Filed Pusuant to Rule 424(b)(3)
Registration File No. 333-132693
PROSPECTUS
CHINA BIOPHARMACEUTICALS HOLDINGS, INC.
The Resale of 20,820,719
Shares of Common Stock
We are registering 20,820,719 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.
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 9 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 MAY 11, 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.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................8
RISK FACTORS.................................................................. 9
USE OF PROCEEDS...............................................................18
SELLING SHAREHOLDERS..........................................................19
PLAN OF DISTRIBUTION..........................................................27
MANAGEMENT....................................................................29
BUSINESS......................................................................38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................................51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................61
EXPERTS.......................................................................62
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..........................................................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") and the predecessor
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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, Inc. 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 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 April 26, 2006, there were 36,848,399 issued and
outstanding shares of our common stock and 335 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 $0.50 per share or $1,650,000. 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 and subject to certain
conditions, 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. Our auditors are currently engaged to audit the
financial statements of Tianyin. The pro forma unaudited balance sheet and
statement of income of Tianyin disclosed a net assets of $231,000 in 2005 and
net assets of $2,727,000 in negative in 2004. Tianyin's net income was $469,000
in 2005 and net loss of $539,000 in 2004. We are currently evaluating the
viability of the implementation of the Tianyin purchase agreement and will make
final determination after consulting with management of Tianyin. Based on the
pre-conditions in the purchase Agreement, the Board of the Company held a
meeting to discuss the possibility of abandoning the acquisition of Tianyin
should Tianyin's shareholders not compromise and meet the company's request for
a reasonable purchased price.
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.
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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 in China. Keyuan has a product pipeline containing
approximately forty major products, including eight 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 has built its LTDC to both
accelerate its own drug discovery and to generate revenue in the form of access
fees paid by other pharmaceutical companies.
We spent $427,999 in year 2004 and $1,470,055 in year 2005,
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 when we start
commercializing our new drugs, 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.
ABOUT 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:
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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
the years 2006. We plan to commercialize the majority of its drugs and license
and sell the remaining of its drugs.
Raw Materials & Intermediates
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.
Commercialized Drugs
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, 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 RECENT PRIVATE PLACEMENTS
Private placement closed in January 2005 (the "Notes Private
Placement")
In January, 2005, we raised 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.
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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 per month if the
registration statement has not become effective before required date, including
a decrease of 5% in exercise price and an increase of 5% in numbers of shares
issueable under the Note Warrants.
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
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.
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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.
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
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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.
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THE OFFERING
Common stock outstanding prior to this offering (April 26, 2006) 36,848,399
Common stock being offered for resale to the public (1) 20,820,719
Common stock outstanding after this offering (1) 48,879,475
Percentage of common stock outstanding following this offering that 42.6%
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.
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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 is
state owned and is 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
9
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.
10
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
11
manufacturing problems pertaining to any of our products could result in product
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.
12
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.
13
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.
14
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
15
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.
16
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.
17
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
$477,347, including the shares issuable as penalty as of April 30, 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 $3,369,588, including the
shares issuable as penalty as of April 30, 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 $597,082, including the
shares issuable as penalty as of April 30, 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.
18
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 (%)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (5)(6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Kaare Kolstad 135,001 35,714 -- 139,166 309,881 309,881 0.84
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Kevin Varner 20,833 -- -- -- 20,833 20,833 0.06
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Evan Collins 20,833 -- -- -- 20,833 20,833 0.06
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Hanka Lew (7) 2,500 35,714 -- 59,166 97,380 97,380 0.26
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Felicia Grossman(7) 2,500 35,714 -- 59,166 97,380 97,380 0.26
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Stuart Michael(7) 2,500 35,714 -- 59,166 97,380 97,380 0.26
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Paul Michaels (8) -- -- -- 40,000 40,000 40,000 0.11
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Tony Pintsopoulos (8) -- 17,857 -- 29,583 47,440 47,440 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David Weinberg (8) -- -- -- 26,666 26,666 26,666 0.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Thomas and Sally Ashmore (8) -- -- -- 13,333 13,333 13,333 0.04
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David and Marian Fass(7) 2,500 -- -- 26,666 29,166 29,166 0.08
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeffrey and Jamie Schnapper 2,500 -- -- 26,666 29,166 29,166 0.08
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Wayne Robbins(7) 1,250 -- -- 13,333 14,583 14,583 0.04
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William F. Donovan 22,083 35,714 -- 45,833 103,630 103,630 0.28
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David A. Chazanovitz 22,083 -- -- 13,333 35,416 35,416 0.10
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Gilbert D. Raker(7) 1,000 -- -- 10,666 11,666 11,666 0.03
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
19
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
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 (%)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (5)8(6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Colin Poole(7) 2,500 -- -- 26,666 29,166 29,166 0.08
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jay and Bernice Salomon (7) 3,750 -- -- 40,000 43,750 43,750 0.12
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harry Steinmetz 44,167 71,429 -- 91,666 207,262 207,262 0.56
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Barbara Michaels 4,417 -- -- 2,666 7,083 7,083 0.02
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Morton Globus 41,667 71,429 -- 65,000 178,096 178,096 0.48
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Samuel Globus (9) 154,167 17,857 24,753 41,002 248,314 237,778 0.67
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Dorothy S. Globus (10) 154,167 17,857 24,753 41,002 248,314 237,778 0.67
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Neal Scott (11) -- 4,000 4,266 8,266 8,266 0.02
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michelle-Lee Cona (11) -- -- 10,000 5,416 15,416 15,416 0.04
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeffrey Goldberg (11) -- -- 1,000 906 1,906 1,906 0.01
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Marissa McKelvey (11) -- -- 3,000 -- 3,000 3,000 0.01
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
West Park Capital (11) -- -- 23,653 23,050 46,703 46,703 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Starobin Partners, Inc. (11) -- -- 41,012 72,688 113,700 113,700 0.31
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michael Nimaroff -- 71,429 -- 65,000 136,429 136,429 0.37
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Steven S. Myers -- 285,714 -- 260,000 545,714 545,714 1.48
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Bernard Mermelstein -- 71,429 -- 65,000 136,429 136,429 0.37
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Raymond J. Markman -- 142,857 -- 130,000 272,857 272,857 0.74
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Aaron Dobrinsky -- 35,714 -- 32,500 68,214 68,214 0.19
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Francis Elenio -- 17,857 -- 16,250 34,107 34,107 0.09
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Isaac Michalovsky -- 17,857 -- 16,250 34,107 34,107 0.09
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
The Watley Group LLC -- 35,714 -- 32,500 68,214 68,214 0.19
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Takeley Investments Limited -- 71,429 -- 65,000 136,429 136,429 0.37
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard D. Globus (12) -- 142,858 -- 130,000 635,464 272,858 1.72
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Stephen E. Globus -- 21,429 -- 19,500 526,643 40,929 1.43
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alice J. Globus -- 14,286 -- 13,000 27,286 27,286 0.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jane Globus -- 14,286 -- 13,000 246,924 27,286 0.67
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Regina Norman -- 14,286 -- 13,000 27,286 27,286 0.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Anthony Ippilito -- 14,286 -- 13,000 27,286 27,286 0.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Ronald P. Globus -- 14,286 -- 13,000 384,428 27,286 1.04
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alpine Venture -- 29,412 -- 28,750 58,162 58,162 0.16
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Adrienne Landau -- 29,412 -- 28,750 58,162 58,162 0.16
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William L. Sheppard -- 14,706 -- 14,375 29,081 29,081 0.08
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Paula Lev -- -- 30,000 -- 30,000 30,000 0.08
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeremy Brown -- -- 840 -- 840 840 0.00
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Young Israel of Great Neck -- -- 2,000 -- 2,000 2,000 0.01
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
GCE Property -- -- 1,000,000 1,000,000 2,000,000 2,000,000 5.43
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Elaine P. Fields -- -- 39,356 39,356 78,713 78,713 0.21
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Victor Dowling -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Victor & Jody Dowling -- -- 198,020 198,020 396,040 396,040 1.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Paul Masters -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
20
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
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 (%)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (5)8(6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Berdon LP -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Rock Associates -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Beechwood Ventures -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harold E and Connie Crowley -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Nicholas Stock -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard and Ken Etra -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Rabbit Trust (Chris Coelho) -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
William Oliver -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David Baum -- -- 198,020 198,020 396,040 396,040 1.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Kurt Stowell -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Francis Discala -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David French -- -- 99,010 99,010 198,020 198,020 0.53
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Summit View Parnership -- -- 50,000 50,000 100,000 100,000 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Donald Papcsy -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard Ross -- -- 100,000 100,000 200,000 200,000 0.54
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michael Ross -- -- 100,000 100,000 200,000 200,000 0.54
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Edoardo Grigone and
Giuseppina Tradito -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Agustin De La Reta and
Gabriela Calle -- -- 99,010 99,010 198,020 198,020 0.54
