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 June 30, 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 |X| No |_|
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...13
Item 3. Controls and Procedures.....................................19
PART II - OTHER INFORMATION...........................................19
Item 1. Legal Proceedings...........................................19
Item 2. Unregistered sales of Equity Securities and Use of Proceeds.19
Item 3. Defaults Upon Senior Securities.............................20
Item 4. Submission of Matters To a Vote of Security Holders.........20
Item 5. Other Information...........................................20
Item 6. Exhibits and Reports on Form 8-K............................20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
3
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
Unaudited Consolidated Balance Sheet as of June 30, 2005 5
Unaudited Consolidated Statements of Operations for the six months ended June 6
30, 2005 and 2004
Unaudited Consolidated Statements of Cash Flows for the six months ended 7
June 30, 2005 and 2004
Notes to the Unaudited Consolidated Financial Statements 8 to 12
4
Global Pharmatech, Inc.
Consolidated Balance Sheet
June 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents 335,389
Accounts receivable 2,025,076
Related party receivable 72,617
Inventories 1,335,964
Prepaid expenses 37,943
Other current assets 558,800
Total Current Assets 4,365,789
------------
PROPERTY,PLANT & EQUIPMENT, net 6,628,958
LAND LEASE, net 448,446
INTANGIBLE ASSETS, net 130,699
------------
Total Assets 11,573,892
============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Short term borrowings 2,174,400
Accounts payable and accrued expenses 877,617
Related party payable 48,335
Advances from customers 268,716
Other payables and accruals 560,380
Other current liabilities 152,231
------------
Total Current Liabilities 4,081,679
Long term borrowings 362,400
------------
Total Liabilities 4,444,079
============
MINORITY INTEREST 693,877
------------
STOCKHOLDERS' EQUITY
Preferred stock par value $0.0001 per share, 5,000,000 shares
authorized, no shares issued and outstanding
Common stock par value $0.0001 per share, 95,000,000 shares 1,745
authorized; 17,447,935 shares issued and outstanding
Additional paid-in capital 5,863,665
Retained earnings 595,526
Subscription receivable (25,000)
------------
Total Stockholders' Equity 6,435,936
============
Total Liabilities and Stockholders' Equity 11,573,892
============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
5
Global Pharmatech, Inc.
Consolidated Statements of Operations
(Unaudited)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
2005 2004 2005 2004
SALES 2,011,261 872,030 1,207,775 761,430
COST OF SALES 869,707 170,214 213,801 134,140
------------ ------------ ------------ ------------
GROSS PROFIT 1,141,554 701,816 993,974 627,290
------------ ------------ ------------ ------------
OPERATING EXPENSES
Advertising 157,326 8,622 99,065 5,201
Research and development 222,356 283,150 108,030 118,275
Selling expenses 53,341 15,309 15,853 5,007
General and administrative expenses 750,384 316,796 375,719 140,412
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (41,853) 77,939 395,307 358,395
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Miscellaneous income 379,283 12,082 122,835 12,082
Interest expense 80,788 75,178 45,616 30,456
------------ ------------ ------------ ------------
INCOME BEFORE TAXES AND MINORITY INTEREST 256,642 14,843 472,526 340,021
INCOME TAXES - Current 6,603 121 0 121
------------ ------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST 250,039 14,722 472,526 339,900
MINORITY INTEREST (35,403) (9,275) (64,330) (1,960)
NET INCOME 285,442 23,997 536,856 341,860
------------ ------------ ------------ ------------
EARNINGS PER COMMON SHARE
Basic and Diluted 0.02 0.00 0.03 0.02
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,315,171 17,118,752 17,447,935 17,118,752
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
6
Global Pharmatech, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
(Unaudited)
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 285,442 23,997
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest (35,403) (9,275)
Depreciation 193,516 192,676
Amortization of land lease and intangible assets 11,226 11,226
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable (1,380,857) 8,030
Related party receivable 4,449 151,804
Inventories (297,181) (183,711)
Prepaid expenses 20,458 (5,938)
Other current assets (9,685) 561,735
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 363,711 120,448
Related party payable (257,091) (24,574)
Advances from customers 157,087 54,665
Other payables and accruals (158,218) (350,628)
Other current liabilities 95,993 (5,801)
Net Cash Provided (Used) by Operating Activities (1,006,553) 544,654
