As filed with the Securities and Exchange Commission on January 12, 2007
Registration No. 333-________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GLOBAL PHARMATECH, INC.
(Name of small business issuer in its charter)
Delaware 2834 33-0976805
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6 (905) 787-8225
(Address and telephone number of principal executive offices)
509 Maoxiang St., Changchun, People's Republic of China
(Address of principal place of business or
intended principal place of business)
Zhuojun Li, Secretary
Global Pharmatech, Inc.
89 Ravine Edge Drive
Richmond Hill, Ontario, Canada L4E 4J6 (905) 787-8225
(Name, address and telephone number of agent for service)
Copies to:
Mitchell S. Nussbaum, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154 (212) 407-4000
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box [ ]
CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum Amount of
Title of each class of Amount to be offering price aggregate registration
securities to be registered registered per unit (1) offering price (1) fee
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value
$0.0001 per share 1,000,000 shares $1.25 $1,250,000 $133.75
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(1) Based on the closing sale price for the Common Stock in the OTCBB on
January 10, 2007 pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
SUBJECT TO COMPLETION, DATED JANUARY 11, 2007
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES PUBLICLY UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
This prospectus shall not constitute an offer to sell or the solicitation
of an offer to buy, nor shall there be any sale of these securities in any state
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
PROSPECTUS
GLOBAL PHARMATECH, INC.
1,000,000 Shares of Common Stock
This prospectus relates to the resale of up to 1,000,000 shares of our
common stock being offered by the selling stockholder identified herein. We will
not receive any proceeds from any sale of shares of common stock by the selling
stockholder.
Our common stock is quoted in both the Pink Sheets and OTCBB under the
symbol "GBLP."
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" ON PAGE
3 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN OUR COMMON
STOCK.
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 January __, 2007.
TABLE OF CONTENTS
SUMMARY .................................................................... 3
FORWARD-LOOKING STATEMENTS.................................................. 3
RISK FACTORS................................................................ 3
USE OF PROCEEDS............................................................. 12
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................... 12
DESCRIPTION OF BUSINESS..................................................... 12
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS................ 17
EXECUTIVE COMPENSATION...................................................... 23
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 23
SELLING STOCKHOLDER......................................................... 28
PLAN OF DISTRIBUTION........................................................ 28
DESCRIPTION OF SECURITIES................................................... 29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES............................................. 30
LEGAL MATTERS............................................................... 31
EXPERTS .................................................................... 31
WHERE YOU CAN FIND MORE INFORMATION......................................... 31
INDEX TO FINANCIAL STATEMENTS............................................... 33
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SUMMARY
THE COMPANY
Global Pharmatech, Inc. develops, manufactures and markets proprietary
drugs and dietary supplements based on China's five millennia of clinical
experience in traditional Chinese medicine and using modern pharmaceutical
technologies. We also offer a full range of "start to finish" biotechnology
services, including drug discovery (basic research leading to the detection of
new drug candidates), preclinical research and clinical experimentation. We
utilize unique extraction methods and innovative techniques that have been
developed by our research and development team. Our core businesses are to
license our patents and technologies relating to botanical/biological drugs to
other pharmaceutical companies, and to manufacture and market our products in
China and around the globe. Our operations are currently conducted, through our
subsidiaries, in the People's Republic of China (PRC), with sales distribution
in China, the United States, Hong Kong, Malaysia, Singapore and Indonesia. Sales
outside China are made either directly to foreign distributors or through a Hong
Kong-based distributor, which sells on to those areas indicated above.
Global was incorporated in Delaware in 2001 under the name Autocarbon.com,
Inc. On January 24, 2005, our company entered into a Share Purchase Agreement
with Natural Pharmatech, Inc., a British Virgin Islands corporation (Natural
Pharmatech), and its shareholders, under which, on February 9, 2005, we acquired
all of Natural Pharmatech's shares in exchange for 80% of our common stock,
which was issued to Natural Pharmatech's shareholders. Natural Pharmatech was
formed in 2004 under British Virgin Islands law as a holding company to own the
subsidiaries that make up our business operations. Its principal subsidiary,
Natural Pharmatech (Jilin China) Co., Ltd. (Natural Pharmatech China) is located
in Changchun in Jilin Province of China, where it originated as a research
department within the Affiliated Hospital of Changchun Traditional Chinese
Medicine College. It was organized as a separate private for-profit entity in
February 2001.
Our principal executive offices in the People's Republic of China are
located at 509 Maoxiang St., Changchun, People's Republic of China. Our
telephone number there is +86-431-5541869. We also maintain an office at 89
Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6, where our telephone
number is 1-905-787-8225.
THE OFFERING
This prospectus relates to the resale of up to 1,000,000 shares of our
common stock being offered by the selling stockholder. At January 9, 2006, there
were 23,247,935 shares of our common stock issued and outstanding. As a result
of this offering, there may ultimately be a significant increase in the
Company's public float, which may have a depressive effect on our stock price
independent of our results of operations.
We will not receive any proceeds from any sale of shares of common stock by
the selling stockholder.
FORWARD-LOOKING STATEMENTS
Statements in this prospectus that are not descriptions of historical facts
are forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. Reference is
made in particular to the description of our plans and objectives for future
operations and assumptions underlying such plans and objectives and other
forward-looking terminology such as "may," "expects," "believes," "anticipates,"
"intends," "projects," or similar terms, variations of such terms or the
negative of such terms. Forward-looking statements are based on management's
current expectations. Actual results could differ materially from those
currently anticipated due to a number of factors, including those set forth
under "Risk Factors."
RISK FACTORS
Investing in our securities involves a great deal of risk. You should
carefully consider the following factors as well as other information included
in this prospectus before deciding to purchase our common stock. You should pay
particular attention to the fact that we conduct a majority of our operations in
China and are governed by a legal and regulatory environment that in some
respects differs significantly from the environment that may prevail in other
countries. Our business, financial condition or results of operations could be
affected materially and adversely by any or all of these risks.
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THE FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR
OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A
FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT
ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR STATEMENTS.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY. We were founded and commenced
operations in 2001. Our operating history may be insufficient for you to
evaluate our business and future prospects. We have sustained losses in the past
and cannot assure you that we will become profitable or that we will not incur
more losses in the future. We expect that our operating expenses will increase
as we expand. We will have significant operating losses if we fail to realize
anticipated revenue growth. We will continue to encounter risks and difficulties
frequently experienced by companies at a similar stage of development, including
that we may fail to implement successfully our business model and strategy, or
prudently adapt and modify them as needed; increase awareness of our brands,
protect our reputation and develop customer loyalty; competently manage our
expanding operations and service offerings, including integration of any future
acquisitions; maintain adequate control of our expenses; and anticipate and
adapt to changing conditions in our markets, government regulation, our
competition and relevant technology.
If we are not successful in addressing any or all of these risks, our
business may be materially and adversely affected.
WE HAVE HAD LOSSES IN THE PAST AND MAY HAVE FUTURE LOSSES. WE MAKE NO
ASSURANCES THAT WE WILL BE ABLE TO ACHIEVE SUSTAINABLE PROFITABILITY. We have
had operating losses since completing our reverse merger in 2005. Although we
made a profit for the year ended December 31, 2005, we will not continue to be
profitable unless we materially increase our sales. The burden of our debt and
current interest liabilities makes it prudent to attract equity investment
rather than further debt to help us grow. Our new product development and
management's ability to successfully manage the business will be essential to
achieving consistent profitability. Although our revenues have grown in recent
quarters, this growth may not be sustained and we may never become consistently
profitable. As sales of goods grow and become a larger part of our total
revenues, we may experience smaller overall margins, as sales of our products
have higher costs of sales than our other revenue streams.
WE HAVE NEVER PAID CASH DIVIDENDS AND ARE NOT LIKELY TO DO SO IN THE
FORESEEABLE FUTURE. We currently intend to retain any future earnings for use in
the operation and expansion of our business. We do not expect to pay any cash
dividends in the foreseeable future but will review this policy as circumstances
dictate.
THE MARKET IN WHICH WE COMPETE IS HIGHLY COMPETITIVE, FAST-PACED AND
FRAGMENTED, AND WE MAY NOT BE ABLE TO MAINTAIN MARKET SHARE. We expect
competition to persist and intensify in the future. Our principal competitors
are Tongrentang and Guangzhou Pharmaceutical, and we also compete with a number
of other, smaller firms. Both Tongrentang and Guangzhou Pharmaceutical are
publicly-traded companies that are substantially larger and have greater
resources than Global. We face the risk that new competitors with greater
resources than ours will enter our market, and that increasing competition will
result in lower prices. If we must significantly reduce our prices, the decrease
in revenues could adversely affect our profitability.
Our products must keep pace with developments in our industry or they may
be displaced by competitors' products. Our industry is characterized by rapid
product development, with significant competitive advantages gained by companies
that introduce products that are first to market, deliver constant innovation in
products and techniques, offer frequent new product introductions and have
competitive prices. Our future growth partially depends on our ability to
develop products that are more effective in meeting consumer needs. In addition,
we must be able to manufacture and effectively market those products. The sales
of our existing products may decline if a competing product is introduced by
other companies.
The success of our new product offerings depends upon a number of factors,
including our ability to accurately anticipate consumer needs, innovate and
develop new products, successfully commercialize new products in a timely
manner, price our products competitively, manufacture and deliver our products
in sufficient volumes and in a timely manner and differentiate our product
offerings from those of our competitors. If we fail to make sufficient
investments in research and pay close attention to consumer needs or we focus on
technologies that do not lead to more effective products, our current and future
products could be surpassed by more effective or advanced products of others.
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We have limited control over the activities of our distributors, which
generally are not employed or otherwise controlled by us, are free to conduct
their business at their own discretion and may be dedicated more to establishing
their own reputations and business relationships than to promoting our products.
By the same token, the simultaneous loss of a number of our distributors could
have a material adverse effect on our business, financial condition and results
of operations.
KEY EMPLOYEES ARE ESSENTIAL TO OUR BUSINESS. Our senior management are
essential to executing our strategy. We will need to retain these people and
attract others to succeed. We require specialized professionals in a variety of
areas, some of which are addressed by relatively few companies. As a result,
depending upon how our business grows, we may experience difficulty in hiring
and retaining highly skilled employees.
We compete for qualified professionals with a number of Chinese research
institutions, some of which are more established than we are and have the
ability to pay more cash and other compensation than we do. Competition for
qualified individuals is intense, and we cannot be certain that our search for
them will be successful. If we are unable to hire and retain skilled
professionals, our business, financial condition, operating results and future
prospects could be materially adversely affected. We do not have key-person
insurance for any of our senior managers or employees.
ESTABLISHING AND EXPANDING INTERNATIONAL OPERATIONS REQUIRES SIGNIFICANT
MANAGEMENT ATTENTION. Substantially all of our current revenues are derived from
China. We intend to expand our international operations in Southeast Asia and
the United States, which, if not planned and managed properly, could materially
adversely affect our business, financial condition and operating results.
Expanding internationally exposes us to legal uncertainties, new regulatory
requirements, liability, export and import restrictions, tariffs and other trade
barriers, difficulties in managing operations across disparate geographic areas,
foreign currency fluctuations, dependence on local distributors and potential
disruptions in sales or manufacturing due to military or terrorist acts, as well
as longer customer payment cycles and greater difficulties in collecting
accounts receivable. We may also face challenges in protecting our intellectual
property or avoiding infringement of others' rights, and in complying with
potentially uncertain or adverse tax laws.