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Michael Bailey -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Certified Systems -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Colin and Gursharn Harvey -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jasuns Holdings Limited -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Vincent John -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Carlos Lee -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Dennis Loeser -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Robert Mynett -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Simon Clarke -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Globus Brothers Studio -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Brian O' Regan -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Andrew Richards -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Philip Rushby -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Duncan Scott -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alan and Sheena Taylor -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Andrew Telford -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Pricaspian Development
Corp. -- -- 99,010 99,010 198,020 198,020 0.54
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alios Wollnik -- -- 24,752 24,752 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Richard Olson -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Adrian Kimberley -- -- 49,505 49,505 99,010 99,010 0.27
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
QVT Fund LP -- -- 990,099 990,099 1,980,198 1,980,198 5.37
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
21
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
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 (%)
Investor Notes (1) Stock (2) Stock (3) Warrants (4) Offering Registered (5)8(6)
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Lewis Opportunity Fund LP -- -- 297,030 297,030 594,059 594,059 1.61
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Vision Opportunity Master
Fund, LTD -- -- 990,099 990,099 1,980,198 1,980,198 5.37
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Portside Growth and
Opportunity Fund -- -- 125,000 125,000 250,000 250,000 0.68
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
DKR Soundshore Oasis
Holding Fund Ltd -- -- 250,000 250,000 500,000 500,000 1.36
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Double U Master Fund LP -- -- 99,010 99,010 198,020 198,020 0.54
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harborview Master Fund LLP -- -- 148,515 148,515 297,030 297,030 0.81
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Alpha Capital AG -- -- 495,050 495,050 990,099 990,099 2.69
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Monarch Capital Fund Ltd -- -- 247,525 247,525 495,050 495,050 1.34
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Meadowbrook Opportunity
Fund LLC -- -- 250,000 250,000 500,000 500,000 1.36
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Forum Global Opportunity
Master Fund -- -- 150,000 150,000 300,000 300,000 0.81
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Sibex Capital Fund Inc -- -- 297,030 297,030 594,059 594,059 1.61
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Red Tiger Holdings -- -- -- 49,505 49,505 49,505 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Carmelo E Troccoli -- -- 21,875 47,777 69,652 47,777 0.19
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jonathan C. Rich -- -- 21,875 19,096 40,971 19,096 0.11
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Harborview Capital
Management LLC -- -- -- 27,792 27,792 27,792 0.07
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Legend Merchant Group, Inc. -- -- -- 7,247 7,247 7,247 0.02
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Sam Ottensoser -- -- -- 3,749 3,749 3,749 0.01
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Randy Fields -- -- -- 12,011 12,011 12,011 0.03
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Tom Suppanz -- -- -- 8,440 8,440 8,440 0.02
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Dani Sabo -- -- -- 8,000 8,000 8,000 0.02
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Sean Martin -- -- -- 52,739 52,739 52,739 0.14
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Marco Racca -- -- -- 496 496 496 0.00
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jody Giraldo -- -- -- 1,237 1,237 1,237 0.00
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Brad Barnard -- -- -- 1,237 1,237 1,237 0.00
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Jeffery Auerbach -- -- 3,012 44,977 47,989 44,977 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Scott Shames -- -- 3,012 44,977 47,989 44,977 0.13
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
David Rich -- -- 181 2,679 2,860 2,679 0.01
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Robert Bookbinder -- -- 45 1,892 1,937 1,892 0.01
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Robin Smith 110,417 196,429 91,620 338,426 736,892 736,892 1.20
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
Totals 750,835 1,630,675 8,038,808 10,400,401 22,453,324 20,820,719 60.9
- ---------------------------- ------------ ------------ ------------- ------------- ---------- ---------- ------------
(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 April 30, 2006.
(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.
22
(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 36,848,399 common stock outstanding as of April 26,
2006.
(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)
237,778 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)
237,778 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)
499,035 shares of our common stock held directly by him and (ii) 136,429 shares
of common stock held by SRG Capital Partnership of which he is the general
partner.
OUR RECENT PRIVATE PLACEMENTS
Private placement in January 2005 (the "Notes Private Placement")
In January, 2005, we raised a gross proceeds of $500,000 through the
sales of promissory notes, 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 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.
23
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 per month if the registration statement has not become effective before
required date, including a decrease of 5% in exercise price and an increase of
5% in numbers of shares issueable under the Note Warrants.
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
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
24
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.
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.
25
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.
26
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.
27
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.
28
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.
29
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 and from China
Pharmaceutical University with a M.S. degree in Pharmacology in 1986.
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
30
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 All
PRINCIPAL COMPENSATION 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
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
31
- --------------------- ------- ------------ ---------- ----------------- -------------- ---------- -----------------
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.
32
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.
33
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 April 26, 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
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
34
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.
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.
35
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 issuance 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:
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;
36
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 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.
37
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 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 ") 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 RevenueCode, according
to which Globus , Inc. 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 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 April 26, 2006, there were 36,848,399 issued and
outstanding shares of our common stock and 335 holders of record.
38
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 $0.50 per share or $1,650,000. 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 and subject to certain
conditions, 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. Our auditors are currently engaged to audit the
financial statements of Tianyin. The pro forma unaudited balance sheet and
statement of income of Tianyin disclosed a net assets of $231,000 in 2005 and
net assets of $2,727,000 in negative in 2004. Tianyin's net income was $469,000
in 2005 and net loss of $539,000 in 2004. We are currently evaluating the
viability of the implementation of the Tianyin purchase agreement and will make
final determination after consulting with management of Tianyin. Based on the
pre-conditions in the purchase Agreement, the Board of the Company held a
meeting to discuss the possibility of abandoning the acquisition of Tianyin
should Tianyin's shareholders not compromise and meet the company's request for
a reasonable purchased price..
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
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
39
in a much shorter period than by traditional pharmaceutical developmental
routes. The technology team is lead by capable drug research scientists and
development experts in China. Keyuan has a product pipeline containing
approximately forty major products, including eight 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 has built LTDC to both
accelerate its own drug discovery and to generate revenue in the form of access
fees paid by other pharmaceutical companies.
We spent $427,999 in year 2004 and $1,470,055 in 2005, 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 when we start
commercializing our new drugs, 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 to 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.
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
790 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
TOTAL: 790
40
By job:
The table below sets forth the number of employees by nature of their
jobs.
Management & Administration 135
Technology and research 65
Sales and marketing 75
Production - drug material & drugs 515
TOTAL: 790
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 Province.
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
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
41
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
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
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
23 Nafamostate Disseminated Clinical trial application approved, Subject to SFDA
mesilate for Intravascular Coagulation Filed Pending
injection (DIC), Pancreatitis Approval No. 2003L00551 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
42
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
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
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
36 Nateglinide tablets II-type diabetes Clinical trial application approved, Subject to SFDA
Phase II Pending
Approval No. 2003L00131 Administrative
Protection
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
43
- ----- -------------------- --------------------------- ----------------------------------------- -------------------
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,
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.
44
Below is a list of Erye's major pharmaceutical products:
- ----------------------------------------- ------------------- ------------------
Drug/Product Name Target Treatment Status
- ----------------------------------------- ------------------- ------------------
Ampicillin sodium/Sulbactam sodium for Antibiotics Commercialized
injection drug. SFDA
approval number
H20030476
- ----------------------------------------- ------------------- ------------------
Amoxicillin sodium/Sulbactam sodium for Antibiotics Commercialized
injection drug SFDA
approval number
H20033126
- ----------------------------------------- ------------------- ------------------
Furbencillin Sodium for Injection Antibiotics Commercialized
drug SFDA
approval number
h20059783
- ----------------------------------------- ------------------- ------------------
SERVICES:
We also offer contractual research and development services. We intend
to license the access to our proprietary screening and testing platforms to
other pharmaceutical companies. In addition, we will offer packaged R&D services
to companies outsourcing their R&D activities for fee-based research and
development revenues.
LIBRARY OF TARGETED DRUG CANDIDATES:
We have 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. We collaborate with China Pharmaceutical
University in enhancing the resources of chemical compounds in the library. We
invest in LTDC to both accelerate our own drug research and discovery as well as
to generate revenue in the form of access fees paid by other pharmaceutical
companies.
OUR CUSTOMERS AND 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 jointly distribute our products.
Drug Distribution Companies- There are approximately 10,000 drugs
distribution companies in China. We work with various distribution companies to
distribute our products. The demand for new drugs in China is substantial as the
drug 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, Zhejiang province and Jiangsu province. The population in these
areas is approximately 150 million. 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 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.
OUR RESEARCH AND DEVELOPMENT
We 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 medicinal products. Our R&D team consists of experts in the fields of
45
medical technology, biotechnology, and pharmaceuticals with over 10-years of
market place experience and a proven record of success in the management of
pharmaceutical businesses in China. The Company has developed a discovery and
development platform with advanced R&D capabilities based on post genome era
technological advances to enable rapid drug discovery and development. We also
have a rich product pipeline. The technological backbone of the Company's R&D
capabilities is a Drug Screening and Testing System based on certain
Post-Genomics Era bio-technologies. This proprietary gene-level technology
platform enables the Company 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
some of the best drug research scientists and development experts in China. Our
subsidiary Keyuan, has a product pipeline of about forty major new drugs for the
treatment of diseases such as cardiovascular and infectious diseases. . We also
offer contractual research and development products by licensing the access to
its proprietary screening and testing platforms to other pharmaceutical
companies. We have 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. We collaborate with China Pharmaceutical
University, which is a shareholder of the Company, in building allied R&D
laboratory for drug screening and testing and enhancing the resources of
chemical compounds in the library.
