UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2005
|_| Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period to
Commission File Number 333-52721
----------------------
GLOBAL PHARMATECH, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0976805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6
(Address of principal executive offices)
(905) 787-8225
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days
Yes |_| No |X|
There were 18,247,935 shares of the Company's common stock, par value
$0.0001 per share, outstanding as of September 1, 2005.
Transitional Small Business Disclosure Format (Check one):
Yes |_| No |X|
1
PART I - FINANCIAL INFORMATION........................................3
Item 1. Condensed Financial Statements and Notes thereto.............3
Item 2. Management's Discussion and Analysis or Plan of
Operation................................................12
Item 3. Controls and Procedures.....................................16
PART II - OTHER INFORMATION...........................................17
Item 1. Legal Proceedings...........................................17
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds..............................................17
Item 3. Defaults Upon Senior Securities.............................17
Item 4. Submission of Matters To a Vote of Security Holders.........17
Item 5. Other Information...........................................17
Item 6. Exhibits and Reports on Form 8-K............................17
2
Part 1 FINANCIAL INFORMATION
Item 1. Financial Statements.
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
3
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
Unaudited Consolidated Balance Sheet as of March 31, 2005 5
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004 6
Unaudited Consolidated Statements of Cash Flows for the three months 7
ended March 31, 2005 and 2004
Notes to the Unaudited Consolidated Financial Statements 8 to 12
4
Global Pharmatech Inc.
Consolidated Balance Sheet
March 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 668,669
Accounts receivable 947,852
Related party receivable 74,714
Inventories 900,565
Other current assets 786,631
Prepaid expenses 104,833
-----------------
Total Current Assets 3,483,265
-----------------
PROPERTY, PLANT & EQUIPMENT, net 6,594,019
LAND LEASE, net 450,143
INTANGIBLE ASSETS, net 125,376
-----------------
7,169,538
-----------------
Total Assets $ 10,652,802
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 2,174,400
Accounts payable and accrued expenses 677,959
Related party payable 56,925
Advances from customers 113,925
Other payables and accruals 534,895
Other liabilities 67,578
-----------------
Total Current Liabilities 3,625,682
LONG-TERM BORROWINGS 362,400
-----------------
MINORITY INTEREST 765,639
-----------------
STOCKHOLDERS' EQUITY
Preferred stock par value $ 0.0001 per share,
5,000,000 shares authorized, no shares issued
and outstanding 0
Common stock par value $ 0.0001 per share,
95,000,000 shares authorized, 17,447,935 shares
issued and outstanding 1,744
Additional paid in capital 5,863,664
Retained earnings 58,672
Subscription receivable (25,000)
-----------------
Total Stockholders' Equity 5,899,081
-----------------
Total Liabilities and Stockholders' Equity $ 10,652,802
=================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
Global Pharmatech Inc.