We do not currently enter into forward exchange rate contracts to hedge
some of the financial risks of international operations, but expect to do so in
the future.
FLUCTUATIONS IN THE VALUE OF THE RMB RELATIVE TO FOREIGN CURRENCIES COULD
AFFECT OUR OPERATING RESULTS. Most of our operations are conducted in Chinese
Renminbi. We also hold Hong Kong Dollars in at least one bank account. To the
extent future revenue is denominated in foreign currencies, such as the U.S.
dollar, we would be subject to increased risks of foreign currency exchange rate
fluctuations that could have a material adverse affect on our business,
financial condition and operating results. The value of Hong Kong dollars and
Chinese Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC's political and economic
conditions. As our operations are primarily in Asia, any significant revaluation
of Hong Kong dollars or 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 U.S. dollars into Hong Kong dollars or Chinese Renminbi
for our operations, appreciation of either currency 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 Hong Kong dollars
or Chinese Renminbi into U.S. dollars for other business purposes and the U.S.
dollar appreciates against either currency, the U.S. dollar equivalent of the
currency we convert would be reduced. To date, we have not engaged in any
hedging transactions in connection with our international operations.
CHINESE FOREIGN EXCHANGE CONTROLS MAY LIMIT OUR ABILITY TO UTILIZE REVENUES
EFFECTIVELY AND RECEIVE DIVIDENDS AND OTHER PAYMENTS FROM OUR CHINESE
SUBSIDIARIES. Our Chinese subsidiaries are subject to Chinese rules and
regulations on currency conversion. The Chinese government regulates the
conversion of the Chinese RMB into foreign currencies. Currently, foreign
investment enterprises are required to apply for authority (renewed annually) to
open foreign currency accounts governing conversion for payment of dividends,
limited capital items such as direct investments, loans, and issuances of
securities, some of which may be effected with governmental approval, while
others require authorization.
Our subsidiaries' ability to remit funds to us may be limited by these
restrictions. There can be no assurance that the relevant regulations in China
will not be amended so as to adversely affect our ability to obtain funds from
our subsidiaries.
OUR OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED
ADDITIONAL FINANCING. ADDITIONAL FINANCING COULD ALSO RESULT IN DILUTION TO OUR
EXISTING STOCKHOLDERS OR RESTRICTIONS ON OUR FINANCIAL DISCRETION. Since
inception our investments and operations primarily have been financed through
sales of our common stock and proceeds from our current sales. In the future we
may need to raise additional funds through public or private financing, which
may include the sale of equity securities or equity or debt securities
convertible into or exchangeable for our common stock. The issuance of these
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securities could result in dilution to our stockholders. To the extent that we
raise additional capital by issuing debt securities, we would incur substantial
interest obligations, may be required to pledge assets as security for the debt
and may be constrained by restrictive financial and/or operational covenants.
Debt financing would also be superior to your interest in bankruptcy or
liquidation. To the extent we raise additional funds through licensing or other
arrangements, it may be necessary to relinquish some rights to our technologies
or products, or grant licenses on unfavorable terms.
If we are unable to raise capital when needed, our business growth strategy
may slow, which could severely limit our ability to increase revenue, and we may
be unable to take advantage of business opportunities or respond to competition.
OUR COMPLIANCE WITH THE SARBANES-OXLEY ACT AND SECURITIES AND EXCHANGE
COMMISSION (SEC) RULES CONCERNING INTERNAL CONTROLS MAY BE TIME CONSUMING,
DIFFICULT AND COSTLY. Although individual members of our management team have
experience as officers of publicly-traded companies, much of that experience
came prior to the adoption of the Sarbanes-Oxley Act of 2002. We have only
recently become a publicly-traded company. It may be time consuming, difficult
and costly for us to develop and implement the internal controls and reporting
procedures required by Sarbanes-Oxley. We may need to hire additional financial
reporting, internal controls and other finance staff in order to develop and
implement appropriate internal controls and reporting procedures. If we are
unable to comply with Sarbanes-Oxley's internal controls requirements, we may
not be able to obtain the independent accountant certifications that
Sarbanes-Oxley Act requires publicly-traded companies to obtain.
RISKS OF DOING BUSINESS IN CHINA
OUR OPERATIONS AND ASSETS ARE SUBJECT TO SIGNIFICANT POLITICAL AND ECONOMIC
UNCERTAINTIES. Changes in laws and regulations, or their interpretation, or the
imposition of confiscatory taxation, restrictions on currency conversion,
imports and sources of supply, devaluations of currency or the nationalization
or other expropriation of private enterprises could have a material adverse
effect on our business, results of operations and financial condition. Under its
current leadership, the Chinese government has been pursuing economic reform
policies that encourage private economic activity and greater economic
decentralization. There is no assurance, however, that the Chinese government
will continue to pursue these policies, or that it will not significantly alter
these policies from time to time without notice.
As China changes its economy from planned to more market-oriented,
uncertainties arise regarding governmental policies and measures. Although, in
recent years, the Chinese government has implemented measures emphasizing the
use of market forces for economic reform, reduction of state ownership of
productive assets, and establishment of sound corporate governance practices, a
substantial portion of productive assets in China are still owned by the Chinese
government. For example, all lands are state owned and leased to business
entities or individuals through governmental grants of state-owned land use
rights. The grant process is typically based on government policies at the time
of grant, which can be lengthy and complex and may adversely affect any
expansion of our operations. The Chinese government also exercises significant
control over China's economic growth through allocation of resources, foreign
currency control and providing preferential treatment to particular industries
or companies.
Products distributed outside China are subject to government regulations of
different jurisdictions, which could be stricter than in China. In some
developed countries, the government regulations for product approval could be
stricter than in China, while in developing countries, government regulation
could be uncertain.
WE ARE REQUIRED TO OBTAIN LICENSES TO EXPAND OUR BUSINESS IN MAINLAND
CHINA. Our activities must be reviewed and approved by various national and
local agencies of the Chinese government before they will issue business
licenses to us. There can be no assurance that Chinese authorities will continue
to approve and renew our licenses. If we are unable to obtain licenses or
renewals we will not be able to continue our business operations in China, which
would have a material adverse effect on our business, financial condition and
results of operations.
WEAKENED POLITICAL RELATIONS BETWEEN THE U.S. AND CHINA COULD MAKE US LESS
ATTRACTIVE. Sino-U.S. relations are subject to sudden fluctuation and periodic
tension. Changes in political conditions in China and the U.S. are difficult to
predict and could adversely affect our operations, and its future business plans
and profitability.
OUR OPERATIONS MAY NOT DEVELOP IN THE SAME WAY OR AT THE SAME RATE AS MIGHT
BE EXPECTED IF THE PRC ECONOMY WERE SIMILAR TO THE MARKET-ORIENTED ECONOMIES OF
OECD MEMBER COUNTRIES. The economy of the PRC has historically been a
nationalistic, "planned economy," meaning it functions and produces according to
governmental plans and pre-set targets or quotas. In certain aspects, the PRC's
economy has been transitioning to a more market-oriented economy. However, there
6
can be no assurance of the future direction of these economic reforms or the
effects these measures may have. The PRC economy also differs from the economies
of most countries belonging to the Organization for Economic Cooperation and
Development, an international group of member countries sharing a commitment to
democratic government and market economy. For instance:
* the number and importance of state-owned enterprises in the PRC is
greater than in most OECD countries;
* the level of capital reinvestment is lower in the PRC than in most
OECD countries; and
* Chinese policies make it more difficult for foreign firms to obtain
local currency in China than in OECD jurisdictions.
As a result of these differences, the combined company's operations may not
develop in the same way or at the same rate as might be expected if the PRC
economy were similar to those of OECD member countries.
THE ECONOMY OF CHINA HAS BEEN EXPERIENCING UNPRECEDENTED GROWTH, WHICH
COULD BE CURTAILED IF THE GOVERNMENT TRIES TO CONTROL INFLATION BY TRADITIONAL
MEANS OF MONETARY POLICY OR ITS RETURN TO PLANNED-ECONOMY POLICIES, ANY OF WHICH
WOULD HAVE AN ADVERSE EFFECT ON US. The Chinese economy's rapid growth has led
to higher levels of inflation. Government attempts to control inflation may
adversely affect the business climate and growth of private enterprise in China,
and may create a more challenging revenue and expense environment for our
business, which could have an adverse effect on our profitability.
CHINESE BUSINESS AND COMMERCIAL LAW IS RELATIVELY RECENT AND REMAINS IN
FLUX, AND WE MAY HAVE LIMITED LEGAL RECOURSE UNDER CHINESE LAW IF DISPUTES ARISE
UNDER OUR CONTRACTS WITH THIRD PARTIES. The Chinese government has enacted some
laws and regulations dealing with matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. Its experience in
implementing, interpreting and enforcing these laws and regulations, however, is
limited, and our ability to enforce commercial claims or to resolve commercial
disputes is unpredictable. If our business is unsuccessful, or other adverse
circumstances arise from our business transactions, we face the risk that our
counterparties may seek ways to terminate the transactions, or, may hinder or
prevent us from accessing important information regarding their financial and
business operations. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under Chinese law, may be limited. Without a means of
recourse by virtue of the Chinese legal system, we may be unable to prevent
these situations from occurring. The occurrence of any such events could have a
material adverse effect on our business, financial condition and results of
operations.
YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS,
ENFORCING FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN CHINA BASED ON
UNITED STATES JUDGMENTS AGAINST US, OUR SUBSIDIARIES, OFFICERS AND DIRECTORS AND
OTHERS. Substantially all of our assets are located in the PRC, and our
management reside and have their assets there. As a result, it may not be
possible for U.S. investors to effect service of process within the U.S. or
elsewhere outside the PRC on our directors or executive officers, including with
respect to matters arising under U.S. federal or state securities laws. The PRC
does not have treaties providing for reciprocal recognition and enforcement of
judgments of courts with the U.S. or many other countries. As a result,
recognition and enforcement in the PRC of such judgments in relation to any
matter, including U.S. securities laws, may be difficult or impossible. An
original action may be brought in the PRC against our subsidiaries' assets,
directors and executive officers only if the actions are not required to be
arbitrated by PRC law and the facts alleged in the complaint give rise to a
cause of action under PRC law. In connection with such an original action, a PRC
court may award civil liability, including monetary damages.
WE MUST COMPLY WITH U.S. LAWS PROHIBITING CORRUPT BUSINESS PRACTICES
OUTSIDE THE UNITED STATES, WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE. We
are required to comply with the U.S. Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business, or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel that such practices are illegal, we can not assure you that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties.
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RISKS RELATED TO OUR PRODUCTS
WE MAY INCUR SUBSTANTIAL UNINSURED LIABILITIES AND BE REQUIRED TO LIMIT
COMMERCIALIZATION OF OUR PRODUCTS IN RESPONSE TO PRODUCT LIABILITY LAWSUITS. The
manufacture, marketing and sale of our products entail inherent risks of product
liability. As a manufacturer of products designed for human consumption, we are
subject to product liability claims that use of our products has resulted in
injury. Some of our products contain vitamins, minerals, herbs and other
ingredients that are not subject to pre-market regulatory approval. Our products
could contain contaminated substances, and some of our products contain
innovative ingredients that do not have long histories of human consumption.
