted as our placement agent in the private placement
described above. In consideration of WestPark's services, we issued to WestPark
or its designees 5,625 common stock in consideration of its service as our
private placement agent and 5,625 warrants representing the right to purchase up
to 5,625 shares of our common stock under the same terms as described in the
preceding paragraph.
Pursuant to the Preferred A Subscription Agreement, we are required to
file with the SEC a registration statement within 120 days, which registers all
the Shares to which the Series A Preferred Convertible Stock may be converted
and the shares underlying the Preferred A Warrants issued or issuable to the
Preferred A Subscribers and WestPark in the private placements. In addition,
pursuant to the Preferred A Subscription Agreements, we are required to pay a
penalty of 5% per month if the registration statement has not become effective
before required date.
Private placement closed in February 2, 2006 (the "Initial Common Stock
Private Placement")
On February 2, 2006, we entered into a securities purchase agreement,
to which we refer as the Initial Common Stock Securities Purchase Agreement,
with GCE Property Holdings, Inc. ("GCE"), to which we refer as the Initial
Common Stock Purchaser. Pursuant to the Initial Common Stock Securities Purchase
Agreement, we issued one million (1,000,000) shares of our common stock to the
Initial Common Stock Purchaser at $1.00 per share.
Upon the execution of the Initial Common Stock Securities Purchase
Agreement, we also issued to the Initial Common Stock Purchaser one million
(1,000,000) warrant with an exercise price of $1.25 per share of common stock
("Initial Common Stock Warrants"). The Initial Common Stock Warrants will expire
four (4) years from the date of the issuance.
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Under the Initial Common Stock Securities Purchase Agreement, we have
agreed not to issue Shares or securities convertible or exchangeable into Shares
at a price equal to or lower than $1.00 per share and not issue any warrants or
securities that are exercisable into Shares at a price lower than $1.25 per
share.
Pursuant to the Initial Common Stock Securities Purchase Agreement, the
Initial Common Stock Purchaser was granted a right to participate up to 100% in
any of our subsequent financing by offering of common stock or common stock
equivalents in the twelve (12) months the effective date of the registration
statement of which this prospectus constitutes a part.
Pursuant to a registration rights agreement entered between the Initial
Common Stock Purchaser and us, we have agreed to file a registration statement
with the SEC covering the Shares and Shares underlying the Warrants, within 65
days from this closing and obtain effectiveness of such registration statement
within 170 days from closing. In case the registrant does not meet the filing
deadlines listed above we will pay a penalty of 1% of the aggregate investment
made by Investors and on each monthly anniversary of such default an amount
equal to 1.5% of the aggregate investment amount of Investors, respectively
Private placement closed on March 10, 2006 (the "Subsequent Common
Stock Private Placement")
On March 10, 2006, we entered into a securities purchase agreement, to
which we refer as the Subsequent Common Stock Securities Purchase Agreement,
with various investors, to which we refer as the Subsequent Common Stock
Purchaser. Pursuant to the Subsequent Common Stock Securities Purchase
Agreement, we issued 6,831,863 Shares to the Subsequent Common Stock Purchaser
at $1.01 per share.
Upon the execution of the Subsequent Common Stock Securities Purchase
Agreement, we also issued to the Subsequent Common Stock Purchaser 6,831,684
warrants with an exercise price of $1.26 per share of common stock ("Subsequent
Common Stock Warrants"). The Subsequent Common Stock Warrants will expire four
(4) years from the date of the issuance.
Under the Subsequent Common Stock Securities Purchase Agreement, we
have agreed not to issue Shares or securities convertible or exchangeable into
Shares at a price equal to or lower than $1.01 per share and not issue any
warrants or securities that are exercisable into Shares at a price lower than
$1.26 per share.
Pursuant to the Subsequent Common Stock Securities Purchase Agreement,
subject and subordinated to the participation rights of the Initial Common Stock
Purchasers, the Subsequent Common Stock Purchaser was granted a right to
participate up to 100% in any of our subsequent financing by offering of common
stock or common stock equivalents in the twelve (12) months from the effective
date of the registration statement of which this prospectus constitutes a part.
Pursuant to a registration rights agreement entered between the
Subsequent Common Stock Purchaser and us, we have agreed to file a registration
statement with the SEC covering the Shares and Shares underlying the Warrants,
within 65 days from this closing and obtain effectiveness of such registration
statement within 170 days from closing. In case the registrant does not meet the
filing deadlines listed above we will pay a penalty of 1% of the aggregate
investment made by Investors and on each monthly anniversary of such default an
amount equal to 1.5% of the aggregate investment amount of Investors,
respectively
11
THE OFFERING
Common stock outstanding prior to this offering (March 15, 2006) 36,848,400
Common stock being offered for resale to the public 20,034,761(1)
Common stock outstanding after this offering 48,250,643 (1)
Percentage of common stock outstanding following this offering 41.5%
that shares being offered for resale represent
Total proceeds raised by offering: we will not receive any proceeds from
the resale of our common stock pursuant
to this offering. We have received
$500,000 in gross proceeds from the
holders of Convertible Notes under the
Notes Private Placement, $1,152,500 in
gross proceeds from the Preferred A
Private Placements, $1,000,000 in gross
proceeds from the Initial Common Stock
Private Placements and $6,900,000 in
gross proceeds from the Subsequent
Common Stock Private Placement. We may
also receive some proceeds if any of the
selling shareholders exercise their
warrants through cash exercise.
Use of proceeds: Any proceeds we may receive will be used
for acquisition of businesses and
general corporate purposes.
(1) Assumes that all of the shares being registered hereby will be issued.
12
RISK FACTORS
An investment in our common stock involves a high degree of risks. You
should carefully consider the risk factors described below, together with all
other information in this prospectus before making an investment decision.
Additional risks and uncertainties not presently foreseeable to us may also
impair our business operations. If any of the following risks actually occurs,
our business, financial condition or operating results could be materially and
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose all or part of your investment.
CHINA RELATED RISKS
Our assets are located in China and its revenues are derived from its
operations in China
In terms of industry regulations and policies, the economy of China has
been transitioning from a planned economy to market oriented economy. Although
in recent years the Chinese government has implemented measures emphasizing the
utilization of market forces for economic reforms, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of productive assets
in China are still owned by the Chinese government. For example, all lands are
state owned and are leased to business entities or individuals through
governmental granting of State-owned Land Use Rights. The granting process is
typically based on government policies at the time of granting and it could be
lengthy and complex. This process may adversely affect our company's future
manufacturing expansions. The Chinese government also exercises significant
control over China's economic growth through the allocation of resources,
controlling payment of foreign currency and providing preferential treatment to
particular industries or companies. Uncertainties may arise with changing of
governmental policies and measures. At present, our company's development of
research and development technologies and products is subject to approvals from
the relevant government authorities in China. Such governmental approval
processes are typically lengthy and complex, and never certain to be obtained.
Political and economic risks
China is a developing country with a young market economic system
overshadowed by the state. Its political and economic systems are very different
from the more developed countries and are still in the stage of change. China
also faces many social, economic and political challenges that may produce major
shocks and instabilities and even crises, in both its domestic arena and in its
relationship with other countries, including but not limited to the United
States. Such shocks, instabilities and crises may in turn significantly and
adversely affect our performance.
Risks related to interpretation of China laws and regulations which
involves significant uncertainties
China's legal system is based on written statutes and their
interpretation by the Supreme People's Court. Prior court decisions may be cited
for reference but have limited value as precedents. Since 1979, the Chinese
government has been developing a comprehensive system of commercial laws, and
considerable progress has been made in introducing laws and regulations dealing
with economic matters such as foreign investment, corporate organization and
governance, commerce, taxation and trade. However, because these laws and
regulations are relatively new, and because of the limited volume of published
cases and judicial interpretation and their lack of force as precedents,
interpretation and enforcement of these laws and regulations involve significant
uncertainties. In addition, as the Chinese legal system develops, we cannot
assure that changes in such laws and regulations, and their interpretation or
their enforcement will not have a material adverse effect on our business
operations.
FOREIGN EXCHANGE CONTROL RISKS
Currency conversion and exchange rate volatility could adversely affect
our financial condition.
The PRC government imposes control over the conversion of Renminbi into
foreign currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
13
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant to the Foreign Exchange Control Regulations of the PRC issued
by the State Council which came into effect on April 1, 1996, and the
Regulations on the Administration of Foreign Exchange Settlement, Sale and
Payment of the PRC which came into effect on July 1, 1996, regarding foreign
exchange control, conversion of Renminbi into foreign exchange by Foreign
Investment Enterprises, or FIEs, for use on current account items, including the
distribution of dividends and profits to foreign investors, is permissible. FIEs
are permitted to convert their after-tax dividends and profits to foreign
exchange and remit such foreign exchange to their foreign exchange bank accounts
in the PRC.
Conversion of Renminbi into foreign currencies for capital account
items, including direct investment, loans, and security investment, is still
subject to certain restrictions. On January 14, 1997, the State Council amended
the Foreign Exchange Control Regulations and added, among other things, an
important provision, which provides that the PRC government shall not impose
restrictions on recurring international payments and transfers under current
account items.
Enterprises in PRC (including FIEs) which require foreign exchange for
transactions relating to current account items, may, without approval of the
State Administration of Foreign Exchange, or SAFE, effect payment from their
foreign exchange account or convert and pay at the designated foreign exchange
banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect of capital account items,
such as direct investment and capital contribution, is still subject to certain
restrictions, and prior approval from the SAFE or its relevant branches must be
sought.
We are a FIEs to which the Foreign Exchange Control Regulations are
applicable. There can be no assurance that we will be able to obtain sufficient
foreign exchange to pay dividends or satisfy other foreign exchange requirements
in the future.
Since 1994, the exchange rate for Renminbi against the United States
dollars has remained relatively stable, most of the time in the region of
approximately RMB8.28 to US$1.00. However, in 2005, the Chinese government
announced that would begin pegging the exchange rate of the Chinese Renminbi
against a number of currencies, rather than just the U.S. dollar. As our
operations are primarily in China, any significant revaluation of the Chinese
Renminbi may materially and adversely affect our cash flows, revenues and
financial condition. For example, to the extent that we need to convert United
States dollars into Chinese Renminbi for our operations, appreciation of this
currency against the United States dollar could have a material adverse effect
on our business, financial condition and results of operations. Conversely, if
we decide to convert Chinese Renminbi into United States dollars for other
business purposes and the United States dollar appreciates against this
currency, the United States dollar equivalent of the Chinese Renminbi we convert
would be reduced.
REGULATORY RISKS
Governmental regulatory and policy risks
We must follow various government regulations and in particular, the
SFDA regulations. Government regulations may have material impact on our
operations, increase costs and could prevent or delay our company in licensing,
manufacturing and selling our products. Our research, development, testing,
manufacturing and marketing activities are subject to various governmental
regulations in China, including health and drug regulations. Government
regulations, among other things, cover the inspection of and controls over
testing, manufacturing, safety and environmental considerations, efficacy,
labeling, advertising, promotion, record keeping and sale and distribution of
pharmaceutical products. We will not be able to license, manufacture, sell and
distribute the vast majority of its products without a proper approval from
government agencies and in particular the SFDA.
14
There is no assurance that we will obtain such approvals.
In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation, administrative action
or changes in governmental policy and interpretation during the period of
product development and product assessment. Although we have, so far, obtained
the marketing rights for selling some of our products in China, we may not
continue to receive and maintain regulatory approvals for the sales of these
products. Our marketing activities are also subject to government regulations
with respect to the prices that we intend to charge or any other marketing and
promotional related activities. Government regulations may substantially
increase our costs for developing, licensing, manufacturing and selling
products, impacting negatively on our operation, revenue, income and cash flow.
There could be changes in government regulations towards the
pharmaceutical Industries that may adversely affect our business.
The manufacture and sale of pharmaceutical products in the PRC is
heavily regulated by many state, provincial and local authorities. These
regulations significantly increased the difficulty and costs involved in
obtaining and maintaining regulatory approvals for marketing new and existing
products. Our future growth and profitability depend to a large extent on our
ability to obtain regulatory approvals.
The State Food and Drug Administration of China recently implemented
new guidelines for licensing of pharmaceutical products. All existing
manufacturers with licenses, which are currently valid under the previous
guidelines, are required to apply for the Good Manufacturing Practices ("GMP")
certifications by June 30, 2004, and to receive approvals by December 31,2004.
We have received our certifications. However, should we fail to receive or
maintain the GMP certifications under the new guidelines in the future, our
businesses would be materially and adversely affected.
Moreover, the laws and regulations regarding acquisitions of the
pharmaceutical industry in the PRC may also change and may significantly impact
our ability to grow through acquisitions.
COMPANY'S RELATED RISKS
Risks related to our strategy and risks related to our inability to
carry out such strategy
Our strategy may be based on wrong assumptions and may be seriously
flawed and may even in fact damage our performance, competitive position in the
market and even our ability to survive in the market place. Even if the strategy
is correct, we may never be able to successfully implement our strategy or
implement the strategy in the desired fashion. These risk factors may cause
major risks to our performance and even survival.
Risks related to the implementation of our operational and marketing
plan
Our operational plan and marketing plan may be seriously flawed and
even in fact damage our performance, competitive position in the market and even
our ability to survive in the market place. Even if the operational plan and the
marketing plan are correct, we may never be able to successfully implement the
plans or implement the strategy in the desired fashion. These risk factors may
cause major risks to our performance and even survival.
Risks related to our products and services
Our products and services involve direct or indirect impact on human
health and life. The drugs, products and services provided may be flawed and
cause dangerous side effects and even fatality in certain cases and lead to
major business losses and legal and other liabilities and damages to us.
Risks related to product liability claims
We face an inherent business risk of exposure to product liability
claims in the event that the use of our technologies or products is alleged to
have resulted in adverse side effects. Side effects or marketing or
manufacturing problems pertaining to any of our products could result in product
15
liability claims or adverse publicity. These risks will exist for those products
in clinical development and with respect to those products that have received
regulatory approval for commercial sale. To date, we have not experienced any
problems associated with claims by users of our products. However, that does not
mean that we will not have any problems with respect to our products in the
future. In addition, our product liability insurance may not be adequate to
cover such claims and we may not be able to obtain adequate insurance coverage
in the future at acceptable costs. A successful product liability claim that
exceeds our policy limits could require us to pay substantial sums.
Risks related to our technology and our platforms
Our technologies and platforms may be seriously defective and flawed
producing wrong and harmful results, exposing us to significant liabilities.
Even if they are not defective or flawed, these technologies and platforms may
become outdated, losing their value and thus affect our competitive advantages.
Risks related to competition
We compete with other companies, many of whom are developing or can be
expected to develop products similar to ours. Our market is a large market with
many competitors. Many of our competitors are more established than we are, and
have significantly greater financial, technical, marketing and other resources
than we presently possess. Some of our competitors have greater name recognition
and a larger customer base. These competitors may be able to respond more
quickly to new or changing opportunities and customer requirements and may be
able to undertake more extensive promotional activities, offer more attractive
terms to customers, and adopt more aggressive pricing policies. We cannot assure
you that we will be able to compete effectively with current or future
competitors or that the competitive pressures we face will not harm our
business.
Marketing risks
Newly developed drugs and technologies may not be compatible with
market needs. Because markets for drugs differentiate geographically inside
China, we must develop and manufacture our products to accurately target
specific markets to ensure product sales. If we fail to invest in extensive
market research to understand the health needs of consumers in different
geographic areas, we may face limited market acceptance of our products, which
could have material adverse effect on our sales and earning.
Risks related to research and the ability to develop new drugs
Our growth and survival depends on our ability to consistently
discover, develop and commercialize new products and find new and improve on
existing technologies and platforms. As such, if we fail to make sufficient
investments in research, be attentive to consumer needs or do not focus on the
most advanced technologies, our current and future products could be surpassed
by more effective or advanced products of other companies.
Risks relating to difficulty in defending intellectual property rights
from infringement
Our success depends, in large part, on our ability to protect our
current and future technologies and products and to defend our intellectual
property rights. If we fail to protect our intellectual property adequately,
competitors may manufacture and market products similar to ours. Numerous
patents covering our technologies have been issued to us, and we have filed, and
expect to continue to file, patent applications seeking to protect newly
developed technologies and products in various countries, including China. Some
patent applications in China are maintained in secrecy until the patent is
issued. Because the publication of discoveries tends to follow their actual
discovery by many months, we may not be the first to invent, or file patent
applications on any of our discoveries. Patents may not be issued with respect
to any of our patent applications and existing or future patents issued to or
licensed by us may not provide competitive advantages for our products. Patents
that are issued may be challenged, invalidated or circumvented by our
competitors. Furthermore, our patent rights may not prevent our competitors from
developing, using or commercializing products that are similar or functionally
equivalent to our products.
16
We also rely on trade secrets, non-patented proprietary expertise and
continuing technological innovation that we seek to protect, in part, by
entering into confidentiality agreements with licensees, suppliers, employees
and consultants. These agreements may be breached and there may not be adequate
remedies in the event of a breach. Disputes may arise concerning the ownership
of intellectual property or the applicability of confidentiality agreements.
Moreover, our trade secrets and proprietary technology may otherwise become
known or be independently developed by our competitors. If patents are not
issued with respect to products arising from research, we may not be able to
maintain the confidentiality of information relating to these products.
Risks relating to third parties that may claim that we infringe on
their proprietary rights and may prevent us from manufacturing and selling
certain of our products
There has been substantial litigation in the pharmaceutical industry
with respect to the manufacturing, use and sale of new products. These lawsuits
relate to the validity and infringement of patents or proprietary rights of
third parties. We may be required to commence or defend against charges relating
to the infringement of patent or proprietary rights. Any such litigation could:
o require us to incur substantial expense, even if we are
insured or successful in the litigation;
o require us to divert significant time and effort of our
technical and management personnel;
o result in the loss of our rights to develop or make certain
products; and
o require us to pay substantial monetary damages or royalties in
order to license proprietary rights from third parties.
Although patent and intellectual property disputes within the
pharmaceutical industry have often been settled through licensing or similar
arrangements, costs associated with these arrangements may be substantial and
could include the long-term payment of royalties. These arrangements may be
investigated by regulatory agencies and, if improper, may be invalidated.
Furthermore, the required licenses may not be made available to us on acceptable
terms. Accordingly, an adverse determination in a judicial or administrative
proceeding or a failure to obtain necessary licenses could prevent us from
manufacturing and selling some of our products or increase our costs to market
these products.
In addition, when seeking regulatory approval for some of our products,
we are required to certify to regulatory authorities, including the SFDA, that
such products do not infringe upon third party patent rights. Filing a
certification against a patent gives the patent holder the right to bring a
patent infringement lawsuit against us. Any lawsuit would delay regulatory
approval by the SFDA. A claim of infringement and the resulting delay could
result in substantial expenses and even prevent us from manufacturing and
selling certain of our products.
Our launch of a product prior to a final court decision or the
expiration of a patent held by a third party may result in substantial damages
to us. Depending upon the circumstances, a court may award the patent holder
damages equal to three times their loss of income. If we are found to infringe a
patent held by a third party and become subject to such treble damages, these
damages could have a material adverse effect on the results of our operations
and financial condition.
Risks related to acquisitions
A major part of our strategy involves acquisitions of other companies
and products and technologies. We may not be able to complete successfully such
acquisitions due to the lack of capital and other factors. Even if we can
complete such acquisitions, we may not be able to absorb and integrate the
acquired operation and assets successfully into our currently operation. We may
even make wrong acquisitions.
17
Risks related to financial reports and estimates
Our company is subject to critical accounting policies and actual
results may vary from our estimates. Our company follows generally accepted
accounting principles for the United States in preparing its financial
statements. As part of this work, we must make many estimates and judgments
concerning future events. These affect the value of the assets and liabilities,
contingent assets and liabilities, and revenue and expenses reported in our
financial statements. We believe that these estimates and judgments are
reasonable, and we make them in accordance with our accounting policies based on
information available at the time. However, actual results could differ from our
estimates, and this could require us to record adjustments to expenses or
revenues that could be material to our financial position and results of
operations in the future.
Risks related to significant financing needs
We need significant amount of capital to invest in our research and
development, in our acquisitions and in our operations. We may not be able to
identify and raise sufficient capital in a timely manner to finance our research
and development activity, operation, acquisitions, growth and even survival.
Even if such financings are available, they may not be timely or sufficient or
on the terms desirable, acceptable or not harmful to our existing shareholders.
Risks related to growth and the ability to manage growth
For our company to survive and to succeed, we have to consistently
grow. However, the management and we may not be able to achieve or manage such
growth. The inability to achieve and maintain and manage growth will
significantly affect our survival and market position.
Dependence on key personnel
We depend on our key management and technological personnel. The
unavailability or departure of such key personnel may seriously disrupt and harm
our operations, business and the implementation of our business strategy and
plans. Although most of these personnel are founders and shareholders of our
company, there can be no assurance that we can be successful in retaining them.
Risks related to not declaring or paying any dividends to our
shareholders
We did not declare any dividends for the year ended December 31, 2005.
Our board of directors does not intend to distribute dividends in the near
future. The declaration, payment and amount of any future dividends will be made
at the discretion of the board of directors, and will depend upon, among other
things, the results of our operations, cash flows and financial condition,
operating and capital requirements, and other factors as the board of directors
considers relevant. There is no assurance that future dividends will be paid,
and if dividends are paid, there is no assurance with respect to the amount of
any such dividend.
It may be difficult to effect service of process and enforcement of
legal judgments upon our company and our officers and directors because they
reside outside the united states.
As our operations are presently based in China and our key directors
and officers reside in China, service of process on our company and our key
directors and officers may be difficult to effect within the United States.
Also, our main assets are located in China and any judgment obtained in the
United States against us may not be enforceable outside the United States.
Most of our assets are located in china, any dividends of proceeds from
liquidation is subject to the approval of the relevant Chinese government
agencies.
Our assets are predominantly located inside China. Under the laws
governing foreign invested enterprises in China, dividend distribution and
liquidation are allowed but subject to special procedures under the relevant
laws and rules. Any dividend payment will be subject to the decision of the
board of directors and subject to foreign exchange rules governing such
repatriation. Any liquidation is subject to both the relevant government
agency's approval and supervision as well the foreign exchange control. This may
generate additional risk for our investors in case of dividend payment and
liquidation.
18
RISKS RELATED TO COMMON STOCK
Risks of lack of liquidity and volatility risks
Currently our common stock is quoted in the OTC Bulletin Board market,
the liquidity of our common stock may be very limited and affected by its
limited trading market. The OTC Bulletin Board market is an inter-dealer market
much less regulated than the major exchanges and are subject to abuses and
volatilities and shorting. There is currently no broadly followed and
established trading market for our common stock. An established trading market
may never develop or be maintained. Active trading markets generally result in
lower price volatility and more efficient execution of buy and sell orders.
Absence of an active trading market reduces the liquidity of the shares traded
there.
The trading volume of our common stock may be limited and sporadic. As
a result of such trading activity, the quoted price for our common stock on the
OTC Bulletin Board may not necessarily be a reliable indicator of its fair
market value. Further, if we cease to be quoted, holders would find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of our common stock and as a result, the market value of our common stock likely
would decline.
Risks related to penny stocks
Our common stock may be subject to regulations prescribed by the SEC
relating to "Penny Stock." The SEC has adopted regulations that generally define
a penny stock to be any equity security that has a market price (as defined in
such regulations) of less than $5.00 per share, subject to certain exceptions.
If our common stock meets the definition of a penny stock, it will be subject to
these regulations, which impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investor, generally institutions with assets in excess
of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 (individually) or $300,000 (jointly with their
spouse).
Risks of depressed price and downward pressure on the shares
A significant number of our shares will be eligible for sale and their
sale could depress the market price of our stock. Sales of a significant number
of shares of our common stock in the public market following the merger and
related transactions could harm the market price of our common stock. Moreover,
as additional shares of our common stock become available for resale in the
public market pursuant to the registration of the sale of the shares, and
otherwise, the supply of our common stock will increase, which could decrease
its price. Some or all of the shares of common stock may be offered from time to
time in the open market pursuant to Rule 144, and these sales may have a
depressive effect on the market for the shares of common stock.
In general, a person who has held restricted shares for a period of one
year may, upon filing with the SEC a notification on Form 144, sell into the
market common stock in an amount equal to the greater of 1% of the outstanding
shares or the average weekly number of shares sold in the last four weeks prior
to such sale. Such sales may be repeated once each three months, and any of the
restricted shares may be sold by a non-affiliate after they have been held two
years.
Existing shareholders may experience some dilution
We have issued convertible preferred stock and warrants to different
investors. Conversion of these preferred stock and exercise of these warrants
may cause dilution in the interests of other shareholders as a result of the
additional common stock that would be issued upon conversion or exercise. In
addition, sales of the shares of our common stock issuable upon conversion of
the preferred stock or exercise of the warrants could have a depressive effect
on the price of our stock, particularly if there is not a coinciding increase in
demand by purchasers of our common stock..