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (426,989) (471,662)
------------ ------------
Net Cash Used by Investing Activities (426,989) (471,662)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings 845,600 (422,876)
Common shares issued 368,007 0
Capital contributions from minority interests 0 297,990
Long-term borrowing 362,400 0
------------ ------------
Net Cash Provided (Used) by Financing Activities 1,576,007 (124,886)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 142,465 (51,894)
CASH AND CASH EQUIVALENTS, beginning of period 192,924 169,547
------------ ------------
CASH AND CASH EQUIVALENTS, end of period 335,389 117,653
------------ ------------
SUPPLEMENTAL DISCLOSURES
Interest paid 80,788 75,164
Income taxes paid 11,603 121
============ ============
NONCASH INVESTING AND FINANCING TRANSACTIONS
Global Pharmatech, Inc. merged into Natural
Pharmatech, Inc. on February 9, 2005 by
issuing 13,703,125 of its common shares for
all of the outstanding shares of Natural
Pharmatech, Inc.
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
7
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States dollars unless otherwise stated)
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 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 acquirer", 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.
In March 2005, Global Pharmatech, Inc. organized a wholly owned subsidiary,
Global Health System Inc. ("GHS") in New York. The main business of GHS will be
selling Chinese medicine products, principally within the United States. GHS has
not yet commenced operations.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with Regulation S-B promulgated by the Securities
and Exchange Commission and 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.
8
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 June 30, 2005; for the six 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 six months ended June 30,
2004 are those of JTY and its subsidiaries. All significant
inter-company balances and transactions have been eliminated in
consolidation.
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. 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
$907,719 and $526,974 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 $108,865 and $40,492 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 $994,677 and $304,564 in 2005 and 2004, respectively.
Government grants are recognized as other income upon receipt. These
revenues are $379,283 and $12,082 in 2005 and 2004, respectively.
d. Foreign Currency Translation
The functional currency of JTY and its subsidiaries is the Chinese
Yuan [RMB] and their reporting currency is the US dollar. JTY's
consolidated balance sheet accounts are translated into US dollars
at the year-end exchange rates and all revenue and expenses are
translated into U.S. dollars at the average exchange rates
prevailing during the periods in which these items arise.
Translation gains and losses are deferred and accumulated as a
component of other comprehensive income in 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 June 30, 2005 and 2004.
The Chinese government imposes significant exchange restrictions on
fund transfers out of China that are not related to business
operations. These restrictions have not had a material impact on the
Company because it has not engaged in any significant transactions
that are subject to the restrictions.
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:
June 30
2005
Raw materials $547,648
Work in progress 220,163
Finished goods 469,388
Others 98,765
----------
$1,335,964
4. Other Current Assets
The account is comprised of the following: a) approximately $133,000
advanced to vendors for purchasing equipment and to contractors for
construction and b) approximately $425,000 advanced to employees and
unrelated parties. These advances do not have any repayment terms.
5. Property and Equipment,
Property and equipment is comprised of the following:
Estimated June 30, 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 2,909,354
Vehicles 10 135,783
Office equipment and other 5-10 304,879
----------
Total at cost 8,100,473
Accumulated depreciation and amortization 1,471,515
----------
$6,628,958
Depreciation and amortization expense for each of the six months ended
June 30, 2005 and 2004 was $204,742 and $203,902, respectively, including
amortization of land lease and intangible assets. The depreciation and
amortization expenses are included in research and development and general
and administrative expenses and cost of production of approximately
$51,000, $31,700, and $122,000, respectively, for 2005. For 2004, the
expenses are approximately $48,000, $34,900, and $121,000, respectively.
10
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 and Jilin Tian Yao Drug Safety Evaluation Co., Ltd are
not entitled to the same exemption and are subject to income taxes at the
rate of 15%.