We leverage our relationship with the research laboratory of China
Pharmaceutical University which is a shareholder of our company. We have the
right of first refusal on their new drug discoveries. We spent $427,999 and
$1,470,055 on research and development during 2004 and 2005, respectively.
PRODUCTION FACILITIES AND EQUIPMENT
Our subsidiary Keyuan has a drug R&D laboratory. The laboratory is
equipped with various type of equipment for compound synthesis, drug testing,
screening, drug analysis, Pharmacological study, Pharmacokinetic study,
efficiency study and toxicity study such as High Performance Liquid
Chromatography (HPLC), Incubator, Ultraviolet-Visible Spectrometer, Centrifuge
and Clean Bench, etc. Our subsidiary Hengyi is fully equipped with facilities
required for the production in high temperature, high pressure, high vacuum and
deep cooling. Our subsidiary Erye has seven laboratories, including
Microorganism lab, Biological inspection lab, Apparatus lab, Chemical lab,
Standard solution lab, Sample lab and Animal lab. The labs are equipped with
advanced Gas Chromatography, HPLC, and Infrared Spectroscopy.
Our subsidiary Hengyi has a sound infrastructure with well-equipped
manufacturing equipments, such as Graphitized heat exchanger, Centrifugal
separator, vacuum dryer, closed condenser, fermentation boiler, spiral grinder
and others, in order to perform our production effectively and efficiently. All
the pharmaceutical raw materials and intermediates are manufactured in a modern
manufacturing unit, where an independent quality control department and research
and development units is maintained. Highest priority to quality control and
adequate precautions are taken to ensure that there are no lapses on the
production front.
Our subsidiary Erye has seven SFDA approved and certified production
lines. The capsule pharmaceutical workshop and the Azlocillin sodium workshop
are all designed by the Designing Institute of Medical Engineering of Nanjing.
The total construction area for the workshop is approximately 2,400 square
meters with an area of 1,450 square meters of medicine workshop of aseptic raw
materials, 550 square meters for 100,000 grades purification control zone and
350 square meters for 300,000 grades purification control zone. Different
production control zones are furnished with separated air conditioning system
respectively according to different varieties and control request. Erye's total
area of warehouse is 4,570 square meters and is set up for finished product
storehouse, original auxiliary materials storehouse and packing materials
storehouse. Erye has an industrial waste reservoir which is situated at a
separated area outside the main production premises. The area of quality control
building is 685 square meters and it consists of the microbiology laboratory,
biological examination room, instrument laboratory, chemical laboratory,
standard solution room, sample room and animal's laboratory. The quality control
46
room is furnished with the gaseous phase chromatograph of Model GC-14C,
SPD-10AVP type high-efficient liquid phase chromatograph, the titri-metric
appearance of electric potential of Model ZDJ-ID , FTIR-8400S type infrared
spectro-comparator, etc. Every workshop uses the special-purpose production
equipment. The equipment directly contacted with the medicines is making of high
quality stainless steel materials and apt to production operation, repairing,
maintaining and washes. It can also prevent the operation mistake and reduce
pollution.
COMPETITION AND COMPETITIVE STRENGTHS
Vertically integrated pharmaceutical operation is still at an early
stage of development in China due to heavy state involvement in the past. The
industry is fragmented. We face competition from domestic drug R&D companies,
drug manufacturing companies which are growing rapidly. Our direct competitors
are domestic pharmaceutical companies and new drug R&D institutes that have
fairly strong R&D capabilities in new drug R&D such as Beijing Venture Biopharma
Technology Co., Ltd., Fosun Group Co., Ltd. and Chongqing Pharmaceutical
Research Institute, Co. Ltd. We also face competition of foreign companies who
have strong proprietary pipeline and strong financial resources. Our advantage
is our local concentration in research and discovery as well as our local
distribution network. We possess certain competitive advantages over our
competitors due to our own discovery capability. Our relationship with China
Pharmaceutical University, one of the leading pharmaceutical scientific research
institution in China, provides us with a unique opportunity to benefit from the
latest discovery in its research laboratory and reduce our fundamental research
cost so that we can concentrate more on application and commercialization. We
are in a competitive position to seize substantial market opportunities as the
pharmaceutical industry in China rapidly moves toward consolidation,
privatization, and commercialization.
Good Product Pipeline
Our subsidiary Keyuan has an existing pipeline of approximately forty
new drugs we intend to introduce to the Chinese market. The drugs are superior
to existing comparable drugs with 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 and 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 China's
most promising pharmaceutical development projects and to the nation's top-level
expertise from academia, government, and industry.
Strong Experience in Dealing with Approval Authorities
Several of our leading management team members used to work with SFDA
in various high level drug approval and screening positions. Our research and
discovery is keyed to the SFDA requirements and we are familiar with the
criteria used and standards expected. This gives us competitive advantage in
government approvals and licenses as well as revenues from participation in
selected government projects and grants.
47
Examination and Appraisement Committee for Small Molecule Drugs.
In August, 2004, we signed an agreement with China Pharmaceutical
University to establish a joint laboratory for potential drug candidates
(effective chemical compounds and effective single ingredient extract from
traditional Chinese medicinal herds) screening and new drugs research and
development.
DESCRIPTION OF PROPERTY
Our subsidiaries, Hengyi, and Eyre, 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 At the end of 2005, the book value of our total assets was
US$27,675,074. Erye's land and buildings, amount to approximately 25% of this
book value. Hengyi 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 a US$1,612,000 rollover
short-term bank loan which was secured by 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.
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 secured by 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.
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 Library of Targeted Drug Candidates (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.
48
(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.
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
49
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.
50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes thereto. The
following discussion contains forward-looking statements. China
Biopharmaceuticals Holdings, Inc. is referred to herein as "we", "our,", "us",
or "the Company". The words or phrases "would be," "will allow," "expect to",
"intends to," "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," or similar expressions are intended to identify
forward-looking statements. Such statements include those concerning our
expected financial performance, our corporate strategy and operational plans.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) those risks and uncertainties related to general economic
conditions in China, including regulatory factors that may affect such economic
conditions; (b) whether we are able to manage our planned growth efficiently and
operate profitable operations, including whether our management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to successfully manage and exploit existing and
potential market opportunities;(c) whether we are able to generate sufficient
revenues or obtain financing to sustain and grow our operations; and (d) whether
we are able to successfully fulfill our primary requirements for cash which are
explained below under "Liquidity and Capital Resources. Statements made herein
are as of the date of the filing of this Form 10-KSB with the Securities and
Exchange Commission and should not be relied upon as of any subsequent date.
Unless otherwise required by applicable law, we do not undertake, and we
specifically disclaim any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement.
OUR BUSINESS
We are a vertically integrated bio-pharmaceutical company focused on
developing, manufacturing and distributing 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.
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.
(1) 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, the Company recognizes
revenue upon delivery of the patented formulas. For sales of final medicines and
processed materials, we recognize revenue upon delivery of the goods. The
company usually does not offer sales returns or refunds on the products except
for some specific circumstances, such as quality problems, which is rare and is
difficult to have an accurate estimate.
51
(2) 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 few of our big customers would have a material adverse
impact on the collectibility of the Company's 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.
(3) 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 - YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED
DECEMBER 31, 2004
We acquired Hengyi on September 30, 2004 and the operating result for
the three months ended December 31, 2004 was included in our 10KSB filed on
April 15, 2005. For management discussion and comparison purposes, a proforma
consolidated statements of income and other comprehensive income for the year
ended December 31, 2004 was prepared as if the acquisition was effective January
1, 2004 as presented below:
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004
PROFORMA 2004
2004 10KSB
------------ ------------
REVENUES 8,089,999 3,443,545
COST OF GOOD SOLD 6,332,442 2,432,172
------------ ------------
GROSS PROFIT 1,757,557 1,011,373
------------ ------------
OPERATING EXPENSES
Research and development expenses 427,999 --
Selling, general and administrative expenses 779,634 545,190
------------ ------------
Total Operating Expenses 1,207,633 545,190
------------ ------------
INCOME FROM OPERATIONS 549,924 466,183
------------ ------------
52
PROFORMA 2004
2004 10KSB
------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expenses) $ (131,805) (20,328)
Other income (expenses) 71,694 119,573
------------ ------------
Total Other Income (expenses) (60,111) 99,24
------------ ------------
INCOME BEFORE INCOME TAXES 489,813 565,428
PROVISION FOR INCOME TAXES 33,246 109,134
------------ ------------
INCOME BEFORE MINORITY INTEREST 456,567 456,294
MINORITY INTEREST 105,927 105,654
------------ ------------
NET INCOME 350,640 350,640
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment (3,361) (3,361)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 347,279 347,279
============ ============
Net income per share - basic and diluted $ 0.01 0.01
============ ============
Weighted average number of shares outstanding -
basic and diluted 24,358,757 24,358,757
============ ============
The following is the audited consolidated statements of income and
other comprehensive income for the year ended December 31, 2005 and the proforma
consolidated statements of income and other comprehensive income for the year
ended December 31, 2004 for our discussion and comparison purposes:
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2004
Audited Proforma
2005 2004
------------ ------------
REVENUES $ 30,948,568 $ 8,089,999
COST OF GOOD SOLD 24,758,487 6,332,442
------------ ------------
GROSS PROFIT 6,190,081 1,757,557
------------ ------------
OPERATING EXPENSES
Research and development expenses 1,470,055 427,999
Selling, general and administrative expenses 1,987,352 779,634
------------ ------------
Total Operating Expenses 3,457,407 1,207,633
------------ ------------
INCOME FROM OPERATIONS 2,732,674 549,924
------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expenses) (488,904) (131,805)
Other income (expenses) (24,129) 71,694
------------ ------------
Total Other Income (expenses) (513,033) (60,111)
------------ ------------
53
Audited Proforma
2005 2004
------------ ------------
INCOME BEFORE INCOME TAXES 2,219,641 489,813
PROVISION FOR INCOME TAXES 533,414 33,246
------------ ------------
INCOME BEFORE MINORITY INTEREST 1,686,227 456,567
MINORITY INTEREST 725,542 105,927
------------ ------------
NET INCOME 960,685 350,640
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 159,428 (3,361)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 1,120,113 $ 347,279
============ ============
Net income per share - basic and diluted $ 0.04 $ 0.01
============ ============
Weighted average number of shares outstanding -
basic 26,483,640 24,358,757
============ ============
Weighted average number of shares outstanding -
diluted 27,096,558 24,358,757
============ ============
We acquired Erye in June 2005. The current financial statements of the
Company only reflects Erye's profit from June 11, 2005 to December 31, 2005.