Previously unknown adverse reactions resulting from human consumption of these
ingredients could occur.
We may be held liable if serious adverse reactions from the use of our
products occur. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities and damage to our
commercial reputation, or be required to limit commercialization of our
products.
Our inability to obtain sufficient product liability insurance at
acceptable cost against claims could prevent or inhibit commercialization of our
products. We currently do not carry product liability insurance. We may not be
able to obtain insurance at reasonable cost, if at all. If we obtain insurance
in the future, it may not adequately compensate us for all losses that we may
incur, which could have a material adverse effect on our business.
CONSUMERS MAY NOT ACCEPT AND USE OUR PRODUCTS. Even if regulatory bodies
approve our products, consumers may not accept and use them. Acceptance and use
will depend upon a number of factors, including perceptions by the health and
nutrition community about their safety and effectiveness, changing consumer
preferences and trends, our products' cost-effectiveness relative to competing
products and the effectiveness of marketing and distribution efforts by us, our
licensees and distributors, if any. Reimbursement for our products from
government or other healthcare payors is generally minimal, and any such
reimbursement is problematic, in that payors routinely challenge prices charged,
limit coverage and provide inadequate reimbursement, which would diminish market
acceptance of our products.
Our success depends in part on our ability to anticipate and respond to
changes in consumer trends, and we may not respond in a timely or commercially
appropriate manner to them. Because markets for our products differentiate
geographically, we must accurately assess demand in each specific market into
which we wish to make sales. If we fail to invest in extensive market research
on consumer health needs in each market we target, we may face limited market
acceptance of our products, which could have a material adverse effect on our
sales and earnings. If we cannot compete successfully for market share against
other drug companies, we may not achieve sufficient product revenues, and our
business will suffer.
OBTAINING AND MAINTAINING NECESSARY REGULATORY APPROVALS FOR OUR PRODUCTS
MAY BE TIME CONSUMING, DIFFICULT AND COSTLY. IF WE FAIL TO DO SO, WE WILL BE
UNABLE TO SELL OUR PRODUCTS IN SOME AREAS. Our current products require and have
obtained regulatory review and approval for sale. We anticipate that future
product candidates we develop will also require such review and approval.
Government regulation includes inspection of and controls over testing,
manufacturing, safety and environmental standards, efficacy, labeling,
advertising, promotion, record keeping and sale and distribution generally. The
required effort to achieve approval may be time consuming, difficult and costly,
and we cannot predict whether such approvals would be obtained in particular
cases. Regulators have substantial discretion in approving products such as
ours, and may either decline to do so or require us to spend considerable effort
to achieve a different result. That process may also be delayed by changes in
government regulation, future legislation, administrative action or changes in
policy that occur prior to or during regulatory review. Delays in obtaining
regulatory approvals may delay commercialization of, and our ability to derive
product revenues from, the affected products, impose costly procedures on us,
and diminish any competitive advantages we may otherwise enjoy.
In addition, even after approval, regulated products are subject to
continuing review, reporting requirements and other compliance obligations. The
discovery of previously unknown problems with our products, our own
manufacturing or manufacturing by third parties, may result in restrictions on
our products or in their manufacture, including withdrawal of the product from
the market.
Internationally, our products are subject to regulatory requirements that
vary by country. Obtaining approval to sell our products internationally
involves complexities of dealing with a variety of governmental regulations. We
have limited experience in dealing with the specific regulations that may be
required to sell our products in certain international markets, which could
8
delay our ability to obtain relevant regulatory approval for our products. In
addition, our product sales in other countries are subject to product regulatory
regimes of various degrees and direct marketing or distribution regulations.
There can be no assurance that our current operations will not be adversely
affected by compliance issues and changes in applicable laws and regulations in
relevant jurisdictions.
WE RELY ON A LIMITED NUMBER OF VENDORS TO SUPPLY RAW MATERIALS AND FINISHED
GOODS FOR OUR PRODUCTS. Regulatory authorities also periodically inspect
manufacturing facilities, including third parties who manufacture our products
or our active ingredients for us, and may challenge their qualifications or
competence. Pharmaceutical manufacturing facilities must comply with applicable
good manufacturing practice standards, and manufacturers usually must invest
substantial funds, time and effort to ensure full compliance with these
standards and make quality products. We do not have control over our contract
manufacturers' compliance with these requirements. Failure to comply with
regulatory requirements can result in sanctions, fines, delays, suspensions of
approvals, seizures or recalls of products, operating restrictions,
manufacturing interruptions, costly corrective actions, injunctions, adverse
publicity against us and our products and criminal prosecutions.
If we are unable to obtain sufficient supplies of raw materials, if
climatic or environmental conditions adversely affect them or if they increase
significantly in price, our business would be seriously harmed. If any of our
current or future third-party suppliers cease to supply products in the quantity
and quality we need to manufacture our products, or if they are unable to comply
with applicable regulations, the qualification of other suppliers could be a
lengthy process, and there may not be adequate alternatives to meet our needs.
As a result, we may not be able to obtain the necessary ingredients used in our
products in the future on a timely basis, if at all. This would negatively
affect our business.
MANUFACTURING RISKS. There are risks associated with ingredients mixing and
production processes and techniques. Our manufacturing process requires a
significant degree of technical expertise. If we fail to manufacture our
products to specifications or inadvertently use defective materials in the
manufacturing process, the reliability and performance of our products will be
compromised.
Any significant disruption in our manufacturing operations for any reason,
such as regulatory requirements and loss of certifications, power interruptions,
fires, hurricanes, war or other force majeure, could adversely affect our sales
and customer relationships.
IF WE FAIL TO PROTECT ADEQUATELY OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, OR TO SECURE RIGHTS TO PATENTS OF OTHERS, THE VALUE OF OUR INTELLECTUAL
PROPERTY RIGHTS COULD DIMINISH. Our success, competitive position and revenues
will depend in part on our ability, and the ability of our licensors, to obtain
and maintain patent or other intellectual property protection for our products,
methods, processes and other technologies, to preserve our trade secrets, to
prevent third parties from infringing on our proprietary rights and to operate
without infringing the proprietary rights of third parties.
Our patents, trade secrets, trademarks, service marks and similar
intellectual property are critical to our success. We rely on patent, trademark
and trade secret law, as well as confidentiality and license agreements with our
employees, customers, partners and others, to protect our proprietary rights. We
have received patent protection for certain of our products in the People's
Republic of China. We have not applied for any patent or other protection in
countries other than China. We cannot predict the degree and range of protection
patents or other intellectual property rights will afford us against
competitors, including whether third parties will find ways to invalidate or
otherwise circumvent our patents, if and when patents will issue, whether or not
others will obtain patents claiming aspects similar to ours, or if we will need
to initiate litigation or administrative proceedings, which may be costly
whether we win or lose.
Our success also depends on the skills, knowledge and experience of our
employees, consultants, advisors, licensors and contractors. To help protect our
proprietary know-how and inventions for which patents may be unobtainable or
difficult to obtain, we rely on trade secret protection and confidentiality
agreements. To this end, we require all of our employees, consultants, advisors
and contractors to enter into confidentiality and, where applicable, grant-back
agreements. These agreements may not provide adequate protection in the event of
unauthorized use or disclosure or the lawful development by others of such
information. If any of our intellectual property is disclosed, its value would
be significantly impaired, and our business and competitive position would
suffer.
IF WE INFRINGE THE RIGHTS OF THIRD PARTIES, WE COULD BE PREVENTED FROM
SELLING PRODUCTS, FORCED TO PAY DAMAGES, AND COMPELLED TO DEFEND AGAINST
LITIGATION. We could also incur substantial costs, and have to obtain licenses,
which may not be available on commercially reasonable terms (if at all),
redesign our products or processes, stop using the subject matter claimed in the
asserted patents, pay damages or defend litigation or administrative
proceedings. All these may be costly, whether we win or lose, and could result
in a substantial diversion of valuable management resources.
9
We believe we do not infringe others' proprietary rights. However, we
cannot guarantee that no third party will claim infringement in the future.
Resolving such issues traditionally has resulted, and could in our case result,
in lengthy and costly legal proceedings, the outcome of which cannot be
predicted accurately.
RISK RELATED TO MANAGEMENT
THE CONCENTRATED OWNERSHIP OF OUR CAPITAL STOCK MAY BE AT ODDS WITH YOUR
INTERESTS, AND HAVE THE EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL OF
OUR COMPANY. Our directors, officers, key personnel and their affiliates as a
group beneficially own or control the vote of approximately 84.96% of our
outstanding capital stock, and control the Company. They will be able to
continue to exercise significant influence over all matters affecting the
Company, including the election of directors, formation and execution of
business strategy and approval of mergers, acquisitions and other significant
corporate transactions, which may have an adverse effect on the stock price.
They may have conflicts of interest and interests that are not aligned with
yours in all respects.
MANAGEMENT IS INEXPERIENCED IN RUNNING A U.S. PUBLIC COMPANY. We are
managed by a management team that is relatively unfamiliar with the capital
market and the processes by which a U.S. public company should be managed and
operated. Management is currently making efforts to familiarize itself with the
relevant laws, rules and regulations and market practice, but there can be no
assurance that it can master the relevant knowledge and skills and set up the
required systems in time to prevent mistakes and to meet shareholder and market
expectations.
WE MAY NOT SUCCESSFULLY MANAGE OUR GROWTH. Our success will depend upon the
expansion of our operations and the effective management of our growth, which
will place a significant strain on our management and administrative,
operational, and financial resources. To manage this growth, we must expand our
facilities, augment our operational, financial and management systems, and hire
and train additional qualified personnel. If we are unable to manage our growth
effectively, our business would be harmed.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES FOR WHICH YOU
MAY DISAGREE. Our management will have considerable discretion in using the
proceeds of this Offering, and you will not have an opportunity, as part of your
investment decision, to assess whether the proceeds are being used
appropriately. The proceeds may be used for corporate purposes with which you
may disagree.
RISKS SPECIFIC TO THIS OFFERING
WHEN THIS OFFERING BECOMES EFFECTIVE, THERE WILL BE A SIGNIFICANT NUMBER OF
SHARES OF COMMON STOCK ELIGIBLE FOR SALE, WHICH COULD DEPRESS THE MARKET PRICE.
IT IS UNLIKELY THAT ALL THE SHARES TO BE SOLD IN THIS OFFERING COULD BE SOLD
WITHOUT OUR STOCK'S MARKET PRICE BEING MATERIALLY ADVERSELY AFFECTED. Shares may
also be offered from time to time in the open market pursuant to Rule 144: these
sales may have a depressive effect as well. In general, a person who has held
restricted shares for a period of one year may, upon filing a notification with
the SEC Form 144, sell into the market common stock in an amount equal to the
greater of one percent of the outstanding shares or the average weekly trading
volume during 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.
In particular, sales of significant amounts of shares held by our directors
and executive officers, or the prospect of these sales, could adversely affect
the market price of our common stock.
There are short selling activities in both the Pink Sheets and OTCBB, where
our stock is quoted. Short-selling is market selling a position not backed by
any possession of the subject shares, generally in anticipation of a decline in
a stock's price. Short sales are often conducted by speculators, and may further
depress our common stock price.