The Company is also subject to value added tax (VAT), business tax and
surtax which equals 10%.
7. Concentrations and Credit Risk
The Company operates principally in China and grants credit to its
customers in this geographic region. Although China is considered
economically stable, it is always possible that unanticipated events in
foreign countries could disrupt the Company's operations.
At June 30, 2005, the Company has a credit risk exposure of uninsured cash
in banks of $335,389. The Company does not require collateral or other
securities to support financial instruments that are subject to credit
risk.
For the six months ended June 30, 2005, three customers accounted for
$ 1,441,393 (72 %) of total sales as follows: Customer A at $845,600
(42%), Customer B at $319,249 (16%), and Customer C at $276,544 (14%). For
the six months ended June 30, 2004 four customers accounted for $571,192
(66%) of total sales as follows: Customer A at $241,600 (28%), Customer B
at $120,800 (14%), Customer C at $112,152 (13%), and Customer D at $96,640
(11%).
8. Debt
The Company has two individual short-term loans payable from two financial
institutions totaling approximately $2,174,400 at June 30, 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 June 30, 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 $362,400 at June 30, 2005. The loan
carries an annual interest rate of approximately 6% and matures on
December 23, 2009. The weighted average interest rate at June 30, 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
11
Interest expense and related service charges were approximately $80,000
and $75,000 for the six months ended June 30, 2005 and 2004, respectively.
9. Related Party Transactions
As of June 30, 2005, the Company has the following amounts due from and to
related parties:
Advances due from related parties
BCT Global Development Limited $29,193
Stockholders:
Wang Ben Ji $36,297
Li Yuqi $1,087
Qu lianqin $4,832
Xu Dong Ming $1,208
Total $72,617
Advances due to related parties
Stockholders:
Xia Lian Zhen $41,933
Dong Yuan Investment (HK) Limited $6,402
Total $48,335
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 January 1, 2004. These
terminations resulted in a decrease in minority interest of approximately
$162,000.
11. Subsequent Event
On August 18, 2005, the Company entered into a subscription agreement with
certain non-U.S. entities pursuant to which the Company agreed to issue an
aggregate of 800,000 shares of common stock for aggregate gross proceeds
of $960,000 (the "Transaction"). The net proceeds from the Transaction
will be used for working capital and general corporate purposes.
12
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;
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.
13
On January 24, 2005, our company entered into a Share Purchase
Agreement with Natural Pharmatech, Inc., a British Virgin Islands corporation
("Natural Pharmatech"), and the shareholders of Natural Pharmatech. Under the
terms of the Share Purchase Agreement, we agreed to acquire 100% of Natural
Pharmatech's shares in exchange for 80% of our common stock, to be issued to the
Natural Pharmatech shareholders. Our acquisition of Natural Pharmatech was
completed on February 9, 2005. In connection with this transaction, we amended
our Certificate of Incorporation on January 31, 2005 changing our name to Global
Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market
proprietary drugs and nutritional supplements that are based on traditional
Chinese medicine. We also offer a full range of "start to finish" biotechnology
services, including research and development, testing, manufacturing drugs in
liquid and solid dose forms, sales and marketing. We utilize unique extraction
methods and innovative techniques that have been developed by our research and
development team. Our core business is to license our patents and technologies
for botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China,
U.S, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. Sales outside of
China are made either by one of our subsidiaries, Jilin Ben Cao Tang Pharmacy
Co., Ltd, directly to foreign distributors, or through China Ben Cao Tang
International Development Ltd, who sells on to those areas indicated above.
Natural Pharmatech was formed on February 2, 2004 under the laws of the
British Virgin Islands. Natural Pharmatech was formed as a holding company to
own the five subsidiaries that make up Natural Pharmatech's business operations.
Natural Pharmatech (Jilin China) Co., Ltd. ("Natural Pharmatech China" 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 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.
14
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. ("GHS") in New York. This company will sell our
products manufactured in China, principally within the United States. GHS has
not yet commenced operations.
On May 13, 2005, we changed our fiscal year end from March 31 to
December 31. Natural Pharmatech's fiscal year end is December 31, and we elected
to change our fiscal year end to match our operating company's fiscal year end.