During the reporting period, our general and administrative costs increased
significantly, largely due to transaction costs related to, acquisition of
Hengyi and Erye . 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.
Revenue
Revenue for the twelve months ended on December 31, 2005 was
$30,948,568, while the revenue for the twelve months ended December 31, 2004 was
$8,089,999, representing approximately 283% increase. We acquired Erye on June
11, 2005. The revenue of Erye for the twelve months ended on December 31, 2005
was $22,218,113. Revenue of Keyuan, Hengyi, and Sintofarm for the twelve months
ended on December 31, 2005 was $1,352,918, $5,099,583, and $2,207,954,
respectively. During the reporting period revenue generated by Erye had
significantly increased the Company's total revenues.
Cost of Goods Sold
Cost of goods sold for the twelve months ended on December 31, 2005 was
$24,758,487 as compared to $6,332,442 for the twelve months ended December 31,
2004. Cost of goods sold as a percentage of sales revenues was approximately 80%
for the twelve months ended December 31, 2005, as compared to approximately 78%
for the twelve months ended December 31, 2004. In 2005, the Company acquired
Erye and as a result cost of goods sold as a percentage of sales was marginally
increased approximately 2% compared to 2004.
54
Gross Profit
Gross profit in the twelve months ended on December 31, 2005 amounted
at $6,190,081, as compared to $1,757,557 for the twelve months ended December
31, 2004, representing 252% increase. The gross profit margin for the twelve
months ended December 31, 2005 was 20% as compared to approximately 22% for the
twelve months ended December 31, 2004. Erye's gross profit margin was 16.61 %
for the twelve months ended December 31, 2005. In 2005, the Company's gross
profit increased significantly due to the acquisition of Erye. The decrease in
Gross profit margin is mainly due to both Hengyi and Erye's low gross profit
margin.
Operating Expenses
Operating expenses for the twelve months ended December 31, 2005 was
$1,987,352 as compared to $779,634 for the twelve months ended December 31,
2004, representing 155% increase. Erye's operating expenses for the twelve
months ended December 31, 2005 was $1,509,677 as compared to $1,705,698 for the
twelve months ended 2004. Operating expenses increased significantly in 2005 due
to the acquisition of Erye. Auditing expense, legal expenses, and other
professional expenses are the main reason for the significant increase in
operating expenses due to the acquisition activities. Some of these expenses are
one time transactional expenses.
R&D
R&D cost for the twelve months ended December 31, 2005 was $1,470,055
as compared to $427,999 for the twelve months ended December 31, 2004. R&D cost
as a percentage of revenues was approximately 4.75% for the twelve months ended
December 31, 2005, as compared to 5.29% for the twelve months ended December 31,
2004. In 2005, the Company's revenue increased significantly by acquiring Erye
but R&D costs in terms of percentage of sales was decreased.
Net Income
Net Income for the twelve months ended December 31, 2005 was $960,685
as compared to net income of $350,640 for the twelve months ended December 31,
2004, representing 174% increase. Erye's net Income for the twelve months ended
December 31, 2005 was $1,019,493, as compared to net income of $951,310 for the
twelve months ended December 31, 2004. The increase of the net income of the
Company is mainly due to the significant increase of revenues from the
acquisition of Erye.
Liquidity and Capital Resources
For the twelve months ended December 31, 2005, net cash used in
operating activities was $1,666,383, net cash used in investing activities was
$1,236,737, and net cash provided by financing activities was $3,427,506. Cash
and cash equivalents as of December 31, 2005 was $1,026,606. This is a unique
period for merger and acquisition in China. Currently we do not have sufficient
cash for such acquisitions. To achieve our goal of continued acquisitions in the
industry, we need to raise additional funding in the near future to fund such
future acquisitions. In January of 2005, we raised gross proceeds of $500,000
through the sales of promissory note to accredited investors. 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 $62,500. 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. Pursuant to
various agreements entered by us in connection with the private placement
mentioned above, we are required to file with the SEC a registration statement,
which registers all the shares of common stock issued under these placements,
including the shares to which the Series A Preferred Convertible Stock may be
55
converted and the shares underlying the warrants issued or issuable pursuant to
these placements. In addition, pursuant to the agreements, we are required to
pay a penalty of 5% per month if the registration statement has not become
effective before required date. We have filed a registration statement on form
SB-2 covering the shares issued and issuable on March 24, 2006.
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 the 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 to allow us to accomplish our future acquisition goals.
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 Fluctuations 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
July 2005, the Chinese government revalued the Renminbi by 2.1% against the U.S.
dollar, moving from Renminbi 8.28 to Renminbi 8.11 per dollar. At the end of
December 31, 2005, the value of the Renminbi to the U.S. dollar was translated
at 8.06 RMB to $1.00 USD. 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.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB")
issued a revised SFAS No. 123, Accounting for Stock-Based Compensation, which
supersedes APB opinion No. 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
56
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 15, 2005.
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.
In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29. The guidance in APB
Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle.
This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in
fiscal periods beginning after June 15, 2005. The Company's adoption of SFAS No.
153 is not expected to have a material impact on the Company's financial
position or results of operations.
In March 2005, the FASB published FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations," which clarifies that
the term, conditional asset retirement obligations, as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The uncertainty about the timing and (or) method of
settlement of a conditional asset retirement obligation should be factored into
the measurement of the liability when sufficient information exists. The
interpretation also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. This
interpretation is effective no later than the end of the Company's fiscal year
2006. The adoption of this Interpretation is not expected to have a material
effect on the Company's consolidated financial position or results of
operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20")
and SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements,"
and applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial information between
periods. SFAS No. 154 will be effective beginning with the Company's first
quarter of fiscal year 2006. The Company does not expect that the adoption of
SFAS No. 154 will have a material impact on its results of operations, financial
position or cash flows.
In June 2005, the FASB's Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 05-06, "Determining the Amortization Period for Leasehold
Improvements" (EITF 05-06). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business
57
combination or purchased after the inception of a lease, collectively referred
to as subsequently acquired leasehold improvements. EITF 05-06 provides that the
amortization period used for the subsequently acquired leasehold improvements be
the lesser of (a) the subsequently acquired leasehold improvements' useful
lives, or (b) a period that reflects renewals that are reasonably assured upon
the acquisition or the purchase. EITF 05-06 is effective on a prospective basis
for subsequently acquired leasehold improvements purchased or acquired in
periods beginning after the date of the FASB's ratification, which was on June
29, 2005. The Company does not anticipate that EITF 05-06 will have a material
impact on its consolidated results of operations.
In July 2005, the Financial Accounting Standards Board (FASB) issued an
Exposure Draft of a proposed Interpretation "Accounting for Uncertain Tax
Positions--an interpretation of FASB Statement No. 109." Under the proposed
Interpretation, a company would recognize in its financial statements its best
estimate of the benefit of a tax position, only if the tax position is
considered probable of being sustained on audit based solely on the technical
merits of the tax position.
In evaluating whether the probable recognition threshold has been met,
the proposed Interpretation would require the presumption that the tax position
will be evaluated during an audit by taxing authorities. The proposed
Interpretation would be effective as of the end of the first fiscal year ending
after December 15, 2005, with a cumulative effect of a change in accounting
principle to be recorded upon the initial adoption.
The proposed Interpretation would apply to all tax positions and only
benefits from tax positions that meet the probable recognition threshold at or
after the effective date would be recognized. The Company is currently analyzing
the proposed Interpretation and has not determined its potential impact on our
Consolidated Financial Statements. While we cannot predict with certainty the
rules in the final Interpretation, there is risk that the final Interpretation
could result in a cumulative effect charge to earnings upon adoption, increases
in future effective tax rates, and/or increases in future interperiod effective
tax rate volatility.
In October 2005, FASB Staff Position (FSB) FAS 13-1, "Accounting for
Rental Costs Incurred during a Construction Period" was issued. This FSP
concluded that rental costs associated with ground or building operating leases
that are incurred during a construction period be expensed. The guidance in the
FSP is required to be applied to the first reporting period beginning after
December 15, 2005. The adoption of this pronouncement is not expected to have a
material impact on the Company's financial position or results of operations.