WE CANNOT ASSURE YOU THAT THE COMMON STOCK WILL BECOME LIQUID OR THAT IT
WILL BE LISTED ON A SECURITIES EXCHANGE. We currently have no plans to seek to
have the Company's common stock listed on NASDAQ or a national securities
exchange. If we determine to do so in the future, however, we cannot assure you
that we will be able to meet the initial listing standards of any other trading
system or stock exchange, or that we will be able to maintain any such listing.
Because we became public by means of a reverse merger, we may not attract
the attention of major brokerage firms, since there is little incentive to
brokerage firms to recommend the purchase of our common stock. No assurance can
be given that brokerage firms will want to conduct any secondary offerings on
our behalf in the future.
10
BECAUSE OUR STOCK IS QUOTED IN BOTH THE PINK SHEETS AND OTCBB, INFORMATION
CONCERNING THE VALUE OF OUR STOCK MAY BE DIFFICULT TO OBTAIN AND UNRELIABLE, AND
OUR STOCK PRICE MAY BE VOLATILE. There has only been a limited public market for
our securities, and there can be no assurance that an active trading market will
be maintained. Both the Pink Sheets and OTCBB are a relatively unorganized,
inter-dealer, over-the-counter market that provides significantly less liquidity
than NASDAQ and the national securities exchanges. Both the Pink Sheets and
OTCBB securities are frequent targets of fraud or market manipulation, both
because of their generally low prices and because both the Pink Sheets and OTCBB
issuer reporting requirements are less stringent than those of the stock
exchanges or NASDAQ. Dealers' spreads (the difference between the bid and ask
prices) may be large in both the Pink Sheets and OTCBB transactions, causing
higher purchase prices and less sale proceeds for purchasers or sellers of our
securities. Trades and quotations in both the Pink Sheets and OTCBB involve a
manual process that may delay order processing. Price fluctuations during a
delay can result in the failure of a limit order to execute or cause execution
of a market order at a price significantly different from the price prevailing
when an order was entered. Consequently, one may be unable to trade in our
common stock at optimum prices.
The trading price of our common stock is expected to continue to fluctuate
significantly, and, as is the case for both the Pink Sheets and OTCBB securities
generally, is not published in newspapers. It is not necessarily a reliable
indicator of our stock's fair market value or fair value. There is a significant
risk that the market price of our common stock will decrease in the future in
response to variations in our quarterly operating results; announcements that
our revenue or income are below analysts' expectations; general economic
slowdowns; changes in market valuations of similar companies; sales of large
blocks of our common stock; announcements by us or our competitors of
significant contracts, acquisitions, strategic partnerships, joint ventures or
capital commitments; or fluctuations in stock market prices and volumes, which
are particularly common among highly volatile securities of
internationally-based companies.
Because of the concentration of ownership of our stock in its hands,
Company management has the ability to exert significant control over our affairs
requiring stockholder approval, including approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying or
preventing a change in control, including a merger, consolidation or other
business combination involving us, or discouraging a potential acquirer from
making a tender offer or otherwise attempting to obtain control, even if such
change of control would benefit our other shareholders.
The price in this offering will fluctuate based on the prevailing market
price of our common stock in both the Pink Sheets and OTCBB. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
ACCORDING TO THE SEC, THE MARKET FOR PENNY STOCKS HAS SUFFERED IN RECENT
YEARS FROM PATTERNS OF FRAUD AND ABUSE. REGULATIONS TO COMBAT MANIPULATION MAY
RESTRICT THE MARKET FOR OUR COMMON STOCK. Our management is aware of the abuses
that have occurred historically in the penny stock market, such as control of
the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; manipulation of prices through prearranged
matching of purchases and sales and false and misleading press releases; "boiler
room" practices involving high pressure sales tactics and unrealistic price
projections by inexperienced sales persons; excessive and undisclosed bid-ask
differentials and markups by selling broker-dealers; and dumping of securities
after prices have been manipulated to a high level, resulting in investor
losses.
To protect investors from this activity, the SEC has adopted regulations
that generally define a "penny stock" to be any equity security having a market
price (as defined) less than $5.00 per share, or an exercise price of less than
$5.00 per share, subject to certain exceptions. As a result, broker-dealers
selling our common stock are subject to additional sales practices when they
sell such securities to persons other than established clients and "accredited
investors." For transactions covered by these rules, before the transaction is
executed, the broker-dealer must make a special customer suitability
determination, receive the purchaser's written consent to the transaction and
deliver a risk disclosure document relating to the penny stock market. The
broker-dealer must also disclose the commission payable to both the
broker-dealer and the registered representative taking the order, current
quotations for the securities and, if applicable, the fact that the
broker-dealer is the sole market maker and the broker-dealer's presumed control
over the market. Monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. "Penny stock" rules may restrict trading in our
common stock.
IF YOU PURCHASE SHARES IN THIS OFFERING, YOU MAY EXPERIENCE IMMEDIATE,
SUBSTANTIAL AND ONGOING DILUTION. If you purchase shares in this offering, your
per-share interest in our pro forma net tangible book value may be substantially
less than the price you paid for your shares. In the event we obtain additional
funding, such financings may also dilute you. If in the future we issue options
or other securities as part of compensation plans or incentives to our employees
or others, the issuance and/or exercise of such instruments may dilute you
further.
11
THERE MAY BE ISSUANCES OF SHARES OF PREFERRED STOCK IN THE FUTURE. Although
we currently do not have preferred shares outstanding, the board of directors
could authorize the issuance of a series of preferred stock that would grant
holders preferred rights to our assets upon liquidation, the right to receive
dividends before dividends would be declared to common stockholders, and the
right to the redemption of such shares, possibly together with a premium, prior
to the redemption of the common stock. To the extent that we do issue preferred
stock, the rights of holders of common stock could be impaired thereby,
including without limitation, with respect to liquidation.
WE HAVE NOT RETAINED INDEPENDENT PROFESSIONALS FOR YOU. We have not
retained any independent professionals to review or comment on this Offering or
otherwise protect your interests. Although we have retained our own counsel, no
one involved with the offering has made any independent examination of any
factual matters represented by management herein, and purchasers of the shares
offered hereby should not rely on any such firms so retained with respect to any
matters herein described.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholder.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted in both the Pink Sheets and OTCBB under the
symbol "GBLP." The following table sets forth, for the calendar quarters
indicated, the range of high and low bid prices of common stock reported by the
Pink Sheets and OTCBB since February 9, 2005, the date of its acquisition of the
business of its predecessor, Natural Pharmatech. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions. Prior to February 9, 2005, the Company, under
different management and a different name, was either in other lines of business
or was dormant, and Natural Pharmatech was a privately-held British Virgin
Islands company based in the People's Republic of China.
High Low
---- ---
FISCAL 2005
First Quarter (from February 9) $3.00 $0.31
Second Quarter 1.80 0.70
Third Quarter 1.80 0.70
Fourth Quarter 2.50 1.01
FISCAL 2006
First Quarter 2.50 1.45
Second Quarter 2.00 1.25
Third Quarter 1.80 1.80
Fourth Quarter (through December 22) 1.80 0.75
As of December 22, 2006, there were 147 record holders of our common stock.
The total number of beneficial holders is unknown as they hold our common stock
in street name, and such number is not provided to us by our Transfer Agent and
Registrar.
We have not paid any cash dividends on our common stock, and we currently
intend to retain any future earnings to fund the development and growth of our
business.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
prospectus. The information in this discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations,
including but not limited to the following:
12
* our ability to raise funds in the future through public or private
financings;
* our ability to develop marketable products through our research and
development efforts;
* our ability to protect our patents and technologies and related
intellectual properties;
* customers' acceptance of our products;
* our ability to compete against new companies entering the Chinese
pharmaceutical market and larger, more established companies which
have more resources than our company;
* our business expenses being greater than anticipated due to
competitive factors or unanticipated developments;
* changes in political and economic conditions in China;
* changes in Chinese laws and regulations applicable to our business,
including the Administration of Pharmaceuticals, the rules and
regulations of the State Food and Drug Administration, the Good Supply
Practice standards, and the inclusion of our products in the insurance
catalogue of the Ministry of Industry and Social Security;
* our ability to retain management and key personnel; and
* our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical fact
may be deemed to be forward-looking statements. For example, words such as
"may," "will," "should," "estimates," "predicts," "potential," "continue,"
"strategy," "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Actual results could
differ materially from those anticipated in these statements as a result of a
number of factors, including our good faith assumptions being incorrect, our
business expenses being greater than anticipated due to competitive factors or
unanticipated development or sales costs or our revenues not materializing in
the manner anticipated. The forward-looking statements may also be affected by
the additional risks faced by us as described in this prospectus and in our SEC
filings. All forward-looking statements included in this prospectus are based on
information available to us on the date hereof, and we assume no obligation to
update any such forward- looking statements.
BACKGROUND
Global Pharmatech, Inc. (Global Pharmatech," the "Company," "we," "us" or
"ours) was incorporated under the laws of the State of Delaware in 2001 under
the name Autocarbon.com, Inc. On November 1, 2002, we filed a Certificate of
Ownership with the Secretary of State of the State of Delaware whereby we merged
with our wholly owned subsidiary and amended our Certificate of Incorporation
changing our name to Autocarbon, Inc.
On January 24, 2005, our company entered into a Share Purchase Agreement
with Natural Pharmatech, Inc., a British Virgin Islands corporation (Natural
Pharmatech), and the shareholders of Natural Pharmatech. Under the terms of the
Share Purchase Agreement, we agreed to acquire 100% of Natural Pharmatech's
shares in exchange for 80% of our common stock, to be issued to the Natural
Pharmatech shareholders. Our acquisition of Natural Pharmatech was completed on
February 9, 2005. In connection with this transaction, we amended our
Certificate of Incorporation on January 31, 2005 changing our name to Global
Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market proprietary
drugs and nutritional supplements that are based on traditional Chinese
medicine. We also offer a full range of "start to finish" biotechnology
services, including research and development, testing, manufacturing drugs in
liquid and solid dose forms, sales and marketing. We utilize unique extraction
methods and innovative techniques that have been developed by our research and
development team. Our core business is to license our patents and technologies
for botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China,
the United States, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. Sales
outside China are made either directly to foreign distributors by our
subsidiary, Jilin Ben Cao Tang Pharmacy Co., Ltd. (BCT Pharmaceuticals), or
through China Ben Cao Tang International Development Ltd. (BCT Pharmaceuticals
HK), which sells on to those areas indicated above.
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Natural Pharmatech was formed on February 2, 2004 under the laws of the
British Virgin Islands. Natural Pharmatech was formed as a holding company to
own the five subsidiaries that make up Natural Pharmatech's business operations.
Natural Pharmatech (Jilin China) Co., Ltd. (Natural Pharmatech China) is a
wholly owned subsidiary of Natural Pharmatech located in Changchun in Jilin
Province of China. Natural Pharmatech China originated as a research department
within the Affiliated Hospital of Changchun Traditional Chinese Medicine
College. It was organized as a separate private for-profit entity in February
2001.
Natural Pharmatech China has four subsidiaries: BCT Pharmaceuticals, Jilin
Yi Cao Tang Pharmacy Co., Ltd. (YCT Pharmaceuticals), Jilin Tian Yao Drug Safety
Evaluation Co., Ltd. (Jilin Evaluation) and Changchun Xiandai Technology Inc.