Since inception, our income has been mainly generated from technical
related services, including sale of patents and research services. However,
recently we have boosted our income by the sale of goods. This is a result of
the operations of our two manufacturing subsidiaries, BCT and YCT, as referred
above.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005
Revenue. Sales for the current six months were $2,011,261,
which is an increase of $1,139,231, or 130%, compared with revenue in
the same period last year. For the six months ended June 30, 2005,
revenues of $2,011,261 were derived as follows: revenue from goods
sold was $994,677, contract revenue earned from the transfer of
technology was $907,719, and revenue derived from experiments,
research and related ancillary services was $108,865.
Sales of goods principally increased from YCT, which attained its GMP
attestation from the PRC government in the middle of 2004, and
increased its operations in the beginning of 2005. For the six months
ended June 30, 2005, YCT revenue increased $631,971, or 262%, compared
with revenue in same period last year. The main reason is that there
were 28 products placed into the market during this period.
Contract revenue earned from the transfer of technology increased
$380,745, or 72%, compared with revenue in the same period last year.
The main reason is a contract for approximately $1,000,000 signed in
2005. According to the terms of the contract, $843,000 was booked as
revenue in the six months ended June 30, 2005.
Cost of Sales. Cost of sales for the six months ended June 30,
2005 was $869,707, an increase of $699,493, from $170,214 for the six
months ended June 30, 2004. The increase is directly associated with
the corresponding increase in revenues.
Gross Profit. Gross profit for the six months ended June 30,
2005 was $1,141,554, an increase of $439,738, from $701,816 for the
six months ended June 30, 2004. Gross profit percentage for the six
months ended June 30, 2005 was 57%, compared to 80% for the same
period of 2004. The decrease is due to the larger proportion of
revenues from the sale of goods in 2005. This is a lower profit
activity compared to research services, which accounted for a greater
proportion of revenues in 2004. We believe that our gross profit
percentage for the six months ended June 30, 2005 approximates the
industry standards.
Advertising and Selling Expenses. Advertising and selling
expenses were $210,667, or 10% of net sales, for the six months ended
June 30, 2005, as compared to $23,931, or 3% of net sales, for the
six months ended June 30, 2004. The increase was due to the
establishment of our own sales team with advertising expenses
increasing $148,704.
15
General and administrative expenses. General and
administrative expenses increased $433,588, or 137%, compared with
the same period last year due principally to stock issue expenses
related to the Company going public, which amounted to approximately
$230,000, bad debts which amounted to $120,800, and salary increases
of approximately $50,000.
Research and development ("R&D") expenses. Research and
development expenses decreased $60,794, or 21%, compared with the
same period 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.
RESULT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005
Revenue. Revenue for the three months ended June 30, 2005 was
$1,207,775, an increase of $446,345, or 59%, compared with revenue in
same period last year. For the three months ended June 30, 2005,
revenues of $1,207,775 were derived as follows: revenue from goods
sold was $256,891, contract revenue earned from the transfer of
technology was $885,652, and revenue derived from experiments,
research and related ancillary services was $65,232.
Sales of goods principally increased from YCT, which attained its GMP
attestation from the PRC government in the middle of 2004, and
increased its operations in the beginning of 2005.
Revenue derived from experiments, research and related ancillary
services increased from JDE, which attained its GLP attestation from
the PRC government at the end of 2004, and increased its operations in
the beginning of 2005. Revenue for the three months ended June 30,
2005 was $65,232, which is an increase of $53,153, or 440%, compared
with revenue in same period last year.
Contract revenue earned from the transfer of technology increased
$357,784, or 68%, with revenue in the same period last year, and the
main reason is a contract for approximately $1,000,000 signed in 2005.
According to the terms of the contract, $843,000 was booked as revenue
in June 2005.
Cost of Sales. Cost of sales for the three months ended June
30, 2005 was $213,801, an increase of $79,661, from $134,140 for the
three months ended June 30, 2004. The increase is directly associated
with the corresponding increase in revenues.