The implementation of the above pronouncements is not expected to have
a material effect on the Company's financial statement presentation or
disclosures.
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
Fourth Quarter (Beginning $1.50 $1.30
December 19, 2005)
2006 High Bid Low Bid
First Quarter (Beginning $2.15 $1.01
on January 3, 2006 through March 31, 2006)
59
RELATED PARTY TRANSACTION
Our predecessor company, Globus, 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 April 26, 2006, we had a total of 36,848,399shares of common
stock issued and outstanding, which are our only issued and outstanding voting
equity securities.
The following table sets forth, as of April 26, 2006, 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
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%
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%
61
Directors and officers as a 9,981,540 27.1%
group
Total: 15,941,936 43.3%
(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 as of December 31, 2005 included
in this prospectus have been audited by Moore Stephens Wurth Frazer and Torbet,
LLP ("Moore Stephens"), 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. Our consolidated financial statements as of December 31, 2004 included
in this prospectus have been audited by Kempisty & Company Certified Public
Accountant.
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-K to 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,
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
62
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, 2004 and 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
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.
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
China Biopharmaceuticals Holdings, Inc. and subsidiaries
(Formerly Globus Growth Group Inc.)
We have audited the accompanying consolidated balance sheet of China
Biopharmaceuticals Holdings, Inc. and subsidiaries as of December 31, 2005 and
the related consolidated statements of income and other comprehensive income,
shareholders' equity and cash flows for the year 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. The financial statements of China Biopharmaceuticals Holdings, Inc.
and subsidiaries as of December 31, 2004 in accompanying financial statements
was audited by other auditors whose report dated April 14, 2005 expressed an
unqualified opinion on that statement.
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. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of China Biopharmaceuticals
Holdings, Inc. and subsidiaries at December 31, 2005 and the results of its'
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
Moore Stephens Wurth Frazer and Torbet, LLP
Walnut, California
April 12, 2006
F-1
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2005
ASSETS
2005
------------
CURRENT ASSETS:
Cash $ 1,026,606
Accounts receivable, trade, net of allowance for doubtful
accounts of $525,391 as of December 31, 2005 4,929,659
Other receivables 262,956
Other receivables - related parties 856,754
Advances to suppliers 864,944
Prepaid expenses 21,101
Inventories 4,782,860
------------
Total current assets 12,744,880
------------
PLANT AND EQUIPMENT, net 5,699,211
------------
OTHER ASSETS:
Intangible asset, net 6,835,759
Restricted cash 1,329,280
Other assets 11,944
------------
Total other assets 8,176,983
------------
Total assets $ 26,621,074
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,408,055
Accounts payable - related parties 240,857
Short-term loans 3,955,600
Other payables 663,874
Other payables - related parties 198,156
Investment payable to Erye's original shareholders 430,000
Customer deposits 743,206
Notes payable 2,356,000
Short-term convertible notes payable 425,000
Taxes payable 983,107
Dividends payable 186,000
Other accrued liabilities 286,979
------------
Total current liabilities 15,876,834
------------
LONG TERM LIABILITIES:
Long term debt 601,369
Long term debt - related parties 415,733
------------
Total long term liabilities 1,017,102
------------
Total liabilities 16,893,936
------------
MINORITY INTEREST 4,458,414
------------
F-2
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
1,152,500 shares Issued and outstanding as of December 31, 2005 11,525
Common stock, $0.01 par value, 200,000,000 shares authorized;
28,616,716 shares issued and outstanding as of December 31, 2005 286,167
Paid-in capital 3,572,207
Capital receivable (252,471)
Statutory reserves 444,623
Deferred compensation (24,000)
Retained earnings 1,074,584
Accumulated other comprehensive income 156,089
------------
Total shareholders' equity 5,268,724
------------
Total liabilities and shareholders' equity $ 26,621,074
============
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of this statement.
F-3
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Year ended December 31
2005 2004
------------ ------------
REVENUES $ 30,948,568 $ 3,443,545
COST OF GOOD SOLD 24,758,487 2,432,172
------------ ------------
GROSS PROFIT 6,190,081 1,011,373
------------ ------------
OPERATING EXPENSES
Research and development expenses 1,470,055 427,999
Selling, general and administrative expenses 1,987,352 117,191
------------ ------------
Total operating expenses 3,457,407 545,190
------------ ------------
INCOME FROM OPERATIONS 2,732,674 466,183
------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expense) (488,904) (20,328)
Other income (expenses) (24,129) 119,573
------------ ------------
Total other income (expenses) (513,033) 99,245
------------ ------------
INCOME BEFORE INCOME TAXES 2,219,641 565,428
PROVISION FOR INCOME TAXES 533,414 109,134
------------ ------------
INCOME BEFORE MINORITY INTEREST 1,686,227 456,294
MINORITY INTEREST 725,542 105,654
------------ ------------
NET INCOME 960,685 350,640
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment 159,428 (3,361)
------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 1,120,113 $ 347,279
============ ============
NET INCOME PER SHARE - BASIC AND DILUTED $ 0.04 $ 0.01
============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - BASIC 26,483,640 24,358,357
============ ============
WEIGHTED AVERAGED NUMBER OF SHARES OUTSTANDING - DILUTED 27,096,558 24,358,757
============ ============
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of this statement.
F-4
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Number of Common Preferred Paid-in Capital
Shares Stock Stock Capital Receivable
----------- ----------- ----------- ----------- -----------
BALANCE, December
31, 2003, Audited 23,158,757 $ 231,588 $ -- $ 183,601 $ --
Shares issued for
Hengyi acquisition 1,200,000 12,000 -- 1,180,000 --
Net income -- -- -- -- --
Statutory reserves -- -- -- -- --
Foreign currency
translation
adjustments -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December
31, 2004 Audited 24,358,757 243,588 -- 1,363,601 --
Shares issued for
Erye acquisition 3,300,000 33,000 -- 1,617,000 --
Adjustment for
shares issued for
Hengyi acquisition -- -- -- (667,974) --
Common shares
issued for lab use 300,000 3,000 -- 27,000 --
right
Common shares
issued for services 657,959 6,579 -- 233,136 --
Capital receivable -- -- -- -- (252,471)
Deferred
compensation -- -- -- -- --
Preferred shares 1,152,500 -- 11,525 999,444 --
issued
Net income -- -- -- -- --
Statutory reserves -- -- -- -- --
Foreign currency
translation
adjustments -- -- -- -- --
----------- ----------- ----------- ----------- -----------
BALANCE, December
31, 2005 Audited 29,769,216 $ 286,167 $ 11,525 $ 3,572,207 $ (252,471)
=========== =========== =========== =========== ===========
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of this statement.
F-5
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 CONTINUED
Accumulated
Unappro- Other
Deferred priated Comprehensiave
Compen- Retained Statutory Income
sation Earnings Reserves (Loss) Totals
----------- ----------- ----------- ----------- -----------
BALANCE, December
31, 2003, Audited $ -- 150,493 $ -- $ 22 $ 565,704
Shares issued for
Hengyi acquisition -- -- -- -- 1,192,000
Net income -- 408,029 -- -- 408,029
Statutory reserves -- (60,750) 60,750 -- --
Foreign currency
translation
adjustments -- -- -- (3,361) (3,361)
----------- ----------- ----------- ----------- -----------
BALANCE, December
31, 2004 Audited -- 497,772 60,750 (3,339) 2,162,372
Shares issued for
Erye acquisition -- -- -- -- 1,650,000
Adjustment for
shares issued for
Hengyi acquisition -- -- -- -- (667,974)
Common shares
issued for lab use -- -- -- -- 30,000
right
Common shares
issued for services -- -- -- -- 239,715
Capital receivable -- -- -- -- (252,471)
Deferred
compensation (24,000) -- -- -- (24,000)
Preferred shares -- -- -- -- 1,010,969
issued
Net income -- 960,685 -- -- 960,685
Statutory reserves -- (383,873) 383,873 -- --
Foreign currency
translation
adjustments -- -- -- 159,428 159,428
----------- ----------- ----------- ----------- -----------
BALANCE, December
31, 2005 Audited $ (24,000) $ 1,074,584 $ 444,623 $ 156,089 $ 5,268,724
=========== =========== =========== =========== ===========
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of this statement.
F-6
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 960,685 $ 350,640
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 533,549 41,850
Minority interest 725,542 105,654
Change in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 171,758 (4,031,764)
Other receivables and prepayments (333,509 60,772
Other receivables - related parties (1,014,621) --
Advances to suppliers (936,406) --
Inventories (3,582,215) (1,472,000)
Restricted cash (1,329,280) --
Increase (decrease) in liabilities:
Accounts payable 2,382,038 3,149,807
Accounts payable - related parties 260,757 --
Other payables and accrued liabilities (303,173) 870,659
Other payables - related parties (177,182) 40,332
Customer deposits 804,610 561,050
Taxes payable 612,971 416,915
Deferred revenue (441,907) --
Deferred tax liabilities -- (32,889)
----------- -----------
Net cash provided by (used in )operating activities (1,666,383) 61,026
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible asset -- (1,759,592)
Business acquisitions - cash acquired (paid) (800,000) 425,396
Purchase of property and equipment (436,737) --
----------- -----------
Net cash used in investing activities (1,236,737) (1,334,196)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock 1,010,969 --
Proceeds (payments) on loans payable 2,585,767 1,655,289
Proceeds from short-term convertible notes 425,000 --
Proceeds from long-term debts - related parties 537,162 --
Increase in minority interest (1,050,845) --
Distributions to minority interest holders (80,547) --
----------- -----------
Net cash provided by financing activities 3,427,506 1,655,289
----------- -----------
EFFECT OF EXCHANGE RATE ON CASH 35,185 (3,361)
----------- -----------
INCREASE IN CASH 559,571 378,758
CASH, beginning of year 467,035 88,277
----------- -----------
CASH, end of year $ 1,026,606 $ 467,035
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes $ -- $ --
=========== ===========
Cash paid for interest expense $ 347,729 $ 37,710
=========== ===========
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of this statement.