Natural Pharmatech China owns 75% of the shares of BCT Pharmaceuticals, which
was established in September 2002 as a Sino-foreign joint venture with BCT
Pharmaceuticals HK, a Hong Kong distributor of natural drugs. BCT
Pharmaceuticals is principally engaged in the manufacture and sale of Chinese
medicine of the solid dose type, and is capable of manufacturing 15 drugs in
three forms. Our solid dose and capsule manufacturing, pre-manufacturing and
extraction plants received a national GMP (Good Manufacturing Practice)
certificate in April 2004.
Natural Pharmatech China owns 95% of the shares of YCT Pharmaceuticals,
which was established in September 2003. It is engaged in the manufacturing and
sales of Chinese and Western medicine. YCT Pharmaceuticals obtained a national
GMP certificate in July 2004, and is capable of manufacturing 78 drugs in eight
forms.
Natural Pharmatech China owns 99.5% of the shares of Jilin Evaluation,
which was established in April 2003. It is engaged in pharmacology, safety
pharmacology, and short and long term toxicology studies. Jilin Evaluation
obtained a national GLP (Good Laboratory Practice) certificate in December 2004.
Natural Pharmatech China owned 51% of the shares of Jilin Mai Di Xing
Medication Development Co., Ltd., which was established in July 2003. Jilin
Development focused on research and development, and technique consulting.
Natural Pharmatech China sold Jilin Development in December, 2005.
On March 17, 2005, we established a new wholly-owned subsidiary, Global
Health System Inc. (GHS), in New York, which will sell our products principally
in the United States. GHS has not yet commenced operations
On May 13, 2005, we changed our fiscal year end from March 31 to December
31. Natural Pharmatech's (and its subsidiaries') fiscal year end is December 31,
and we elected to change our fiscal year end to match our operating companies'
fiscal year end.
In June 2005, JTY, the Company's wholly-owned subsidiary, acquired an 80%
equity interest in a new company, Changchun Xiandai Technology Inc. ("XD"), by
making a $719,000 investment (total capital of XD is RMB 10 million; JTY
contributed RMB 8 million).
Since inception, our revenues have been mainly generated from technical
related services, including the sale of patents and research services. We have
recently sought to increase revenues from sales of goods, through the operations
of our two manufacturing subsidiaries, BCT Pharmaceuticals and YCT
Pharmaceuticals.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND
SEPTEMBER 30, 2005.
REVENUE. Revenue from goods sold is recognized when title has passed to the
purchaser, which generally is at the time of delivery. The revenues earned for
the nine months ended September 30, 2006 and 2005 were $1,349,092 and
$1,047,824, respectively. This increase was attributable to strong sales of the
Company's recently introduced "Jutai" brand dietary supplements. The increase in
sales was partially offset by a decline in sales at the Company's YCT subsidiary
as the subsidiary underwent a temporary stoppage of production as it improved
its facilities.
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues for the nine months ended
September 30, 2006 and 2005 were $328,192 and $1,031,630, respectively. The
decrease was primarily attributable to the effect of a major, disproportionately
large contract in 2005. The Company did not experience a similar contract during
the first nine months of 2006.
14
Revenue derived from experiments, research and related ancillary services
is recognized when the customer accepts the service. Such revenues are $7,916
and $184,414 in 2006 and 2005, respectively. This decrease was due to the fact
that the Company was successful in having substantially all of its research
activities classified as "technology transfer". A classification of technology
transfer rather than revenue derived from experiments allows the Company an
exemption from Chinese sales taxes on the revenue derived from such services.
Accordingly, this change became effective on January 1, 2006 and will affect
revenue classification comparison going forward.
MISCELLANEOUS INCOME. Miscellaneous income consisted principally of
government grants and revenue accrued from a judgment issued by the Chinese
Court of Final Appeal.
Government grants for the nine months ended September 30, 2006 and 2005
were approximately $115,000 and $419,800, respectively. Government grants are
opportunistically granted and will therefore fluctuate widely from period to
period.
In May, the Company won a judgment of approximately $410,000 from the
Chinese Court of Final Appeal related to litigation involving the transfer of
drug technology to a research hospital. The Company's outside (PRC) counsel
advised the Company's management in July 2006 that the Company would receive the
money from the research hospital by the end of August 2006. However, the money
was not received by August 2006.
In early November 2006, a three-way legal arrangement was entered into
between the Company, the research hospital, and the spouse of the chairperson of
our Company. In exchange for waiving a pre-existing debt between the research
hospital and the spouse of our Company's chairperson, the spouse undertook to
pay the $410,000 judgment on behalf of the research hospital to our Company. As
of December 4, 2006, the judgment had been paid in full.
As the Company had determined the judgment had a high probability of being
paid, the Company made a full accrual for this revenue for the nine months ended
September 30, 2006.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES. R&D expenses for the nine months
ended September 30, 2006 were $98,979, as compared to $260,883 for the same
period last year. The decrease was principally due to the Company's shift to a
more sales-focused operation, rather than just research and development.
Additionally, for the third quarter ended September 30, 2006, we added back
research and development expenses of approximately $135,000 due to
reclassification of certain accounts in the quarter; the net effect for the full
nine months ended September 30, 2006 is unchanged.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2006 was
$1,078,528 as compared to $1,206,969 as reported in the same period last year.
As the Company's YCT subsidiary experienced a temporary stoppage to upgrade
facilities, gross profit decreased. As a percentage of sales, gross profit
increased to 64% for the first nine months of 2006 from 53% in the same period
last year; the increase was primarily as the result of a higher contribution
from sales of the Company's "Jutai" brand product which have higher gross
margins.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 2006 were $1,302,464, as compared to
$970,821 for the same period last year. These expenses increased as the Company
continued to incur administrative expenditures of being a U.S. publicly traded
company and incurred expenses as it sought to implement strategic objectives to
increase its market size.
ADVERTISING EXPENSE. Advertising expenses were approximately $35,000 for
the nine months ended September 30, 2006, a considerable decrease from the
$167,296 recorded in the same period last year. This decrease was due to a major
marketing drive last year to introduce the Company's "Jutai" brand dietary
supplements. The Company did not deem it necessary to conduct a similar campaign
this year.
LIQUIDITY AND CAPITAL RESOURCES. As of September 30, 2006, we had cash of
$5,295,147. For the nine months then ended, we used cash of $227,506 in our
operating activities. The significant reasons for the provision of cash are:
1) the net loss for the nine months ended of $39,749;
2) the decrease in related party receivable of $547,228;
3) an increase in other current assets of (1,163,057).
Financing activities: The issuing of common stock to an investor netting
proceeds of $4,601,621
Investing activities: During this quarter, excluding purchases of certain
fixed assets, we had no material investing activities.
15
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005
REVENUE. Sales for the current year were $3,085,175, an increase of
$1,529,505, or 98%, compared with revenue in the same period of 2004. These
revenues were derived as follows: revenue from goods sold was $1,694,000,
contract revenue earned from the transfer of technology was $1,150,000, and
revenue derived from experiments, research and related ancillary services was
$241,000.
Sales of goods principally increased from YCT, which attained its GMP
attestation from the Chinese government in the middle of 2004, and increased its
operations in the beginning of 2005. For the year ended December 31, 2005,
revenue from goods sold from YCT increased $520,002, or 86%, compared with
revenue from YCT goods sold in the same period of 2004, which totaled $603,802.
For all our subsidiaries for the period, revenue from goods sold increased
$752,000, or 80%, compared with the same period of 2004, which totaled $942,000.
Contributing to the increase was an increase in the number of products offered
by YCT during 2005.
Contract revenue earned from the transfer of technology increased $674,000
or 142%, compared with contract revenue in the same period of 2004, which
totaled $476,000. One of the principal reasons for the increase was a major
technology agreement signed with an unrelated Changchun, China company in 2005.
COST OF SALES. Cost of sales for the year ended December 31, 2005 was
$1,400,014, an increase of 162% from $533,770 for 2004. The increase is directly
associated with the corresponding increase in revenues generally and those from
sales of goods, which have higher costs of sales than our other revenue streams.
GROSS PROFIT. Gross profit for the year ended December 31, 2005 was
$1,685,161, an increase of 65% from $1,021,900 for the corresponding period of
2004. Gross profit percentage for the year ended December 31, 2005 was 55%,
compared to 66% 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.
ADVERTISING EXPENSES. Advertising expenses increased substantially, to
$173,828 for the year ended December 31, 2005, compared to $17,802 for 2004. The
increase was due to a major promotional campaign launched by BCT to increase
sales and product awareness.
SELLING EXPENSES. Selling expenses were $91,980, for the year ended
December 31, 2005, as compared to $40,832 for the corresponding period of 2004,
an increase of 125%. The increase in selling expenses was principally due to the
increase in employees on the sales team, as the company develops additional
sales channels.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 2005 increased $403,525 or 46%, over such
expenses for the same period of 2004, due principally to expenses associated
with becoming a U.S. public company.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development (R&D) expenses
remained flat in 2005 at $508,405. These expenses were essentially unchanged
from 2004 expenses of $507,578 as the Company continued to invest in its product
pipeline. The Company currently has projects in various stages of completion,
some in early stages and some that are close to gaining approval to market.
OTHER INCOME. Other income is principally government grants. Each year, the
Chinese government provides allowances to help companies doing business in
medical pharmaceuticals research and development. These payments vary according
to the projects we are engaged in and the priorities of the government in
funding particular efforts. In 2005, government grants totaled $695,160, down
22% from 2004's total $892,845.
16
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, we had cash of $690,835 and working capital of
$3,861,468, and for the year we earned net income of $200,695. During 2005 we
used cash of $1,860,329 in our operating activities. The significant reasons for
the use of cash are:
* an increase in accounts receivable of $1,114,427;
* an increase in related party receivables of $581,302;
* an increase in other receivables of $409,389;
* an increase in accounts payable and accrued expenses of $26,645;
* a decrease in advances from customers of $48,257;
During the year ended December 31, 2005, we invested cash of $363,431
towards the purchase of fixed assets, with the main payment being for a building
for YCT. We borrowed two long-term loans from two separate banks totaling
$2,583,315. We also issued 1,129,183 shares of common stock raising net proceeds
of $1,264,110.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
DESCRIPTION OF BUSINESS
INTRODUCTION
Global Pharmatech, Inc. develops, manufactures and markets proprietary
drugs and dietary supplements based on China's five millennia of clinical
experience in traditional Chinese medicine and using modern pharmaceutical
technologies. We also offer a full range of "start to finish" biotechnology
services, including drug discovery (basic research leading to the detection of
new drug candidates), preclinical research and clinical experimentation. We
utilize unique extraction methods and innovative techniques that have been
developed by our research and development team. Our core businesses are to
license our patents and technologies relating to botanical/biological drugs to
other pharmaceutical companies, and to manufacture and market our products in
China and around the globe. Our operations are currently conducted, through our
subsidiaries, in the People's Republic of China, with sales distribution in
China, the United States, Hong Kong, Malaysia, Singapore and Indonesia. Sales
outside China are made either directly to foreign distributors or through a Hong
Kong-based distributor, which sells on to those areas indicated above.