Consolidated Statements of Operations
For the Three Months Ended March 31,
(Unaudited)
2005 2004
----------------------------------------
SALES $ 803,486 $ 110,600
COST OF SALES 655,906 36,106
GROSS PROFIT 147,580 74,495
OPERATING EXPENSES
Advertising 58,261 3,421
Research and development 114,326 164,843
Selling expenses 37,488 10,302
General and administrative expenses 374,665 176,384
584,740 354,949
LOSS FROM OPERATIONS (437,160) (280,454)
OTHER INCOME (EXPENSES)
Miscellaneous income (loss) 256,448 0
Interest expense (35,172) (44,722)
221,276 (44,722)
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (215,884) (325,176)
PROVISION FOR INCOME TAXES
Current 6,602 0
6,602 0
LOSS BEFORE MINORITY INTEREST (222,486) (325,176)
MINORITY INTEREST 28,927 (7,315)
NET LOSS $ (251,413) $ (317,862)
========================================
LOSS PER COMMON SHARE:
Basic and Diluted $ (0.01) $ (0)
========================================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,394,333 17,115,150
========================================
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
Global Pharmatech Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
(Unaudited)
2005 2004
------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (251,413) $ (317,862)
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest 28,927 (7,315)
Depreciation 118,954 92,956
Amortization of land lease 14,852 14,568
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable (303,633) 453,045
Related party receivable 10,872 161,667
Inventories 138,218 49,546
Prepaid expenses (46,432) 58,558
Other current assets (215,949) (447,886)
Increase (Decrease) in operating liabilites:
Accounts payable and accrued expenses 164,053 6,722
Related party payable (238,952) (24,574)
Advance from customers 2,296 48,296
Other payable and accruals (270,870) 18,064
Taxes payable (60,359) (131,073)
Other liabilities (11,315) 13,328
Net Cash Used by Operating Activities (920,751) (11,960)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (179,511) (306,769)
Investment 0 (13,725)
------------------------------------------
Net Cash Used by Investing Activities (179,511) (320,494)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings 845,600 0
Capital contributions from minority interests 0 297,990
Long-term borrowings 362,400 0
Common shares issued 368,007 0
------------------------------------------
Net Cash Provided by Financing Activities 1,576,007 297,990
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 475,745 (34,464)
CASH AND CASH EQUIVALENTS, beginning of period 192,924 169,547
------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 668,669 $ 135,083
==========================================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 33,773 $ 42,444
==========================================
Income taxes paid $ 11,603 $ 0
==========================================
NONCASH INVESTING AND FINANCING TRANSACTIONS
Global Pharmatech, Inc. merged with Natural Pharmatech, Inc. on February 9, 2005
by issuing 13,703,125 of its common shares for all of the outstanding common
shares of Natural Pharmatech, Inc.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
7
1. The Company
Global Pharmatech, Inc. ("Global" or the "Company") was incorporated on
June 26, 2001 under the laws of the State of Delaware. Global merged
with Natural Pharmatech, Inc. ("Natural") on February 9, 2005 by
issuing 13,703,125 of its common shares for all of the outstanding
common shares of Natural.
Natural was incorporated on February 2, 2004 in the British Virgin
Islands, to hold 100% of the outstanding common stock of Jilin Tian Yao
Science and Technology Limited Company ("JTY"), which is located in
Changchun, China. Natural merged with JTY on June 15, 2004 by issuing
43,800,000 of its common shares in exchange for all of the outstanding
common shares of JTY.
Under generally accepted accounting principles, both acquisitions
described above are considered to be capital transactions in substance,
rather than business combinations. That is, the acquisitions are
equivalent, in the Global/Natural merger, to the issuance of stock by
Natural for the net monetary assets of Global, and in the Natural/JTY
merger, the issuance of stock by JTY for the net monetary assets of
Natural. Each transaction is accompanied by a recapitalization, and is
accounted for as a change in capital structure. Accordingly, the
accounting for the acquisition is identical to that resulting from a
reverse acquisition, except that no goodwill is recorded. Under reverse
takeover accounting, the comparative historical financial statements in
the Global/Natural merger of the "legal acquiror", Global, are those of
the "accounting acquiror", Natural.
JTY was organized as a Chinese limited liability company on February 7,
2001 in China. JTY and its subsidiaries are principally engaged in the
research and development of modern Chinese medicine and bio-pharmacy,
the sale of this technology, and the manufacture and sale of Chinese
medicine and vitamins throughout China.