Moreover, we may need to raise additional funds in the future to
finance new developments or expand existing operations. If we raise additional
funds through the issuance of new equity or equity-linked securities, other than
19
on a pro rata basis to our existing shareholders, the percentage ownership of
the existing shareholders may be reduced. Existing shareholders may experience
subsequent dilution and/or such newly issued securities may have rights,
preferences and privileges senior to those of the existing shareholders.
Risks related to concentration of ownership
Certain of our principal stockholders have significant voting power and
may take actions that may not be in the best interest of other stockholders.
Certain of our officers, directors and principal stockholders control a
significant percentage of our outstanding common stock. If these stockholders
act together, they may be able to exert significant control over our management
and 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 and might adversely affect the market
price of our common stock. This concentration of ownership may not be in the
best interests of all Registrant's stockholders.
20
Special note regarding forward-looking statements This prospectus
contains forward-looking statements. These statements relate to our growth
strategy and our future financial performance, including our operations,
economic performance, financial condition and prospects, and other future
events. We generally identify forward-looking statements by using such words as
"anticipate," "believe", "can", "continue", "could", "estimate", "expect",
"intend", "may", "plan", "potential", "seek", "should", "will", or variations of
such words or other similar expressions and the negatives of such words. These
forward-looking statements are only predictions and are based on our current
expectations.
In addition, a number of known and unknown risks, uncertainties and
other factors could affect the accuracy of these statements, including the risks
outlined under "Risk factors" and elsewhere in this prospectus. Some of the more
significant known risks that we face are uncertainty regarding market acceptance
of our products and services and our ability to generate revenue or profit.
Other important factors to consider in evaluating our forward-looking statements
include:
>> our possible inability to execute our strategy due to changes in our
industry or the economy generally;
>> our possible inability to execute our strategy due to changes in
political, economic and social conditions in the markets in which we
operate;
>> uncertainties associated with currency exchange fluctuations;
>> changes in laws and regulations governing our business and operations
or permissible activities;
>> changes in our business strategy; and
>> the success of our competitors and the emergence of new competitors.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee our future
results, levels of activity or performance. Any or all of our forward-looking
statements in this prospectus may turn out to be inaccurate. We have based these
forward-looking statements on our current expectations and projections about
future events and financial, political and social trends and assumptions we made
based on information currently available to us. These statements may be affected
by inaccurate assumptions we might have made or by known or unknown risks and
uncertainties, including the risks and uncertainties described in "Risk
factors." In light of these assumptions, risks and uncertainties, the
forward-looking events and circumstances discussed in this prospectus may not
occur as contemplated and actual results could differ materially from those
anticipated or implied by the forward-looking statements.
Forward-looking statements contained herein speak only as of the date
of this prospectus. Unless required by law, we undertake no obligation to update
publicly or revise any forward-looking statements to reflect new information or
future events or otherwise. You should, however, review the factors and risks we
describe in the reports we will file from time to time with the Securities and
Exchange Commission (SEC) after the date of this prospectus.
21
USE OF PROCEEDS
We are registering these shares pursuant to the registration rights
granted to the selling shareholders in our recent private placements. We will
not receive any proceeds from the resale of our common stock under this
offering. We have, however, received proceeds from the sale of securities
convertibles into our common stock to: (i) the Notes Subscribers in the Notes
Private Placement of approximately $500,000, (ii) the Preferred A Subscribers in
the Preferred A Privately Placements of approximately $1,152,500, (iii) the
Initial Common Stock Purchaser in the Initial Common Stock Private Placement of
approximately $1,000,000 and (iv) the Subsequent Common Stock Purchaser in the
Subsequent Common Stock Private Placement of approximately $6,900,000.
Net proceeds are approximately $460,000 in connection with the Notes
Private Placement, $993,099 in connection with the Preferred A Private
Placements, $984,990 in connection with the Initial Common Stock Private
Placement, and $6,193,806 in connection with the Subsequent Common Stock Private
Placement.
We may also receive proceeds from the issuance of shares of common
stock to the holders of the warrants if they exercise their warrants through a
cash exercise. If each of the Notes Warrants is exercised through a cash
exercise, we estimate that we may receive up to an approximately additional
$717,480, including the shares issuable as penalty as of February 28, 2006; if
each of the Preferred A Warrants is exercised through a cash exercise, we
estimate that we may receive up to an approximately additional $2,856,250,
including the shares issuable as penalty as of February 28, 2006; if each of the
Initial Common Stock Warrants is exercised through a cash exercise, we estimate
that we may receive up to an approximately additional $1,250,000; if each of the
Subsequent Common Stock Warrants is exercised through a cash exercise, we
estimate that we may receive up to an approximately additional $8,607,922. In
addition, if all of the warrants issued to the private placement agents are
exercised, we estimate that we may receive up to an approximately addition
$259,062, including the shares issuable as penalty as of February 28, 2006.
We have not allocated a specific purpose to these proceeds from the
exercise of the warrants because we are not sure if we will receive it.
22
SELLING SHAREHOLDERS
The selling shareholders may from time to time offer and sell pursuant
to this prospectus any or all of the shares of our common stock set forth below.
When we refer to "selling shareholders" in this prospectus, we mean
those persons listed in the table below, and the pledgees, donees, permitted
transferees, assignees, successors and others who later come to hold any of the
selling shareholders' interests in shares of our common stock other than through
a public sale.
The following table sets forth, as of the date of this prospectus, the
name of each selling shareholder for whom we are registering shares for resale
to the public, and the number of shares of common stock that each selling
shareholder may offer pursuant to this prospectus. The common stock being
offered by the selling shareholders was acquired from us in the private
placements that were completed in January 2005, June 14, 2005, October 19, 2005,
February 2, 2006 and March 10, 2006. The shares of common stock offered by the
selling shareholders were issued pursuant to exemptions from the registration
requirements of the Securities Act. The selling shareholders represented to us
that they were accredited investors and were acquiring our common stock for
investment and had no present intention of distributing the common stock. We
have agreed to file a registration statement covering the common stock received
by the selling shareholders with respect to the resale of the common stock from
time to time by the selling shareholders, and this prospectus forms a part of
such registration statement. Except as noted below, none of the selling
shareholders has, or within the past three years has had, any material
relationship with us or any of our predecessors or affiliates and none of the
selling shareholders is or was affiliated with registered broker-dealers.
We cannot advise you as to whether the selling shareholders will in
fact sell any or all of such shares of common stock. In addition, the selling
shareholders may have sold, transferred or otherwise disposed of, or may sell,
transfer or otherwise dispose of, at any time and from time to time, the shares
of our common stock in transactions exempt from the registration requirements of
the Securities Act after the date on which they provided the information set
forth on the table below.
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Shares Shares Total Percentage
Issued Upon Issuable upon Shares of Number of common
Conversion conversion of Common Stock Securities of stock owner
of Series A Issuable upon Owned Securities after the
Convertible Preferred Common exercise of Prior to Being offering (5)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Kaare Kolstad 135,001 31,250 -- 124,582 290,833 290,833 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Kevin Varner 20,833 -- -- -- 20,833 20,833 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Evan Collins 20,833 -- -- -- 20,833 20,833 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Hanka Lew (7) 2,500 31,250 -- 54,582 88,332 88,332 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Felicia Grossman(7) 2,500 31,250 -- 54,582 88,332 88,332 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Stuart Michael(7) 2,500 31,250 -- 54,582 88,332 88,332 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Paul Michaels (8) -- -- -- 31,250 31,250 31,250 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Tony Pintsopoulos (8) -- -- -- 10,416 10,416 10,416 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David Weinberg (8) -- -- -- 18,332 18,332 18,332 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Thomas and Sally Ashmore -- --
(8) -- -- 10,416 10,416 10,416
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David and Marian Fass(7) 2,500 -- -- 23,332 25,832 25,832 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeffrey and Jamie 2,500 --
Schnapper(7) -- -- 23,332 25,832 25,832
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Wayne Robbins(7) 1,250 -- -- 11,666 12,916 12,916 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William F. Donovan 22,083 -- -- 11,666 33,749 33,749 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David A. Chazanovitz 22,083 -- -- 11,666 33,749 33,749 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Gilbert D. Raker(7) 1,000 -- -- 9,332 10,332 10,332 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
23
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Shares Shares Total Percentage
Issued Upon Issuable upon Shares of Number of common
Conversion conversion of Common Stock Securities of stock owner
of Series A Issuable upon Owned Securities after the
Convertible Preferred Common exercise of Prior to Being offering (5)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Colin Poole(7) 2,500 -- -- 23,332 25,832 25,832 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jay and Bernice Salomon (7) 3,750 -- -- 35,000 38,750 38,750 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harry Steinmetz 44,167 62,500 -- 85,832 192,499 192,499 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Barbara Michaels 4,417 -- -- 2,332 6,749 6,749 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Morton Globus 41,667 62,500 -- 62,500 166,667 166,667 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Samuel Globus (9) 154,167 15,625 24,752 40,377 245,458 234,922 0%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Dorothy S. Globus (10) 154,167 15,625 24,752 40,377 245,458 234,922 0%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Neal Scott (11) 4,000 -- -- 4,835 8,835 8,835 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michelle-Lee Cona (11) 4,000 -- 6,000 5,935 15,935 15,935 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeffrey Goldberg (11) 1,000 -- -- 1,027 2,027 2,027 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Marissa McKelvey (11) 1,000 -- 2,000 -- 3,000 3,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
West Park Capital (11) 6,400 -- 17,253 23,184 46,837 46,837 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Starobin Partners, Inc. (11) 37,400 -- 3,612 72,455 113,467 113,467 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michael Nimaroff -- 62,500 -- 62,500 125,000 125,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Steven S. Myers -- 250,000 -- 250,000 500,000 500,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Anthony Pintsopoulos -- 15,625 -- 15,625 31,250 31,250 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Bernard Mermelstein -- 62,500 -- 62,500 125,000 125,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Raymond J. Markman -- 125,000 -- 125,000 250,000 250,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Aaron Dobrinsky -- 31,250 -- 31,250 62,500 62,500 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Francis Elenio -- 15,625 -- 15,625 31,250 31,250 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William Donovan -- 31,250 -- 31,250 62,500 62,500 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Isaac Michalovsky -- 15,625 -- 15,625 31,250 31,250 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
The Watley Group LLC -- 31,250 -- 31,250 62,500 62,500 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Takeley Investments Limited -- 62,500 -- 62,500 125,000 125,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard D. Globus (12) -- 125,000 -- 125,000 749,035 250,000 1.4%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Stephen E. Globus -- 18,750 -- 18,750 523,214 37,500 1.3%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alice J. Globus -- 12,500 -- 12,500 25,000 25,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jane Globus -- 12,500 -- 12,500 244,638 25,000 0%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
SRG Capital Partnership -- 62,500 -- 62,500 128,500 125,000 0%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Regina Norman -- 12,500 -- 12,500 25,000 25,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Anthony Ippilito -- 12,500 -- 12,500 25,000 25,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Ronald P. Globus -- 62,005 -- 62,005 481,152 124,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alpine Venture -- 27,500 -- 27,500 55,000 55,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Adrienne Landau -- 27,500 -- 27,500 55,000 55,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William L. Sheppard -- 13,750 -- 13,750 27,500 27,500 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Paula Lev -- -- 30,000 -- 30,000 30,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeremy Brown -- -- 840 -- 840 840 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Young Israel of Great Neck -- -- 2,000 -- 2,000 2,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
GCE Property -- -- 1,000,000 1,000,000 2,000,000 2,000,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Elaine P. Fields -- -- 39,356 39,356 78,713 78,713 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
24
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Shares Shares Total Percentage
Issued Upon Issuable upon Shares of Number of common
Conversion conversion of Common Stock Securities of stock owner
of Series A Issuable upon Owned Securities after the
Convertible Preferred Common exercise of Prior to Being offering (5)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Victor Dowling -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Victor & Jody Dowling -- -- 198,020 198,020 396,040 396,040 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Paul Masters -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Berdon LP -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Rock Associates -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Beechwood Ventures -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harold E and Connie Crowley -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Nicholas Stock -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard and Ken Etra -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Rabbit Trust (Chris Coelho) -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William Oliver -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David Baum -- -- 198,020 198,020 396,040 396,040 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Kurt Stowell -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Francis Discala -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David French -- -- 99,010 99,010 198,020 198,020 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Summit View Parnership -- -- 50,000 50,000 100,000 100,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Donald Papcsy -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard Ross -- -- 100,000 100,000 200,000 200,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michael Ross -- -- 100,000 100,000 200,000 200,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Edoardo Grigone and
Giuseppina Tradito -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Agustin De La Reta and
Gabriela Calle -- -- 99,010 99,010 198,020 198,020 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michael Bailey -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Certified Systems -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Colin and Gursharn Harvey -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jasuns Holdings Limited -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Vincent John -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Carlos Lee -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Dennis Loeser -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Robert Mynett -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Simon Clarke -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Globus Brothers Studio -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Brian O' Regan -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Andrew Richards -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Philip Rushby -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Duncan Scott -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alan and Sheena Taylor -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Andrew Telford -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Pricaspian Development Corp. -- -- 99,010 99,010 198,020 198,020 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alios Wollnik -- -- 24,752 24,752 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
25
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Shares Shares Total Percentage
Issued Upon Issuable upon Shares of Number of common
Conversion conversion of Common Stock Securities of stock owner
of Series A Issuable upon Owned Securities after the
Convertible Preferred Common exercise of Prior to Being offering (5)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard Olson -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Adrian Kimberley -- -- 49,505 49,505 99,010 99,010 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
QVT Fund LP -- -- 990,099 990,099 1,980,198 1,980,198 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Lewis Opportunity Fund LP -- -- 297,030 297,030 594,059 594,059 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Vision Opportunity Master
Fund, LTD -- -- 990,099 990,099 1,980,198 1,980,198 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Portside Growth and
Opportunity Fund -- -- 125,000 125,000 250,000 250,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
DKR Soundshore Oasis
Holding Fund Ltd -- -- 250,000 250,000 500,000 500,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Double U Master Fund LP -- -- 99,010 99,010 198,020 198,020 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harborview Master Fund LLP -- -- 148,515 148,515 297,030 297,030 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alpha Capital AG -- -- 495,050 495,050 990,099 990,099 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Monarch Capital Fund Ltd -- -- 247,525 247,525 495,050 495,050 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Meadowbrook Opportunity
Fund LLC -- -- 250,000 250,000 500,000 500,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Forum Global Opportunity
Master Fund -- -- 150,000 150,000 300,000 300,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Sibex Capital Fund Inc -- -- 297,030 297,030 594,059 594,059 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Red Tiger Holdings -- -- -- 49,505 49,505 49,505 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Carmelo E Troccoli -- -- -- 47,777 47,777 47,777 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jonathan C. Rich -- -- -- 19,096 19,096 19,096 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harborview Capital
Management LLC -- -- -- 27,792 27,792 27,792 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Legend Merchant Group, Inc. -- -- -- 7,247 7,247 7,247 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Sam Ottensoser -- -- -- 3,749 3,749 3,749 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Randy Fields -- -- -- 12,011 12,011 12,011 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Tom Suppanz -- -- -- 8,440 8,440 8,440 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Dani Sabo -- -- -- 8,000 8,000 8,000 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Sean Martin -- -- -- 52,739 52,739 52,739 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Marco Racca -- -- -- 496 496 496 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jody Giraldo -- -- -- 1,237 1,237 1,237 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Brad Barnard -- -- -- 1,237 1,237 1,237 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeffery Auerbach -- -- -- 44,977 44,977 44,977 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Scott Shames -- -- -- 44,977 44,977 44,977 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David Rich -- -- -- 2,679 2,679 2,679 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Robert Bookbinder -- -- -- 1,892 1,892 1,892 --
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Totals 694,218 1,259,375 7,893,388 9,941,077 21,598,174 19,788,058 2.7%
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
(1) Including (i) original amount of shares issueable upon conversion of the
Convertible Notes, (ii) shares issued to investors who agreed to extend the
maturity date of the Convertible Notes to December 31, 2005 ("Extension
Shares"), and (iii) shares issued under penalty as of December 31, 2005 when all
the Convertible Notes were either converted or redeemed.
(2) Including (i) original number of shares issueable upon conversion of the
Series A Convertible Preferred Stock and (ii) shares issuable under the penalty
as of February 28, 2006.
26
(3) Including (i) shares issued in the Initial Common Stock Private Placement
and (ii) shares issued in the Subsequent Common Stock Private Placement.
(4) Including shares issuable under (i) Notes Warrants, (ii) Preferred A
Warrants, (iii) Initial Common Stock Warrants and (iv) Subsequent Common Stock
Warrants.
(5) Assumes that each named selling shareholder sells all of the shares of
common stock it holds (including the shares it will hold pursuant to the
exercise of warrants, as applicable) that are covered by this prospectus and
neither acquires nor disposes of any other shares, or right to purchase other
shares, subsequent to the date as of which we obtained information regarding its
holdings. Because the selling shareholders are not obligated to sell all or any
portion of the shares of our common stock shown as offered by them, we cannot
estimate the actual number of shares of common stock (or actual percentage of
the class of common stock) that will be held by any selling shareholder upon
completion of the offering.
(6) Calculated based on Rule 13d-3(d)(i) of the Exchange Act of 1934, as
amended, using shares of 36,848,400 common stock outstanding as of March 15,
2004.
(7)These selling stock holders redeemed their Convertible Notes on December 31,
2005. They have received certain number of Extension Shares as consideration for
their agreements that the maturity date of the Convertible Notes were extended
to December 31, 2005.
(8) These selling stock holders redeemed their Convertible Notes before October
1, 2005 and did not receive any Extension Shares.
(9) The shares of our common stock attributed to Samuel Globus include (i)
234,922 shares of our common stock held directly by him and (ii) 10,536 shares
of common stock held jointly with Dorothy Globus.
(10) The shares of our common stock attributed to Dorothy Globus include (i)
234,922 shares of our common stock held directly by him and (ii) 10,536 shares
of common stock held jointly with Samuel Globus.
(11) These selling stock holders received their securities for acting as
Placement Agent in the private placements.
(12)The shares of our common stock attributed to Richard D. Globus include (i)
620,535 shares of our common stock held directly by him and (ii) 128,500 shares
of common stock held by SRG Capital Partnership of which he is the general
partner.
OUR RECENT PRIVATE PLACEMENTS
Private placement closed in January 2005 (the "Notes Private
Placement")
In January, 2005, we raised a gross proceeds of $500,000 through the
sales of promissory note , pursuant to a subscription agreement, to which we
refer as the Notes Subscription Agreement, which we entered into with twenty
(20) accredited investors, to which we collectively refer as the Notes
Subscribers. Pursuant to the Notes Subscription Agreement, the Notes Subscribers
received convertible notes ("Notes" or "Convertible Notes") for a total
aggregate amount of $500,000 with a maturity date of 180 days from the Notes
issuance (the "Maturity"), bearing an interest rate on the principal balance of
the Notes of 7% per annum payable at Maturity or upon satisfaction or discharge
of the Note. Holder of the Note has a right to convert all, but not less than
all, of the Notes into shares of our common stock (each a "Share") at one dollar
per share. In September, 2005, sixteen of the Notes Subscribers have agreed to
extend the maturity date of the Notes until December 31, 2005. As of December
31, 2005, all of the Notes have been either converted into Shares or have been
redeemed. In addition, as an inducement for the Notes Subscribers to extend the
maturity date, we have issued 42,500 additional shares to these Notes Holders
who agreed to grant us the extension as described above,
Upon the execution of the Notes Subscription Agreement, we also issued
to the Notes Subscribers one (1) warrant for every one (1) Share that the
convertible notes can convert into under the Notes Subscription Agreement (the
"Notes Warrants"). The exercise price of the majority of Notes Warrants is $1.50
per share. Pursuant to the Notes Warrants, the Notes Subscribers are entitled to
purchase an aggregate amount of 341,657 Shares. The Notes Warrants may be
exercised only in full. The Notes Warrants will expire three (3) years from
issue date of the Notes Warrants. See also "Selling Shareholders."
27
WestPark acted as our placement agent in the private placement
described above. In consideration of WestPark's services, we issued to WestPark
or its designees 65,000 Shares in consideration of its service as our private
placement agent and 26,666 warrants representing the right to purchase up to
26,666 Shares under the same terms as described in the preceding paragraph.
Pursuant to the Notes Subscription Agreement, we are required to file
with the SEC a registration statement within 120 days after the issuance date of
the Notes and the Notes Warrants, which registers all the Shares to which the
Notes may be converted and the shares underlying the Notes Warrants issued or
issuable to the Notes Subscribers and WestPark in the private placement. In
addition, pursuant to the Notes Subscription Agreement, we are required to pay a
penalty of 5% per month if the registration statement has not become effective
before required date.
Private placement closed in June, 2005 (the "Initial Preferred A
Private Placement")
In June, 2005, we entered into a June subscription agreement, to which
we refer as the Initial Preferred A Subscription Agreement, with each of twenty
eight (28) accredited investors, to which we collectively refer as the Initial
Preferred A Subscribers. Pursuant to the Initial Preferred A Subscription
Agreement, the Initial Preferred A Subscribers received shares of our Series A
Convertible Preferred Stock ("Series A Convertible Preferred Stock"), face value
$1.00 per share, purchase price US$1.00 per share convertible at a ratio of 1:1
into Shares. For more information on Series A Convertible Preferred Stock, see
"Description of Securities."
Upon the execution of the Initial Preferred A Subscription Agreements,
we also issued to the Initial Preferred A Subscribers one (1) warrant for every
one (1) share of Series A Convertible Preferred Stock subscribed under the
Initial Preferred A Subscription Agreements ("Initial Preferred A Warrants").
The exercise price of the Initial Preferred A Warrants is $2.00 per Share.
Pursuant to the Initial Preferred A Warrants, the Initial Preferred A
Subscribers are entitled to purchase an aggregate amount of 1,090,000 Shares.
The Initial Preferred A Warrants may be exercised only in full. The Initial
Preferred A Warrants will expire three (3) years from the issue date of the
Initial Preferred A Warrants.
WestPark acted as our placement agent in the private placement
described above. In consideration of WestPark's services, we issued to WestPark
or its designees 76,500 Shares in consideration of its service as our private
placement agent and 76,500 Initial Preferred A Warrants representing the right
to purchase up to 76,500 Shares under the same terms as described in the
preceding paragraph.
Private placement closed on October 19, 2005 (the "Subsequent Preferred
A Private Placement")
On October 19, 2005, we entered into a subscription agreement, to which
we refer as the Subsequent Preferred A Subscription Agreement (together with the
Initial Preferred A Subscription Agreement, the "Preferred A Subscription
Agreement"), with each of three (3) accredited investors, to which we
collectively refer as the Subsequent Preferred A Subscribers (together with the
Initial Preferred A Subscribers, the "Preferred A Subscribers"). Pursuant to the
Subsequent Preferred A Subscription Agreement, the Subsequent Preferred A
Subscribers received 62,500 shares of our Series A Convertible Preferred Stock.
Upon the execution of the Subsequent Preferred A Subscription
Agreement, we also issued to the Subsequent Preferred A Subscribers one (1)
warrant for every one (1) share of Series A Convertible Preferred Stock
subscribed under the Subsequent Preferred A Subscription Agreement ("Subsequent
Preferred A Warrants", and together with the Initial Preferred A Warrants, the
"Preferred A Warrants"). The Subsequent Preferred A Warrants has the same terms
as of those of the Initial Preferred A Warrants and the Subsequent Preferred A
Subscribers are entitled to purchase an aggregate amount of 62,500 Shares.
WestPark acted as our placement agent in the private placement
described above. In consideration of WestPark's services, we issued to WestPark
or its designees 5,625 common stock in consideration of its service as our
28
private placement agent and 5,625 warrants representing the right to purchase up
to 5,625 shares of our common stock under the same terms as described in the
preceding paragraph.
Pursuant to the Preferred A Subscription Agreement, we are required to
file with the SEC a registration statement within 120 days, which registers all
the Shares to which the Series A Preferred Convertible Stock may be converted
and the shares underlying the Preferred A Warrants issued or issuable to the
Preferred A Subscribers and WestPark in the private placements. In addition,
pursuant to the Preferred A Subscription Agreements, we are required to pay a
penalty of 5% per month if the registration statement has not become effective
before required date.
Private placement closed in February 2, 2006 (the "Initial Common Stock
Private Placement")
On February 2, 2006, we entered into a securities purchase agreement,
to which we refer as the Initial Common Stock Securities Purchase Agreement,
with GCE Property Holdings, Inc. ("GCE"), to which we refer as the Initial
Common Stock Purchaser. Pursuant to the Initial Common Stock Securities Purchase
Agreement, we issued one million (1,000,000) shares of our common stock to the
Initial Common Stock Purchaser at $1.00 per share.
Upon the execution of the Initial Common Stock Securities Purchase
Agreement, we also issued to the Initial Common Stock Purchaser one million
(1,000,000) warrant with an exercise price of $1.25 per share of common stock
("Initial Common Stock Warrants"). The Initial Common Stock Warrants will expire
four (4) years from the date of the issuance.
Under the Initial Common Stock Securities Purchase Agreement, we have
agreed not to issue Shares or securities convertible or exchangeable into Shares
at a price equal to or lower than $1.00 per share and not issue any warrants or
securities that are exercisable into Shares at a price lower than $1.25 per
share.