Global was incorporated in Delaware in 2001 under the name Autocarbon.com,
Inc. Under previous management, the Company engaged in several businesses, now
discontinued, that were unrelated to our current one. In early 2005, the Company
entered into a share purchase agreement with Natural Pharmatech, Inc. and its
shareholders, under which we acquired all of Natural Pharmatech's shares in
exchange for 80% of our common stock issued to Natural Pharmatech's
shareholders. As a result of this transaction, we are now controlled by Natural
Pharmatech's shareholders, and our business is now the Natural Pharmatech
business.
Natural Pharmatech was formed in 2004 under British Virgin Islands law as a
holding company to own the subsidiaries that make up our business operations.
Its principal subsidiary, Natural Pharmatech (Jilin China) Co., Ltd. (Natural
Pharmatech China) is located in Changchun, Jilin Province of China, where it
originated as a research department within the Affiliated Hospital of Changchun
Traditional Chinese Medicine College. It was organized as a separate private
for-profit entity in February 2001.
Our principal executive offices are in the People's Republic of China,
located at 509 Maoxiang St., Changchun, People's Republic of China. Our
telephone number there is +86-431-5541869. We also maintain an office at 89
Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6, where our telephone
number is 1-905-787-8225.
17
ORGANIZATIONAL HISTORY AND CORPORATE STRUCTURE
Natural Pharmatech was formed on February 2, 2004 in the British Virgin
Islands as a holding company to own the subsidiaries that make up our business
operations. Its principal subsidiary, Natural Pharmatech China, has four
subsidiaries: (1) Jilin Ben Cao Tang Pharmacy Co., Ltd. (BCT Pharmaceuticals);
(2) Jilin Yi Cao Tang Pharmacy Co., Ltd. (YCT Pharmaceuticals); (3) Jilin Tian
Yao Drug Safety Evaluation Co., Ltd. (Jilin Evaluation); and (4) Changchun
Traditional Chinese Medicine (TCM) Technology Service Company, Ltd. (Changchun
TCM). A former subsidiary, Jilin Mai Di Xing Medication Development Co., Ltd.,
was sold in December, 2005.
Natural Pharmatech China owns 75% of BCT Pharmaceuticals, which was
established in September 2002 as a joint venture with China Ben Cao Tang, a Hong
Kong distributor of natural drugs. BCT Pharmaceuticals is principally engaged in
the manufacture and sale of Chinese medicine in solid dose form.
Natural Pharmatech China owns 95% of YCT Pharmaceuticals, established in
September 2003 and principally engaged in the manufacture and sale of Chinese
medicine in liquid dose form and in commissioned processing of health food.
Natural Pharmatech China owns 99.5% of Jilin Evaluation, established in
April 2003 and principally engaged in performing toxicity research, including
acute toxicity testing and long-term toxicity observations, for different kinds
of new drugs.
Natural Pharmatech China owns 80% of Changchun TCM, which was established
in 2005 with Changchun Science and Technology Enterprise Service Center, and
focuses on research and development.
On March 17, 2005, we established a new wholly-owned subsidiary, Global
Health System Inc. (GHS), in New York, which will sell our products principally
in the United States. GHS has not yet commenced operations.
TRADITIONAL CHINESE MEDICINE (TCM)-BASED BOTANICAL DRUG PRODUCTS
We use the phrase "Traditional Chinese Medicine" to refer to a range of
medical materials used in China for the treatment of human disease over the past
five millennia, including botanical materials, minerals and materials prepared
from animals. Our company is focusing on the development of botanical drug
products based on China's five millennia of clinical experience in traditional
Chinese medicine and using modern pharmaceutical technologies. As currently
practiced in China, botanical drug products are used as prescription drugs or
complements to Western medicines.
Traditional Chinese Medicine is a significant part of the public health
care system in China. TCM products are sold over-the-counter and via
prescription, and their cost to consumers is covered by China's medical care
systems. Since 2000, Natural Pharmatech, through its operating subsidiaries, has
been identifying the active ingredients used in botanical medical materials,
isolating those ingredients, testing them, and selling development rights to
other manufacturers.
OUR CURRENT PRODUCTS
Our product line consists of more than 90 products, primarily TCM-based
prescription drugs, over-the-counter drugs and dietary supplements, including
several western medicines and bio-medicines. We sell our products through
distributors and directly to consumers through our own sales team. We currently
have three principal drugs that are patented in China and approved for sale by
the Chinese State Food & Drug Administration (SFDA):
QINGXUAN ANTI-HYPERTENSION TABLET is an SFDA-approved over-the-counter drug
product indicated for the treatment of hypertension and high serum cholesterol
level. The drug substance of Qingxuan is extracted from a single Chinese medical
herb, radish seed. The extract contains methyl mercaptan, erucic acid,
octadecatrienoic acid, nC13, Glycerol sinapate, raphanin, cyanidin and coumarin.
Pharmacology experiments showed that Qingxuan may reduce blood pressure in
several animal models. In a three-month toxicity study, after Qingxuan was
orally given to mice at ten to 40 times greater than human clinical dose (based
on body surface areas), no mortality or organ toxicity was observed in the
animal tested. As an over-the-counter drug product, these tablets can be
marketed in China without prescription.
18
The JUTAI SOFT CAPSULE is an SFDA-approved dietary supplement. Substances
of this product are extracted from ginseng and ECHINACEA PURPUREA , a plant
originally grown in North America. This dietary supplement and energy provider
was developed by Global Pharmatech. As reported previously in the literature,
ECHINACEA PURPUREA may increase the concentration of blood leukocyte and enhance
human immunity. In addition, Jutai is approved for sale to combat fatigue.
HUANGZHIHUA ORAL LIQUID is an SFDA-approved prescription drug for the
treatment of common cold, especially for children. The drug substances of
Huanzhihua are extracted from several Chinese herbs. Global Pharmatech developed
this product based upon the written experience of more than a thousand years of
Chinese medical practice. Pharmacology studies illustrated that Huangzhihua can
inhibit the growth of various bacterium in vitro, and inhibit the proliferation
of influenza virus in mouse lungs in vivo and has been shown to have
anti-inflammatory benefits in animal models. Long-term toxicology studies showed
that orally administered Huangzhihua drug substance at 25 or 50 g/kg/day
(several times greater than the human clinical dose) did not induce significant
organ toxicity in rats. A clinical study demonstrated that Huangzhihua could
significantly reduce symptom of common cold in a randomized, comparator
controlled clinical trial. Stability studies showed that the drug product was
stable within 3 years testing period. According to Chinese regulations,
Huangzhihua has been granted a seven-year administrative market protection by
the SFDA.
In addition to these patented products, Global Pharmatech manufactures and
sells other proprietary drugs, generics and dietary supplements used to treat
symptoms ranging from headaches, coughing and dry mouth to infections and
numbness of limbs.
RESEARCH AND DEVELOPMENT
Our own R&D efforts result in new drug patents which form the basis for
some of our products. We sell patented technology to other drug manufactures
when we are unable to manufacture the products ourselves due to lack of
appropriate manufacturing facilities or choose not to because certain products
are incompatible with or duplicative of our current product mix or lack required
profitability criteria. We also provide research services, primarily through
contracts with other drug manufacturers which lack their own R&D capabilities.
Our R&D capabilities conduct almost all our pre-clinical trial research and
develop products according to consumer requirements, distinguishing us from many
of our competitors. R&D expenditures were US$508,405 for 2005 and US$507,578 for
2004.
We currently have 26 patents and 15 trademarks, and are not a party to any
license, royalty or franchise contacts.
We currently have 30 products at different stages of research and/or
development, including two new drugs, Yanlixiao Pills (an
analgesic/anti-inflammatory treatment) and Ganshao Capsules (for treatment of
extreme menstrual pain), that we believe could be significant additions to our
product line and both of which are in the latter stages of the SFDA approval
process.
Additionally, we have at least 15 drugs that have been approved for
clinical trial.
We conduct research and development of products by a variety of means,
including two methods we believe are used exclusively by us. The first is a
method of analyzing the components of Traditional Chinese Medicines in a serum
to determine the chemical structure and bioactivity of the effective compounds
absorbed into the blood. The second method is analyzing the chemical structure
of polypeptides, or specialized proteins, of Traditional Chinese Medicine in
animals, and using bioengineering methods to produce polypeptide preparations.
MANUFACTURING
The Company's 14,533-sq.m. manufacturing plant contains manufacturing
capacity for over 300 million capsules, 200 million pills and tablets, 50
million bags of granules, 50 million vials of liquid dosage form drugs and 200
tons of pilular (orally-administered) drugs annually. Its facilities are
certified as compliant with Chinese Current Good Manufacturing Practices, which
are governmentally-established current, scientifically sound methods, practices
and principles that are implemented and documented during product development
and production to ensure consistent and uniform manufacture of safe products.
Current Good Manufacturing Practices require the design and implementation of
standard operating procedures for each step in the manufacturing process,
beginning with the selection of raw materials suppliers and ending with storage
and shipment.
19
Our principal capsule supplier is Zhejiang Huaguang Capsule Co., Ltd.
Shenzhen Dongyangguang Development Co., Ltd. is our principal source for
medicine wrappers. We have a number of other smaller suppliers of raw materials
and other materials. We believe that a loss of any of these suppliers could be
compensated for through arrangements with alternative sources of supply.
We believe we are in material compliance with all Chinese environmental
laws. In each of 2002 and 2004, we spent approximately US$140,000 to purchase
equipment for processing production wastes, and we spend approximately US$78,000
annually on maintenance and other compliance expenses.
CURRENT AND PROPOSED MARKETING AND OPERATING STRATEGIES
The Company has historically generated revenue from transferring technology
during various stages of development to other pharmaceutical companies, in which
it retains no ownership interest and for which it receives lump-sum payments
based on pre-established milestones rather than royalties or other compensation.
We plan to continue to do so with certain drugs, primarily in cases where
products are requested and selected by pharmaceutical companies that do not have
their own research facilities. For example, Global Pharmatech currently provides
services to medium-sized pharmaceutical companies in northern China that have
mature manufacturing capacities and sales channels, but do not have similar
research and development capabilities.
We also plan to increase our focus in the future on manufacturing in-house
developed medicines in our own production facilities. We intend to target the
urban consumer market in China. Currently, sales are mainly through
distributors, such as wholesale companies and chain store representatives. We
also target the sale of our products to medical institutions, such as hospitals
and clinics.
Geographically, Global Pharmatech focuses its sales efforts in Beijing,
Anhui, Shandong, Shanxi, Liaoning, Heilongjiang, Jilin, Chongqing, Shenzhen and
other provinces in China. The Company also sells to parts of Southeast Asia.
Our Chinese operating subsidiaries have received more than thirty
commendations since 2001 from various governmental agencies, including several
commendations related to the Company's technology and intellectual property.
Our principal customers include Jilin Aodong Pharmaceutical Group, which
utilizes our research services and has acquired technology from us, resulting in
aggregate revenue of approximately US$500,000; the Shanghai Hutchison
Pharmaceutical subsidiary of Hutchison Whampoa Ltd., a diversified public
company with global operations, to which we sold approximately US$100,000 of
products during 2004; Changchun Xinyu Pharmaceuticals Co., Ltd., our major
client for technology transfers, from which we derived approximately US$843,000
during 2005; and Jiuzhoutong Group Co., Ltd., one of the three largest
pharmaceutical companies in China and our largest distributor, to which we sold
approximately US$10,000 of products during 2005. We do not believe that the loss
of any of these our customers would have a material adverse effect on our
business.