THE ACCOMPANYING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY HAVE BEEN PREPARED IN ACCORDANCE WITH REGULATION S-B
PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION AND DOES NOT
INCLUDE ALL THE INFORMATION AND FOOTNOTES REQUIRED BY GENERALLY
ACCEPTED ACCOUNTING PRINCIPALS IN THE UNITED STATES OF AMERICA FOR
COMPLETE FINANCIAL STATEMENTS. IN THE OPINION OF MANAGEMENT, THESE
INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDE ALL
ADJUSTMENTS NECESSARY IN ORDER TO MAKE THE FINANCIAL STATEMENTS NOT
MISLEADING. THE RESULTS OF OPERATIONS FOR SUCH INTERIM PERIODS ARE NOT
NECESSARILY INDICATIVE OF RESULTS FOR A FULL YEAR. THE UNAUDITED
CONSOLIDATED INTERIM FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION
WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO OF
NATURAL FOR THE YEAR ENDED DECEMBER 31, 2004.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in
the United States of America and include the accounts of
Global and its majority owned subsidiaries as of March 31,
2005; for the three months then ended, the accounts include
Natural and its majority owned subsidiaries for the whole
period and Global from the date of the merger. The comparative
consolidated financial statements for the three months ended
March 31, 2004 are those of JTY and its subsidiaries. All
significant inter-company balances and transactions have been
eliminated in consolidation.
8
b. Inventory
Inventories are stated at the lower of cost or market.
Substantially all inventory costs are determined using the
first-in, first-out (FIFO) method. Certain inventory goods
purchased are subject to spoilage within a short period of
time while in possession of the Company. Inventory costs do
not exceed net realizable value.
c. Revenue Recognition
Contract revenues earned from the transfer of technology are
recognized in accordance with contract terms. Such revenues
are $22,068 and $36,240 in 2005 and 2004, respectively.
Revenue derived from experiments, research and related
ancillary services is recognized when the customer accepts the
service. Such revenues are $43,633 and $31,955 in 2005 and
2004, respectively.
Revenue from goods sold is recognized when title has passed to
the purchaser, which generally is at the time of delivery. The
revenues earned are $737,785 and $42,409 in 2005 and 2004,
respectively.
Government grants are recognized as other income upon receipt.
These revenues are $256,448 and $0 in 2005 and 2004,
respectively.
d. Foreign Currency Translation
JTY's functional currency is the Chinese Yuan [RMB] and its
reporting currency is the US dollar. JTY's balance sheet
accounts are translated into U.S. dollars at the year-end
exchange rates and all revenue and expenses are translated
into U.S. dollars at the average exchange rates prevailing
during the periods in which these items arise. Translation
gains and losses are deferred and accumulated as a component
of other comprehensive income in members' equity. Transaction
gains and losses that arise from exchange rate fluctuations
from transactions denominated in a currency other than the
functional currency are included in the statement of
operations as incurred. The translation gains and losses were
immaterial for the periods ended March 31, 2005 and 2004.
The Chinese government imposes significant exchange
restrictions on fund transfers out of China that are not
related to business operations. These restrictions have not
had a material impact on the Company because it has not
engaged in any significant transactions that are subject to
the restrictions.
e. Appropriated retained earnings
In accordance with Chinese regulations, the JTY must
appropriate fifteen percent of its annual profits as computed
under Chinese generally accepted accounting principles.
9
3. Inventory
Inventory is comprised of the following:
March 31,
2005
Raw materials $ 307,435
Work in progress 320,133
Finished goods 198,389
Others 74,608
----------
$ 900,565
==========
4. Other Current Assets
The account is comprised of the following: a) approximately $331,000
advanced to vendors for purchasing equipment and to contractors for
construction and b) approximately $456,000 advanced to employees and
unrelated parties. These advances do not have any repayment terms.
5. Property and Equipment, Net
Property and equipment is comprised of the following:
Estimated March 31, 2005
Useful Life
In Years
Buildings and improvements 20-40 $ 2,561,457
Building pledged as security
to creditor 20-40 $ 2,189,000
Machinery and equipment 5-10 $ 2,886,699
Vehicles 10 $ 135,783
Office equipment and other 5-10 $ 218,033
-----------
Total at cost $ 7,990,972
Accumulated depreciation and
amortization $ 1,396,953
-----------
$ 6,594,019
Depreciation and amortization expense for each of the three months
ended March 31, 2005 and 2004 was approximately $119,000 and $93,000,
respectively. The depreciation and amortization expenses are included
in research and development and general and administrative expenses and
cost of production of approximately $35,000, $18,000 and $66,000,
respectively, for 2005. For 2004, the expenses are approximately
$35,000, $13,000 and $45,000, respectively.