Pursuant to the Initial Common Stock Securities Purchase Agreement, the
Initial Common Stock Purchaser was granted a right to participate up to 100% in
any of our subsequent financing by offering of common stock or common stock
equivalents in the twelve (12) months the effective date of the registration
statement of which this prospectus constitutes a part.
Pursuant to a registration rights agreement entered between the Initial
Common Stock Purchaser and us, we have agreed to file a registration statement
with the SEC covering the Shares and Shares underlying the Warrants, within 65
days from this closing and obtain effectiveness of such registration statement
within 170 days from closing. In case the registrant does not meet the filing
deadlines listed above we will pay a penalty of 1% of the aggregate investment
made by Investors and on each monthly anniversary of such default an amount
equal to 1.5% of the aggregate investment amount of Investors, respectively
Private placement closed on March 10, 2006 (the "Subsequent Common
Stock Private Placement")
On March 10, 2006, we entered into a securities purchase agreement, to
which we refer as the Subsequent Common Stock Securities Purchase Agreement,
with various investors, to which we refer as the Subsequent Common Stock
Purchaser. Pursuant to the Subsequent Common Stock Securities Purchase
Agreement, we issued 6,831,863 Shares to the Subsequent Common Stock Purchaser
at $1.01 per share.
Upon the execution of the Subsequent Common Stock Securities Purchase
Agreement, we also issued to the Subsequent Common Stock Purchaser 6,831,684
warrants with an exercise price of $1.26 per share of common stock ("Subsequent
Common Stock Warrants"). The Subsequent Common Stock Warrants will expire four
(4) years from the date of the issuance.
29
Under the Subsequent Common Stock Securities Purchase Agreement, we
have agreed not to issue Shares or securities convertible or exchangeable into
Shares at a price equal to or lower than $1.01 per share and not issue any
warrants or securities that are exercisable into Shares at a price lower than
$1.26 per share.
Pursuant to the Subsequent Common Stock Securities Purchase Agreement,
subject and subordinated to the participation rights of the Initial Common Stock
Purchasers, the Subsequent Common Stock Purchaser was granted a right to
participate up to 100% in any of our subsequent financing by offering of common
stock or common stock equivalents in the twelve (12) months from the effective
date of the registration statement of which this prospectus constitutes a part.
30
PLAN OF DISTRIBUTION
We are registering the securities covered by this prospectus on behalf
of the selling shareholders. Each selling shareholder is free to offer and sell
his or her shares of our common stock at such times, in such manner and at such
prices as he or she may determine. The selling shareholders have advised us that
the sale or distribution of our common stock owned by the selling shareholders
may be affected in transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of our
common stock, or a combination of such methods of sale. The sales will be at
market prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling shareholders
have advised us that they have not entered into agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
shares. The selling shareholders do not have an underwriter or coordinating
broker acting in connection with the proposed sale of our common stock. There is
no over-allotment option and no shares will be sold by us.
The selling shareholders may sell their shares directly to purchasers
or to or through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders. They may also receive compensation
from the purchasers of our common stock for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Selling shareholders and any broker-dealer that acts in connection with
the sale of shares of our common stock hereunder may be deemed to be
"underwriters" within the meaning of Section 2(a)(11) of the Securities Act. Any
commissions received by such broker-dealers and any profit on the resale of the
shares of our common stock sold by them while acting as principals might be
deemed to be underwriting discounts or commissions under the Securities Act. The
selling shareholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of our common stock against
certain liabilities, including liabilities arising under the Securities Act.
Because each of selling shareholders may be deemed to be an
"underwriter" within the meaning of Section 2(a)(11) of the Securities Act, the
selling shareholders will be subject to prospectus delivery requirements of the
Securities Act.
We have informed the selling shareholders that the anti-manipulation
rules of the SEC, including Regulation M promulgated under the Securities
Exchange Act, will apply to its sales in the market, and we have informed the
other selling shareholders that these anti-manipulation rules may apply to their
sales in the market. We have provided all of the selling shareholders with a
copy of such rules and regulations.
Regulation M may limit the timing of purchases and sales of any of the
shares of our common stock by the selling shareholders and any other person
distributing our common stock. The anti-manipulation rules under the Securities
Exchange Act may apply to sales of shares of our common stock in the market and
to the activities of the selling shareholders and their affiliates. Furthermore,
Regulation M of the Securities Exchange Act may restrict the ability of any
person engaged in the distribution of shares of our common stock to engage in
market-making activities with respect to the particular shares of common stock
being distributed for a period of up to five business days prior to the
commencement of such distribution. All of the foregoing may affect the
marketability of our common stock and the ability of any person or entity to
engage in market-making activities with respect to our common stock.
Rules 101 and 102 of Regulation M under the Securities Exchange Act,
among other things, generally prohibit certain participants in a distribution
from bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 104 of Regulation M governs bids and purchases made to
stabilize the price of a security in connection with a distribution of the
security.
31
The selling shareholders also may resell all, or a portion, of our
common stock in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of such Rule.
The selling stockholders will pay all commissions, transfer taxes and
other expenses associated with their sales. The shares offered hereby are being
registered pursuant to our contractual obligations, and we have agreed to pay
the expenses of the preparation of this prospectus.
32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of our current
directors and executive officers, their principal offices and positions and the
date each such person became our director or executive officer. Our executive
officers are elected annually by the board of directors. Our directors serve
one-year terms until their successors are elected. The executive officers serve
terms of one year or until their death, resignation or removal by the board of
directors. There are no family relationships between any of the directors and
executive officers. In addition, there was no arrangement or understanding
between any executive officer and any other person pursuant to which any person
was selected as an executive officer. The executive officers are all full time
employees of us.
NAME AGE POSITION DATE OF APPOINTMENT
Mao, Peng 34 Chief Executive Officers August 28, 2004
and Chairman of the Board
AN, Lufan 40 Director, President and August 28, 2004
Chief Operation Officers
ZHANG, Luyong 43 Chief Technology Officer August 28, 2004
LIU ,Xiaohao 41 Director and Senior Vice August 28, 2004
President,
HUANG, Chentai 56 Chief Financial Officer August 28, 2004
Stephen E. Globus 58 Director August 28, 2004
MAO, Peng, MBA
MAO Peng is the Chairman and Chief Executive Officer (CEO) as well as a
major shareholder of our company. Before that, Mr. Mao was the CEO of China
Pharmaceuticals Investment Fund Ltd. and managed its investments in the
pharmaceutical industry in China. Mr. Mao was also a co-founder and the
President of Infogroup Investment Corp., a Canadian company specializing in
corporate finance and investment management, and Infogroup Management Consultant
Ltd. Canada as well as the CEO of the Shandong China Life S.T. Research
Institute. He has extensive connections and experience in the pharmaceutical
industry. Mr. Mao graduated from Shandong University in 1993 with a B.A. degree
in Marketing and graduated in 1997, with an MBA degree from the Lundquist
College of Business at the University of Oregon.
AN, Lufan, Ph.D.
AN Lufan is the President and Chief Operation Officer (COO) and a major
shareholder of our company. Mr. An also serves as CEO of Nanjing Keyuan. He
served as the CEO of Shandon Tungtai Pharmaceutical Technology Corp. Prior to
that, Mr. An served as head of the New Drugs Development Center of Nanjing
Keyuan Pharmaceutical Technology Corp. He has extensive experience in new drug
R&D and commercialization of new drugs and has been involved in the development
of about thirty-two new drugs and published fifteen related articles in national
and international professional journals. Mr. An graduated from Jining Medical
College in 1985 with a B.S. degree in Medicine and acquired his Ph.D. degree in
Pharmacology from China Pharmaceutical University in 1991.
33
ZHANG, Luyong, Ph.D.
Zhang, Luyong is the Chief Technology Officer (CTO) and a major
shareholder of our company. He was a founder and head of Xinzhung New Drugs R&D
Center and is still the Deputy Director of the Technology Department of China
Pharmaceutical University.
Between 2000 and 2002, Mr. Zhang was the head of the Department of New
Drug Examination in SFDA. Given his strong academic background and R&D
capabilities in the pharmaceutical field, Mr. Zhang has been invited to run many
state research projects as well as projects in the private sector. For example,
he was in charge of a project called the National Laboratory of New Drugs
Screening. The remarkable results of the project have provided a research
platform for the future discovery of new drugs. As a result, the Lab has been
approved and certified by the Ministry of Technology and became the first
National Class Laboratory in China. Furthermore, Mr. Zhang founded Jiangsu New
Drugs Screening Center with funding from the Jiangsu Provincial government.
Other government funded projects that Mr. Zhang supervised include: National 863
Project "Establishing New Type of High Through-Put Drug Screening Model",
"National 863 Project "Establishing the Platform for High Through-Put Screening
Techniques", "R&D for 1st Class TCM of Teng Huang Suan" and "R&D for 1st Class
TCM of Hong Hua Huang Ser Su". Mr. Zhang graduated from China Pharmaceutical
University in 1983 with a B.S. degree in Pharmacology and obtained his PhD in
Pharmacology from China Pharmaceutical University in 1989. He currently holds a
professorship at China Pharmaceutical University. He is also a consultant to the
National New Drugs Examination Committee of SFDA.
LIU, Xiaohao, M.S.
Liu Xiaohao, our Senior Vice President and a major shareholder of our
company, heads the sales operations of our company. Mr. Liu has accumulated
extensive experience and gathered strong track record in drug sales and
marketing and has gained broad recognition and high esteem in the industry.
Prior to joining our company, Mr. Liu held several top marketing and sales
positions in some of the most successful companies in the industry. He was
specially invited by the management and shareholders of our company to become a
shareholder of our company to head our company's sales and marketing department.
He is a major asset for our company's future growth. Before joining our company,
Mr. Liu served as the vice general manager in Shanghai Fuxin Pharmaceutical
Corporation ("Fuxin"), the largest and one of the most successful generic drug
manufacturers in China and a major part of the Fuxin group listed on the
Shanghai Stock Exchange. He was responsible for Fuxin's Sales Department and
built up a strong sales team in less than 6 months, achieving major sales growth
for Fuxin. Prior to Fuxin, he worked at Shengzhen Haiwang Pharmaceutical
Corporation as Project Manager and Sales Manager. He developed, licensed and
then put in production "Tai-Rui-Ning", a product for pediatric use. Mr. Liu also
worked in Nanjing Tian-Ying Pharmaceutical Corporation and served as Vice
General Manager in charge of Sales Department. He built up a top special sales
team from the scratch and his team contributed at least 50% of that company's
total sales and profits. Prior to that, Mr. Liu worked in Jiangsu Chang Ao
Pharmaceutical Corp. as Marketing Director. He was in charge of the sales and
marketing department in three provinces responsible for planning and marketing
major products of our company and turned those products into market leaders in a
very short period of time and received "Excellent Management Award" from our
company for his achievements. Prior to that, Mr. Liu worked for Jiangsu Xuzhou
Pharmaceutical Corporation as Vice General Manager in charge of the Marketing
Department. He was responsible for planning, marketing and sales promotions,
organized the first "National Forum on Narcotics and Intensive Care" and chaired
many seminars on various topics. He graduated from the SFDA Graduate Research
Program with a M.S. in Pharmaceutical Administration in 2002.
HUANG Chentai, MBA
Huang, Chentai is the CFO in charge of Corporate Development of our
company. Mr. Huang has over twenty years of business related working experience
in both North America and Asia. Mr. Huang has been engaged in numerous public
offerings and M&A transactions in Singapore, Taiwan and China. He was Co-founder
34
and Director of Infogroup Investment Corporation, Canada. Mr. Huang graduated
from Missouri State University with an MBA degree in 1979 and graduated form
Taiwan Tamkang University with a B.A. degree in Business Administration in 1971.
Stephen E. Globus
Stephen Globus was the Chairman of Globus Growth Group, a company that
specialized in venture capital for technology companies. It was the seed and
initial investors to Plasmaco, a USA developer of Plasma Television where Mr.
Globus was Chairman and subsequently sold Plasmaco to Matsushita (Panasonic)
where he served on one of its Board of Directors. Globus Growth Group was also
among the initial investors in Genitope (GTOP), a San Francisco area
biotechnology company that is utilizing novel immuno-therapies for the treatment
of B-cell Non-Hodgkin's Lymphoma. Globus Growth Group also started Proscure, a
Boston based Biotechnology company that was purchased by Repligen (RGEN) and
ExSar, a private company involved in drug discovery through the protein/peptide
mapping. Among the other portfolio early investments were also Energy Research
Company (now FuelCell Energy, FCEL) and Kimeragen, a gene modification company,
that was sold to Valigen, a French biotechnology company. Mr. Globus mainly
resides in New York City.
INDEMNIFICATION
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by Delaware law. This limitation of liability is
subject to exceptions including intentional misconduct, obtaining an improper
personal benefit and abdication or reckless disregard of director duties. Our
articles of incorporation and bylaws provide that we may indemnify our
directors, officer, employees and other agents to the fullest extent permitted
by law. Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the bylaws would permit
indemnification. We currently do not have such an insurance policy.
STOCK OPTION PLAN
We currently do not have but intend to formally adopt a stock option or
restricted share plan.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid to our chief executive officer and our four other most highly
compensated executive officers and our independent director during the periods
described below:
- --------------------- ------------------------------------------------- ------------------------- -----------------
NAME AND ANNUAL COMPENSATION LONG TERM COMPENSATION All
PRINCIPAL OTHER
POSITION COMPENSATION
- --------------------- ------------------------------------------------- ------------------------- -----------------
YEAR SALARY($) BONUS($) OTHER AWARDS PAYOUTS
ANNUAL
COMPENSATION
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
SECURITIES
UNDERLYING
OPTIONS(#)
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
Mao, Peng 2003 0 0 0 0 0 0
CHAIMAN AND CEO ------- ------------ ---------- ----------------- -------------- ---------- -----------------
2004 15,000 0 0 0 0 0
------- ------------ ---------- ----------------- -------------- ---------- -----------------
2005 15,000 0 0 0(1) 0 0
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
AN, Lufan 2003 0 0 0 0 0 0
DIRECTOR, ------- ------------ ---------- ----------------- -------------- ---------- -----------------
PRESIDENT 2004 15,000 0 0 0 0 0
AND COO ------- ------------ ---------- ----------------- -------------- ---------- -----------------
2005 15,000 0 0 0(1) 0 0
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
ZHANG, Luyong 2003 0 0 0 0 0 0
CTO ------- ------------ ---------- ----------------- -------------- ---------- -----------------
2004 12,500 0 0 0 0 0
------- ------------ ---------- ----------------- -------------- ---------- -----------------
2005 12,500 0 0 0(1) 0 0
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
35
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
LIU ,Xiaohao 2003 0 0 0 0 0 0
DIRECTOR, ------- ------------ ---------- ----------------- -------------- ---------- -----------------
VICE PRESIDENT 2004 12,500 0 0 0 0 0
------- ------------ ---------- ----------------- -------------- ---------- -----------------
2005 12,500 0 0 0(1) 0 0
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
HUANG, Chentai 2003 0 0 0 0 0 0
CFO ------- ------------ ---------- ----------------- -------------- ---------- -----------------
2004 12,500 0 0 0 0 0
------- ------------ ---------- ----------------- -------------- ---------- -----------------
2005 12,500 0 0 0(1) 0 0
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
Stephen E. Globus 2003 0 0 0 0 0 0
DIRECTOR (2) ------- ------------ ---------- ----------------- -------------- ---------- -----------------
2004 0 0 0 0 0 0
------- ------------ ---------- ----------------- -------------- ---------- -----------------
2005 0 0 0 0 0 0
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
(1) In August 2004 we entered into employment agreements with our top
executive officers to secure their commitment to continued service to
us. The employment agreements provide, each, for the grant of options
to purchase shares of our common stock pursuant to the stock option
plan to be adopted by us (the "Stock Option Plan"). These options are
to be awarded in four quarterly installments on each three month
anniversary after August 29, 2004. The exercise price for each option
granted to the executive officers shall be $1.50. Each quarterly grant
shall consist of the quantity of shares of our common stock whose
aggregate market price at close of trading on the date of grant minus
their aggregate exercise price equals $7,500.00. The executive
officers' right to receive any quarterly grant of stock options is
subject to and conditional upon his status as our full-time employee at
the time of such grant, and such executive officer shall not be
entitled to any portion of any quarterly grant that has not already
been awarded to him prior to his last day of a full-time employment
with us.
(2) We shall promptly pay or reimburse Mr. Stephen E. Globus as our
director for all reasonable out-of-pocket expenses (in accordance with
our policy) incurred or paid by him, in an amount not to exceed
US$50,000, in connection with the performance of his services
(including, without limitation, travel expenses) upon presentation of
expense statements or vouchers or such other supporting documentation
in such form and containing such information as we may from time to
time require.
(3) We have omitted information on "perks" and other personal; benefits
because the aggregate value of these items, if any, does not meet the
minimum amount required for disclosure under the Securities and
Exchange Commission's regulations.
OPTION EXERCISES DURING 2005 FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
There were no options exercised during the 2005 fiscal year.
DIRECTOR COMPENSATION
None of our directors has received any compensation for their services
rendered as our directors during fiscal years 2004 and 2005.
EMPLOYMENT AGREEMENTS
In August 2004, we entered into respective employment agreements with
our top executive officers to secure their commitment to continued service to
us.
36
MAO Peng's employment agreement has a term of five years, commencing on
September 1, 2004, and provides for a salary of $15,000 for the first year of
the term, subject to subsequent annual review by our board of directors. The
agreement also provides for the grant of options to purchase shares of our
common stock pursuant to the Stock Option Plan. These options are to be awarded
in four quarterly installments on each three month anniversary after August 29,
2004, in accordance with the terms and conditions of Stock Option Plan and any
other stock option agreement entered into by Mr. Mao and us. We have not adopted
the Stock Option Plan yet and therefore no options have been granted. The
exercise price for each option granted to Mr. Mao shall be US$1.50. Each
quarterly grant shall consist of the quantity of shares of our common stock
whose aggregate market price at close of trading on the date of grant minus
their aggregate exercise price equals $7,500.00. Mr. Mao's right to receive any
quarterly grant of stock options is subject to and conditional upon his status
as our full-time employee at the time of such grant, and Mr. Mao shall not be
entitled to any portion of any quarterly grant that has not already been awarded
to him prior to his last day of full-time employment with us.
HUANG Chentai's employment agreement has a term of five years,
commencing on September 1, 2004, and provides for an annual salary of $12,500
for the first year of the term, subject to subsequent annual review by our board
of directors. The agreement also provides for the grant of options to purchase
shares of our common stock pursuant to the Stock Option. These options are to be
awarded in four quarterly installments on each three month anniversary after
August 29, 2004 pursuant to and in accordance with the terms and conditions of
the Stock Option Plan and any other stock option agreement entered into by Mr.
Huang and us. We have not adopted the Stock Option Plan yet and therefore no
options have been granted. The exercise price for each option granted to Mr.
Huang shall be US$1.50. Each quarterly grant shall consist of the quantity of
shares of our common stock whose aggregate market price at close of trading on
the date of grant minus their aggregate exercise price equals $7,500.00. Mr.
Huang's right to receive any quarterly grant of stock options is subject to and
conditional upon his status as our full-time employee at the time of such grant,
and Mr. Huang shall not be entitled to any portion of any quarterly grant that
has not already been awarded to him prior to his last day of full-time
employment with us.
AN Lufan's employment agreement has a term of five years, commencing on
September 1, 2004, and provides for an annual salary of $15,000 for the first
year of the term, subject to subsequent annual review by our board of directors.
The agreement also provides for the grant of options to purchase shares of our
common stock pursuant to the Stock Option Plan. These options are to be awarded
in four quarterly installments on each three month anniversary after August 29,
2004 pursuant to and in accordance with the terms and conditions of the Stock
Option Plan and any other stock option agreement entered into by Mr. An and us.
We have not adopted the Stock Option Plan yet and therefore no options have been
granted. The exercise price for each option granted to Mr. An shall be US$1.50.
Each quarterly grant shall consist of the quantity of shares of our common stock
whose aggregate market price at close of trading on the date of grant minus
their aggregate exercise price equals $7,500.00. Mr. An's right to receive any
quarterly grant of stock options is subject to and conditional upon his status
as our full-time employee at the time of such grant, and Mr. An shall not be
entitled to any portion of any quarterly grant that has not already been awarded
to him prior to his last date of full-time employment with us.
LIU Xiaohao's employment agreement has a term of five years, commencing
on September 1, 2004, and provides for an annual salary of $12,500 for the first
year of the term, subject to subsequent annual review by our board of directors.
The agreement also provides for the grant of options to purchase shares of our
common stock pursuant to the Stock Option Plan. These options are to be awarded
in four quarterly installments on each three month anniversary after August 29,
2004 pursuant to and in accordance with the terms and conditions of the Stock
Option Plan and any other stock option agreement entered into by Mr. Liu and us.
We have not adopted the Stock Option Plan yet and therefore no options have been
granted. The exercise price for each option granted to Mr. Liu shall be US$1.5.
Each quarterly grant shall consist of the quantity of shares of our common stock
whose aggregate market price at close of trading on the date of grant minus
their aggregate exercise price equals $7,500.00. Mr. Liu's right to receive any
quarterly grant of stock options is subject to and conditional upon his status
as our full-time employee at the time of such grant, and Mr. Liu shall not be
entitled to any portion of any quarterly grant that has not already been awarded
to him prior to his last date of full-time employment with us.
37
Zhang Luyong's employment agreement has a term of five years,
commencing on September 1, 2004, and provides for an annual salary of $12,500
for the first year of the term, subject to subsequent annual review by our board
of directors. The agreement also provides for the grant of options to purchase
shares of our common stock pursuant to the Stock Option Plan. These options are
to be awarded in four quarterly installments on each three month anniversary
after August 29, 2004 pursuant to and in accordance with the terms and
conditions of the Stock Option Plan and any other stock option agreement entered
into by Mr. Zhang and us. We have not adopted the Stock Option Plan yet and
therefore no options have been granted. The exercise price for each option
granted to Mr. Zhang shall be US$1.5. Each quarterly grant shall consist of the
quantity of shares of our common stock whose aggregate market price at close of
trading on the date of grant minus their aggregate exercise price equals
$7,500.00. Mr. Zhang's right to receive any quarterly grant of stock options is
subject to and conditional upon his status as our full-time employee at the time
of such grant, and Mr. Zhang shall not be entitled to any portion of any
quarterly grant that has not already been awarded to him prior to his last date
of full-time employment with us.
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our Articles of Incorporation, as
amended to date, our by-laws, and the certificate of designations filed with the
State of Delaware. Our Articles of Incorporation and our by-laws have been filed
as exhibits to our registration statement of which this prospectus is a part.
All material terms of these referenced documents are disclosed in this document.
Our authorized capital stock consists of 200,000,000 shares of common stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01
per share.
Common Stock
The holders of our common stock are entitled to one vote for each share
held. The affirmative vote of a majority of votes cast at a meeting that
commences with a lawful quorum is sufficient for approval of matters upon which
shareholders may vote, including questions presented for approval or
ratification at the annual meeting. Our common stock does not carry cumulative
voting rights, and holders of more than 50% of our common stock have the power
to elect all directors and, as a practical matter, to control our company.
Holders of our common stock are not entitled to preemptive rights.
After the satisfaction of requirements with respect to preferential
dividends, if any, holders of our common stock are entitled to receive, pro
rata, dividends when and as declared by our board of directors out of funds
legally available therefore.
Preferred Stock:
We have authorized 10,000,000 shares of preferred stock with 1,152,000
shares of Series A Convertible Preferred Stock, face value $1.00, currently
outstanding as of March 15, 2006.
The Preferred Stock shall be issued at a purchase price of US$1.00 per
share. The number of shares constituting the Series A Convertible Preferred
Stock is 1,152,500. The main characteristics of the Series A Convertible
Preferred Stock are as follows:
Preference. Subject to the rights of the holders of any other series of
preferred stock ranking senior to or on a parity with the Series A Convertible
Preferred Stock with respect to liquidation and any other class or series of our
capital stock ranking senior to or on a parity with Series A Convertible
Preferred Stock with respect to liquidation, in the event of any liquidation,
dissolution or winding up of the affairs of the Company, whether voluntary or
involuntary, the holders of record of the issued and outstanding shares of
Series A Convertible Preferred Stock ("Holder") shall be entitled to receive,
out of our assets available for distribution to the Holders of shares of Series
A Convertible Preferred Stock, prior and in preference to any distribution of
any of our assets to the holders of our common stock and any other series of
preferred stock ranking junior to the Series A Convertible Preferred Stock with
38
respect to liquidation and any other class or series of our capital stock
ranking junior to the Series A Convertible Preferred Stock with respect to
liquidation, an amount in cash per share equal to $1.50, plus an amount equal to
all dividends accrued and unpaid on each such share (whether or not declared) up
to the date fixed for distribution. If, upon such liquidation, dissolution or
winding up of the affairs of the Company, our assets distributable among the
Holders of Series A Convertible Preferred Stock and any other series of
preferred stock ranking on a parity therewith in respect thereto or any class or
series of our capital stock ranking on a parity therewith in respect thereto
shall be insufficient to permit the payment in full to all such Holders of
shares of the preferential amounts payable to them, then our entire assets
available for distribution to such Holders of shares shall be distributed
ratably among such Holders in proportion to the respective amounts that would be
payable per share if such assets were sufficient to permit payment in full.