F-7
CHINA BIOPHARMACEUTICALS HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY GLOBUS GROWTH GROUP INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1- ORGANIZATION AND OPERATIONS
China Biopharmaceuticals Holdings, Inc. (CBH), 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 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.
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. The detail information of accounting for this transaction is
disclosed on Note 15 - Business Combinations.
On June 11, 2005, we signed a purchase agreement, which was amended on August 3,
2005 under which, we acquired approximately 51% of the controlling ownership
interest of 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 $0.50 per share or $1,650,000. 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. The detail information of
accounting for this transaction is disclosed on Note 15 - Business Combinations.
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, the Company is 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. We are currently evaluating the viability of the implementation of
the Tainyin purchase agreement and will make final determination after
consulting with management of Tianyin. Since this transaction has been in the
process of evaluation, the final determination of this merger transaction has
not reasonably reached a conclusion, the financial statements of Tianyin were
not included in the consolidated financial statements for the year ended
December 31, 2005. The detail information of this transaction is disclosed on
Note 17 - Subsequent events.
The principle activities of the Company in Mainland China ("China" or "PRC") are
research, manufacture and sale of drug raw materials and intermediates as well
as prescription and non-prescription chemical drugs and Traditional Chinese
Medicines. The principle activities are in China only.
See Report of Independent Registered Public Accounting Firm.
F-8
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.
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.
Since the Tianyin's transaction has been in the process of evaluation, the final
determination of this merger transaction has not reasonably reached a
conclusion, the financial statements of Tianyin were not included in the
consolidated financial statements for the year ended December 31, 2005.
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 Agreement 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).
Certain amounts in the prior year have been reclassified to confirm to current
year's presentation.
Land Use Rights
According to Chinese law, the government owns all the land in China. Companies
or individuals are authorized to possess and use the land only through land use
rights granted by the Chinese government. Land use rights are being amortized
using the straight-line method over the lease term of 40 to 50 years.
Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line basis over their respective
estimated useful lives. Estimated useful lives are as follows.
Equipment and machinery 5 years
Motor vehicles 5 years
Furniture and fixtures 5 years
Buildings 20 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.
See Report of Independent Registered Public Accounting Firm.
F-9
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.
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.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out basis.
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 capitalized 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.
Cash and concentration of risk
Cash includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People's Republic of China. Total cash in
state-owned banks at December 31, 2005 amounted to $979,979 of which no deposits
are covered by insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.
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.
Revenue and Revenue Recognition
For fixed-price refundable new drug 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.
See Report of Independent Registered Public Accounting Firm.
F-10
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 basis 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 includes 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.
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, SFAS 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 reporting currency of the Company is the US dollar. The Company's Chinese
subsidiaries' financial records are maintained and the statutory financial
statements are stated in its local currency, Renminbi (RMB), as their functional
currency. Results of operations and cash flow are translated at average exchange
rates during the period, and assets and liabilities are translated at the
unified exchange rate as quoted by the People's Bank of China at the end of each
reporting period.
This 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 People's Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate 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 invoices, shipping
documents and signed contracts.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the consolidated statement of shareholders' equity
and amounted to $156,089 and $(3,361) as of December 31, 2005 and 2004,
respectively. The balance sheet amounts with the exception of equity at December
31, 2005 were translated at 8.06 RMB to $1.00 USD as compared to 8.26 RMB at
December 31, 2004. The equity accounts were stated at their historical rate. The
average translation rate of 8.18 RMB for the year ended December 31, 2005 was
applied to income statement accounts.
See Report of Independent Registered Public Accounting Firm.
F-11
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. These amounts are not
material to the consolidated financial statements.
Earnings (Loss) Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"earnings Per Share" (SFAS128). SFAS 128 requires the presentation of earnings
per share (EPS) as Basic EPS and Diluted EPS.
During 2005, the Company issued 1,152,500 shares of Series A convertible
preferred stock, which bear no dividends. This preferred stocks is convertible
to common stock at a ratio of 1:1. As a result, the convertible preferred stock
has no dilution effects on the net income for calculating diluted EPS. The
Company computed the Diluted EPS due to the dilution effect of the number of
shares of the convertible preferred stock. Income per common share calculation
for the year ended December 31, 2004 reflects the retroactive restatement of the
shareholders' equity section to reflect the recapitalization of the Company as
of August 28, 2004. The number of shares used in computing diluted earnings per
share for the years ended December 31, 2005 and 2004 each amounted to
27,096,558, which included 612,918 weighted averaged number of convertible
preferred stock, and 24,358,757, respectively. The number of shares used in
computing basic earnings per share for the years ended December 31, 2005 and
2004 were 26,483,640 and 24,358,757, respectively. Basic and diluted earnings
per share as of December 31, 2005 and 2004 amounted to $0.04 and $0.01,
respectively.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revised SFAS No. 123, Accounting for Stock-Based Compensation, which superseded
APB opinion No. 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 15, 2005.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle.
This Statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The Company's adoption of SFAS No. 153 is not
expected to have a material impact on the Company's financial position or
results of operations.
In March 2005, the FASB published FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," which clarifies that the term,
conditional asset retirement obligations, as used in
SFAS No. 143, "Accounting for Asset Retirement Obligations," refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of the entity. The uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
See Report of Independent Registered Public Accounting Firm.
F-12
exists. The interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. This interpretation is effective no later than the end of the
Company's fiscal year 2006. The adoption of this Interpretation is not expected
to have a material effect on the Company's consolidated financial position or
results of operations.
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections" ("SFAS No. 154"). SFAS No. 154 replaces APB No. 20 ("APB 20") and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements," and
applies to all voluntary changes in accounting principle, and changes the
requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change a
cumulative effect of changing to the new accounting principle whereas SFAS No.
154 requires retrospective application to prior periods' financial statements of
a voluntary change in accounting principle, unless it is impracticable.
SFAS No. 154 enhances the consistency of financial information between periods.
SFAS No. 154 will be effective beginning with the Company's first quarter of
fiscal year 2006. The Company does not expect that the adoption of SFAS No. 154
will have a material impact on its results of operations, financial position or
cash flows.
In June 2005, the FASB's Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 05-06, "Determining the Amortization Period for Leasehold
Improvements" (EITF 05-06). EITF 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business
combination or purchased after the inception of a lease, collectively referred
to as subsequently acquired leasehold improvements. EITF 05-06 provides that the
amortization period used for the subsequently acquired leasehold improvements be
the lesser of (a) the subsequently acquired leasehold improvements' useful
lives, or (b) a period that reflects renewals that are reasonably assured upon
the acquisition or the purchase. EITF 05-06 is effective on a prospective basis
for subsequently acquired leasehold improvements purchased or acquired in
periods beginning after the date of the FASB's ratification, which was on June
29, 2005. The Company does not anticipate that EITF 05-06 will have a material
impact on its consolidated results of operations.
In July 2005, the Financial Accounting Standards Board (FASB) issued an Exposure
Draft of a proposed Interpretation "Accounting for Uncertain Tax Positions--an
interpretation of FASB Statement No. 109." Under the proposed Interpretation, a
company would recognize in its financial statements its best estimate of the
benefit of a tax position, only if the tax position is considered probable of
being sustained on audit based solely on the technical merits of the tax
position.
In evaluating whether the probable recognition threshold has been met, the
proposed Interpretation would require the presumption that the tax position will
be evaluated during an audit by taxing authorities. The proposed Interpretation
would be effective as of the end of the first fiscal year ending after December
15, 2005, with a cumulative effect of a change in accounting principle to be
recorded upon the initial adoption.
The proposed Interpretation would apply to all tax positions and only benefits
from tax positions that meet the probable recognition threshold at or after the
effective date would be recognized. The Company is currently analyzing the
proposed Interpretation and has not determined its potential impact on our
Consolidated Financial Statements. While we cannot predict with certainty the
rules in the final Interpretation, there is risk that the final Interpretation
could result in a cumulative effect charge to earnings upon adoption, increases
in future effective tax rates, and/or increases in future interperiod effective
tax rate volatility.
In October 2005, FASB Staff Position (FSB) FAS 13-1, "Accounting for Rental
Costs Incurred during a Construction Period" was issued. This FSP concluded that
rental costs associated with ground or building operating leases that are
incurred during a construction period be expensed. The guidance in the FSP is
required to be applied to the first reporting period beginning after December
15, 2005. The adoption of this pronouncement is not expected to have a material
impact on the Company's financial position or results of operations.
See Report of Independent Registered Public Accounting Firm.