6. Income Taxes
JTY and each of its subsidiaries file separate income tax returns. JTY
qualified as a joint venture in 2004, which entitled it to an exemption
from PRC income tax for two years beginning with its first profitable
year. The same exemption applies to its subsidiary, Jilin BCT Pharmacy
Company, Ltd., JTY's subsidiaries, Jilin Yi Cao Tang Pharmacy Co.,
Ltd., Jilin Mai Di Xing Medication Development Co., Ltd. and Jilin Tian
Yao Drug Safety Evaluation Co., Ltd. are not entitled to the same
exemption and are subject to income taxes at the rate of 33%.
The Company is also subject to value added tax (VAT), business tax and
surtax.
7. Concentrations and Credit Risk
10
The Company operates principally in China and grants credit to its
customers in this geographic region. Although China is considered
economically stable, it is always possible that unanticipated events in
foreign countries could disrupt the Company's operations.
At March 31, 2005, the Company has a credit risk exposure of uninsured
cash in banks of $668,669. The Company does not require collateral or
other securities to support financial instruments that are subject to
credit risk.
For the three months ended March 31, 2005, four customers accounted for
$ 613,212 (76 %) of total sales as follows: Customer A at $284,426
(35%), Customer B at $150,287 (19%), Customer C at $118,099 (15%) and
Customer D at $60,400 (7%). For the three months ended March 31, 2004,
four customers accounted for $80,930 (73%) of total sales as follows:
Customer A at $36,240 (33%), Customer B at $17,510 (17%), Customer C at
$15,100 (15%) and Customer D at $12,080 (8%).
8. Debt
The Company has two individual short-term loans payable from two
financial institutions totaling approximately $22,000,000 at March 31,
2005. The loans carry an annual interest rate of approximately 7%, and
will mature on December 5, 2005 and January 10, 2006. The weighted
average interest rate at March 31, 2005 was approximately 7%. One of
the Company's buildings secures one of the loans.
The Company has one individual long-term loan payable from a financial
institution totaling approximately $362,000 at March 31, 2005. The loan
carries an annual interest rate of approximately 6% and matures on
December 23, 2009. The weighted average interest rate at March 31, 2005
was approximately 6%. Minimum annual principal payments on the loan for
each of the years ending December 31 are as follows:
-------------------------------------------------
2005 $18,000
-------------------------------------------------
2006 $48,000
-------------------------------------------------
2007 $66,000
-------------------------------------------------
2008 $91,000
-------------------------------------------------
2009 $139,000
-------------------------------------------------
Interest expense and related service charges were approximately $35,000
and $45,000 for the three months ended March 31, 2005 and 2004,
respectively.
9. Related Party Transactions
As of March 31, 2005, the Company has the following amounts due from
and to related parties:
11
-----------------------------------------------------------------------
Advances due from related parties
-----------------------------------------------------------------------
Company subsidiary's Shareholders:
-----------------------------------------------------------------------
BCT Global Development Limited $26,338
-----------------------------------------------------------------------
Stockholders:
-----------------------------------------------------------------------
Wang Ben Ji $36,296
-----------------------------------------------------------------------
Xu Dong Ming $12,080
-----------------------------------------------------------------------
Total $74,714
-----------------------------------------------------------------------
Advances due to related parties
-----------------------------------------------------------------------
Stockholders:
-----------------------------------------------------------------------
Xie Lian Zhen $51,597
-----------------------------------------------------------------------
Dong Yuan Investment (HK) Limited $ 5,328
-----------------------------------------------------------------------
Total $56,925
-----------------------------------------------------------------------
These balances have no stated terms for repayment and are not interest
bearing
10. Minority Interest
In March 2004 and May 2004, JTY terminated its investments in Hainan
Gong An Detoxification and Rehabilitation Center ("HGAR") and Hainan
Gong An Health-care Products Co., Ltd. ("HGA") effective on January 1,
2004. These terminations resulted in a decrease in minority interest of