After payment of the full amount to which they are entitled upon liquidation,
the Holders of shares of Series A Convertible Preferred Stock will not be
entitled to any further participation in any distribution of assets by us.
Neither a consolidation or merger of us with another corporation or other entity
nor a sale, transfer, lease or exchange of all or part of our assets will be
considered a liquidation, dissolution or winding up of the affairs of us.
No Preference on Common Stock. The preference in liquidation described
above shall not apply if the Holder of the Series A Convertible Preferred Stock
has converted the Series A Convertible Preferred Stock into our common stock,
which shall be ranked junior to preferred stock.
Optional Conversion Rights: The Series A Convertible Preferred Stock
shall be convertible as follows:
Optional Conversion: Subject to certain conditions set forth in the
Holder of any shares of the Series A Convertible Preferred Stock shall have the
right at such Holder's option (an "Optional Conversion"), at a date elected by
such Holder, to convert such Series A Convertible Preferred Stock into fully
paid and nonassessable shares our common stock at the ratio of one for one
shares of our common stock ("Conversion Ratio").
Cost: We shall pay all documentary fee attributable to the issuance or
delivery of shares of our common stock upon conversion of any shares of Series A
Convertible Preferred Stock; provided that we shall not be required to pay any
taxes which may be payable in respect of any transfer involved in the issuance
or delivery of any certificate for such shares in a name other than that of the
Holder of the shares of Series A Convertible Preferred Stock in respect of which
such shares are being issued.
Dividends Upon Conversion: In connection with any conversion of shares
of Series A Convertible Preferred Stock, we shall pay accrued and unpaid
dividends thereon in accordance with the provisions of the Certificate of
Designation.
Dividends: Subject to the rights of the Holders of any other series of
preferred stock ranking senior to or on a parity with the Preferred Stock with
respect to dividends and any other class or series of our capital stock ranking
senior to or on a parity with the Series A Convertible Preferred Stock with
respect to dividends, other than our common stock, the Holders of the Series A
Convertible Preferred Stock shall be entitled to receive, when and as declared
by our board of directors, cumulative dividends per share of the Series A
Convertible Preferred Stock at a rate of 7% per annum or as determined by our
board of directors, payable semi-annually, during the period commencing after
the date of original issuance of any shares of the Series A Convertible
Preferred Stock until converted pursuant to the provisions described above;
provided, however, in the event of a conversion as a result of an Optional
Conversion, no dividends will be due or payable to Holders of Series A
Convertible Preferred Stock. Any dividends shall be paid within thirty (30)
calendar days from the date it has been declared by our board of directors.
Convertible Notes
In the private placement in January 2005, we issued Convertible Notes
in the aggregate amount of $500,000 with a maturity date of 180 days from the
Notes issuance, the principal balance of which bearing an interest rate of 7%
per annum payable at maturity or upon satisfaction or discharge of the Note.
39
Holder of the Notes has a right to convert all, but not less than all, of the
Notes into our common stock at $1.00 per share. The Notes holders consented in
September 2005 to a ninety day extension of the maturity of the Convertible
Notes.
As of December 31, 2005, part of the Convertible Notes have been
converted into 358,334 shares of our Common Stock and the rest have been
redeemed by us. As a result of the consent from the Note holders, we have issued
the consenting Note holders additional 42,500 shares of our common stock.
Warrants
We also issued 368,323 warrants in the Notes Private Placement in
January 2005, among which 26,666 warrants were attributed to WestPark as part of
the consideration for its services as our private placement agent. The exercise
price of the Notes Warrants is $1.50 per share. Pursuant to the Notes Warrants,
the Notes Subscribers are entitled to purchase an aggregate of 368,323 shares of
common stock. These Notes Warrants will expire on the third anniversary after
the issue date and may be exercised in full but not or in part during that
period.
We issued 1,152,500 warrants in the private placement in June 2005 and
October 2005 in connection with the private placement of Series A Convertible
Preferred Stock, among which 76,500 warrants were attributed to WestPark and its
designees as part of the consideration for its services as our private placement
agent. The exercise price of these warrants is $2.00 per share. These warrants
will expire on the third anniversary after the issue date as specified in the
warrants and may be exercised in full but not or in part during that period.
We have also issued 1,000,000 warrants in connection with the private
placement of our common stock on February 2, 2006. The exercise price of the
warrant is $1.25 per share. The warrants will expire on the February 2, 2010 and
may be exercised in full or in part from time to time during this period.
We have also issued 6,831,684 warrants in connection with the private
placement of our common stock on March 10, 2006. The exercise price of the
warrant is $1.26 per share. The warrants will expire on the March 10, 2010 and
may be exercised in full or in part from time to time during this period.
Dividends
We have not declared or paid any cash dividends to date, and we do not
intend to declare any cash dividends on the shares of our common stock in the
foreseeable future. Any future decision to pay dividends on shares of our common
stock will be solely at the discretion of our board of directors. See also
"Dividend Policy."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
Our Certificate of Incorporation provides that our board of directors, pursuant
to a resolution, may issue preferred stock from time to time and fix the terms
and rights of such stock, including the voting rights. The issuance of
additional preferred stock with voting rights may have certain anti-takeover
effects.
DELAWARE ANTI-TAKEOVER STATUTE
We are a Delaware corporation and are subject to Section 203 of the Delaware
General Corporation Law. In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of our
outstanding voting stock) from engaging in a merger, acquisition or other
"business combination" (as defined in Section 203) with us for three years
following the time that person becomes an interested stockholder unless:
40
o before that person became an interested stockholder, our board of
directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination;
o upon completion of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock outstanding at the
time the transaction commenced (excluding stock held by our directors
who are also officers and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange
offer); or
o following the transaction in which that person became an interested
stockholder, the business combination is approved by our board of
directors and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the
outstanding voting stock not owned by the interested stockholder.
Generally, a "business combination" for these purposes includes a merger, asset
or stock sale, or other transaction resulting in a financial benefit to the
interested stockholder. An "interested stockholder" for these purposes is a
person who, together with affiliates and associates, owns or, within three years
prior to the determination of interested stockholder status, did own 15% or more
of a corporation's outstanding voting securities. We expect the existence of
this provision to have an anti-takeover effect with respect to transactions our
board of directors does not approve in advance. We also anticipate that Section
203 may discourage attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
41
BUSINESS
OUR COMPANY
We are a vertically integrated bio-pharmaceutical company focused on
developing, manufacturing and distributing innovative drugs in the People's
Republic of China ("China" or PRC").
We, a Delaware corporation, were originally organized as a corporation
under the laws of the state of New York on August 6, 1976 under the name of
Globuscope, Inc. On August 7, 1984, its name was changed to Globus Growth Group,
Inc., which was its name until it was merged into China Biopharmaceuticals
Holdings, Inc. (CBH), its wholly owned subsidiary in the state of Delaware on
August 28, 2004 through an internal re-organizational merger. Effective August
28, 2004, CBH completed the acquisition of China Biopharmaceuticals Corp.
("CBC"), a British Virgin Islands corporation as the parent, the management
company and holder of 90% of the ownership interest in its then only operating
subsidiary and asset, NanJing Keyuan Pharmaceutical R&D Co., Ltd., doing
business in English a.k.a. Nanjing Chemsource Pharmaceutical R&D Co. Ltd,
("Keyuan" or "Chemsource"), a company established in China and engaged in the
discovery, development and commercialization of innovative drugs and related
bio-pharmaceutical products in China. Nanjing Keyuan Pharmaceutical R&D Co.,
Ltd. was established in March 2000 in Nanjing City of Jiangsu Province, China.
It was founded and spear-headed by graduates from China Pharmaceutical
University to engage in new drug research and discovery and in the development
of new drug screening technologies.
On February 27, 1986, our stockholders approved the divestiture and
sale of those assets of our company as pertained to its then camera
manufacturing and photography operations as well as the sale of certain shares
of stock in a photographic related company owned by it and its interest in our
then owned premises. The sale was consummated as of February 28, 1986. After
such divestiture, our activities consisted of the holding of interests in
various companies and the seeking out of acquisition and joint-venture
opportunities in various fields of business endeavor. On May 27 1988, we filed
with the Securities and Exchange Commission (the "SEC") a notification of
election to be treated as a "Business Development Company" ("BDC") as that term
is defined in the Investment Company Act of 1940 (the "1940 Act"). The decision
to become a BDC was made primarily to better reflect our anticipated future
business and development relationships. A BDC is an investment company designed
to assist eligible portfolio companies with capital formation. As a result of
the reorganization the acquisition of CBC pursuant to the Exchange Agreement, we
are no longer a a BDC and is now an operating company.
On August 4, 2004, we filed Definitive Information Statement
("Information Statement") pursuant to Section 14(c) of the Securities Exchange
Act of 1934, as amended, notifying its shareholders the execution and pending
implementation of an Agreement and Plan of Merger was signed by and between
Globus Growth Group, Inc., a New York corporation ("Globus Growth") and the
predecessor of our company and its wholly owned subsidiary in the State of
Delaware under the name of China Biopharmaceuticals Holdings, Inc.("CBH"). The
Agreement and Plan of Merger Agreement provided for a tax-free reorganization
pursuant to the provisions of Section 368 of the Internal Revenue Code,
according to which Globus Growth merged with and into our company, ceasing its
corporate existence and having CBH as the surviving corporation of the merger
(the "Merger"). In the Merger, all issued and outstanding shares of the common
stock of Globus Growth have been converted into shares of our common stock. On
August 28, 2004, the internal reorganizational Merger was completed with Globus
Growth merging into CBH as the surviving entity.
Pursuant to a share exchange agreement ("Exchange Agreement") between
CBH, CBC, Keyuan, and MAO Peng as the sole shareholder of CBC, we received all
of the issued and outstanding common stock of CBC in exchange for 20,842,779
shares of restricted (as defined in Rule 144 of the Securities Act of 1933, as
amended) our common stock, par value $0.01 per share, representing approximately
90% of the issued and outstanding common capital stock of our company following
the time of the issuance. As of March 15, 2006, there were 36,848,400 issued and
outstanding shares of our common stock and 336 holders of record.
42
On September 29, 2004, we signed a purchase agreement which was amended
on December 31, 2004 to acquire approximately 75.8% ownership interest of Suzhou
Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a Chinese company
established in Suzhou, China for 1,200,000 of common shares and additional
$1,600,000 as additional contribution into the acquired Hengyi for working
capital and/or expansion purposes. The cash contribution is to be made in
installments.
On June 11, 2005, we signed a purchase agreement, which was amended on
August 3, 2005 under which, we acquired controlling ownership interest
(approximately 51%) in Suzhou Erye Pharmaceutical Limited Company ("Erye"), a
company established in Suzhou, China. Total consideration paid by us to acquire
51% ownership interest in Erye is $3,000,000 cash to be paid in installments,
and 3,300,000 of common shares valued at $1.00 per share or $3,300,000. Out of
the $3,000,000 to be paid in cash, $2,200,000 will be contributed to the
acquired Erye for working capital and/or expansion purposes.
On December 31, 2005, our wholly owned subsidiary, CBC, entered into an
Agreement with four shareholders of Chengdu Tianyin Pharmaceutical Limited
Company, a pharmaceutical company located in the city of Chengdu, Sichuan
Province, China ("Tianyin") to immediately assume operation control of Tianyin
in all aspects of its business operations and to acquire a 51% ownership
interest in Tianyin. Pursuant to the Agreement, we are to issue 3 million shares
of its common stock to existing shareholders of Tianyin or their designees and
also agreed to invest an amount of US$2 million into Tianyin operations.
Additional 300,000 shares of our common stock will be issued to the existing
shareholders of Tianyin or their designees, if Tianyin's after tax audited
profit for the year ended December 31, 2005 reaches at least US$3,000,000.
The shares of our common stock are quoted on the Over the Counter
Bulletin Board ("OTC Bulletin Board") under the symbol CHBP.OB.
BUSINESS DESCRIPTION
Our business is composed of three parts: Research & Development, Raw
Materials, and Manufacturing.
Research & Development
We, through our indirectly held subsidiary Keyuan, have a robust
research and development ("R&D") team focused on discovering new small and large
molecule drugs as well as developing generic and improved drugs based on
existing products already on the market and traditional Chinese medicine
products. Keyuan has developed a solid discovery and development platform with
advanced R&D capabilities based on post genome era technological advances to
enable rapid drug discovery and development. Keyuan also has a rich existing
product pipeline. The technological backbone of the Keyuan advanced R&D
capabilities is a Drug Screening and Testing System--an advanced drug screening
and testing system based on certain bio-technologies that have only recently
been made possible by rapid technological advances in the Post-Genomics Era.
This proprietary gene-level technology platform enables Keyuan to deliver the
next generation of drugs--which are more effective and have fewer side effects
in a much shorter period than by traditional pharmaceutical developmental
routes. The technology team is lead by capable drug research scientists and
development experts China. Keyuan has a product pipeline containing
approximately forty major products, including eight new drugs that are ready for
commercialization in China. Keyuan also offers contractual research and
development products by licensing the access to its proprietary screening and
testing platforms to other pharmaceutical companies. Keyuan has built a Library
of Targeted Drug Candidates ("LTDC") with 20,000 chemical compounds. Drug
candidates undergo screening to reveal their potential to become new drugs.
Keyuan collaborates with China Pharmaceutical University in enhancing the
resources of chemical compounds in LTDC. Keyuan builds LTDC to both accelerate
its own drug discovery and to generate revenue in the form of access fees paid
by other pharmaceutical companies. We charge access fee of US$60,000 per access.
We spent $302,042 in year 2003 and $326,205 in year 2004, respectively,
on our research and development.
43
Raw Materials
Our subsidiary Hengyi specializes in research and development,
production and sales of chemicals and intermediaries used in pharmaceutical
products as well as pharmaceutical products. Hengyi has extensive product
pipeline containing twenty six major products that are raw material and
intermediaries for making pharmaceutical products. More than 90% of Hengyi's
products are exported to North America, South America and European countries
with large, multi national pharmaceutical companies as end user customers..
Hengyi can manufacture and provide most of the raw materials for our production
pipeline, enabling us to lower our production cost and gain competitive
advantages.
Manufacturing
Our subsidiary, Erye, specializes in research and development,
production and sales of pharmaceutical products as well as chemicals used in
pharmaceutical products. The acquisition of 51% of the ownership interest of
Erye, adds new drug products our pipeline, manufacturing capabilities that
comply with China Good Manufacturing Practices (GMP) standard set by the State
Food and Drug Administration ("SFDA") of China and marketing network that covers
25 provinces in China. Erye has obtained production certificates for 68 drug
items, among which 33 are in production, mainly antibiotics drugs such as
Cefotaxime Sodium for injection, Ceftriaxone Sodium for injection, Amoxicillin
for injection, and Compound Amoxicillin for injection. Erye's sales exceeded $20
million in 2004, with raw material Acetylspiramycin per oral taking 15% of
domestic market share, and Cloxacillin Sodium taking 80% of domestic market
share.
Our recently acquired subsidiary, Tianyin, is a pharmaceutical company
specializing in research and development, production and sales of pharmaceutical
products as well as traditional Chinese medicine products, integrating China's
natural medicinal resources with modern high technology.
Tianyin has established sophisticated management team organization
system and distribution channel, and was titled as Provincial Good
Pharmaceutical Enterprise in Sichuan Province. Tianyin has seven production
lines, including oral liquid line, syrup line, granule line, capsule line,
tablet line, complex line, oral solution line, and all of them have passed GMP
certification on August 2003. Tianyin's products include both traditional
Chinese medicines and Chemical medicines, such as Qing Re Jie Du Kou Fu Ye, Xue
Lian Chong Cao He Ji, Hu Gan Ning Pian, Fen Tong An Jiao Nang, Wei Kang Ling
Jiao Nang, for the treatment of cold, kidney problem, impotence, hepatitis,
arthritis, gastritis respectively.
NUMBER OF EMPLOYEES
Due to the acquisitions as described above, the number of our employees
has expanded significantly as compared to 2004. Currently we have approximately
990 full-time employees.
By Company:
The table below set forth the number of employees of each of CBH and
the subsidiaries:
Company Number of Employees
CBH & CBC 15
Keyuan 25
Hengyi 250
Erye 500
Tianyin 200
TOTAL: 990
44
By job:
The table below sets forth the number of employees by nature of their
jobs.
Management & Administration 150
Technology and research 70
Sales and marketing 95
Production - drug material & drugs 675
TOTAL: 990
We have employment contracts with a significant number of our
employees. None of our employees are covered by a collective bargaining
agreement, and we believe our employee relations are good. All of our employees
are located in Jiangsu and Sichuan Provinces.
OUR PRODUCTS
We have a diversified portfolio of drugs and robust drug screening and
testing platforms. We concentrate on the development of drugs for treatment of
common diseases such as cardiovascular diseases, cancer, infectious diseases and
diabetes, etc.
Our products can be divided into three categories; new drugs through R&D, drug
materials & intermediates and commercialized drugs:
New drug:
We, through our subsidiary Keyuan, have a product pipeline of about
forty new drugs for the treatment of diseases such as cardiovascular and
infectious diseases. We intend to commercialize or license eight drugs during
year 2006. We plan to commercialize the majority of its drugs and license and
sell the remaining of its drugs. The table below lists the products of Keyuan,
our subsidiary. For each drug, the table indicates the condition for treatment
and SFDA approval and licensing status. SFDA provides administrative protection
for a period of 3-5 years for drugs newly introduced to China.
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
No. Drug Name Target Treatment Clinical Program Status SFDA
Authorized
Protection Date
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
1 Diclofenac Sodium Oral ulcer, stomatitis, Approved and licensed by SFDA 2026.10.7
Lozenges small oral operation Approval No. H20031259 Patent protection
Patent number CN1413583A
Patent application number 011360828
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
2 Rhodiola rosea L. Alzheimer disease Preclinical 2028.9.26
abstracts Patent application number 031583490 Patent Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
3 Platinum(II) Cancers Preclinical 2029.4.27
complexes Yibo Patent application number 2004100147727 Patent Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
4 Pazufloxacin Infection Approved and licensed by SFDA 2007.06.23
Mesilate material Approval No. H20041948
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
5 Pazufloxacin Infection Approved and licensed by SFDA 2007.06.23
Mesilate and Approval No. H20041949
Sodium chloride
Injection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
45
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
No. Drug Name Target Treatment Clinical Program Status SFDA
Authorized
Protection Date
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
6 Cefixime material Antibiotics Approved and licensed by SFDA 2005.10.28
Approval No.H20041527 Expired
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
7 Cefixime tablets Antibiotics Approved and licensed by SFDA 2006.01.28
Approval No. H20041529
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
8 Cefixime capsules Antibiotics Approved and licensed by SFDA 2008.09.11
Approval No. H20041528
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
9 Cefixime granules Antibiotics Approved and licensed by SFDA 2008.09.11
Approval No. H20041645
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
10 Loxoprofen sodium Pain and inflammation Approved and licensed by SFDA 2006.11.9
capsules Approval No. H20050915
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
11 Loxoprofen sodium Pain and inflammation Approved and licensed by SFDA 2008.07.24
material Approval No. H20041922
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
12 Loxoprofen sodium Pain and inflammation Approved and licensed by SFDA 2008.07.24
tablets Approval No. H20041923
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
13 Gliclazide II-type diabetes Approved and licensed by SFDA Generic Drug
Sustained Release Approval No. H20056883
Tablets
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
14 Nizatidine material Gastric ulcer Approved and licensed by SFDA Generic Drug
Approval No. H20053694
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
15 Loxoprofen sodium Pain and inflammation Approved and licensed by SFDA Generic Drug
granules Approval No. H20052446
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
16 Meglumine Heart Failure Approved and licensed by SFDA Generic Drug
Adenosine Approval No. H20040859
Cyclophosphate for
injection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
17 Aceglutamide for Post-neurosurgery coma Approved and licensed by SFDA Generic Drug
injection Approval No. H20040887
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
18 Loratadine Allergic rhinitis, Approved and licensed by SFDA Generic Drug
material, tablets Allergic dermatosis Approval No. H20051688
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
19 Secnidazole Infection of anaerobe and Clinical trial application approved , Subject to SFDA
material trichomonas vaginalis Filed Pending
Approval No. 2003L01222 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
20 Secnidazole Infection of anaerobe and Clinical trial application approved, Subject to SFDA
tablets, capsules trichomonas vaginalis Filed Pending
Approval No. 2003L01223 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
21 Desloratadine Allergic rhinitis, Clinical trial application approved, Subject to SFDA
material and Allergic dermatosis Filed Pending
tablets Approval No. 2003L02927 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
22 Nafamostate Disseminated Clinical trial application approved, Subject to SFDA
mesilate material Intravascular Coagulation Filed Pending
(DIC),Pancreatitis Approval No. 2003L00552 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
46
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
No. Drug Name Target Treatment Clinical Program Status SFDA
Authorized
Protection Date
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
23 Nafamostate Disseminated Clinical trial application approved, Subject to SFDA
mesilate for Intravascular Coagulation Filed Pending
injection (DIC), Pancreatitis Approval No. 2003L00551 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
24 Torasemide material Diuretic, Hypertension, Clinical trial application approved, Subject to SFDA
Ascites, Heart Filed Pending
failure,Renal failure Approval No. 2003L00803 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
25 Torasemide tablets Diuretic, Hypertension, Clinical trial application approved, Subject to SFDA
Ascites, Heart Filed Pending
failure,Renal failure Approval No. 2003L00804 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
26 Torasemide capsules Diuretic, Hypertension, Clinical trial application approved, Subject to SFDA
Ascites, Heart Filed Pending
failure,Renal failure Approval No. 2003L00516 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
27 Torasemide for Diuretic, Hypertension, Clinical trial application approved, Subject to SFDA
injection Ascites, Heart Filed Pending
failure,Renal failure Approval No. 2003L01294 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
28 Edaravone material Acute Cerebral infarction Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2003L02173 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
29 Edaravone Injection Acute Cerebral infarction Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2003L02174 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
30 Edaravone Sodium Acute Cerebral infarction Clinical trial application approved, Subject to SFDA
Chloride Injection Phase II Pending
Approval No. 2004L00440 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
31 Sofalcone material Gastric ulcer Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2004L02119 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
32 Sofalcone tablets Gastric ulcer Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2004L02122 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
33 Sofalcone capsules Gastric ulcer Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2004L02121 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
34 Sofalcone granules Gastric ulcer Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2004L02120 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
35 Nateglinide II-type diabetes Clinical trial application approved, Subject to SFDA
material Phase II Pending
Approval No. 2003L00073 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
47
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
No. Drug Name Target Treatment Clinical Program Status SFDA
Authorized
Protection Date
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
36 Nateglinide tablets II-type diabetes Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2003L00131 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
37 Heptaplatin Tumor Clinical trial application approved, Subject to SFDA
material Phase II Pending
Approval No. 2003L01704 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
38 Heptaplatin for Tumor Clinical trial application approved, Subject to SFDA
injection Phase II Pending
Approval No. 2003L01705 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
39 Indosine Pranobeox Antivirus Clinical trial application approved, Subject to SFDA
material Phase II Pending
Approval No. 2005L00979 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
40 Indosine Pranobeox Antivirus Clinical trial application approved, Subject to SFDA
tablets Phase II Pending
Approval No. 2005L00980 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
Raw Materials and Intermediaries
Our subsidiary Hengyi specializes in research and development, production and
sales of pharmaceutical products as well as chemicals and intermediaries used in
pharmaceutical products. Hengyi has extensive product pipeline containing twenty
six major products that are raw material and intermediaries for making
pharmaceutical products. More than 90% of Hengyi's products are exported to
North America, South America and European countries with large, multi national
pharmaceutical companies as end user customers. Hengyi can manufacture and
provide most of the raw materials for our production pipeline, enabling us to
lower our production cost and gain competitive advantages over our competitors.
Below is a list of Hengyi's major pharmaceutical and intermediary products:
- -------------------------- ---------------------------- ------------------------
Drug/Product Name Target Treatment Status
- -------------------------- ---------------------------- ------------------------
Carbamazepine material Epilepsy, Prosopalgia Commercialized Product
- -------------------------- ---------------------------- ------------------------
S-POZ Drug Intermediates Commercialized Product
- -------------------------- ---------------------------- ------------------------
Flumequine Antimicrobial agent Commercialized Product
- -------------------------- ---------------------------- ------------------------
Commercialized Drug
Our subsidiary, Erye, specializes in research and development, production and
sales of pharmaceutical products as well as chemicals used in pharmaceutical
products. The acquisition of 51% of the ownership interest of Erye, adds new
drug products to our pipeline, manufacturing capabilities that comply with China
Good Manufacturing Practices (GMP) standard and marketing network that covers 25
provinces in China. Erye has obtained production certificates for 68 drug items,
48
among which 33 are in production, mainly antibiotics drugs such as Cefotaxime
Sodium for injection, Ceftriaxone Sodium for injection, Amoxicillin for
injection, and Compound Amoxicillin for injection. Erye's sales exceeded $20
million in 2004, with raw material Acetylspiramycin per oral taking 15% of
domestic market share, and Cloxacillin Sodium taking 80% of domestic market
share.