Gross Profit. Gross profit for the three months ended June 30,
2005 was $993,974, an increase of $366,684, from $627,290 for the
three months ended June 30, 2004. Gross profit percentage for the
three months ended June 30, 2005 and 2004 was 82%. This percentage
for the three months ended June 30, 2005 is mainly attributable to
the technology transfer of Di Ao Ning. Di Ao Ning's transfer adds a
significant amount to the revenue; however, the R&D cost of Di Ao
Ning was counted in last year's expense, so the transfer of Di Ao
Ning only generates net income which greatly increased our net
income.
Advertising and Selling Expenses. Advertising and selling
expenses were $114,918, or 10% of net sales, for the three months
ended June 30, 2005, as compared to $10,208 or 1% of net sales, for
the three months ended June 30, 2004. The increase is due to the
Company beginning to create its own selling team, and strengthening
the marketing of its products.
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General and administrative expenses. General and administrative
expenses increased $235,307, or 168%, compared with the same period last
year due principally to stock issue expenses related to the Company going
public, which amounted to approximately $73,000, bad debts which amounted
to $120,800, and salary increases of approximately $41,500.
Research and development expenses. Research and development expenses
decreased $10,245, or 9%, compared with the same period 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we have cash of $335,389, working capital of $284,110
and for the six months then ended, we earned a net profit of $285,442. For
the six months ended June 30, 2005, we used cash of $1,006,553 in our
operating activities. The significant reasons for the use of cash are:
1) the increase in accounts receivable of $1,380,857, which is a
function of increased sales for the quarter;
2) an increase in inventory of $297,181, which is a function of
increased sales for the quarter; and
3) decreases in related party payable of $257,091 and other payables
and accruals of $158,218, representing payments to these various
parties.
These cash uses were partially offset by an increase in cash advances from
customers of $157,087, and an increase in accounts payable and accrued
expenses of $363,711 and other liabilities of $95,993.
During these six months, we invested cash of $426,989 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.
For the second quarter, cash decreased $333,280, compared with the first
quarter of 2005. The main reason for the cash use is that our accounts
receivable increased $1,077,224 and inventory increased $435,399 in this
quarter. These cash uses were partially offset by a net profit of
$536,856, decrease of other current assets of $227,831, and an increase in
account payable of $199,658.
Next quarter is a low season for the pharmaceutical manufacturing sector,
we will spend some time to maintain our facilities in this quarter, and
this will reduce our revenue for goods sold. However, we believe we will
not be short of cash because we are going to finance approximately
$1,000,000 in the next quarter through issuing new shares in order to
increase our cash (See subsequent event note). We also believe our
subsidiaries, BCT and YCT, will pass an examination set by the state
government, and this will ensure we keep generating cash through
manufacturing. This examination is required for every pharmaceutical
manufacturing plant every 5 years. We believe we will have sufficient cash
to support our operations in the next quarter.
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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 June 30, 2005. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of June 30, 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.
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.
On August 18, 2005, the Company entered into a subscription agreement
with certain non-U.S. entities pursuant to which the Company agreed to issue an
aggregate of 800,000 shares of common stock for aggregate gross proceeds of
$960,000 (the "Transaction"). The Shares have not been and will not be
registered under the Securities Act, and, if in the future the Subscriber
decides to offer, resell, pledge or otherwise transfer the Shares, such Shares
may be offered, resold, pledged or otherwise transferred only (A) pursuant to an
effective registration statement filed under the Act, (B) to non-U.S. persons in
an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S
of the Act, (C) pursuant to the resale limitations set forth in Rule 905 of
Regulation S, or (D) pursuant to an exemption from registration under the Act
provided by Rule 144. The net proceeds from the Transaction will be used for
working capital and general corporate purposes.
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Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
(a) Exhibits
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 30, 2005 By:/s/ Xiaobo Sun
------------------------------------
Name: Xiaobo Sun
Title: President and Chief Executive
Officer
Date: September 30, 2005
By:/s/ Junhui Peng
------------------------------------
Name: Junhui Peng
Title: Chief Financial Officer
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