approximately $162,000.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Forward-Looking Statements
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-QSB. The information in this discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations,
including but not limited to the following:
o our ability to raise funds in the future through public or private
financings;
o our ability to develop marketable products through our research and
development efforts;
o our ability to protect our patents and technologies and related
intellectual properties;
o customers' acceptance of our products;
o our ability to compete against new companies entering the Chinese
pharmaceutical market and larger, more established companies which
have more resources than our company;
o our business expenses being greater than anticipated due to
competitive factors or unanticipated developments;
o changes in political and economic conditions in China;
12
o changes in Chinese laws and regulations applicable to our business,
including the Administration of Pharmaceuticals, the rules and
regulations of the State Food and Drug Administration, the Good
Supply Practice standards, and the inclusion of our products in the
insurance catalogue of the Ministry of Industry and Social Security;
o our ability to retain management and key personnel;
o our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including our good faith assumptions being
incorrect, our business expenses being greater than anticipated due to
competitive factors or unanticipated development or sales costs; revenues not
resulting in the manner anticipated due to a continued slow down in technology
spending, particularly in the telecommunications market; our failure to generate
investor interest or to sell certain of our assets or business segments. The
forward-looking statements may also be impacted by the additional risks faced by
us as described in this Report and in our filings with the Securities and
Exchange Commission (the "SEC"). All forward-looking statements included in this
Report are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.
Background
Global Pharmatech, Inc. ("Global Pharmatech," the "Company", "we", "us"
or "ours") was incorporated under the laws of the State of Delaware in 2001
under the name Autocarbon.com, Inc. On November 1, 2002, we filed a Certificate
of Ownership with the Secretary of State of the State of Delaware whereby we
merged with our wholly owned subsidiary and amended our Certificate of
Incorporation changing our name to Autocarbon, Inc.
On January 24, 2005, our company entered into a Share Purchase
Agreement with Natural Pharmatech, Inc., a British Virgin Islands corporation
("Natural Pharmatech"), and the shareholders of Natural Pharmatech. Under the
terms of the Share Purchase Agreement, we agreed to acquire 100% of Natural
Pharmatech's shares in exchange for 80% of our common stock, to be issued to the
Natural Pharmatech shareholders. Our acquisition of Natural Pharmatech was
completed on February 9, 2005. In connection with this transaction, we amended
our Certificate of Incorporation on January 31, 2005 changing our name to Global
Pharmatech, Inc.
We, through our subsidiaries, develop, manufacture and market
proprietary drugs and nutritional supplements that are based on traditional
Chinese medicine. We also offer a full range of "start to finish" biotechnology
services, including research and development, testing, manufacturing drugs in
liquid and solid dose forms, sales and marketing. We utilize unique extraction
methods and innovative techniques that have been developed by our research and
development team. Our core business is to license our patents and technologies
for botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China,
U.S, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. These sales are made
(export) either by one of our subsidiary, Jilin Ben Cao Tang Pharmacy Co., Ltd.,
directly to foreign distributors, or through China Ben Cao Tang International
Development Ltd., who then sell in those areas.
13
Natural Pharmatech was formed on February 2, 2004 under the laws of the
British Virgin Islands. Natural Pharmatech was formed as a holding company to
own the five subsidiaries that make up Natural Pharmatech's business operations.
Natural Pharmatech (Jilin China) Co., Ltd. ("Natural Pharmatech China"or "JTY")
is a wholly owned subsidiary of Natural Pharmatech located in Changchun in Jilin
Province of China. Natural Pharmatech China originated as a research department
within the Affiliated Hospital of Changchun Traditional Chinese Medicine
College. It was organized as a separate private for-profit entity in February
2001.