Below is a list of Erye's major pharmaceutical products:
- ----------------------------------- ---------------------- ---------------------
Drug/Product Name Target Treatment Status
- ----------------------------------- ---------------------- ---------------------
Ampicillin sodium/Sulbactam Antibiotics Commercialized
sodium for injection drug. SFDA
approval number
H20030476
- ----------------------------------- ---------------------- ---------------------
Amoxicillin sodium/Sulbactam Antibiotics Commercialized drug
sodium for injection SFDA approval
number H20033126
- ----------------------------------- ---------------------- ---------------------
Furbencillin Sodium for Injection Antibiotics Commercialized drug
SFDA approval
number h20059783
- ----------------------------------- ---------------------- ---------------------
Our subsidiary Tianyin has seven production lines, including oral liquid line,
syrup line, granule line, capsule line, tablet line, complex line, oral solution
line, and all of them have passed GMP certification on August 2003. Tianyin's
products include both traditional Chinese medicines and Chemical medicines, such
as Qing Re Jie Du Kou Fu Ye, Xue Lian Chong Cao He Ji, Hu Gan Ning Pian, Fen
Tong An Jiao Nang, Wei Kang Ling Jiao Nang, for the treatment of cold, kidney,
impotence, hepatitis, arthritis, gastritis respectively. Below is a list of
Tianyin's major pharmaceutical products:.
Drug/Product Name Target Treatment Status
- ------------------------------------- --------------------- --------------------
Qinrejiedu Capsules 10*10 Fever, sore throat, Commercialized
influenza drug. SFDA approval
number Z51020066
- ------------------------------------- --------------------- --------------------
Tianyin Xin-nao-ning tablets 10*10 Cardiovascular Commercialized
diseases drug. SFDA
approval number
H20013079
- ------------------------------------- --------------------- --------------------
Pazufloxacin Injection Infection Commercialized
drug. SFDA
approval number
H20041949
- ------------------------------------- --------------------- --------------------
SERVICES
We also offer contractual research and development services. We intend
to offer packaged R&D services to companies outsourcing their R&D activities for
fee-based research and development revenue.
PRODUCTION FACILITIES AND EQUIPMENT
Our subsidiary, Keyuan, owns fully equipped drug R&D lab, the LTDC. The
lab equipped with various type of equipment for drug testing, screening,
efficiency study and toxicity study such as High Performance Liquid
49
Chromatography (HPLC), Incubator, Ultraviolet-Visible Spectrometer, Centrifuge
and Clean Bench etc. Our subsidiaries Hengyi, Erye and Tianyin are fully
equipped with facilities required for the production in high temperature, high
pressure, high vacuum and deep cooling.
DISTRIBUTION CHANNELS
We have three groups of customers:
Pharmaceutical Companies- We maintain a fine reputation in the
pharmaceutical industry in China for new drug R & D. We work with other
pharmaceutical companies to license or joint distribute our products.
Drug Distribution Companies- There are approximately 10,000 drugs
distribution companies in China. We work with distribution companies to
distribute our products. The demand for new drugs in China is substantial as the
drugs distribution companies suffer from very low profit margins from the
distribution of old generic drugs.
Hospitals- We have a network of connections with hospitals in the areas
of Shanghai City, Zhejiang Province and Jiangsu Province. Our sales executives
have held senior sales positions in various pharmaceutical companies that sell
in these areas and have an extensive network of contacts that provide direct
access to sell to hospitals in these areas.
We currently have 4 sales representative offices in China, two of which
located in Nanjing city, one in Wuxi City and one in Shanghai City.
COMPETITION
We face competition from domestic drug R&D companies, drug
manufacturing companies and multinational drug companies. We possess certain
competitive advantages over our competitors due to our own discovery capability.
We are in a unique position to seize substantial market opportunities as the
pharmaceutical industry in China rapidly moves toward consolidation,
privatization, and commercialization.
We also face competition of foreign companies who have strong
proprietary pipeline and strong financial sources. Our advantage is our local
concentration in research and discovery as well as our local distribution
network.
Good Product Pipeline
We have an existing pipeline of approximately forty major new drugs
that it intends to introduce to the Chinese market in the subsequent five years
and thereafter. Compared to existing comparable drugs , the new drugs have
reduced toxicity, enhanced effectiveness and cheaper manufacturing costs due to
technological innovation. Among the forty drugs in our pipeline, our company
intends to commercialize three SFDA approved and licensed drugs through our
subsidiaries in year 2006 and to have five in-application drugs to be approved
by SFDA in year 2006.
R&D Capabilities / Technology
We have managed to obtain intellectual property rights for our advanced
technologies and to gain a strong competitive edge over the vast majority of all
domestic pharmaceutical companies. Our R&D capabilities are one of the most
advanced in the Chinese pharmaceutical industry. Our advanced R&D technology
platform represents the latest drug discovery and development tools available
for screening potential drug candidates for new drugs. Additionally, through our
joint venture with the University's R&D laboratory, we have access to promising
pharmaceutical development projects and to excellent expertise from academia,
government, and industry.
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Strong Customer Base
As described above, we have three groups of customers, pharmaceutical
companies, drug distribution companies and hospitals. We do not rely on any
single of these three groups and these three groups of customers provide us with
a balanced customer base.
DESCRIPTION OF PROPERTY
Our subsidiaries, Hengyi, Eyre and Tianyin, each owns plots of lands in
China; Hengyi owns approximately 25,000 square meters in the city of Kunshan,
Jiangsu Province, Erye owns approximately 49,000 square meters in the city of
Suzhou, Jiangsu Province and Tianyin owns approximately 30,000 square meters in
the city of Chengdu, Sichuan Province.
At the end of 2005, the unaudited book value of our total assets was
approximately US$32,269,374. Erye's land and buildings, amount to nearly 9.8% of
this book value. Both Hengyi and Tianyin has less than 10% and Keyuan does not
own any land or building.
Hengyi's Properties
All properties of Hengyi are located at No. 54, Kunshan City and
fourteen of the buildings serve as office, general purpose, warehouse,
production, utilities and waste disposal. All buildings are fully occupied and
used by us. Hengyi solely owns all properties with land title and certificates
of building's ownership. At the end of 2005, there was an US$1,618,929 rollover
short-term bank loan against the company's land. In 2005, there was no major
improvement of the buildings. No other renovation, improvement or development
occurred in 2005. All building is fully operated and used by Hengyi. The age of
all buildings is over 5 years. All buildings with property are insured by
Chinese property insurance company, which is mandatory regulated by Chinese
government.
Erye's Properties
All properties of Erye are located at No. 839, Pan Xu Road, Suzhou City
and twelve of the buildings serve as office, general purpose, warehouse,
production, utilities and waste disposal. All buildings are fully occupied and
used by us. Erye solely owns all properties with land title and certificates of
building's ownership. At the end of 2005, there was a US$3,000,000 rollover
short-term bank loan against the company's land. In 2005, there was one major
improvement of one of the buildings and the cost for this improvement was
approximately US$300,000. No other renovation, improvement or development
occurred in 2005. The improved building done in 2005 is a FDA approved with GMP
licensed production building, which is 100% occupant for producing anti-biotic
drugs. This building is fully operated and used by Erye. The age of all
buildings, other than the building with the new improvement, are over 25 years.
Erye's land is situated at the heart of city and is restricted by government
regulation of not allowing any new building development. All buildings with
property are insured by Chinese property insurance company, which is mandatory
regulated by Chinese government.
Tianyin's Properties
Tianyin has two production bases in Chengdu City and one locates at
Chengdu Economical Zone and the other in Chengdu Inner District, with a total
size of 30,000 square meters. Ten buildings serve as office, general purpose,
warehouse, production, utilities and waste disposal. All buildings are fully
occupied and use by the company. Tianyin solely owns all properties with land
titles and certificates of building's ownership. At the end of 2005, there was a
US$1,600,000 rollover short-term bank loan against Tianyin's land. There is no
renovation, improvement or development occurred in 2005. The age of four
buildings in Chengdu Economical Zone is about 3 years and the rest of buildings
in Chengdu Inner District are over 20 years. All buildings with property
insurance by Chinese property are insured company, which is mandatory regulated
by Chinese government.
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INTELLECTUAL PROPERTY
An asset base of intellectual property is the foundation of our
operations and R&D facilities. We have the capacity to rapidly generate
intellectual property in the many forms as described above: new drugs / full
product pipeline, drug screening & testing platforms, proprietary technologies,
and LTDC. This asset base of valuable intellectual property is leveraged to
derive revenues, form strategic partnerships, and make acquisitions to expand
our operations and profit-earning capacity.
Our subsidiary, Keyuan, owns the following patents, one of which
approved and two pending approval:
(1) Low dose Diclofenac Sodium Lozenges and preparation. (Indication:
oral ulcer, stomatitis, small oral operation); Patent Application number:
011360828; Application date: Oct.8, 2001; Approval date: Jan.15, 2005; Patent
Number: CN1413583A; Patent Expiration date: Oct 7, 2021.
(2) Usage of the abstracts of Rhodiola rosea L. in the preparation of
drugs treating Alzheimer disease; Application number: 031583490; Application
date: Sep.27, 2003; Patent Expiration date: Sep. 26, 2023
(3) Preparation of a platinum(II) compound Yibo, anticancer drug
Application number: 2004100147727; Application date: Apr.28, 2004; Patent
Expiration date: April 27, 2024
The typical duration of these patents is twenty years from the date of
application. Other drugs of Keyuan are subject to pending or existing SFDA
administrative protection.
REGULATORY ENVIRONMENT
Our principal sales market is presently in China. We are subject to the
Drug Administration Law of China, which governs the licensing, manufacturing,
marketing and distribution of pharmaceutical products in China and sets
penalties for violations of the law. Additionally, we are also subject to
various regulations and permit systems by the Chinese government.
The application and approval procedure in China for a newly developed
drug product is described below. New drug applicants prepare the documentation
of Pharmacological study, toxicity study and pharmacokinetics and Drug
Metabolism (PKDM) study and new drug samples. Documentation and samples are then
submitted to provincial food and drug administration ("provincial FDA"). The
provincial FDA sends its officials to the applicant to check the applicant's R&D
facilities and to arrange new drug examination committee meeting for approval
deliberations. This process usually takes three months. After the documentation
and samples being approved by the provincial FDA, the provincial FDA will submit
the approved documentation and samples to SFDA. SFDA examines the documentation
and tests the samples and arranges new drug examination committee meeting for
approval deliberations. If the application is approved by SFDA, SFDA will issue
a clinical trial license to the applicant for clinical trials. The clinical
trial license approval typically takes one year. The applicant completes the
clinical trial process and prepares documentation and files submitted to SFDA
for new drug approval. The clinical trial process usually takes one year or two
depending on the category and class of the new drug. SFDA examines the
documentation and gives final approval for the new drug and issues the new drug
license to the applicant. This process usually takes 8 months. The whole process
for new drug approval usually takes three to four years.
The Government approval procedure in China for application for new
patents is as follows. The applicant prepares documentation and sends
application to State Intellectual Property Office of China ("SIPO"), usually
through patent application agencies. The application is then examined by SIPO.
If the application is approved, SIPO issues and releases patent illustration
book for challenges by competing claimants. Once the illustration book issued,
the patent is protected. Within a three year period depending on different
categories of the patent, if there are no challenges against the patent, then
SIPO will issue patent license to the applicant.
52
COMPLIANCE WITH ENVIRONMENTAL LAW
We comply with the Environmental Protection Law of China and its local
regulations. In addition to statutory and regulatory compliance, we actively
ensure the environmental sustainability of our operations.
LITIGATION
We are currently not involved in any litigation that we believe could
have a materially adverse effect on our financial condition or results of
operations. There is no action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the our executive officers,
threatened against or affecting us, our common stock, any of our subsidiaries or
of our or our subsidiaries' officers or directors in their capacities as such,
in which an adverse decision could have a material adverse effect.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
operations in conjunction with the consolidated financial statements and related
notes included elsewhere in this prospectus. This prospectus 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 include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "we believe," "our
company believes," "management believes" and similar language. The
forward-looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including those set forth in
the discussion under the sections of "Business," "Risk Factors", and
"Management's Discussion and Analysis." The actual results may differ materially
from results anticipated in these forward-looking statements. We base the
forward-looking statements on information currently available to us, and we
assume no obligation to update them. In addition, our historical financial
performance is not necessarily indicative of the results that may be expected in
the future and we believe that such comparisons cannot be relied upon as
indicators of future performance.
PLAN OF OPERATION
We are a bio-pharmaceutical company focused on research and discovery
of, development and commercialization of innovative drugs in China. Our mission
is to maximize investment returns for our shareholders by integrating our strong
drug discovery and development strength with manufacturing and commercialization
capabilities and by actively participating in the consolidation and
privatization of the pharmaceutical industry in China to become a dominant
player in the bio-pharmaceutical industry in China.
We have sufficient cash for our operations in the next twelve months,
but we may borrow from time to time to expand our business by acquisition.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to understanding of
our financial statements. The application of these polices requires management
to make estimates and assumptions that affect the valuation of assets and
expenses during the reporting period. There can be no assurance that actual
results will not differ from these estimates. The impact and any associated
risks related to these policies on our business operations are discussed below.
Revenue and Revenue Recognition
For fixed-price refundable contracts, we recognize revenue on a
milestone basis. Progress payments received/receivables are recognized as
revenue only if the specified milestone is achieved and accepted by the
customer. Confirmed revenue is not refundable and continued performance of
future research and development services related to the milestone are not
required. For sale of patented pharmaceutical formulas, we recognize revenue
upon delivery of the patented formulas.
Accounts Receivable
Our accounts receivable are concentrated in numbers of pharmaceutical
manufacturers. We believe that a significant change in the liquidity or
financial position of a few of our big customers would have a material adverse
impact on the collectability of our accounts receivable. Based upon our
historical experience, the delaying of payment caused by customer's unpredicted
management or financial trouble is influencing our financial and future
operating results.
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Income Tax
Significant judgment is required in determining our income tax
provision. In the ordinary course of business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Although we believe
that our estimates are reasonable, no assurance can be given that the final
outcome of these matters will not be different than that which is reflected in
our historical income tax provisions and accruals. Such differences could have a
material effect on our income tax provision and net income in the period in
which such determination is made. We apply an asset and liability approach to
accounting for income taxes. Deferred tax liabilities and assets are recognized
for the expected future tax consequences of temporary differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The recoverability of deferred tax assets is dependent upon our assessment of
whether it is more likely than not that sufficient future taxable income will be
generated to utilize the deferred tax asset. In the event we determine that
future taxable income will not be sufficient to utilize the deferred tax asset,
a valuation allowance is recorded.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004
On September 29, 2004, we signed a purchase agreement which was amended
on December 31, 2004 to acquire an approximately 75.8% ownership interest of
Hengyi. On June 11, 2005, we signed a purchase agreement which was amended on
August 3, 2005 to acquire an approximately 51% ownership interest of Erye. Our
current financial statements reflect Hengyi's revenue and profit for the nine
months ended September 30, 2005 and the revenue of Erye for the period from June
11, 2005 to September 30, 2005.
(1) REVENUE.
Revenue for the nine months ended on September 30, 2005 was $13,129,081
compared to $663,850 for the nine months ended September 30, 2004, representing
a 1877.28% increase. The increase is attributable primarily to revenues
generated by Erye and Hengyi which were not part of our revenues in the nine
months ended September 30, 2004, as well as to an increase in the R&D services,
licensing of access to Keyuan's proprietary screening and testing platforms
during the nine months ended September 30, 2005.
(2) R&D.
R&D cost for the nine months ended September 30, 2005 was $297,864 as
compared to $154,971 for the nine months ended September 30, 2004, representing
a 92.21% increase. The increase is mainly attributable to the R&D costs of
Hengyi and Erye which were not part of our R&D costs during the nine months
ended September 30, 2004.
(3) GROSS PROFIT.
Gross profit in the nine months ended September 30, 2005 amounted at
$3,682,103, as compared to a gross profit of $603,835 for the nine months ended
September 30, 2004, representing a 509.78% increase. The gross profit margin for
the nine months ended September 30, 2005 was 28.05% as compared to 90.96% for
the nine months ended September 30, 2004. In the first three quarters of 2005,
our sales increased significantly. The decrease in gross profit margin is mainly
due to the low gross profit margins of Hengyi and Erye which were not reflected
in our financial statements for the nine months ended September 30, 2004.
55
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September
30, 2005 was $2,039,938 as compared to $818,071 for the nine months ended
September 30, 2004 representing a 149.36% increase. General and administrative
expenses increased significantly for the nine months ended September 30, 2005
due to general and administrative expenses incurred by Hengyi and Erye for that
period and which were not reflected in our financial statements for the nine
months ended September 30, 2004.
(5) NET INCOME
Net income for the nine months ended September 30, 2005 was $1,049,378
as compared to a net loss of $472,603 for the nine months ended September 30,
2004. Our net income has increased significantly for the nine months ended
September 30, 2005 and the increase is attributable to the performance of Keyuan
as well as to net income of Erye and Hengyi which was not reflected in our
financial statements for the nine months ended September 30, 2004.
RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED
DECEMBER 31, 2003
We acquired Hengyi on September 30, 2004. We paid 1,200,000 shares of
our common stock and has agreed to contribute $1,600,000 to the acquired Hengyi
as additional working capital and/or for expansion purposes. Such cash
contribution was to be made in installments. Our current financial statement
only reflects Hengyi's revenue and profit for the three months from October 1,
2004 to December 31, 2004. During the reporting period, our general and
administrative costs increased significantly, largely due to transaction costs
related to the Merger, our reorganization and the acquisition of Hengyi.
Auditing expenses, legal expenses and other professional expenses consist of
major parts of the general and administration expenses. Some of the costs are
one time costs related to acquisitions. However, as we are considering
additional acquisitions, transaction costs may occur over different periods in
the future.
(1) REVENUE
Revenue for the twelve months ended on December 31, 2004 was
$3,443,545, while our revenue for the twelve months ended December 31, 2003 was
$1,016,733, representing 239% increase. We acquired Hengyi on September 30,
2004. The revenue of Hengyi for three months period from October 1, 2004 to
December 31, 2004 was $2,550,655. Revenue of Keyuan for the twelve months ended
on December 31, 2004 was $904,972. During the reporting period R&D services to
other domestic pharmaceutical companies increased significantly. We offered
contractual research and development products by licensing the access to our
proprietary screening and testing platforms to other pharmaceutical companies.
(2) R&D
R&D cost for the twelve months ended December 31, 2004 was $261,813 as
compared to $306,621 for the twelve months ended December 31, 2003. R&D cost as
a percentage of sales was 7.6% for the twelve months ended December 31, 2004, as
compared to 30% for the twelve months ended December 31, 2003. In 2004, we
reduced its investment in R&D of new drug project and simultaneously increased
our activities of providing contractual R&D service to other pharmaceutical
companies. In 2004, we were focused on the preparation of commercialization of
our new drugs which are expected to increase our profit margin.
(3) GROSS PROFIT
Gross profit in the twelve months ended on December 31, 2004 amounted
at $1,011,373, as compared to $710,112 for the twelve months ended December 31,
2003, representing 42% increase. The gross profit margin for the twelve months
ended December 31, 2003 was 70% as compared to 30% for the twelve months ended
56
December 31, 2004. Hengyi's gross profit margin was 13% for the twelve months
ended December 31, 2004. In 2004, we increased sales and significantly decreased
our R&D cost. The decrease in Gross profit margin was mainly due to Hengyi's low
gross profit margin.
(4) GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the twelve months ended
December 31, 2004 was $545,190 as compared to $55,400 for the twelve months
ended December 31, 2003, representing 884% increase. Hengyi's General and
administrative expenses for the twelve months ended December 31, 2004 was
$208,824 as compared to $296,861 for the twelve months ended 2003. General and
administrative expenses increased significantly in 2004 due to the Merger and
our reorganization as well as the acquisition-related transaction costs for
Hengyi. Auditing expense, legal expenses, and other professional expenses were
the main reason for the significant increase in general and administrative
expenses due to the Merger and acquisition activities. Some of these expenses
were one time transactional expenses.
(5) NET INCOME
Net Income for the twelve months ended December 31, 2004 was $350,640
as compared to net income of $484,175 for the twelve months ended December 31,
2003, representing 28% decrease. Hengyi's net Income for the twelve months ended
December 31, 2004 was $539,088 as compared to net income of $659,113 for the
twelve months ended December 31, 2003. The decrease of our net profit was mainly
due to the significant increase in general and administrative expenses related
to the Merger and acquisition activities.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended September 30, 2005, net cash used by
operating activities was $106,507, net cash used in investing activities was
$502,389 and net cash provided by financing activities was $334.111. Cash and
cash equivalents as of September 30, 2005 was $2,007,819. Net decrease in cash
and cash equivalents for the three months ended September 30, 2005 was $274,785.
For the nine months ended September 30, 2005, net cash provided by operating
activities was $197,481, net cash used in investing activities was $1,109,771
and net cash provided by financing activities was $2,453,073. Net increase in
Cash and cash equivalents for the nine months ended September 30, 2005 was
$1,540,783.
In January of 2005, we raised gross proceeds of $500,000 through the
sales of promissory note to accredited investors ("Note"). In June of 2005,
pursuant to an exemption under the Securities Act, we have conducted a private
placement of approximately $1,090,000 with 28 accredited investors, through
issuance of Series A Convertible Preferred Stock. In October of 2005, we
conducted a private placement of additional Series A Convertible Preferred Stock
worth $625,000. In February 2006, we conducted a private placement of our common
stock with gross proceeds of $1,000,000. In March 2006, we sold additional
shares of our common stock with gross proceeds of $6,900,000.
Going forward, our primary requirements for cash consist of: (1)
acquisition of additional pharmaceutical manufacturing companies with GMP
standard facilities in order to commercialize new drugs in our extensive new
drug pipeline and further extend of product pipeline and expand our sales
network (2) Continued R&D for more selected new drug projects (3) Build up sales
network for new drug distribution. We anticipate that our internal source of
liquid assets may enable us to continue our operation activities other than
acquisition activities for next twelve months. However, we anticipate that our
current operating activities may not enable us to meet the anticipated cash
requirements for future acquisition activities. External source of capital may
be needed for our expansion. We are exploring bank loans and private equity
financing to finance such expenditures and intend to raise equity through the
capital market once our shares are traded.
57
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions
relating to our current operations, that existing cash and funds generated from
operations may not be sufficient to meet capital requirements for future
acquisition activities. We could therefore be required to seek additional
financing. There can be no assurance that we will be able to obtain such
additional financing at acceptable terms to us, or at all.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. Their business
activities are mainly in China using Chinese Renminbi as the functional
currency. The value of the Renminbi against the U.S. dollar and other currencies
may fluctuate and is affected by, among other things, changes in China's
political and economic conditions. As we rely entirely on revenues earned in
China, any significant revaluation of the Renminbi may materially and adversely
affect our cash flows, revenues and financial condition. For example, to the
extent that we need to convert U.S. dollars we receive from an offering of our
securities into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar could have a material adverse effect on our business,
financial condition and results of operations.
Conversely, if we decide to convert our Renminbi into U.S. dollars for
the purpose of making payments for dividends on our common shares or for other
business purposes and the U.S. dollar appreciates against the Renminbi, the U.S.
dollar equivalent of the Renminbi we convert would be reduced. To date, however,
we have not engaged in transactions of either type.
Since 1994 China has pegged the value of the Renminbi to the U.S.
dollar. We do not believe that this policy has had a material effect on our
business. However, there have been indications that the Chinese government may
be reconsidering its monetary policy in light of the overall devaluation of the
U.S. dollar against the Euro and other currencies during the last two years. In
September 2005, the Chinese government revalued the Renminbi by 2.3% against the
U.S. dollar, moving from Renminbi 8.28 to Renminbi 8.09 per dollar. Because of
the pegging of the Renminbi to the U.S. dollar is loosened, we anticipate that
the value of the Renminbi appreciate against the dollar with the consequences
discussed above.
58
MARKET INFORMATION FOR OUR COMMON STOCK
The following table presents, for the periods indicated, the high and low bid
prices per share of the common stock as reported on the OTC Bulletin Board:
2005 High Bid Low Bid
First Quarter (Beginning 1.500 1.300
on December 19, 2005)
2006 High Bid Low Bid
First Quarter (Beginning 2.150 1.010
on January 3, 2006 through March 17, 2006)
59
RELATED PARTY TRANSACTION
Our predecessor company, Globus Growth, was founded by Stephen E.
Globus, who is currently one of our directors. See "Business-our company."
Certain family members of Stephen E.Globus, our director, have
participated in the Initial Preferred A Private Place with a total investment of
$170,000. SRG Capital Partnership, a company controlled by Richard D. Globus,
purchased $50,000 Series A Preferred Stock in the Initial Preferred A Private
Placement. Richard D. Globus is Stephen E Globus' brother.