COMPETITION
The Chinese pharmaceuticals market is highly fragmented and competitive.
Market entry is generally not controlled, although regulatory and technological
hurdles, significant start-up costs and limited available facilities may deter
inexperienced or undercapitalized entrants. We anticipate that competition in
this market will continue to intensify. Our competitors include national and
regional pharmaceutical promotion companies, independent pharmaceutical research
and development companies and pharmaceutical distributors. We anticipate
substantial new competition from foreign and domestic competitors entering the
Chinese pharmaceutical marketing and distribution market.
Some of our competitors are more established, and have significantly
greater financial, technical, marketing and other resources than we do. Many
also have greater name recognition and a larger customer base. Our competitors
may be better able than we are to respond to new or changing opportunities and
customer requirements, undertake more extensive research and development,
manufacturing and distribution activities, offer more attractive terms to
customers, and adopt more aggressive pricing policies.
We believe we best compete with other pharmaceutical companies in China on
the basis of our modern facilities, talented research and development
professionals and comprehensive research and development and production
resources. We believe our facilities approach or meet Western standards and have
sufficient capacity to meet our research and development and production needs
for the foreseeable future. In contrast, we believe many Chinese pharmaceutical
companies rely on outdated equipment, inadequate facilities and/or less
stringent quality control measures.
20
GOVERNMENTAL REGULATION
The law of China on the Administration of Pharmaceuticals was promulgated
on September 20, 1984 by the Executive Committee of the National People's
Congress and amended effective December 1, 2001. This law sets out the basic
legal framework for administration of pharmaceutical production and sale in
China, covering manufacture, distribution, packaging, pricing and advertising.
The Implementation Rules on the Administration of Pharmaceuticals were
promulgated effective September 15, 2002 to set out detailed implementation
rules.
The State Drug Administration was established in 1998 as the Chinese
pharmaceutical regulatory authority, to assume supervisory and administrative
functions previously carried out by the Ministry of Health, the State
Administration Bureau for Pharmaceuticals and the State Administration Bureau
for Traditional Chinese Medicine. In March 2003, China's SFDA was established to
assume the functions previously carried out by the SDA. The SFDA's primary
responsibilities include:
* formulating and supervising the implementation of regulations and
policies concerning drug administration;
* promulgating standards for pharmaceutical products and medical
appliances;
* categorizing drugs and medical appliances for regulatory purposes;
* registering and approving new drugs, generic drugs and imported and
Chinese medicines;
* granting approvals for the production of pharmaceutical products and
medical appliances; and
* approving the manufacture and distribution of pharmaceutical products.
Before any pharmaceutical distribution enterprise, including any wholesaler
or retailer, can distribute pharmaceutical products in China, it must obtain a
Pharmaceutical Distribution Permit issued by the relevant provincial or county
level SFDA where the enterprise is located. Issuance of a Permit is subject to
inspection of the facilities, warehouse, hygiene environment, quality control
systems, personnel and equipment of the enterprise and, when granted, the Permit
is valid for five years. Enterprises must apply for Permit renewal no later than
six months prior to expiration, subject to reassessment by the relevant
authority. Pharmaceutical distribution enterprises must also obtain a business
license from the relevant administration bureau for industry and commerce to
commence business.
Good Supply Practice standards have been established in China regulating
pharmaceutical wholesale and retail enterprises to ensure quality distribution
of pharmaceutical products. Currently applicable GSP standards, passed by the
SDA effective July 1, 2000, require wholesale and retail enterprises to
implement strict control of staff qualifications, distribution premises,
warehouses, inspection equipment and facilities, management and quality control
in order to obtain a GSP certificate to conduct business. GSP certificates are
valid for five years, after a one-year certification for newly established
enterprises. Renewal applications must be made no later than three months prior
to expiration, subject to reassessment by the relevant authority.
Pursuant to the Decision of the State Council on the Establishment of the
State Basic Medical Insurance System for Urban Employees and relevant
Implementation Measures, the Chinese Ministry of Labor and Social Security
established a Catalogue listing medicines covered by social insurance (the
Insurance Catalogue). The Insurance Catalogue is divided into Parts A and B.
Part A medicines are qualified for general application, and their content may
not be changed by local authorities. Provincial level authorities may make
limited changes to Part B medicines, resulting in some regional variations.
Patients purchasing Part A medicines are entitled to reimbursement of their
costs from the social medical fund in accordance with relevant regulations.
Patients purchasing Part B medicines are required to pay a predetermined
proportion of their costs.
Medicines included in the Insurance Catalogue are selected by the Chinese
government authorities based on factors including treatment requirements,
frequency of use, effectiveness and price, and are subject to government price
control. The Insurance Catalogue is revised every two years. In connection with
each revision, relevant provincial drug authorities collect proposals from
relevant enterprises, and the SFDA makes final revisions based on the
preliminary opinions suggested by the provincial drug administrations.
21
Medicine products included in the Insurance Catalogue and those whose
production or trading will constitute monopolies are also subject to government
price control. Maximum prices for these products are periodically revised by
state and provincial administration authorities. Prices for medicines not
subject to price control are determined by the pharmaceutical manufacturers,
subject in some cases to providing notice to provincial pricing authorities.
Price controls are set to create reasonable profit margins for pharmaceutical
enterprises after taking into account the type and quality of the products,
their production costs, prices of substitute products and other similar factors.
EMPLOYEES
The Company currently has approximately 397 full-time employees and no
part-time employees. None of our employees is covered by a collective bargaining
agreement. We consider relations with our employees to be good.
DESCRIPTION OF PROPERTY
The Company, either directly or through its subsidiaries, operates under
50-year ground leases acquired from the Chinese government for lump-sum
payments, (1) an office building and factory located at 509 Maoxiang St.,
Changchun (approximately 9,300 and 5,600 sq.m., respectively), including the
20,800 sq.m. of land on which they are situated; and (2) an office building,
factory and storage facility located at 44 Xinghuanan St., Kuaitong, Tongyu
(approximately 2,800, 3,331 and 2,600 sq.m., respectively), including the 20,800
sq.m. of land on which they are situated. The Changchun and Tongyu ground leases
expire in 2050 and 2053, respectively. The Company owns the buildings and
improvements on the properties, which will revert to the Chinese government at
the end of the relevant lease term in the absence of extension.
LEGAL PROCEEDINGS
We are not currently a party to, nor is any of our property currently the
subject of, any pending legal proceeding.
PERIODIC REPORTING AND AUDITED FINANCIAL STATEMENTS
We have reporting obligations, including the requirement to file annual,
quarterly and current reports with the SEC. In accordance with the requirements
of the Exchange Act, our annual reports contain financial statements audited and
reported on by our independent accountants.
22
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below are the names of the directors, executive officers and key
employees of the Company as of January 11, 2007:
Name Age Position
---- --- --------
Lianqin Qu 51 Chairwoman of the Board of Directors, President
and Chief Executive Officer
Tom Du 51 Director and Chief Technology Officer
Joseph J. Levinson 30 Chief Financial Officer and Director
Zhenyou Zhang 47 Director
Pursuant to the Company's bylaws, directors are elected at the annual
meeting of stockholders and each director holds office until his successor is
elected and qualified. Officers are elected by the Board of Directors and hold
office until an officer's successor has been duly appointed and qualified unless
an officer sooner dies, resigns or is removed by the Board. There are no family
relationships among any of the Company's directors and executive officers.
BACKGROUND OF EXECUTIVE OFFICERS AND DIRECTORS
LIANQIN QU, 51 Researcher, MBA, graduated from Asia International Open
University (Macau). Her current positions include Chairwoman, President and CEO
of Global Pharmatech, Inc. Chairwoman of Dongyuan Investment Consultancy H.K.
Limited. Chairwoman and President of Jilin Natural Pharmatech, Inc. Ms. Qu has
many years of experiences in financing and corporate management. She has helped
more than 30 companies with restructuring, merge or acquisition. She has
facilitated the listing of two Chinese pharmaceutical companies on the Shanghai
and Shenzhen Stock Exchanges of China, and two additional Chinese pharmaceutical
companies to list on the Growth Enterprise Market of Hong Kong, and a Chinese
pharmaceutical development and sales company listed in the U.S. In recent years,
she has focused on the management of pharmaceutical companies, the companies she
held control are widely known in China and south-east Asia.
TOM DU, M.D., PH.D. has held his current position with the Company since
February, 2005, and is currently Vice President, Regulatory Affairs, for
Humphairs Industries Ltd., a global pharmaceutical consulting company. Dr. Du
has held this position since October 2004. Prior to joining Humpharis, Dr. Du
worked as Senior Director, Clinical and Regulatory Affairs, for Hutchison
Medipharma, a Hutchison Whampoa Company from 2002 to July 2004. From 2001 to
2002, Dr. Du worked as Acting Managing Director, China operation, at Ingenix
Pharmaceutical Services, a UnitedHealth Group Company. From 1994 to 2000, Dr. Du
worked as a reviewing officer for the U.S. Food and Drug Administration.
JOSEPH J. LEVINSON, CPA joined the Company in January, 2006 and since 2004
has been Chief Financial Officer of BDL Media, a closely-held China-based media
holding company. From 2001 to 2003, he was Vice President, Business Development
for Chengdu Environmental Control Incorporated in southwest China, and from 2000
to 2001 he was a manager in the New York office of Deloitte and Touche. During
the 1990s, Mr. Levinson was Corporate Development Officer at Hong Kong-listed
China Strategic Holdings, an Asian mergers and acquisitions company led by Asian
businessman Oei Hong Leong, where his major responsibilities included the
company's subsidiary, China Tire, one of the first Mainland Chinese companies to
list on the New York Stock Exchange. Mr. Levinson has been a U.S. Certified
Public Accountant since 1996.
ZHENYOU ZHANG has been active in the Chinese pharmaceutical industry for
more than 20 years. He currently serves as the Chairman of the Board of several
companies, including Guangdong Baiyi Pharmaceutical, Guangzhou Youcheng
Industrial, and Guangzhou Tianhe Zhenkai Trading Company. He also serves as the
director of Tianjin Tianshili Pharmaceutical, a publicly-traded company in
China. He graduated from Guangxi Chinese Medicine Institute and is a
professional pharmacologist.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth all cash compensation
paid to or to be paid by the Company, as well as certain other compensation paid
or accrued during each of the Company's last three fiscal years, to each named
executive officer. None of the named executive officers was employed by the
Company during 2003 or 2004. No executive officer's annual cash compensation
exceeded $100,000 during the fiscal year ended December 31, 2005.
23
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards Payouts
------------------------------------ ------------------------- ---------
Other Restricted Securities All
Name and Annual Stock Underlying LTIP Other
Principal Position Year Salary($) Bonus($) Compensation($) Award(s)(#) Options(#) Payouts($) Compensation($)
Lianqin Qu 2005 36,000 -- -- -- -- -- --
Xiaobo Sun 2005 60,000 -- -- -- -- -- --
Tom Du 2005 48,000 -- -- -- -- -- --
From February 8, 2005 until December 1, 2006, Xiaobo Sun, Ph.D. served as
President and Chief Executive Officer and as a director of the Company. On
December 1, 2006, Dr Sun notified the Company of his resignation as President
and Chief Executive Officer and as a director of the Company. On December 1,
2006, Dr Sun also resigned from his position as President and as a director of
Jilin Natural Pharmatech, a wholly-owned subsidiary of the Company. There were
no disagreements between Dr Sun and the Company on any matter relating to the
Company's operation, policies or practices that resulted in his resignation.