Natural Pharmatech China has four subsidiaries: (1) Jilin Ben Cao Tang
Pharmacy Co., Ltd. ("BCT"); (2) Jilin Yi Cao Tang Pharmacy Co., Ltd. ("YCT");
(3) Jilin Tian Yao Drug Safety Evaluation Co., Ltd. ("JDE"); and (4) Jilin Mai
Di Xing Medication Development Co., Ltd. ("MDX"). Natural Pharmatech China owns
75% of the shares of BCT which was established in September 2002 as a
Sino-foreign joint venture with China Ben Cao Tang International Development
Ltd., a Hong Kong distributor of natural drugs. BCT is principally engaged in
the manufacture and sale of Chinese medicine of the solid dose type. BCT is
capable of manufacturing 13 drugs in 3 forms. Solid dose and capsule
manufacturing, pre-manufacturing and extraction plants received a national GMP
(Good Manufacturing Practice) certificate in April 2004.
Natural Pharmatech China owns 95% of the shares of YCT. which was
established in September 2003. It is engaged in the manufacturing and sales of
Chinese and Western medicine. The company obtained a national GMP certificate in
July 2004. It is capable of manufacturing 78 drugs in 8 forms.
Natural Pharmatech China owns 99.5% of the shares of JDE, which was
established in April 2003. It is engaged in pharmacology, safety pharmacology,
and short and long term toxicology studies. The company obtained a national GLP
(Good Laboratory Practice) certificate in December 2004.
Natural Pharmatech China owns 51% of the shares of MDX. MDX was
established in July 2003. It focuses on research and development, and technique
consulting.
On March 17, 2005, we established a new wholly-owned subsidiary, Global
Health System Inc., in New York. The company's main business will be selling
Chinese medicines, principally within the United States. The company has not yet
commenced operations.
Since inception, our income has mainly been generated from technical
related services, including the sale of patents and research services. However,
recently we have boosted our income by the sale of goods. This is due to the
operations of our two manufacturing subsidiaries, which are BCT and YCT, as
referred to above.
Results of Operations for the Three-Month Periods Ended March 31, 2005 and March
31, 2004.
Revenue
Revenues for the three months ended March 31, 2005 were $803,486, an
increase of $692,882, from $110,604 for the same quarter of 2004. Revenues were
derived from sale of goods and research related (including Patent transfer and
Research services) services. The sale of goods was $737,785 for the three months
ended March 31, 2005, an increase of $695,376, from $42,409 for the same quarter
of 2004. BCT and YCT passed a GMP (Good Manufacturing Practice) test in March
and August of 2004. These two subsidiaries of Jilin Natural Pharmatech had 28
products available to consumers after they received GMP certificates. These
products generated the majority of the current quarter's sales. Among the
products, Gui Ling Dan, Huang Zhi Hua Oral Liquid and Zhuang Jin Xu Gu Wan were
well accepted by consumers, resulting in an increase in sales. These 3 products
generated sales of $200,009, $87,061 and $42,258, respectively. Contract and
research related revenues were $65,701 for the three months ended March 31,
2005; 66% of these were from research services, an increase of 37% from the same
quarter last year. This is due to a GLP certified lab which attracts customers.
This lab belonged to JDE, a subsidiary of Jilin Natural Pharmatech. Our company
currently has 6 products that have been approved for clinical trials.
14
Government Grants
Government Grants were $256,448 for the three months ended March 31,
2005. In the same quarter of 2004 there were no Government Grants. The state
government gave these grants because our research and development ("R&D")
department has research projects that are supported by the state, and our
research instruments and facilities met the standards required by the state. The
government will evaluate our research topics every year to decide whether we are
eligible to receive a grant. In 2005 the state government informed us that it
will grant $725,000 for our new product, Long Ya Guan Xin Kang, a product
recognized by the state development and renovation committee as a profitable
high-tech product. This grant will be paid in installments; the first payment we
have received was $220,208 and it was recognized as income for this quarter.
MDX, a subsidiary of Jilin Natural Pharmatech, also received a government grant
of $36,240.
R&D Expenses
R&D expenses were $114,326, a decrease of $50,517, from $164,843 for
the same quarter last year. R&D expenses vary during the different stages of
research projects. In 2004 most of our research projects were in the
intermediary stage, which requires a greater amount of input than the other
stages. We expect that most of those projects will be finished and filed for
review in 2005. Other projects in our pipeline are in their early stages, so
input is minimal.