In December 2005, certain family members of Stephen E.Globus, our
director, purchased the Convertible Notes from certain Notes holders in the
aggregated amount of $210,000. All of these Convertible Notes purchased by these
family members were converted into our common shares.
In March 2006, certain family members of Stephen E. Globus, our
director, purchased our common stock in the private placement in the aggregate
amount of $100,000.
60
Security Ownership of Certain Beneficial Owners and Management
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934,
as amended, as consisting of sole or shared voting power (including the power to
vote or direct the vote) and/or sole or shared investment power (including the
power to dispose of or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or otherwise
subject to community property laws where applicable.
As of March 15, 2006, we had a total of 36,848,400 shares of common
stock issued and outstanding, which are our only issued and outstanding voting
equity securities.
The following table sets forth, as of March 15, 2006, (a) the names of
each beneficial owner of more than five per cent (5%) of our common stock and
preferred stock known to us, and the amount and percentage of such ownership;
(b) the names and addresses of each director and executive officer that owns
more than five per cent (5%) of our common stock and preferred stock, and the
amount and percentage of such ownership, by each person and by all of our
directors and executive officers as a group. Except as otherwise indicated, the
addresses of each of the person below is c/o China Biopharmaceuticals Holdings,
Inc., Suite 1601, Building A, Jinshan Tower No. 8, Shan Xi Road, Nanjing,
Jiangsu, China.
Name Positions Held Shares Owned Percentage
SHI Xinzhong
Address: No. 39, Mai Tai
Street, Nanjing , Jiangsu, Shareholder 1,725,595 4.7%
China
GCE Property Holdings,
Inc.
Address: c/o Bryan Cave Shareholder 2,000,000 5.4%
LLP, 1290 Avenue of the
Americas, New York, NY 10104
QVT Fund LP
Address: 527 Madison
Avenue, 8th Floor, New Shareholder 1,980,198 5.4%
York, NY 10022
Vision Opportunity
Master Fund, LTD
Address: 317 Madison Ave, Shareholder 1,980,198 5.4%
Suite 1220, New York, NY
10017
Mao Peng Director, Chairman of Board Chief 3,432,986 9.3%
Executive Officer
AN Lufan Director, President Chief Operating 3,036,848 8.2%
Officer
LIU Xiaohao Director, Vice President, 2,425,992 6.7%
HUANG Chentai Chief Financial Officer 400,000 1.1%
61
Stephen E. Globus
Address: 44 West 24th st., Director 485,714 1.3%
New York, NY 10010
ZHANG Luyong Chief Technology Officer 200,000 0.5%
Directors and officers as a 9,981,540 27.1%
group
Total: 17,667,531 47.9%
(1) The shares of common stock contributed to GCE Property Holdings, Inc.
include (i) 1,000,000 shares of common stock and (ii) 1,000,000 shares of common
stock issuable upon exercise of the warrants held by GCE Property Holdings, Inc.
EXPERTS
Our consolidated financial statements for the nine months ended
September 30, 2005 and 2004, have been included in this prospectus and in the
registration statement of which this prospectus forms a part. Our consolidated
financial statements as of December 31, 2004 and 2003 include din this
prospectus have been audited by Kempisty & Company Certified public Accountants
PC, as set forth in its report thereon appearing elsewhere herein, and which
have been included herein in reliance on said report of such firm given on its
authority as experts in auditing and accounting in giving said report.
See "Changes In and Disagreements with Accountants on Accounting And
Financial Disclosure" for information about recent dismissal of Weinberg &
Company, P.A. g as our principal independent accountants and our engagement of
the new independent accountants.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 29, 2005, we filed a Current Report on Form 8-K to report
the change in our certifying accountant. Our board of directors authorized the
engagement of Moore Stephens Wurth Frazer and Torbet, LLP, Certified Public
Accountants and Consultants ("Moore Stephens") as the new independent auditor to
audit our financial statements, effective as of December 27, 2005 . This
appointment replaced Kempisty & Company Certified Public Accountants, PC
("Kempisty") as the independent accountant engaged to audit the financial
statements of the Registrant. The decision to dismiss Kempisty was approved by
the Registrant's Board of Directors. No audit committee exists other than the
members of the Board of Directors. Kempisty performed the audit of the
Registrant's financial statements for the years ended December 31, 2004 and 2003
and reviewed the Registrant financial statements for the three months ended
March 31, 2005 and March 31, 2004, for the three and six months ended June 30,
2005 and June 30, 2004 and for the three and nine months ended September 30,
2005 and September 30, 2004. During this period and the subsequent interim
period prior to its dismissal, there were no disagreements with Kempisty on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not resolved to Kempisty's
satisfaction would have caused Kempisty to make reference to this subject matter
of the disagreements, nor were there any "reportable events" as such term is
defined in Item 304(a)(1)(iv)of Regulation S-K, promulgated under the Securities
Exchange Act of 1934, as amended ("Regulation S-K"). The Registrant has
requested Kempisty to furnish it with a letter addressed to the SEC stating
whether it agrees with the statements made above by the Registrant. Moore
Stephens, the Registrant's successor auditors, provides auditing services for
the Registrant which is a United States company according to the United States
generally accepted accounting principles. The decision to engage Moore Stephens
was approved by the Registrant's Board of Directors. The Board of Directors of
the Registrant believes that Moore Stephens should be able to better service the
Registrant's expanding auditing needs.
On March 10, 2005, we filed a Current Report on Form 8-Kto report the
change in our certifying accountant. Our board of directors authorized the
engagement of Kempisty & Company Certified Public Accountants, PC as the new
independent auditor to audit our financial statements, effective as of March 9,
62
2005. This appointment replaced BDO Reanda, Certified Public Accountants ("BDO")
as the independent accountant engaged to audit our financial Statements. BDO was
dismissed on March 9, 2005 as the principal independent accountant. Our board of
directors authorized the dismissal of BDO. During the one month in which BDO was
engaged by us, BDO did not issue any reports on the audited financial statements
of our company, and there were no disagreements with BDO on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to BDO's satisfaction
would have caused BDO to make reference to this subject matter of the
disagreements, nor were there any "reportable events" as such term is defined in
Item 304(a)(1)(iv)of Regulation S-K, promulgated under the Securities Exchange
Act of 1934, as amended ("Regulation S-K").
On February 10, 2005, we filed a Current Report on Form 8-K to report
the change in our certifying accountant. Our board of directors authorized the
engagement of BDO as the new independent auditor to audit our financial
statements, effective as of February 8, 2005. This appointment replaced Weinberg
& Company, P.A. ("Weinberg") as the independent auditor engaged to audit our
financial statements. Weinberg was dismissed on February 8, 2005 as the
principal independent accountant. Our board of directors authorized the
dismissal of Weinberg. Weinberg performed the review of our financial statements
for the three and nine months ended September 30, 2003. During this period and
the subsequent interim period prior to their dismissal, there were no
disagreements with Weinberg on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to Weinberg's satisfaction would have caused
Weinberg to make reference to this subject matter of the disagreements, nor were
there any "reportable events" as such term is defined in Item 304(a)(1)(iv)of
Regulation S-K.
On September 20, 2004, we filed a Current Report on Form 8-K, which was
amended on December 3, 2004 to report the change in our certifying accountant.
This appointment replaced Eisner LLP as the independent auditor engaged to audit
our financial statements. Our board of directors authorized the engagement of
Weinberg & Company, P.A., effective as of September 15, 2004, as the new
independent auditor to audit our financial statements and the dismissal of
Eisner LLP. Eisner LLP performed the audit of our financial statements for the
three years ended February 29, 2004. During this period and the subsequent
interim period prior to their dismissal, there were no disagreements with Eisner
LLP on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements if not resolved
to Eisner LLP's satisfaction would have caused Eisner LLP to make reference to
this subject matter of the disagreements nor were there any "reportable events"
as such term is defined in Item 304(a)(1)(iv)of Regulation S-K.
TRANSFER AGENT
Our transfer agent is North American Transfer Company. The address is
17 West Merrick Road, Freeport, New York, New York.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form SB-2
under the Securities Act with respect to the common stock offered hereby. This
prospectus constitutes the prospectus of China Biopharmaceuticals Holdings,
Inc., filed as part of the registration statement, and it does not contain all
of the information in the registration statement, as certain portions have been
omitted in accordance with the rules and regulations of the Securities and
Exchange Commission. For further information with respect to our company and
this offering, we refer you to the registration statement and exhibits filed as
part of it. You may inspect the registration statement, including the exhibits
thereto, without charge at the Public Reference Room of the Commission at 100 F
Street, NE, Washington, D.C. 20549. You may obtain copies of all or any portion
of the registration statement from the Public Reference Room of the Commission
at 100 F Street, NE, Washington, D.C. 20549, upon payment of the prescribed
63
fees. You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. You may also access such material
electronically by means of the Commissions home page on the Internet at
http://www.sec.gov. Descriptions contained in this prospectus as to the contents
of a contract or other document filed as an exhibit to the registration
statement are not necessarily complete and each such description is qualified by
reference to such contract or document.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
China Biopharmaceuticals Holdings, Inc.
(Formerly Globus growth Group Inc.) and subsidiaries
We have audited the accompanying consolidated balance sheet of China
Biopharmaceuticals Holdings, Inc. as of December 31, 2004 and the related
consolidated statements of income and changes in shareholders' equity and cash
flows for each of the years in the two years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of China
Biopharmaceuticals Holdings, Inc. at December 31, 2004 and the results of its'
operations and cash flows for each of the years in the two years then ended in
conformity with U.S. generally accepted accounting principles.
Kempisty & Company
Certified Public Accountants PC
New York, New York
April 14, 2005
F-1
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current Assets:
Cash $ 467,036
Accounts receivable-net 5,088,309
Inventory 1,474,021
------------
Total current assets 7,029,366
Fixed Assets, net 1,687,549
Land-use right 1,416,511
Goodwill 305,774
Deferred taxes 84,029
------------
Total Assets $ 10,523,229
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank loans $ 1,655,289
Accounts payable and accrued expenses 3,207,802
Other payable 939,939
Income taxes payable 327,030
Other taxes payable 89,885
Deferred revenue 695,162
Due to shareholders 361,816
------------
Total Current Liabilities 7,276,923
Commitments and contingencies --
Minority interests 1,050,845
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; none issued
Common stock, $0.01 par value, 200,000,000 shares authorized;
24,358,757 shares issued and outstanding as of December 31, 2004 243,588
Paid-in capital 1,363,601
Retained earnings 591,611
Accumulated comprehensive (loss) (3,339)
------------
Shareholders' Equity 2,195,461
------------
Total Liabilities and Shareholders' Equity $ 10,523,229
============
See Notes to Financial Statements
F-2
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended
December 31,
2004 2003
------------ ------------
Revenues
Sales $ 3,443,545 $ 1,016,733
Cost of sales 2,411,451 306,621
Business tax 20,721 --
------------ ------------
Gross Profit 1,011,373 710,112
Operating Expenses
General and administrative 545,190 55,400
------------ ------------
Income from operations 466,183 654,712
Other income:
Interest income 17,382 166
Interest expense (37,710) --
Other revenues and gains 117,720 --
Other income, net 1,853 12
------------ ------------
Income before income taxes 565,428 654,890
Income taxes 109,134 116,918
Minority interest 105,654 53,797
------------ ------------
Net income 350,640 484,175
Foreign currency translation gain(loss) (3,361) 2
------------ ------------
Comprehensive income $ 347,279 $ 484,177
============ ============
Basic and fully diluted earnings per share $ 0.01 $ 0.02
============ ============
Weighted average shares outstanding $ 24,358,757 $ 23,158,757
============ ============
See Notes to Financial Statements
F-3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Preferred Additional Accumulated
.01 par value Stock Paid-in Comprehensive Retained
Shares Amount Shares Capital Income Earnings Totals
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balances at
January 1, 2003 20,842,779 $ 208,428 -- $ 146,364 $ -- $ -- $ 354,792
Reverse merger
adjustment 2,315,978 23,160 -- 37,237 20 (300,593) (240,176)
Net income -- -- -- -- -- 484,175 484,175
Foreign currency
translation gain -- -- -- -- 2 -- 2
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balances at
December 31, 2003 23,158,757 $ 231,588 -- $ 183,601 $ 22 $ 183,582 $ 598,793
Shares issued for
Hengyi acquisition 1,200,000 12,000 -- 1,180,000 -- -- 1,192,000
Net income -- -- -- -- -- 408,029 408,029
Foreign currency
translation loss -- -- -- -- (3,361) -- (3,361)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balances at
December 31, 2004 24,358,757 $ 243,588 -- $ 1,363,601 $ (3,339) $ 591,611 $ 2,195,461
============= ============= ============= ============= ============= ============= =============
See Notes to Financial Statements
F-4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
For the Year Ended
December 31,
2004 2003
----------- -----------
Operating Activities
- --------------------
Net income $ 350,640 $ 484,175
Adjustments to reconcile net income to net cash provided(used)
by operating activities:
Depreciation 41,850 11,943
Minority interest 105,654 53,797
Changes in operating assets and liabilities:
Accounts receivable (4,031,764) (786,545)
Inventories (1,472,000) (1,674)
Patent and development costs 13,290 (13,290)
Prepaid expense and other rec 47,482 (24,528)
Other assets (1,762,953) --
Accounts payable and accrued expenses 3,149,807 57,995
Other payable 870,659 59,769
Due to shareholder 40,332 106,751
Deferred tax liability (32,889) 116,918
Customer deposit 561,050 (3,614)
Taxes payable 416,915 --
----------- -----------
Net cash provided(used) by operating activities (1,701,927) 61,697
Investing Activities
- --------------------
Business acquisitions-cash acquired 425,396 --
Purchase of fixed assets -- (21,828)
----------- -----------
Net cash provided(used) by investing activities 425,396 (21,828)
Financing Activities
- --------------------
Bank loan 1,655,289 --
----------- -----------
Net cash provided by financing activities 1,655,289 --
----------- -----------
Net increase in cash and cash equivalents 378,758 39,869
Effects of exchange rates on cash (3,361) 2
Cash at beginning of period 88,277 48,406
----------- -----------
Cash at end of period $ 467,035 $ 88,277
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during year for:
Interest $ 37,710 $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
See Notes to Financial Statements
F-5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1- ORGANIZATION AND OPERATIONS
CBH was incorporated under the laws of the State of Delaware in the
United States. The consolidated financial statements of CBH and
subsidiaries reflect the activities and financial transactions of its
subsidiary, CBC, a British Virgin Islands corporation which is the
parent, management company and holder of a 90% ownership interest in
Chemsource, a company established in the People's Republic of China.
Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a
Chinese company established in Suzhou Province, China, which the
Company acquired a 75.76% ownership on September 30, 2004.
On August 28, 2004, the Company completed a share exchange (the
"Exchange") with the stockholders of CBC pursuant to the terms of an
Agreement for Share Exchange, dated August 28, 2004. In the Exchange,
the Company acquired 100% of the issued and outstanding stock of CBH
in exchange of the issuance of 20,842,779 shares of its restricted
common stock, par value at $0.01 per share. The Exchange resulted in a
change of voting control of the Company. After the Exchange, the
previous shareholders of CBC owned 90% of outstanding common shares of
CBH.
CBC owns 90% interest of Chemsource, a company established in the
People's Republic of China. From 2001 to 2004, Chemsource engaged in
the discovery, development and commercialization of innovative drugs
and related bio-pharmaceutical products in China.
The principal activities of Hengyi are sales and manufacturing of
pharmaceutical intermediates, such as carbamazephine, flumequine and
iminostilbene carbonyl chloride in Mainland China.
Note 2- SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges since its assets
are located in China and its revenues are derived from its operations
in China. China is a developing country with a young market economic
system overshadowed by the state. Its political and economic systems
are very different from the more developed countries and are still in
the stage of change. China also faces many social, economic and
political challenges that may produce major shocks and instabilities
and even crises, in both its domestic arena and its relationship with
other countries, including but not limited to the United States. Such
shocks, instabilities and crises may in turn significantly and
negatively affect the Company's performance.
F-6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries which require
consolidation. Inter-company transactions have been eliminated in
consolidation.
On August 4, 2004, the Company declared that the majority stockholders
of Globus executed a written consent providing a merger ( the
"Merger") of Globus with and into its wholly owned subsidiary, CBH. On
July 3, 2004, an Agreegment and Plan of Merger (the "Merger
Agreement") was signed by and between Globus and CBH. The Merger
Agreement provided for a tax-free reorganization pursuant to the
provisions of Section 368 of the Internal Revenue Code, whereby Globus
would be merged with and into CBH. The separate corporate existence of
Globus ceased and CBH continued as the surviving corporation of the
merger. In the Merger, all issued and outstanding shares of Globus
were converted into shares of common stock of CBH on the basis of
seven for five (7 for 5).
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation.
Depreciation on fixed assets is provided on the straight-line basis
over their respective estimated useful lives. Estimated useful lives
are as follows.
Equipment and machinery 6 years
Motor vehicles 8 years
Furniture and fixtures 5 years
Land use right 48 years
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or
loss is included in the statement of operations. The cost of
maintenance and repairs is charged to income as incurred, whereas
significant renewals and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The Company also re-evaluated the periods of amortization to
determine whether subsequent events and circumstances are warrant
revised estimate of useful lives.
F-7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly
liquid investment purchased with original maturity of three months or
less to be cash equivalents. The Company maintains no bank accounts in
the United States of America.
Patent and Development Costs
The patent and development costs represent patented pharmaceutical
formulas, which have obtained official registration certificate or
official approval for clinical trials. No amortization is provided as
it is held for sale. Such costs comprise purchase costs of patented
pharmaceutical formulas, development costs, raw materials and other
related expenses of pharmaceutical formulas. Patent and development
costs are accounted for on an individual basis. The carrying value of
patent and development costs is reviewed for impairment annually, and
otherwise when events changes in circumstances indicate that the
carrying value may not be recoverable.
Research and Development Costs
Research and development costs of pharmaceutical formulas for
contracted projects are expensed when incurred.
Research costs of pharmaceutical formulas held for sale are expensed
whereas the development cost are expensed until the project attains
technical feasibility (i.e. obtained official approval for clinical
trials), and then such development costs are capitalized.
Fair Value of Financial Instruments
The Company's financial instruments primarily include cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses,
customer deposits and amounts due to related parties and shareholders.
Management has estimated that the carrying amounts approximate their
fair values due to their short-term nature.
F-8
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue and Revenue Recognition
For fixed-price refundable new drugs contracts, the Company recognizes
revenue on a milestone basis. Progress payments received/receivables
are recognized as revenue only if the specified milestone is achieved
and accepted by the customer, the payment is not refundable, and
continued performance of future research and development services
related to the milestone are not required.
For sales of patented pharmaceutical formulas, the Company recognizes
revenue upon the delivery of the patented formulas.
Retirement Benefits
Retirement benefits in the form of contributions under defined
contribution retirement plans to the relevant authorities are charged
to the income statement as incurred. The retirement benefits expense
for the years ended December 31, 2004 and 2003 was $49,745 and $1,806,
respectively.
Income Taxes
Income taxes are provided on the liability method whereby deferred tax
assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases and
reported amounts of assets and liabilities. Deferred tax assets and
liabilities are computed using enacted tax rates expected to apply to
taxable income in the periods in which temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities from a change in tax rates is recognized in income in
the period that include the enactment date. The Company provides a
valuation allowance for certain deferred tax assets, if it is more
likely than not that the Company will not realize tax assets through
future operations.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Management makes these estimates using the best
information available at the time the estimate are made; however
actual results could differ materially form those estimates.
F-9
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income(Loss)
SFAS No. 130, Reporting Comprehensive Income, established standard for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial
statements. SFAS No. 130 defines comprehensive income to include all
changes in equity excepts those resulting form investments by owners
and distributions to owners. Among other disclosures, SPAS No. 130
requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in financial statement that is presented with the same
prominence as other financial statements. The Company's only current
component of comprehensive income is the foreign currency translation
adjustment.
Foreign Currency Translation
The Company's financial information is presented in US dollars.
People's Republic of China currency (Renminbi dollars) has been
converted into US dollars at the exchange rate of 8.277 to 1.
The RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized
institutions. No representation is made that the RMB amounts could
have been, or could be, converted into US$ at the rates used in
translation.
Earnings (Loss) Per Share
Basic earning(loss) per share is computed by dividing income(loss)
available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per
share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
There were no dilutive securities outstanding for the reporting
periods presented.
F-10
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
In January 2003, (as revised in December 2003) the Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46,
"ntitylifathey occur,iable Interest Entities", an interpretation of
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements". Interpretation No. 46 addresses consolidation by business
enterprises of variable interest entities, which have one or both of
the following characteristics: (i) the equity investment at risk is
not sufficient to permit the entity to finance its activities without
additional subordinated support from other parties, which is provided
through other interest that will absorb some or all of the expected
losses of the entity; (ii) the equity investors lack one or more of
the following essential characteristics of a controlling financial
interest: the direct or indirect ability to make decisions about the
entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures
by the primary beneficiary (as defined) of a variable interest entity
and by an enterprise that holds a significant variable interest in a
variable interest entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers
no later than the end of the first reporting period that ends after
December 15, 2004. This effective date included those entities to
which Interpretation 46 had previously been applied. However, prior to
the required application of Interpretation No. 46, a public entity
that is small business issuer shall apply Interpretation 46 or this
Interpretation to those entities that are considered to be
special-purpose entities no later than as of the end of the first
reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements for one
or more years with a cumulative-effect adjustment as of the beginning
of the first year restated.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities ". SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The changes in SFAS No. 149
improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. This statement
is effective for contracts entered into or modified after June 30,
2003 and all of its provisions should be applied prospectively.
F-11
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 changes the accounting for certain financial
instruments with characteristics of both liabilities and equity that,
under previous pronouncements, issuers could account for as equity.
The new accounting guidance contained in SFAS No. 150 requires that
those instruments be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange
for cash or other assets. A second type includes put options and
forward purchase contracts, which involves instruments that do or may
require the issuer to buy back some of its shares in exchange for cash
or other assets. The third type of instruments that are liabilities
under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to
a variable such as a market index, or varies inversely with the value
of the issuers' shares. SFAS No. 150 does not apply to features
embedded in a financial instrument that is not a derivative in its
entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements". The remaining provisions of this
Statement are consistent with the FASB's proposal to revise that
definition to encompass certain obligations that a reporting entity
can or must settle by issuing its own shares. This Statement shall be
effective for financial instruments entered into or modified after May
31, 2003 and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity,
as to which the effective date is for fiscal periods beginning after
December 15, 2004.
In March 2004, the U.S. Securities and Exchange Commission's Office of
the Chief Accountant and the Division of Corporaropriate.e released
Staff Accounting Bulletin ("SAB") No. 105, "Loan Commitments Accounted
for as Derivative Instruments". This bulletin contains specific
guidance on the inputs to a valuation-recognition model to measure
loan commitments accounted for at fair value, and requires that
fair-value measurement include only differences between the guaranteed
interest rate in the loan commitment and market interest rate,
excluding any expected future cash flows related to the customer
relationship or loan servicing. In addition, SAB105 requires the
disclosures of the accounting policy for loan commitments, including
methods and assumptions used to estimate the fair value of loan
commitments, and any associated hedging strategies. SAB105 is
effective for derivative instruments, entered into subsequent to March
31, 2004 and should also be applied to existing instrument as
appropriate.
F-12
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-Monetary Assets, an Amendment of APB No. 29". This statement
amends APB Opinion No. 29, "Accounting for Nonmonetary Transactions".
Earlier guidance had been based on the principle that exchanges of
nonmonetary assets should be based on the fair value of the assets
exchanged and APB No. 29 included certain exception to this principle.
However, FASB 153 eliminated the specific exceptions for nonmonetary
exchanges with a general exception rule for all exchanges of
nonmonetary assets that do not have commercial and economic substance.
A nonmonetary exchange has commercial substance only if the future
cash flows of the entity is expected to change significantly as a
result of the exchange. This statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005.
In December 2004, the FASB issued a revised SFAS No. 123, Accounting
for Stock-Based Compensation, which supethatemayPbeosettledNo. 25,
Accounting for Stock Issued to Employees, and its related
implementation guidance. This statement requires a public entity to
recognize and measure the cost of employee services it receives in
exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). These costs will be
recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service
period (usually the vesting period). This statement also establishes
the standards for the accounting treatment of these share-based
payment transactions in which an entity exchanges its equity
instruments for goods or services. It addresses transactions in which
an entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity's equity instruments or that
may be settled by the issuance of those equity instruments. This
statement shall be effective the first interim or annual reporting
period that begins after December Implementation of the revised SFAS
No. 123 is not expected to have a significant effect on the Company's
financial statement presentation or its disclosures.
The implementation of the above pronouncements is not expected to have
a material effect on the Company's financial statement presentation or
disclosures.