F-13
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 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest expense paid amounted to $347,729 and $37,710 for the years ended
December 31, 2005 and 2004, respectively.
No income tax payments were paid for the years ended December 31, 2005 and 2004.
During 2005, the Company issued 657,959 shares of common stock for services. The
fair market value of the services received was $239,715.
On March 8, 2005, the Company issued 300,000 shares of common stock to China
Pharmaceutical University for the use of lab use right.
Note 4- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December 31, 2005:
Accounts receivable $ 5,455,050
Allowance for doubtful accounts (525,391)
---------
Accounts receivable, net $ 4,929,659
=========
For the twelve months ended December 31, 2005, the Company recognized doubtful
accounts receivable of $525,391 relating to sales. The Company recognized
doubtful accounts receivable of $277,702 relating to sales record in 2005 and
$247,689 relating to sales record in 2004. During 2005 certain customers
experienced deteriorating financial condition which resulted in non-payment of
accounts receivable. However the Company continues to pursue payment, due to the
uncertainty of collection, the Company recorded a bad debt allowance for the
accounts.
Note 5- INVENTORIES
Inventories consisted of the following at December 31, 2005:
2005
----------
Raw Materials $1,208,932
Packaging Suppliers 140,373
Sundry Suppliers 9,218
Work in Process 971,028
Finished Goods 2,453,310
---------
4,782,860
=========
See Report of Independent Registered Public Accounting Firm.
F-14
Note 6- PLANT AND EQUIPMENT
Plant and equipment consist of the following as of December 31, 2005:
2005
----------
Plant $3,567,800
Office Equipment 132,494
Machinery 6,155,928
Automobiles 156,192
----------
Total Plant & Equipment 10,012,413
Less: Accumulated Depreciation 4,313,202
----------
$5,699,211
==========
Depreciation expense for the years ended December 31, 2005 and 2004 was $421,613
and $34,571, respectively.
Note 7- OTHER ASSETS
Intangible Assets - Land use rights
2005
----------
Hengyi Cost of land use right $1,512,969
Less: Accumulated amortization (93,459)
----------
1,419,510
----------
Erye Cost of land use right 5,737,354
Less: Accumulated amortization (321,105)
----------
5,416,249
----------
Total intangible assets, net $6,835,759
==========
Amortization expense for the years ended December 31, 2005 and 2004 was $111,935
and $7,279, respectively.
Restricted Cash
Restricted cash represents cash required to be deposited to bank but subject to
withdrawal with restrictions according to the agreement with bank. The following
list the depositors, the amount and names of the bank:
Depositor Name of Bank Amount
- --------- --------------------------------------- -----------
Hengyi Taicang Chengxiang Bank $ 151,280
Erye Hua Xia Bank, Suzhou 1,178,000
-----------
Total $ 1,329,280
===========
See Report of Independent Registered Public Accounting Firm.
F-15
Note 8- RELATED PARTIES TRANSACTIONS
List of transactions of the Company's subsidiaries with related parties during
2005:
Amount of
Subsidiaries Related Party Description of Relation Transaction Transaction
- ------------ ------------- ----------------------- ----------- -----------
Erye Erye Jingmao Company owned by Purchase goods from Erye $1,522,457
shareholders of Erye
Erye Erye Jingmao Company owned by Acquired assets from Erye 1,810,958
shareholders of Erye
Erye Erye Jingmao Company owned by Assumed debt from Erye 2,226,690
shareholders of Erye
Erye Hainan Kaiye Company owned by Erye purchase raw material 891,171
shareholders of Erye from Hainan Kaiye
Hengyi Shareholders of Purchase goods from Hengyi 562,480
Hengyi
Sintofarm Shareholder of Advance to Shareholder 60,574
Sintofarm
CBC BVI holding Co Shareholder of CBH Advance to Shareholder 42,461
Other Receivables - Related Parties
Subsidiary Amount Due From
- ---------- --------- --------
Erye $ 152,520 Erye Jingmao -
Hengyi 601,199 Shareholder of Hengyi
Sintofarm 60,574 Shareholder of Sintofarm
CBC 42,461 Advance to Shareholders
---------
Total $ 856,754
=========
As of December 31,2005, total receivables due from related parties was $856,754
Accounts Payable - Related Parties
Subsidiary Amount Due to Nature
- ---------- ------- ------------ ------------
Erye $240,857 Hainan Kaiye Purchase
As of December 31, 2005, the Company's subsidiary Erye had remaining outstanding
payables to Hainan Kaiye Pharmaceutical Distribution & Supply Company ("Kaiye")
in the amount of $240,857.
See Report of Independent Registered Public Accounting Firm.
F-16
Other Payable - Related Parties
Subsidiary Amount Due to Nature
- ---------- ------ ------ ------
Erye and Hengyi $198,156 Erye Jiangmao, Purchase and sales
Suzhou Wanqing
Long Term Debt - Related Parties
Subsidiary Amount Due to Nature
- ---------- ------ ------ ------
Eryi $415,733 Erye Jingmao Merger transaction
As of December 31, 2005, the Company's subsidiary Erye had an outstanding
payable to Erye Jiangmao Limited ("Jiangmao") in the amount of $415,732.
Jiangmao acquired Erye's assets of $1,810,958 and assumed Erye's debt of
$2,226,690. Net debt of $415,732 was assumed by Jiangmao.
Note 9- PAYABLES
Notes Payable - $ 2,356,000
The Company's subsidiary Erye has $2,356,000 of notes payable to Erye's vendors
for the purchase of drug raw materials. Notes payable are interest free and
usually mature after a six month period.
Convertible notes payable - $425,000
In 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. In September, 2005, all of the Notes
Subscribers have agreed to extend the maturity date of the Notes until December
31, 2005. The balance amount of $425,000 was outstanding as of December 31,
2005. In January, 2006, all of the Notes have been either converted into shares
or have been redeemed.
Investment Payable to Erye's original shareholders
The amount of $430,000 was due to shareholders of Erye which represents the
remaining amount due for the acquisition of Erye. The total amount of $430,000
investment payable is interest free and has been paid in April 2006.
Dividends Payable
Subsidiary Amount Due to Nature
- ---------- ------ ------ ------
Erye $186,000 Erye shareholders Dividends
In December 2005, the Board of Erye announced to pay dividends for a total
amount of $186,000 which has been approved by the Company's Board of Directors.
Note 10- MINORITY INTEREST
Minority interest consists of the interest of minority shareholders in the
subsidiaries of the Company. The Company owns a 51% ownership interest in Erye
and approximately 76% ownership interest in Hengyi; while Hengyi controls 50%
ownership interest of Sintofarm. The Company's wholly owned subsidiary China
Biopharmaceuticals Corporation (BVI Company) owns 90% ownership interest in
Keyuan.
See Report of Independent Registered Public Accounting Firm.
F-17
Equity of the Ownership Minority
Subsidiaries in Interest in
as of Subsidiaries Subsidiaries
Subsidiary December 31, 2005 Percentage Amount Percentage Amount
- ---------- ----------------- ---------- ----------- ---------- -----------
Erye $ 3,449,936 51.00% $ 800,041 49.00% $ 2,649,895
Keyuan 1,133,474 90.00% 1,042,065 10.00% 91,409
Hengyi 3,501,651 75.76% 2,652,851 24.24% 848,800
Sintofarm 1,736,617 50.00% 868,308 50.00% 868,309
----------------- ----------- -----------
Total $ 9,821,678 $ 5,363,265 $ 4,458,414
================== =========== ===========
Note 11- STATUTORY RESERVES
According to Chinese Corporation Law, a company incorporated in China is
requested to contribute an amount of no less then 15% of its yearly net income
for its employees to a reserve account in the company. This statutory reserve
fund is planned for future development of the company or use for employee's
benefits. The following list the provision of statutory reserve for 2004 and
2005,
Year Amount
---- --------
2004 60,750
2005 383,873
--------
Total $444,623
========
Note 12 - 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 2005, of the Company's subsidiaries, Hengyi,
Keyuan, Sintofarm were exempt from CIT, while Erye was subject to a 33% income
tax rate. Erye will be granted income tax exemption for two years commencing
from January 1, 2006.
Income tax expense for the years ended December 31, 2005 and 2004 are summarized
as follows:
CIT 2005 2004
-------- --------
Current $533,414 $109,134
Deferred -- --
Total $533,414 $109,134
======== ========
According to China's income tax law, company income tax is due to the State Tax
Bureau monthly or quarterly. Subsidiaries of the Company paid its income tax by
quarter. Before every 15th day of pay month, subsidiaries pay its income tax
base on its quarterly net profit. Since income tax rate, with income tax
preference or not, is a flat rate in China, that there is no need for income tax
reconciliation to practice in China.
See Report of Independent Registered Public Accounting Firm.
F-18
The Company's controlling operating subsidiaries are all operated in China.
According to the Chinese Joint Venture Business Law, those subsidiaries, been
registered and incorporated with the status of Sino-foreign joint venture
companies, are subject to a two-year-exemption-and-three-year-halved income tax
preference treatment, which commonly commencing from the first year of establish
of the joint venture or the approval date of income tax preference application.