Gross Profit
Our manufacturing operations were not operated at full capacity in the
first quarter of 2005. Therefore, the apportionment of manufacturing
expenditures for unit production costs resulted in an increase of cost of sales
and a decrease of gross profit. We believe that by opening up product markets,
increasing product sales, standardizing output levels, and decreasing unit
costs, gross profit will increase.
Administrative Expenses
The administrative cost of the first quarter in 2005 was $374,665,
compared to $176,384 for the same quarter last year, increasing $198,281. The
increase was principally due to the expense of approximately $130,000 incurred
for our company going public in 2005; there was no such an expense in 2004.
Without this expense, our company's administrative costs for the first quarter
in 2005 only increased $68,281 compared to the 2004. This is due mainly to the
increase caused by the growth of income.
15
Liquidity and Capital Resources
As of March 31, 2005, we have cash of $668,669 and a working capital
deficit of $142,417. For the three months then ended, we used cash of $920,751
in our operating activities. The significant reasons for the use of cash are:
1) the net loss for the quarter of $251,413;
2) the increase in accounts receivable of $303,633, which is a
function of increased sales for the quarter;
3) an increase in other current assets of $215,949, principally due
to advances to vendors and employees; and
4) decreases in related party payable of $238,952 and other payables
and accruals of $270,870, representing payments to these various
parties.
These cash uses were partially offset by a decrease in inventory of
$138,218, reflecting increased sales of products for the period, and an increase
in accounts payable and accrued expenses of $164,053.
During this quarter, we invested cash of $179,581 towards the purchase
of a new building for YCT. We received funds of $362,400 from Agriculture Bank
in the form of a long-term loan, and the Commercial Bank of Chang Chun extended
us a short-term loan of $845,600. We also sold common shares for cash of
$368,007.
These monies helped us to finance our activities in this quarter and
will also be used in succeeding quarters. In addition, we are taking other steps
to improve our cash flows. We are instituting procedures to create a more
effective customer credit policy, and reduce our accounts receivable and shorten
the aging of them. We intend to improve inventory and logistic management for
our manufacturing operations by using an advanced MRP (material requirement
plan) system. We also anticipate a steady growth in revenue as we have, at March
31, 2005, six developing drugs approved for clinical trials.
Off-Balance Sheet Arrangements
We have no off-balance arrangements.
Item 3. Controls and Procedures.
We maintain "disclosure controls and procedures," as such term is
defined under Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and in reaching a reasonable level of assurance our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We have carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2005. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2005 our disclosure controls and procedures were effective
at the reasonable assurance level in ensuring that material information relating
to us, is made known to the Chief Executive Officer and Chief Financial Officer
by others within our company during the period in which this report was being
prepared.
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There were no changes in our internal controls or in other factors
during the most recent quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any pending material legal proceeding.
Item 2. Unregistered sales of equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters To a Vote of Security Holders.
On January 31, 2005 we filed an amendment to our Certificate of
Incorporation whereby we declared a one for ten reverse stock split of our
common stock, par value $0.0001 per share, effective as of the date of the
filing of the amendment; authorized for issuance 95,000,000 shares of our common
stock; and authorized for issuance 5,000,000 shares of preferred stock. Our
preferred stock shall have such designations, preferences and relative,
participating, optional or other special rights and qualifications, limitations
or restrictions thereof as shall be expressed in the resolution or resolutions
providing for the issue of such stock adopted by our board of directors.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
Exhibits
(a) 31.1 Certification of the Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Principal Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GLOBAL PHARMATECH, INC.
Date: September 5, 2005 By: /s/ Xiaobo Sun
------------------------------------------
Name: Xiaobo Sun
Title: President and Chief Executive Officer
Date: September 5, 2005 By: /s/ Junhui Peng
------------------------------------------
Name: Junhui Peng
Title: Chief Financial Officer
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