Note 3- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December 31, 2004:
Accounts receivable $ 5,335,998
Allowance for bad debt (247,689)
-------------
Accounts receivable, net $ 5,088,309
=============
F-13
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3- ACCOUNTS RECEIVABLE (continued)
The Company's only operating subsidiary, Chemsource, accounted for
100% of the accounts receivable of the Company at September 30, 2004.
For the nine months ended September 30, 2004 the Company recognized
bad debt expenses of $538,843 relating to sales record in 2003. In
2003, the Company believed that all of the criteria for revenue
recognition existed. However, during 2004 certain customers
experienced deteriorating financial condition which resulted in
non-payment of accounts receivable. While, the Company continues to
pursue payment, due to the uncertainty of collection, the Company
recorded a bad debt allowance for the accounts.
Note 4- INVENTORY
2004
----
Finished goods $ 1,154,723
Packing materials and supplies 287,398
Work in progress =============
Note 5- FIXED ASSETS
Fixed assets consists of the following as of December 31, 2004:
Furniture and equipment $ 756,285
Less: Accumulated depreciation 70,946
-------------
$ 685,339
=============
Depreciation expense for the years ended December 31, 2004 and 2003 was
$509,841 and $357,946 , respectively.
Note 6- LAND USE RIGHT
2004
----
Cost of land use right $ 1,449,800
Less: Accumulated amortization 29,479
-------------
$ 1,420,321
=============
F-14
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7- AMOUNT DUE TO SHAREHOLDERS
Amounts due to shareholders consist of the following as of December
31, 2004:
Lufan An $ 313,123
Xiahao Liu 36,589
Xinzhong Shi 12,082
-------------
$ 361,794
=============
The amounts due to shareholders are unsecured, interest-free and have
no fixed repayment terms.
Note 8- INCOME TAXES
Corporation Income Tax ("CIT")
In accordance with the relevant tax laws and regulations of the
People's Republic of China, a company is entitled to a full exemption
from CIT for the first two years, and a 50% deduction in CIT for the
next three years, commencing from the first profitable year. For 2003,
the Company was exempt from CIT.
Income tax expense for years ended December 31, 2004 and 2003 are
summarized as follows:
CIT 2004 2003
---- ----
Current $ 310,081 $ --
Deferred (200,947) 116,918
------------- -------------
$ 109,134 $ 116,918
============= =============
The Company's tax expense differs from the "expected" tax expense for
the nine months ended September 30, 2004 and 2003 (computed by
applying the CIT rate of 33 percent to net profit) as follows:
2004 2003
---- ----
Computed "expected" expense(benefit) $ 186,591 $ 216,114
Valuation allowance -- (99,196)
CIT exemption (77,457) --
------------- -------------
Income tax expense $ 109,134 $ 116,918
============= =============
F-15
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8- INCOME TAXES (continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax liabilities(assets) are as follows at
December 31, 2004:
Deferred tax assets:
Depreciation $ 10,439
Research and development costs not yet deducted for tax purpose 205,405
Other costs not yet deducted for tax purpose 40,503
Foreign net operating loss carry forwards 83,503
Valuation allowance (339,850)
-------------
Total deferred tax assets --
-------------
Deferred tax liabilities:
Revenue not yet taxable (411,613)
-------------
Net deferred tax liability $ (411,613)
=============
The foreign net operating loss carry forwards expire five years from
the year of the loss. The loss carry forwards expire as follows:
Year of Expiration
2005 $ 34,371
2006 43,696
2007 48,559
2008 58,045
2009 83,503
-------------
$ 268,174
=============
The tax effects of temporary differences that give rise to deferred
tax assets were reduced by a valuation allowance because of the
uncertainty as to whether the deferred tax assets will be realized.
Business Tax ("BT")
The Company is subject to Business Tax, which is charged on the
selling price at a general rate of 5% in accordance with the tax law
applicable.
F-16
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9- BANK LOANS
The Company has a total amount of US$1,655,289 in short term loans
from two different banks in China. These loans are one year or less in
mature and renew automatically. The average interest rate is
approximately 6.75%.
Note 10- COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and dormitory facilities for its
employees from a third party. Accordingly, for the years ended
December 31, 2004 and 2003 the Company recognized rent expense of
$10,545 and $9,062, respectively.
As of December 31, 2004, the Company has outstanding commitments in
respect of non-cancellable operating leases, which fall due as
follows:
2005 $ 24,500
2006 26,950
2007 29,650
2008 32,610
2009 35,870
-------------
$ 149,580
=============
Note 11- BUSINESS COMBINATIONS
Effective August 28, 2004, the Company completed the acquisition of
CBC, a British Virgin Islands corporation which is the parent,
management company and holder of a 90% of the ownership interest in
its only operating subsidiary, Chemsource, a company established in
the People's Republic of China and engaged in the discovery,
development and commercialization of innovative drugs and related
bio-pharmaceutical products in China. The Company exchanged 20,842,779
shares of its restricted common stock, par value $0.01 per share, for
that number of shares of CBC that constitutes 100% of the equity
interest of CBC, valued at $447,431 which represented the net asset of
CBC at the acquisition date.
The following summarizes the acquisition:
Assets acquired $ 1,077,242
Liability assumed (629,811)
-------------
Net assets of CBC at the acquisition date $ 447,431
=============
F-17
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11- BUSINESS COMBINATIONS(continued)
On September 29, 2004, we signed a purchase agreement to acquire a
75.7606% ownership interest of Suzhou Hengyi Pharmaceuticals of
Feedstock Co., Ltd ("Hengyi"), a Chinese company established in
Suzhou, China for 1,200,000 of common shares valued at $1.00 per share
or $1,200,000 and additional $1,600,000 as an additional contribution
into the acquired Hengyi for working capital and/or expansion
purposes. The cash contribution is to be made in installments
beginning in 2005.
Note 12- COMMON STOCK
On December 17, 2004, the Company issued 600,000 shares of common
stock to Gang Zhu and another 600,000 shares of common stock to Fu
Ying Chou, both are shareholders of Suzhou Hengyi Pharmaceutical
Feedstock Co., Ltd. pursuant to the acquisition of Hengyi effective
October 1, 2004.
During October 2004 the Company engaged a consultant for six months
ending March 31, 2005. The terms of the agreement are for the
consultant to receive cash payment of $4,000 plus value at $2,500
common stocks and 10,000 three year warrants to purchase common stock
at $0.50 per share, each month during the agreement. The common shares
are being valued at $1.00 per share and the warrants are valued at
$0.58 per warrant for a total monthly cost to the Company of $10,917
for the consulting services. The common stock and warrants will be
physically issued in 2005.
Note 13- SUBSEQUENT EVENTS
During January 2005, the Company issued $500,000 face value
convertible notes payable 180 days from the date of issue with
interest at 7% per annum. The notes are convertible into common stock
of the Company at $1.00 per share. Attached to the notes are three
year warrants that allow the holder to purchase shares of common stock
at $1.50 per share.
Additionally, the Company paid $40,000 in cash and issued 65,000
shares valued at $65,000 and 26,666 three year warrants to purchase
the Company's common stock at $1.50 per share valued at $3,200 using
the Black-Schole pricing model for a total of $108,200 of note
issuance expense to be amortized over the life of the note.
During March 2005, the Company issued 300,000 shares of common stock
to China Pharmaceutical University located in Nanjing, China, pursuant
to a joint laboratory agreement and agreed to invest $36,245 into the
laboratory.
F-18
FINANCIAL STATEMENTS
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2005
And for three and nine months ended September 30, 2005
The consolidated financial statements of China Biopharmaceuticals Holdings, Inc.
and subsidiaries (collectively, the "Company"), included herein were prepared,
without audit, pursuant to rules and regulations of the Securities and Exchange
Commission. Because certain information and notes normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America were condensed or omitted pursuant to such rules
and regulations, these financial statements should be read in conjunction with
the financial statements and notes thereto included in the audited financial
statements of the Company as included in the Company's Form 10-KSB for the year
ended December 31, 2004.
F-19
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
September 30,
2005
-------------
Current Assets:
Cash $ 2,007,819
Accounts receivable-net (Note 3) 8,882,052
Prepaid expenses 108,704
Inventory (Note 4) 5,714,727
Loan to Shareholders 0
-------------
Total current assets 16,713,302
Fixed Assets, net (Note 5) 5,358,394
Other Assets (Note 6) 10,197,678
-------------
Total Assets $ 32,269,375
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Loan $ 4,506,464
Accounts Payable 8,328,970
Other Payable 815,822
Income taxes payable 793,103
Deferred revenue 888,234
Due to RPT 1,855,574
Due to Shareholders 1,512,534
Due to Erye's Shareholders 600,000
Bond Payable 450,000
-------------
Total Current Liabilities 19,750,701
Long-term Liabilities
Long-term Loan 544,046
-------------
Total Long-term Loan 544,046
Minority interests 3,906,024
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 10,900
1,090,000 shares issued and outstanding as of September 30, 2005
Common stock, $0.01 par value, 200,000,000 shares authorized;
28,210,257 shares issued and outstanding as of September 30, 2005 282,103
Common stock to be issued 125
Additional Paid-in capital 6,137,828
Retained earnings 1,640,988
Accumulated comprehensive (loss) (3,339)
-------------
Shareholders' Equity 8,068,605
-------------
Total Liabilities and Shareholders' Equity $ 32,269,375
=============
See Notes to Financial Statements
F-20
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
FOR NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
For Nine Month Ended For 3 Months Ended
September 30 September 30
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues
Sales $ 13,129,081 663,850 $ 7,498,008 480,131
Cost of sales 9,430,835 60,015 5,498,940 7,048
Business tax 16,142 -- 13,540 --
------------ ------------ ------------ ------------
Gross Profit 3,682,103 603,835 1,985,527 473,083
Operating Expenses
General and administrative 2,039,938 818,071 1,078,393 786,575
------------ ------------ ------------ ------------
Income from operations 1,642,165 (214,236) 907,134 (313,492)
Other income:
Other income, net (35,694) (6,815) (23,119) (6,962)
------------ ------------ ------------ ------------
Income before income taxes 1,606,471 (221,051) 884,015 (320,454)
Income taxes -- 294,695 -- 234,492
Minority interest 557,094 (43,153) 367,764 (47,073)
------------ ------------ ------------ ------------
Net income 1,049,378 (472,593) 516,252 (507,873)
Foreign currency translation gain(loss) -- (10) -- --
------------ ------------ ------------ ------------
Comprehensive Income $ 1,049,378 (472,603) $ 516,252 (507,873)
============ ============ ============ ============
Basic and Fully Diluted Earnings per Share $ 0.04 (0.02) $ 0.02 (0.02)
============ ============ ============ ============
Weighted average shares outstanding 26,218,201 21,691,971 28,133,757 21,125,843
============ ============ ============ ============
See Notes to Financial Statements
F-21
CHINA BIOPHARMACEUTICAL HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
For the 9 Months Ended
September 30,
2005 2004
----------- -----------
Operating Activities
- --------------------
Net income $ 1,049,377 $ (472,593)
Adjustments to reconcile net income to net cash
provided(used) by operating activities:
Depreciation 429,040 11,332
Minority interest 851,123 (43,153)
Changes in operating assets and liabilities: -- --
Accounts receivable 3,916,849 400,657
Inventories (1,702,024) (175)
Prepaid expense and other receivables (203,757) (193,626)
Other assets 428,862 (402)
Payable and accrued expenses (4,606,424) 47,457
Due to Shareholders (115,332) 21,600
Customer deposit 185,450 (128,071)
Taxes payable (35,684) 294,690
----------- -----------
Net cash provided(used) by operating activities 197,481 (62,284)
Investing Activities
- --------------------
Business acquisitions-cash acquired (200,000) --
Acquisition or Disposal of fixed assets (909,771) (4,842)
----------- -----------
Net cash provided(used) by investing activities (1,109,771) (4,842)
Financing Activities
- --------------------
Processes from issuance of common stock 397,000 300,000
Processes from issuance of preferred stock 1,090,000 --
Process from convertible notes 450,000 --
Bank loan 516,073 --
----------- -----------
Net cash provided by financing activities 2,453,073 300,000
Net increase in cash and cash equivalents 1,540,783 232,874
Effects of exchange rates on cash -- (11)
Cash at beginning of period 467,036 88,277
----------- -----------
Cash at end of period $ 2,007,819 $ 321,140
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during year for:
Interest $ 237,830 $ --
=========== ===========
Income taxes $ 110,219 $ 356,840
=========== ===========
See Notes to Financial Statements
F-22
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1- ORGANIZATION AND OPERATIONS
CBH was incorporated under the laws of the State of Delaware in the
United States. The consolidated financial statements of CBH and
subsidiaries reflect the activities and financial transactions of its
subsidiary, CBC, a British Virgin Islands corporation which is the
parent, management company and holder of a 90% ownership interest in
Chemsource, a company established in the People's Republic of China.
Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd ("Hengyi"), a
Chinese company established in Suzhou Province, China, which the
Company acquired a 75.76% ownership on September 30, 2004. Suzhou Erye
Pharmaceutical Limited Company ("Erye"), a Chinese company established
in Suzhou Province, China, which the Company acquired a 51% ownership
on June 11, 2005.
On August 28, 2004, the Company completed a share exchange (the
"Exchange") with the stockholders of CBC pursuant to the terms of an
Agreement for Share Exchange, dated August 28, 2004. In the Exchange,
the Company acquired 100% of the issued and outstanding stock of CBH in
exchange of the issuance of 20,842,779 shares of its restricted common
stock, par value at $0.01 per share. The Exchange resulted in a change
of voting control of the Company. After the Exchange, the previous
shareholders of CBC owned 90% of outstanding common shares of CBH.
CBC owns 90% of Chemsource, a company established in the People's
Republic of China. From 2001 to 2004, Chemsource engaged in the
discovery, development and commercialization of innovative drugs and
related bio-pharmaceutical products in China.
The principal activities of Hengyi are sales and manufacturing of
pharmaceutical intermediates, such as carbamazephine, flumequine and
iminostilbene carbonyl chloride in Mainland China.
The principal activities of Hengyi are sales and manufacturing of
pharmaceutical intermediates, such as carbamazephine, flumequine and
iminostilbene carbonyl chloride in Mainland China.
The principal activities of Erye are sales and manufacturing of
pharmaceutics approved for sale in Mainland China.
Note 2- SIGNIFICANT ACCOUNTING POLICIES
Economic and Political Risks
The Company faces a number of risks and challenges since its assets are
located in China and its revenues are derived from its operations in
China. China is a developing country with a young market economic
system overshadowed by the state. Its political and economic systems
are very different from the more developed countries and are still in
the stage of change. China also faces many social, economic and
political challenges that may produce major shocks and instabilities
and even crises, in both its domestic arena and its relationship with
other countries, including but not limited to the United States. Such
shocks, instabilities and crises may in turn significantly and
negatively affect the Company's performance.
F-23
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and all its majority-owned subsidiaries which require
consolidation. Inter-company transactions have been eliminated in
consolidation.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles in the United States of
America ("US GAAP"). This basis of accounting differs from that used in
the statutory accounts of the Company, which are prepared in accordance
with the "Accounting Standards for Business Enterprises" and
"Accounting system for Business Enterprises" in the PRC ("PRC GAAP").
Certain accounting principles, which are stipulated by US GAAP, are not
applicable in the PRC. The difference between PRC GAAP accounts of the
Company and its US GAAP financial statements was immaterial.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation.
Depreciation on fixed assets is provided on the straight-line basis
over their respective estimated useful lives. Estimated useful lives
are as follows.
Equipment and machinery 6 years
Motor vehicles 8 years
Furniture and fixtures 5 years
Land use right 50 years
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss
is included in the statement of operations. The cost of maintenance and
repairs is charged to income as incurred, whereas significant renewals
and betterments are capitalized.
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
The Company also re-evaluated the periods of amortization to determine
whether subsequent events and circumstances are warrant revised
estimate of useful lives.
F-24
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly
liquid investment purchased with original maturity of three months or
less to be cash equivalents. The Company maintains no bank accounts in
the United States of America.
Patent and Development Costs
The patent and development costs represent patented pharmaceutical
formulas, which have obtained official registration certificate or
official approval for clinical trials. No amortization is provided as
it is held for sale. Such costs comprise purchase costs of patented
pharmaceutical formulas, development costs, raw materials and other
related expenses of pharmaceutical formulas. Patent and development
costs are accounted for on an individual basis. The carrying value of
patent and development costs is reviewed for impairment annually, and
otherwise when events changes in circumstances indicate that the
carrying value may not be recoverable.
Research and Development Costs
Research and development costs of pharmaceutical formulas for
contracted projects are expensed when incurred.
Research costs of pharmaceutical formulas held for sale are expensed
whereas the development cost are expensed until the project attains
technical feasibility (i.e. obtained official approval for clinical
trials), and then such development costs are capitalized.
Fair Value of Financial Instruments
The Company's financial instruments primarily include cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses,
customer deposits and amounts due to related parties and shareholders.
Management has estimated that the carrying amounts approximate their
fair values due to their short-term nature.
Allowance for Doubtful Accounts
The Company determines the allowance for doubtful accounts based on bad
debt rate in prior year and other factors. The Company also provides
specific provisions for bad debt if factors and circumstance indicate
the receivables are unlikely to be collected.
F-25
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue and Revenue Recognition
For fixed-price refundable new drugs contracts, the Company recognizes
revenue on a milestone basis. Progress payments received/receivables
are recognized as revenue only if the specified milestone is achieved
and accepted by the customer, the payment is not refundable, and
continued performance of future research and development services
related to the milestone are not required.
For sales of patented pharmaceutical formulas, the Company recognizes
revenue upon the delivery of the patented formulas.
Income Taxes
Income taxes are provided on the liability method whereby deferred tax
assets and liabilities are recognized for the expected tax consequences
of temporary differences between the tax bases and reported amounts of
assets and liabilities. Deferred tax assets and liabilities are
computed using enacted tax rates expected to apply to taxable income in
the periods in which temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities from a
change in tax rates is recognized in income in the period that include
the enactment date. The Company provides a valuation allowance for
certain deferred tax assets, if it is more likely than not that the
Company will not realize tax assets through future operations.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Management makes these estimates using the best
information available at the time the estimate are made; however actual
results could differ materially form those estimates.
F-26
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income(Loss)
SFAS No. 130, Reporting Comprehensive Income, established standard for
the reporting and display of comprehensive income, its components and
accumulated balances in a full set of general purpose financial
statements. SFAS No. 130 defines comprehensive income to include all
changes in equity excepts those resulting form investments by owners
and distributions to owners. Among other disclosures, SPAS No. 130
requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in financial statement that is presented with the same
prominence as other financial statements. The Company's only current
component of comprehensive income is the foreign currency translation
adjustment.
Foreign Currency Translation
The Company maintains its books and accounting records in Renminb
("RMB"), thePRC's currency. Translation of dmcontracts. RMB in United
States dollars ("US$") has been made at the single rate of exchange of
US$1.00:RMB8.277. No representation is made that RMB amounts could have
been or could be, converted into US dollar at that rate. On January 1,
1994, the PRC government introduced a single rate of exchange as quoted
daily by the People's Bank of China (the "Unified Exchange Rate"). The
quotation of the exchange rates does not imply free convertibility of
RMB to other foreign currencies. All foreign exchange transactions
continue to take place either through the Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange rates
quoted by the People's Bank of China. Approval of foreign currency
payments by the Bank of China or other institutions requires submitting
a payment application form together with supplier's invoices, shipping
documents and signed contracts.
One July 21, 2005, the People's Bank of China, China's central bank,
announced that, beginning from July 21, 2005, China will implement a
regulated, managed floating exchange rate system based on market supply
and demand and in reference to a package of currencies. RMB will no
longer be pegged to the US dollar and the RMB exchange rate regime will
be improved with greater flexibility.
The People's Bank of China will announce the closing price of a foreign
currency such as the US dollar traded against the RMB in the inter-bank
foreign exchange market after the closing of the market on each working
day, and will make it the central parity for the trading against the
RMB on the following working day.
The exchange rate of the US dollar against the RMB will be adjusted to
8.11 yuan per US dollar on July 21, 2005.
The daily trading price of the US dollar against the RMB in the
inter-bank foreign exchange market will continue to be allowed to float
within a band of 0.3 percent around the central parity published by the
People's Bank of China, while the trading prices of the non-US dollar
currencies against the RMB will be allowed to move within a certain
band announced by the People's Bank of China.
The People's Bank of China will make adjustment of the RMB exchange
rate band when necessary according to market development as well as the
economic and financial situation. The People's Bank of China is
responsible for maintaining the RMB exchange rate basically stable at
an adaptive and equilibrium level.
F-27
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Business Combination
The Company accounts for its business combination using purchase method
of accounting. This method requires that the acquisition cost be
allocated to the assets acquired and liabilities assumed based on their
fair value. The Company makes judgments and and estimate in determining
the fair value of the assets and liabilities acquired.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over fair value of the
identifiable assets and liabilities acquired as a result of business
acquisition. The Company adopts the Statement of Financial Accounting
Board 142 Goodwill and Intangible Asset. Under SFAS 142, Goodwill is no
longer amortized, but tested for impairment upon first adoption and
annually thereafter, or more frequently when events or changes in
circumstance indicate that it might be impaired. The Company assess its
goodwill in accordance with SFAS 142.
Interim financial information
The unaudited balance sheet, the unaudited statements of income and
cash flows have been prepared in accordance with United States
generally accepted accounting principles for interim financial
information. In our opinion, all adjustments (consisting solely of
normal recurring accruals) considered necessary for a fair presentation
of the financial position, results of operations and cash flows as at
September 30, 2005, and 2004, have been included. Readers of these
financial statements should note that the interim results for the nine
month periods ended September 30, 2005, and September 30, 2004, are not
necessarily indicative of the results that may be expected for the
fiscal year as a whole.
F-28
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2- SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings (Loss) Per Share
Basic earning(loss) per share is computed by dividing income(loss)
available to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share
is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Since the Company's common stock currently does not trade, the dilutive
effect of any warrants or convertible notes outstanding can not be
determined.
Note 3- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following: September 30 2005
Accounts receivable $ 9,654,965
less: Allowance for bad debt 772,913
------------
Accounts receivable, net $ 8,882,052
============
During 2004, the Company recognized bad debt expenses of $538,843
relating to sales record in 2003. In 2003, the Company believed that
all of the criteria for revenue recognition existed. However, during
2004 certain customers experienced deteriorating financial condition
which resulted in non-payment of accounts receivable. While, the
Company continues to pursue payment, due to the uncertainty of
collection, the Company recorded a bad debt allowance for the accounts.
Note 4- INVENTORY
Inventory consists of following:
September 30
2005
------------
Finished goods $ 2,223,705
Packing materials and supplies 1,889,985
Work in progress 1,601,037
------------
$ 5,714,727
============
Note 5- FIXED ASSETS
Fixed assets consists of the following:
September 30
2005
------------
Plant, Equipment $ 9,241,505
Less: Accumulated depreciation (4,193,591)
------------
5,047,913
Construction in progress 310,481
------------
$ 5,358,394
============
F-29
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6- OTHER ASSETS
Other assets consists of the following:
September 30
2005
------------
Cost of land use right $ 4,670,389
Less: Accumulated amortization 85,164
------------
4,585,225
Deferred consultant expenses 179,250
Less: Accumulated amortization 125,339
------------
53,911
Laboratory use right 344,750
Less: Accumulated amortization 69,824
------------
274,926
Computer software 6,343
Less: Accumulated amortization 5,638
------------
705
Goodwill 5,198,887
Deferred taxes 84,024
------------
$ 10,197,678
============
Note 7- AMOUNT DUE TO SHAREHOLDERS
Amounts due to shareholders consist of the following:
September 30
2005
------------
Due to shareholders $ 1,512,534
The amounts due to shareholders are unsecured, interest-free and have
no fixed repayment terms.
F-30
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 8- BUSINESS COMBINATIONS
Effective August 28, 2004, the Company completed the acquisition of
CBC, a British Virgin Islands corporation which is the parent,
management company and holder of a 90% of the ownership interest in its
only operating subsidiary, Chemsource, a company established in the
People's Republic of China and engaged in the discovery, development
and commercialization of innovative drugs and related
bio-pharmaceutical products in China. The Company exchanged 20,842,779
shares of its restricted common stock, par value $0.01 per share, for
that number of shares of CBC that constitutes 100% of the equity
interest of CBC, valued at $447,431 which represented the net asset of
CBC at the acquisition date.
The following summarizes the acquisition:
Assets acquired $ 1,077,242
Liability assumed (629,811)
-----------
Net assets of CBC at the acquisition date $ 447,431
===========
On September 29, 2004, the Company acquired a 75.7606% ownership
interest of Suzhou Hengyi Pharmaceuticals of Feedstock Co., Ltd
("Hengyi"), a Chinese company established in Suzhou, China for
1,200,000 of common shares valued at $1.00 per share or $1,200,000 and
additional $1,600,000 as an additional contribution into the acquired
Hengyi for working capital and/or expansion purposes. The cash
contribution is to be made in installments beginning in 2005.