The following list depicts the tax preference rate applicable to the
subsidiaries and the applicable years:
Income Tax 5 years preference Period and Tax Rate
Full Exemption Period Half-Reduction Period
Subsidiaries Period Tax Rate Period Tax Rate
- ------------ ------ -------- ------ --------
Nanjing Keyuan 2005-2006 0.00% 2007-2009 16.50%
Suzhou Hengyi 2005-2006 0.00% 2007-2009 16.50%
Suzhou Erye 2006-2007 0.00% 2008-2010 16.50%
After the income tax preference period expires, a 33% income tax rate is
applicable. The following table reconciles the U.S. statutory rates to the
Company's effective tax rate:
2005 2004
------- -------
U.S. Statutory rate 34.0% 34.0%
Foreign income not recognized in USA (34.0%) (34.0%)
China income taxes 24.0 19.0
------- -------
Total provision for income taxes 24.0% 19.0%
====== =======
The estimated tax savings due to the reduced tax rate for the years ending
December 31, 2005 and 2004 amounted to $317,408 and $71,779, respectively. The
net effect on earnings per share if the income tax had been applied would
decrease earnings per share for December 31, 2005 and 2004 to $0.012 and $0.003,
respectively.
Business Tax ("BT")
The Company is subject to Business Tax, which is charged on the selling price of
applicable product and service at a general rate of 5% in accordance with the
tax law applicable. Keyuan is exempt from business tax according to local
applicable favorable tax policy.
Value Added Tax ("VAT")
In accordance with the relevant taxation laws in China, the VAT rate for
domestic sales is 17% and 0% for export sales on the invoiced value of sales and
is payable by the purchaser.
See Report of Independent Registered Public Accounting Firm.
F-19
Note 13 - LOANS
Long Term Bank Loans
The Company's subsidiary Erye has a loan of $601,369 from Communication Bank of
China. It is a long term roll-over loan with an annual interest rate of 5.742%.
This is a government guaranteed loan as an incentive policy to help local
manufacturers to locate in their area. Erye has no plans to pay back the loan in
the near future.
Total interest expense for this loan for the year ending December 31, 2005 and
2004 was $34,531 and $34,531, respectively.
Short Term Bank Loans
The Company has a total amount of US$3,955,600 in short term loans from two
different banks in China. These loans mature in one year or less and renew
automatically. The average interest rate is approximately 6.75%.
Interest expense for the years ended December 31, 2005 and 2004 was $351,545 and
$139,092, respectively.
Note 14 - 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, 2005 and 2004 the
Company recognized rent expense of $24,500 and $10,545, respectively.
As of December 31, 2005, the Company has outstanding commitments in respect of
non-cancelable operating leases, which fall due as follows:
2006 $ 26,950
2007 29,650
2008 32,610
2009 35,870
Thereafter 39,000
Note 15- BUSINESS COMBINATIONS
Hengyi acquisition
On September 29, 2004, the Company signed a purchase agreement which was amended
on December 31, 2004 to acquire approximately 76% ownership interest of Hengyi,
a Chinese company established in Kunshan City, Jiangsu Province, China.
Assets acquired and debts assumed of the transaction are listed as below:
Acquired (Assumed)
Item Fair Value by the Company
- ---- ------------------ ------------------
Total Assets $ 6,652,372 $ 5,570,201
Total Liabilities 4,538,210 3,438,175
------------------ ------------------
Net Assets $ 2,114,162 $ 2,132,026
================== ==================
Hengyi acquisition, (continued)
See Report of Independent Registered Public Accounting Firm.
F-20
The Board of Directors and management have evaluated Hengyi's assets acquired in
this transaction; and total consideration originally paid by the Company to
acquire approximately 76% ownership interest of Hengyi. The Company originally
valued this acquisition at $1,600,000 in cash and 1,200,000 shares of common
stock valued at $1.00 per share and recorded goodwill of $305,774 at December
31, 2004. However, the Company has reevaluated the common stock value based upon
the stock trading history in the past year and determined that the common stock
should be valued at less than $1.00 per share for the purpose of determining the
total purchase price of the acquisition. On April 2, 2006, the board of
directors decided to amend the purchase agreement terms to be $1,600,000 in cash
to be paid in installments, and 1,200,000 shares of common stock valued at $0.44
per share, which was a total amount of $2,128,000 effective as December 31,
2005. This amendment resulted in a write down of goodwill and equity. As of
December 31, 2005, the Company has contributed $620,000 into additional
registered capital. The remaining balance of $300,000 will be made by the end of
April, 2006 and the balance of $680,000 will be paid in May, 2006.
Erye acquisition
On June 11, 2005, the Company signed a purchase agreement, which was amended on
August 3, 2005 under which, the Company acquired a controlling ownership
interest of approximately 51% in Erye, a company established in Suzhou City,
Jiangsu Province, China.
Assets acquired and debts assumed of the transaction are listed as below:
Acquired (Assumed)
Item Fair Value by the Company
- ---- ------------------ ------------------
Total Assets $ 21,840,638 $ 11,138,725
------------------ ------------------
Total Liabilities 12,722,990 6,488,725
------------------ ------------------
Net Assets $ 9,117,648 $ 4,650,000
================== ==================
The original purchase price amounted to $80,000 in cash, 3,300,000 shares of
common stock valued at $1.00 per share and $2,200,000 of additional cash to be
contributed in installments. The original purchase price generated goodwill of
approximately $4,893,113 that was reported on our September 30, 2005 financial
statements and form 10QSB. The Board of Directors and management reevaluated the
common stock value based upon the stock trading history in the past year and
determined that the common stock should be valued at less than $1.00 per share
for the purpose of determining the total purchase price of the acquisition. On
April 12, 2006, the board of directors decided to amend the purchase price for
the 51% of ownership interest in Erye to be $3,000,000 cash to be paid in
installments, and 3,300,000 shares of common stock valued at $0.50 per share,
which amounted to a total amount of $4,650,000, effective as of December 31,
2005. The amendment resulted in a write down of goodwill and equity. As of
December 31, 2005, $2,200,000 of cash contribution has not been made. The
Company will contributed $2,200,000 in full by the end of April, 2006.
Note 16- SHAREHOLDERS' EQUITY
Private placement closed on December 31, 2004 (the "Notes Private Placement")
In January, 2005, we raised gross proceeds of $500,000 through the sales of
promissory notes, 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, all of the Notes Subscribers have agreed to extend the maturity date of
the Notes until December 31, 2005. In January, 2006, all of the Notes have been
either converted into shares or have been redeemed. In addition, as an
See Report of Independent Registered Public Accounting Firm.
F-21
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
issuance 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.
Common stock issued for lab use right
On March 8, 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. The management originally estimated the stock value as $1.00 share.
However, the management reevaluated the value of the stock based upon the stock
performance in the past year and decided to discount the value of the stock as
$0.10 per share as of December 31, 2005.
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 issuance 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 of common stock 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")
See Report of Independent Registered Public Accounting Firm.
F-22
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.
Issuance of Shares for Requisitions
On May 31, 2005, the Company issued 3,300,000 shares of common stock to 38
persons including and represented by Shi Ming Sheng or its assigned natural
person or legal representative, all 38 persons are shareholders of Suzhou Erye
Pharmaceutical Limited Co., pursuant to the acquisition of Erye effective June
11, 2005.
Issuance of Shares/Warrants for Services
During 2005, the Company engaged with Consulting For Strategic Growth 1, Ltd.
for six months ending May 14, 2006. The terms of the agreement are for the
consultant to receive cash payment of $4,000 plus value at $2,500 of common
stock and 10,000 three year warrants to purchase common stock at $0.50 per
share, each month during the agreement. In December 2005, the Company reengaged
this company for a period of six month and the terms of the agreement are for
the consultant to receive cash payment of $4,000 plus value at $2,500 of common
stock and 10,000 three year warrants to purchase common stock at $0.50 per
share, each month during the agreement. The shares of common stock will be
issued to the consultant in 2006.
On April 1, 2005, the Company entered into an advisory agreement with Robin
Smith as the Chairman of the Company's Advisory Board for a period of one year.
The terms of the agreement are for Ms. Smith to receive 60,000 shares of
unregistered common stock plus three-year warrants to purchase 35,000 shares of
common stock of the Company at an exercise price equal to $2.00. The shares of
common stock will be issued to Ms. Smith in 2006.
On April 1, 2005, the Company engaged a consultant for a period of seven months
ending October 31, 2005. The terms of the agreement are for the consultant to
receive cash payment of $50,000 plus 50,000 shares of common stock of the
Company. On December 20, 2005, the Company reengaged this consultant for a
period ending December 31, 2006 and the terms of the agreement are for the
consultant to receive cash payment of $50,000 plus 50,000 shares of common stock
of the Company.
Note 17- SUBSEQUENT EVENTS
See Report of Independent Registered Public Accounting Firm.
F-23
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.
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 to 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.
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
See Report of Independent Registered Public Accounting Firm.
F-24
of the Company's common stock to the 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.
Our auditors are currently engaged to audit the financial statements of Chengdu
Tianyin Pharmaceutical Limited ("Tianyin"). We are currently evaluating the
viability of the implementation of the Tainyin purchase agreement and will make
a final determination after consulting with management of Tianyin. Based on the
pre-conditions in the purchase agreement, the Board of Directors held a meeting
to discuss the possibility of abandoning the acquisition of Tianyin should
Tianyin's shareholders can not compromise and meet the Company's request for a
reasonable price.
See Report of Independent Registered Public Accounting Firm.
F-25