On June 11, 2005, the Company acquired a 51% ownership interest of
Suzhou Erye Pharmaceutical Limited Company ("Erye"), a Chinese company
established in Suzhou, China for $80,000 in cash and 3,300,000 of
common shares valued at $1.00 per share or $3,300,000. Also, the
Company will contribute an additional $2,200,000 to Erye for working
capital and/or expansion purposes. The cash contribution is to be made
in installments. The current shareholders will be entitled all profits
made from June 11, 2005 to the date Government approval is granted for
the change in ownership. On June 30, 2005, the Company owes Eyre's
shareholders $600,000 of the purchase price.
F-31
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 10- COMMON STOCK
On December 17, 2004, the Company issued 600,000 shares of common stock
to Gang Zhu and another 600,000 shares of common stock to Fu Ying Chou,
both are shareholders of Suzhou Hengyi Pharmaceutical Feedstock Co.,
Ltd. pursuant to the acquisition of Hengyi effective October 1, 2004.
During October 2004 the Company engaged a consultant for six months
ending March 31, 2005. The terms of the agreement are for the
consultant to receive a cash payment of $4,000 plus 2,500 shares of
common stock valued at $2,500 and 10,000 three year warrants to
purchase common stock at $0.50 per share, each month during the
agreement with the first month free. The common shares are being valued
at $1.00 per share and the warrants are valued at $0.58 per warrant for
a total monthly cost to the Company of $10,205 for the consulting
services.
During January 2005, the Company issued $500,000 face value convertible
notes payable 180 days from the date of issue with interest at 7% per
annum. The notes are convertible into common stock of the Company at
$1.00 per share. Attached to the notes are three year warrants that
allow the holder to purchase shares of common stock at $1.50 per share.
Relating to the convertible notes issuance, the Company paid investment
banking fees of $40,000 in cash and issued 65,000 shares common stock
valued at $65,000 and 26,666 three year warrants to purchase the
Company's common stock at $1.50 per share valued at $3,200 using the
Black-Schole pricing model for a total of $108,200 of note issuance
expense to be amortized over the life of the note.
On March 8, 2005, the Company issued 300,000 shares of common stock to
China Pharmaceutical University located in Nanjing, China, pursuant to
a joint laboratory agreement and agreed to invest $36,245 into the
laboratory in the next five years. The value of the 300,000 shares has
not been stated in the agreement. However, the management estimated the
stock as $1.00 per share.
During April 2005 the Company engaged a consultant for seven months
ending October 31, 2005. The terms of the agreement are for the
consultant to receive a cash payment of $50,000 plus 50,000 shares of
common stock valued at $50,000. The Company also engaged another
consultant for one year ended March 31, 2006. The term of this
agreement is for the consultant to receive 60,000 shares of common
stock valued at $60,000 and 35,000 three year warrants to purchase
common stock at $2.00 per share valued at $19,250.
During June 2005, the Company issued $1,090,000 face value convertible
preferred with interest at 7% per annum to the investor. The Company
issued to the investors shares of Series A Convertible Preferred Stock,
face value $1.00 per share, purchase price US$1.00 per share,
convertible at a ratio of 1:1 into shares of the common stock of the
Company. The Company also issued to the investors one warrant for every
one share of Series A Convertible Preferred Stock subscribed under the
subscription agreement. The exercise price of these Warrants is $2.00
per share of common stock. Pursuant to these Warrants, the investors
are entitled to purchase an aggregate amount of 1,090,000 shares of the
Company's common stock. Relating to the convertible preferred shares
issuing, the Company paid fees of $80,750 in cash, and issued 76,500
shares of common stock valued at $76,500, and 76,500 three year
warrants to purchase the Company's common stock at $2.00 per share.
During September 2005, the convertible notes due on September 30, 2005
were extended 90 days. Additionally, since the Company did not register
the underlying stock for the conversion of the notes and warrants by
July 30, a penalty provision was trigged, whereby the conversion price
of the convertible notes drops $0.05 per month (at October 1, the
conversion price was $0.70 per share) and the number of warrants the
note holders was to receive increases 5% per month.
F-32
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 11- WARRANT OUTSTANDING
The following list the warrants outstanding as of September 30, 2005
which call for the common stock of the Company.
HOLDERS NUMBER EXCISE PRICE EXCISE PERIOD
CFSG1 10,000 $0.50 2004-10-1 through
October 2007
Wellfleet Capital, LLP 26,667 $1.50 January 2005 through
January 2008
Holders of Notes 450,000 $1.25 January 2005 through
January 2008
Holders of Preferred
Convertible 1,090,000 $2.00 3 years from the
effectiveness of the
company's registration
statement
Wellfleet Capital, LLP 76,500 $2.00 3 years from the
effectiveness of the
company's registration
statement
------------
Total 1,653,167
============
In October of 2004, the Company granted to CGF1 of the warrant right to
purchase at 0.50 for a period of 3 years for its work as the Company's
consultant. Total warrant amount to be purchase is 10,000.
In January of 2005, the Company raised gross proceeds of $500,000
through the sales of promissory note to accredited investors ("Note").
The Company further granted to holders of the Note with warrant right
to purchase at a price of $1.50 for a period of three years from the
date of sales of the Note. The purchase price shall be $1.50 per share
with the underlying shares to be registered within 120 days after the
date of sales of the Note. The Company agreed to prepare and file with
the SEC a registration statement covering the resale of the common
stock on or before April 30, 2005 for certain investors. If such
registration statement covering the shares of common stock to which the
promissory note can be converted was not declared effective on or
before April 30, 2005, then the conversion price will be reduced by 5%
or $0.05 per share and the warrant amount will be increased by 5% per
month for every month. To such date there is no effective registration
statement for the underlying securities. As of the September 30, 2005,
the Note of amounting of $450,000 has been agreed extend until December
31, 2005. Total warrant amount, including compensation for late
registration, to be purchased is 450,000. The price is reduced to
$1.25.
In January of 2005, the Company granted to Wellfleet Capital, LLP of
the warrant right to purchase at a price of $1.50 for a period of three
years for its work of $500,000 proceeds raised through the sale of the
promissory note. Total warrant amount to be purchase is 26,667.
F-33
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE11- WARRANT OUTSTANDING (CONTINUED)
In June of 2005, the Company has conducted a private placement of
$1,090,000 through issuance of Series A Convertible Preferred Stock
with face value of $1.00 per share, purchase price US$1.00 per share
convertible at a ratio of 1:1 into shares of the common stock of the
Company. The Company also issued to the Investors one (1) warrant for
every one (1) share of Series A Convertible Preferred Stock subscribed
under the subscription agreement. The exercise price of these Warrants
is $2.00 per share of common stock. Pursuant to these Warrants, the
Investors are entitled to purchase an aggregate amount of 1,090,000
shares of the Company's common stock. These Warrants will expire three
(3) years from the effectiveness of the registration statement that the
Company is required to file with the SEC. The Company is required to
file with the Securities and Exchange Commission a registration
statement, covering the resale of all the shares of common stock to
which the Series A Preferred Convertible Stock may be converted and the
shares underlying the Warrants issued or issuable to investors before
October 15, 2005 If such registration statement is not declared
effective on or before October 15, 2005, then the conversion price will
be reduced by 5% or $0.05 per share and the warrant amount will be
increased by 5% per month for every month. To such date there is no
effective registration statement for the underlying securities.
In June of 2005, the Company granted to Wellfleet Capital, LLP of the
warrant right to purchase at a price of $2.00 for a period of three
years for its work of $1,090,000 proceeds raised through the sale of
Series A Convertible Preferred Stock. Total warrant amount to be
purchase is 76,500.
NOTE12- PRO FORMA
On June 11, 2005, the Company entered into an agreement with Suzhou
Erye Pharmaceutical Manufacturing Ltd. To purchase 51% of the ownership
controlling interest the manufacturer. The Company determined the
acquisition date was June 11, 2005 and consolidated the revenue, cost,
expenses and income subsequent to the acquisition date. The following
unaudited pro forma information is prepared as if the acquisition of
Erye were consummated at the beginning of the fiscal year presented.
Twelve Months Ended Nine Months Ended
December 31 2004 September 30, 2005
Revenue 21,185,949 21,751,150
Net Income 831,713 1,165,339
Basic and diluted EPS 0.03 0.04
Weighted Average Shares Outstanding 24,358,757 26,218,201
F-34
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
September 30,
2005
-------------
Current Assets:
Cash $ 2,154,096
Accounts receivable-net (Note 3) 12,091,547
Prepaid expenses 809,047
Inventory (Note 4) 7,423,763
Loan to Shareholders 0
-------------
Total current assets 22,478,455
Fixed Assets, net (Note 5) 7,273,084
Other Assets (Note 6) 10,477,573
-------------
Total Assets $ 40,229,112
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Loan $ 5,991,612
Accounts Payable 9,269,279
Other Payable 4,075,231
Income taxes payable 793,103
Deferred revenue 888,233
Due to RPT 1,855,574
Due to Shareholders 2,488,260
Due to Erye's Shareholders 600,000
Bond Payable 450,000
-------------
Total Current Liabilities 26,411,293
Long-term Liabilities
Long-termLoan 652,102
-------------
Total Long-term Loan 652,102
Minority interests 4,489,656
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized; 10,900
1,090,000 shares issued and outstanding as of September 30, 2005
Common stock, $0.01 par value, 200,000,000 shares authorized;28,210,257
shares issued and outstanding as of September 30, 2005 282,103
Common stock to be issued 125
Additional Paid-in capital 6,137,828
Retained earnings 2,248,442
Accumulated comprehensive (loss) (3,339)
-------------
Shareholders' Equity 8,676,059
-------------
Total Liabilities and Shareholders' Equity $ 40,229,112
=============
F-35
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(FORMERLY GLOBUS GROWTH GROUP INC.) AND SUBSIDIARIES
PRO FORMA CONSOLIDATED INCOME STATEMENT
FOR NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
For Nine Month
Ended
September 30,
2005
--------------
Revenues
Sales 16,433,049
Cost of sales 9,442,637
Business tax 1,151,299
--------------
Gross Profit 5,839,112
Operating Expenses
General and administrative 3,005,859
--------------
Income from operations 2,833,253
Other income:
Other income, net (35,694)
--------------
Income before income taxes 2,797,559
Income taxes --
Minority interest 1,140,727
--------------
Net income 1,656,832
Foreign currency translation gain(loss) --
--------------
Comprehensive Income 1,656,832
==============
Basic and Fully Diluted Earnings per Share (0.06)
==============
Weighted average shares outstanding 28,218,201
==============
F-36
PART II.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
As permitted by applicable law, our Bylaws provide that we will
indemnify our officers, directors, employees, consultants and agents. This
includes indemnification against attorneys' fees and other expenses and
liabilities they incur to defend, settle or satisfy any civil or criminal action
brought against them arising out of their association with or activities on
behalf of our company. However, they will not be indemnified if they are
adjudged to have acted with gross negligence, engaged in willful misconduct,
knowingly violated the law, breached their duty of loyalty or received improper
personal benefit. We will bear the expenses of such litigation for any such
persons upon their promise to repay such sums if it is ultimately determined
that they are not entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to our
directors, officers and controlling persons (within the meaning of the
Securities Exchange Act) pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
- -------------------------------------------
The following table sets forth the various expenses to be paid by us in
connection with the issuance and distribution of the securities being
registered, other than sales commissions. All amounts shown are estimates except
for amounts of filing and listing fees.
Filing Fee $ 4,000.00
Accounting and Audit Fees $10,000.00
Legal Fees and Expense $75,000.00*
Printing and Engraving Expenses (includes EDGAR service) $ 1,000.00*
Total estimated expenses $90,000.00*
*Estimated
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
In January 2005, we sold $500,000 convertible notes to twenty (20)
accredited investors and issued to the investors one (1) warrant for every one
(1) share of common stock that the convertible notes can convert into. As of
December 31, 2005, all of the convertible notes have been either converted into
shares of our common stock or have been redeemed. We also issued WestPark
Capital Inc. ("WestPark"). Acted as our placement agent, 65,000 shares of common
stock in consideration of its service as our private placement agent and 26,666
warrants representing the right to purchase up to 26,666 shares of our common
stock. This transaction was exempt from registration under section 4(2) of the
Securities Act.
In June, 2005, we sold our Series A Convertible Preferred Stock to
twenty eight (28) accredited investors and we also issued to the investors one
(1) warrant for every one (1) share of Series A Convertible Preferred Stock
subscribed. In consideration of WestPark's services, we issued to WestPark
76,500 common stock in consideration of its service as our private placement
agent and 76,500 warrants representing the right to purchase up to 76,500 shares
of our common stock. This transaction was exempt from registration under section
4(2) of the Securities Act.
On October 19, 2005, we sold our Series A Convertible Preferred Stock
to three (3) accredited investors and we also issued to the investors one (1)
warrant for every one (1) share of Series A Convertible Preferred Stock
subscribed. We issued to WestPark 5,625 common stock in consideration of its
service as our private placement agent and 5,625 warrants representing the right
to purchase up to 5,625 shares of our common stock. This transaction was exempt
from registration under section 4(2) of the Securities Act.
II-1
On February 2, 2006, we sold one million (1,000,000) shares of our
common stock to GCE at $1.00 per share and we also issued to GCE one million
(1,000,000) warrants with an exercise price of $1.26. This transaction was
exempt from registration under section 4(2) of the Securities Act.
Private placement closed on March 10 , 2006 (the "Subsequent Common
Stock Private Placement")
On March 10, 2006, we sold 6,831,683 shares of our common stock to
various investors at a price of $1.01 per share and we also issued to 6,831,684
warrants to these investors with an exercise price of $1.26. This transaction
was exempt from registration under section 4(2) of the Securities Act.
EXHIBITS
A. Exhibits (*documents filed with this registration statement)
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger, dated June 24, 2004, by and
between Globus Growth Group, Inc. and China Biopharmaceuticals
Holdings, Inc. (incorporated by reference to the Schedule 14C,
filed with the SEC on August 4, 2004)
3.1 Amendment and Restatement of Articles of Incorporation of
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. (incorporated by
reference to the Schedule 14C, filed with the SEC on August 4,
2004)
3.2 Bylaws of CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(incorporated by reference to the Schedule 14C, filed with the
SEC on August 4, 2004)
5.1 Legal opinion of Baker & Mckenzie LLP
10.1 Form of common stock purchase warrant issued in January 2005
in the private placement of the convertible notes.
10.2 Form of Subscription Agreement between the Company and the
Subscribers relating to the Series A Convertible Preferred
Stock
10.3 Amended and Restated Certificate of Designation of Series A
Convertible Preferred Stock
10.4 Form of common stock purchase warrant issued in the private
placements of the Series A Convertible Preferred Stock.
10.5 Form of Securities Purchase Agreement between the Company and
the Purchasers relating to the sales and purchases of $1.0
million of the Company's common stock (incorporated by
reference to Exhibit 4.1 to the Form 8-K/A filed with the SEC
on February 8, 2006).
10.6 Form of Registration Rights Agreeement in connection with the
private placement of $1.0 million of the Company's common
stock (incorporated by reference to Exhibit 4.2 to the Form
8-K/A filed with the SEC on February 8, 2006).
10.7 Form of common stock purchase warrant issued in the private
placement of $1.0 million of the Company's common stock
(incorporated by reference to Exhibit 4.3 to form 8-K/A filed
with the SEC on February 8, 2006).
10.8 Form of Securities Purchase Agreement between the Company and
the Purchasers relating to the sales and purchases of $6.9
million of the Company's common stock (incorporated by
reference to Exhibit 4.1 to Form 8-K filed with the SEC on
March 14, 2006).
10.9 Form of Registration Rights Agreeement in connection with the
private placement of $6.9 million of the Company's common
stock (incorporated by reference to Exhibit 4.2 to the Form
8-K filed with the SEC on March 14, 2006).
10.10 Form of common stock purchase warrant issued on March 10, 2006
(incorporated by reference to Exhibit 4.3 to the Form 8-K
filed with the SEC on March 14, 2006).
10.11 Employment Agreement with MAO Peng dated August 29, 2004
(incorporated by reference to Exhibit 10.1 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.12 Employment Agreement with HUANG Chentai dated August 29, 2004
(incorporated by reference to Exhibit 10.2 to Form 10-KSB,
filed with the SEC on April 14, 2005)
II-2
10.13 Employment Agreement with AN Lufan dated August 29, 2004
(incorporated by reference to Exhibit 10.3 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.14 Employment Agreement with LIU Xiaohao dated August 29, 2004
(incorporated by reference to Exhibit 10.4 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.15 Employment Agreement with Zhang, Lu Yong dated August 29, 2004
(incorporated by reference to Exhibit 10.5 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.16 Cooperation Agreement between our company and China
Pharmaceutical University dated August 26, 2004 (incorporated
by reference to Exhibit 10.6 to Form 10-KSB, filed with the
SEC on April 14, 2005)
10.17 Restated Amendment to a Share Purchase Agreement by and among
Zhu Gang, Zhou Fuying and China Biopharmaceuticals Holdings,
Inc.dated as of December 31, 2005 (incorporated by reference
to the current report on Form 8K/A, filed with the SEC on
April 14, 2005)
10.18 Purchase Agreement between the Registrant and the shareholders
of Erye represented by Mr. Shi Mingsheng dated as of June 11,
2005 (incorporated by reference to the current report on Form
8K/A, filed with the SEC on June 14, 2005)
10.19 Agreement between China Biopharmaceuticals Corporation and 4
shareholders of Tianyin including and represented by Mr. Jiang
Guoqing dated as of December 31, 2005 (incorporated by
reference to the current report on Form 8K, filed with the SEC
on January 5, 2006)
16.1 Letter from Eisner LLP on Change in Certifying Accountant
(incorporated by reference to the current report on Form 8K/A,
filed with the SEC on September 20, 2004)
16.2 Letter from Weinberg & Company, P.A., on Change in Certifying
Accountant (incorporated by reference to the current report on
Form 8K, filed with the SEC on February 10, 2005)
16.3 Letter from BDO Reanda, Certified Public Accountants on Change
in Certifying Accountant (incorporated by reference to the
current report on Form 8K, filed with the SEC on March 10,
2005)
16.4 Letter from Kempsty & Company Certified Public Accountants,
PC, Certified Public Accountants on Change in Certifying
Accountants (incorporate by reference to the current report on
Form 8-K, filed with the SEC on December 29, 2005)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Kempisty & Company Certified Public Accountants,
Certified Public Accountants
24.1 Power of Attorney (contained on signature page)
B. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
formation is shown in our consolidated financial statements and related noted
attached to the prospectus.
II-3
UNDERTAKINGS
- ------------
(1) The undersigned Registrant hereby undertakes to:
(2) 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) for the
Securities Act of 1933, as amended (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 forgoing, 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 the 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 changed material information on the plan
of distribution.
(3) For determining liability under the Securities Act, treat each such
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 thereof.
(4) File a post-effective amendment to remove from registration any of the
securities, which remain unsold at the end of the offering.
(5) Provide to the transfer agent at the closing, certificates in such
denominations and registered in such names as are required by the transfer agent
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer 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.
We will file, during any period in which we offer or sell securities, a
post-effective amendment to this registration statement to reflect in the
prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Nanjing, People's Republic of China, on the date specified below.
Dated: March 24 , 2006
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
By: /s/ MAO Peng
--------------------------------------------------
Name: MAO Peng
Title: Chief Executive Officer and Chairman of the
Board
POWER OF ATTORNEY
We, the undersigned directors and officers of China Biopharmaceuticals
Holdings, Inc., do hereby constitute and appoint MAO Peng, acting individually,
our true and lawful attorney and agent, to do any and all acts and things in our
name and behalf in our capacities as directors and officers, and to execute any
and all instruments for us an d in our names in the capacities indicated below,
which said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Act of 1933, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with this Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our names
and in the capacities indicated below, any and all amendments (including
post-effective amendments) hereof; and we do hereby ratify and confirm all that
the said attorney and agent shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------- ------------------------------------ --------------
/s/ MAO Peng Chairman and Chief Executive Officer March 24, 2006
MAO Peng
/s/ HUNAG Chentai Chief Financial Officer March 24, 2006
HUANG Chentai
/s/ AN Lufan Director, President March 24, 2006
AN Lufan
/s/ LIU Xiaohao Director, Vice President March 24, 2006
LIU Xiaohao
/s/ Stephen E. Globus Director March 24, 2006
Stephen E. GLOBUS
II-5
EXHIBIT INDEX
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
The following exhibits are included as part of this Registration
Statement.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger, dated June 24, 2004, by and
between Globus Growth Group, Inc. and China Biopharmaceuticals
Holdings, Inc. (incorporated by reference to the Schedule 14C,
filed with the SEC on August 4, 2004)
3.1 Amendment and Restatement of Articles of Incorporation of
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. (incorporated by
reference to the Schedule 14C, filed with the SEC on August 4,
2004)
3.2 Bylaws of CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
(incorporated by reference to the Schedule 14C, filed with the
SEC on August 4, 2004)
5.1 Legal opinion of Baker & Mckenzie LLP
10.1 Form of common stock purchase warrant issued in January 2005
in the private placement of the convertible notes.
10.2 Form of Subscription Agreement between the Company and the
Subscribers relating to the Series A Convertible Preferred
Stock
10.3 Amended and Restated Certificate of Designation of Series A
Convertible Preferred Stock
10.4 Form of common stock purchase warrant issued in the private
placements of the Series A Convertible Preferred Stock.
10.5 Form of Securities Purchase Agreement between the Company and
the Purchasers relating to the sales and purchases of $1.0
million of the Company's common stock (incorporated by
reference to Exhibit 4.1 to the Form 8-K/A filed with the SEC
on February 8, 2006).
10.6 Form of Registration Rights Agreeement in connection with the
private placement of $1.0 million of the Company's common
stock (incorporated by reference to Exhibit 4.2 to the Form
8-K/A filed with the SEC on February 8, 2006).
10.7 Form of common stock purchase warrant issued in the private
placement of $1.0 million of the Company's common stock
(incorporated by reference to Exhibit 4.3 to form 8-K/A filed
with the SEC on February 8, 2006).
10.8 Form of Securities Purchase Agreement between the Company and
the Purchasers relating to the sales and purchases of $6.9
million of the Company's common stock (incorporated by
reference to Exhibit 4.1 to Form 8-K filed with the SEC on
March 14, 2006).
10.9 Form of Registration Rights Agreeement in connection with the
private placement of $6.9 million of the Company's common
stock (incorporated by reference to Exhibit 4.2 to the Form
8-K filed with the SEC on March 14, 2006).
10.10 Form of common stock purchase warrant issued on March 10, 2006
(incorporated by reference to Exhibit 4.3 to the Form 8-K
filed with the SEC on March 14, 2006).
10.11 Employment Agreement with MAO Peng dated August 29, 2004
(incorporated by reference to Exhibit 10.1 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.12 Employment Agreement with HUANG Chentai dated August 29, 2004
(incorporated by reference to Exhibit 10.2 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.13 Employment Agreement with AN Lufan dated August 29, 2004
(incorporated by reference to Exhibit 10.3 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.14 Employment Agreement with LIU Xiaohao dated August 29, 2004
(incorporated by reference to Exhibit 10.4 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.15 Employment Agreement with Zhang, Lu Yong dated August 29, 2004
(incorporated by reference to Exhibit 10.5 to Form 10-KSB,
filed with the SEC on April 14, 2005)
10.16 Cooperation Agreement between our company and China
Pharmaceutical University dated August 26, 2004 (incorporated
by reference to Exhibit 10.6 to Form 10-KSB, filed with the
SEC on April 14, 2005)
10.17 Restated Amendment to a Share Purchase Agreement by and among
Zhu Gang, Zhou Fuying and China Biopharmaceuticals Holdings,
Inc.dated as of December 31, 2005 (incorporated by reference
to the current report on Form 8K/A, filed with the SEC on
April 14, 2005)
10.18 Purchase Agreement between the Registrant and the shareholders
of Erye represented by Mr. Shi Mingsheng dated as of June 11,
2005 (incorporated by reference to the current report on Form
8K/A, filed with the SEC on June 14, 2005)
10.19 Agreement between China Biopharmaceuticals Corporation and 4
shareholders of Tianyin including and represented by Mr. Jiang
Guoqing dated as of December 31, 2005 (incorporated by
reference to the current report on Form 8K, filed with the SEC
on January 5, 2006)
16.1 Letter from Eisner LLP on Change in Certifying Accountant
(incorporated by reference to the current report on Form 8K/A,
filed with the SEC on September 20, 2004)
16.2 Letter from Weinberg & Company, P.A., on Change in Certifying
Accountant (incorporated by reference to the current report on
Form 8K, filed with the SEC on February 10, 2005)
16.3 Letter from BDO Reanda, Certified Public Accountants on Change
in Certifying Accountant (incorporated by reference to the
current report on Form 8K, filed with the SEC on March 10,
2005)
16.4 Letter from Kempsty & Company Certified Public Accountants,
PC, Certified Public Accountants on Change in Certifying
Accountants (incorporate by reference to the current report on
Form 8-K, filed with the SEC on December 29, 2005)
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Kempisty & Company Certified Public Accountants,
Certified Public Accountants
24.1 Power of Attorney (contained on signature page)