Effective December 2, 2006, Dr Sun was retained as a senior technology advisor
to Jilin Natural Pharmatech where he will continue his work as a researcher in
the field of botanically-based medicine.
On December 2, 2006, the Board of Directors of the Company appointed Ms
Lianqin Qu to serve as Chief Executive Officer and President of the Company.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On February 8, 2005, the Company entered into an Executive Services
Contract with Lianqin Qu, pursuant to which Lianqin Qu has agreed to act as a
Director and Chairperson of the Company's Board of Directors. Lianqin Qu's
salary under the Executive Services Contract is US$3,000 per month. In addition,
the Company agreed to grant Lianqin Qu an option to purchase 100,000 shares of
the Company's common stock upon the achievement of working goals as determined
by the Board. During the term of Madam Qu's appointment, unless the relevant
competition is made known to the public and (if required) approved by relevant
regulatory authorities, she has agreed not to engage in any business in
competition with the Company, or seek any position from any company or
individual who competes in business with the Company or any subsidiary or branch
of the Company. Lianqin Qu has also agreed to certain confidentiality covenants
regarding information obtained from the Company and any of its subsidiaries and
branches. The Executive Services Contract may be terminated upon any of the
following events, unless otherwise determined by the Board of Directors: (a)
Lianqin Qu is prohibited by any laws, regulations or rules from acting in any of
her positions or she is no longer qualified to act in any position; (b) Lianqin
Qu is unable to perform her duties for a period of three months due to health
reasons; (c) Lianqin Qu commits a material breach and/or repeated and/or
continual breach of her obligations under the Executive Services Contract; (d)
Lianqin Qu is guilty of any serious misconduct or serious neglect in the
discharge of her duties; (e) Lianqin Qu's actions or omissions bring the name or
reputation of the Company or any subsidiary or branch of the Company into
serious disrepute or prejudice; (f) Lianqin Qu is or becomes of unsound mind or
becomes a patient for the purpose of any laws relating to mental health; (g)
Lianqin Qu is sued for criminal liability or convicted of any criminal offense
other than an offense which in the reasonable opinion of the Board of Directors
does not affect her position with the Company; (h) Lianqin Qu is removed from
her position by the Board of Directors; (i) Lianqin Qu leaves the service of the
Company in accordance with the Company's Certificate of Incorporation; or (j)
Lianqin Qu fails to attend three consecutive meetings of the Board of Directors.
There is no expiration date of the Executive Services Agreement.
On February 14, 2005, the Company entered into a Director and Chief
Technology Officer Service Contract with Tom Du, pursuant to which Mr. Du has
agreed to act as the Company's Chief Technology Officer and as a member of the
Company's Board of Directors. Mr. Du's salary under the Director and Chief
Technology Officer Service Contract is US$4,000 per month. In addition, the
Company agreed to grant Mr. Du an option to purchase 50,000 shares of the
Company's common stock upon the achievement of working goals as determined by
the Board. During his term of employment, Mr. Du agreed not to engage in any
business that individually develops any of the products developed by the
Company, including all products approved by the SFDA, products marketed by the
Company prior to, during, or under development during the employment period. Mr.
Du has also agreed to certain confidentiality covenants regarding information
obtained of the Company and any of its subsidiaries and branches. The Director
24
and Chief Technology Officer Service Contract may be terminated upon any of the
following events, unless otherwise determined by the Board of Directors: (a) Tom
Du is prohibited by any laws, regulations or rules from acting in any of his
positions or he is no longer qualified to act in any position; (b) Mr. Du is
unable to perform his duties for a period of three months due to health reasons;
(c) Mr. Du commits a material breach and/or repeated and/or continual breach of
his obligations under the Director and Chief Technology Officer Service
Contract; (d) Mr. Du is guilty of any serious misconduct or serious neglect in
the discharge of his duties; (e) Mr. Du's actions or omissions bring the name or
reputation of the Company or any subsidiary or branch of the Company into
serious disrepute or prejudice; (f) Mr. Du is or becomes of unsound mind or
becomes a patient for the purpose of any laws relating to mental health; (g) Mr.
Du is sued for criminal liability or convicted of any criminal offense other
than an offense which in the reasonable opinion of the Board of Directors does
not affect his position with the Company; (h) Mr. Du is removed from his
position by the Board of Directors; (i) Mr. Du leaves the service of the Company
in accordance with the Company's Certificate of Incorporation; or (j) Mr. Du
fails to attend three consecutive meetings of the Board of Directors. In
addition, Mr. Du may terminate the Director and Chief Technology Officer Service
Contract with one-month notice for good cause arising from impossibility of
performance and/or conflict of interest. There is no expiration date of the
Director and Chief Technology Officer Service Contract.
On January 1, 2006, the Company entered into a Chief Financial Officer
service contract with Joseph J. Levinson, pursuant to which Mr. Levinson has
agreed to act as the Company's Chief Financial Officer. Mr. Levinson's salary
under the Executive Employment Contract is US$1,205 per month. During his term
of employment, unless the relevant competition is made known to the public and
(if required) approved by relevant regulatory authorities, Mr. Levinson has
agreed not to engage in any business in competition with the Company, or seek
any position from any company or individual who competes in business with the
Company or any subsidiary or branch of the Company. Mr. Levinson has also agreed
to certain confidentiality covenants regarding information obtained of the
Company and any of its subsidiaries and branches. The Executive Employment
Contract may be terminated upon any of the following events, unless otherwise
determined by the Board of Directors: (a) Mr. Levinson is prohibited by any
laws, regulations or rules from acting in any of his positions or he is no
longer qualified to act in any position; (b) Mr. Levinson is unable to perform
his duties for a period of three months due to health reasons; (c) Mr. Levinson
commits a material breach and/or repeated and/or continual breach of his
obligations under the Executive Employment Contract; (d) Mr. Levinson is guilty
of any serious misconduct or serious neglect in the discharge of his duties; (e)
Mr. Levinson's actions or omissions bring the name or reputation of the Company
or any subsidiary or branch of the Company into serious disrepute or prejudice;
(f) Mr. Levinson is or becomes of unsound mind or becomes a patient for the
purpose of any laws relating to mental health; (g) Mr. Levinson is sued for
criminal liability or convicted of any criminal offense other than an offense
which in the reasonable opinion of the Board of Directors does not affect his
position with the Company; (h) Mr. Levinson is removed from his position by the
Board of Directors; (i) Mr. Levinson leaves the service of the Company in
accordance with the Company's Certificate of Incorporation; or (j) Mr. Levinson
fails to attend three consecutive meetings of the Board of Directors. This
agreement has been terminated and superseded by the Director and Chief Financial
Officer service contract, entered into on October 9, 2006, described below.
On October 9, 2006, the Company entered into a Director and Chief Financial
Officer service contract with Mr. Levinson, pursuant to which Mr. Levinson has
agreed to act as the Company's director and Chief Financial Officer. Mr.
Levinson's salary under the Director and Chief Financial Officer service
contract is US$4,000 per month. In addition, Mr. Levinson shall be granted
40,000 shares of the Company's common stock, pending the completion of certain
goals. During his term of employment Mr. Levinson has agreed not to engage in
any business in direct competition with the Company, or seek any position from
any company or individual who competes in business with the Company or any
subsidiary or branch of the Company. Mr. Levinson has also agreed to certain
confidentiality covenants regarding information obtained of the Company and any
of its subsidiaries and branches. The Director and Chief Financial Officer
service contract may be terminated upon any of the following events, unless
otherwise determined by the Board of Directors: (a) Mr. Levinson is prohibited
by any laws, regulations or rules from acting in any of his positions or he is
no longer qualified to act in any position; (b) Mr. Levinson is unable to
perform his duties for a period of three months due to health reasons; (c) Mr.
Levinson commits a material breach and/or repeated and/or continual breach of
his obligations under the Director and Chief Financial Officer service contract;
(d) Mr. Levinson is guilty of any serious misconduct or serious neglect in the
discharge of his duties; (e) Mr. Levinson's actions or omissions bring the name
or reputation of the Company or any subsidiary or branch of the Company into
serious disrepute or prejudice; (f) Mr. Levinson is or becomes of unsound mind
or becomes a patient for the purpose of any laws relating to mental health; (g)
Mr. Levinson is sued for criminal liability or convicted of any criminal offense
other than an offense which in the reasonable opinion of the Board of Directors
does not affect his position with the Company; (h) Mr. Levinson is removed from
his position by the Board of Directors; or (i) Mr. Levinson leaves the service
of the Company in accordance with the Company's Certificate of Incorporation.
There is no expiration date of this Director and Chief Financial Officer service
contract. This Director and Chief Financial Officer service contract terminates
and supersedes the Chief Financial Officer service contract entered into on
January 1, 2006 by and between the Company and Mr. Levinson.
25
On October 9, 2006, the Company entered into a Director service contract
with Mr. Zhenyou Zhang, pursuant to which Mr. Zhang has agreed to serve as the
Company's director. Under the Director service contract, Mr. Zhang shall be paid
a fee of $2,000 per month. In addition, Mr. Zhang shall be granted 80,000 shares
of the Company's common stock, pending the completion of certain goals. During
his term as a director of the Company, Mr. Zhang has agreed not to engage in any
business in direct competition with the Company, or seek any position from any
company or individual who competes in business with the Company or any
subsidiary or branch of the Company. Mr. Zhang has also agreed to certain
confidentiality covenants regarding information obtained of the Company and any
of its subsidiaries and branches. The Director and Chief Financial Officer
service contract may be terminated upon any of the following events, unless
otherwise determined by the Board of Directors: (a) Mr. Zhang is prohibited by
any laws, regulations or rules from acting in any of his positions or he is no
longer qualified to act in any position; (b) Mr. Zhang is unable to perform his
duties for a period of three months due to health reasons; (c) Mr. Zhang commits
a material breach and/or repeated and/or continual breach of his obligations
under the Executive Employment Contract; (d) Mr. Zhang is guilty of any serious
misconduct or serious neglect in the discharge of his duties; (e) Mr. Zhang's
actions or omissions bring the name or reputation of the Company or any
subsidiary or branch of the Company into serious disrepute or prejudice; (f) Mr.
Zhang is or becomes of unsound mind or becomes a patient for the purpose of any
laws relating to mental health; (g) Mr. Zhang is sued for criminal liability or
convicted of any criminal offense other than an offense which in the reasonable
opinion of the Board of Directors does not affect his position with the Company;
(h) Mr. Zhang is removed from his position by the Board of Directors; (i) Mr.
Zhang leaves the service of the Company in accordance with the Company's
Certificate of Incorporation; or (j) Mr. Zhang fails to attend three consecutive
meetings of the Board of Directors. There is no expiration date of this Director
service contract.
2006 EQUITY INCENTIVE PLAN
On December 26, 2006, the Company's stockholders adopted and approved the
Company's 2006 Equity Incentive Plan (the "Plan"). The purpose of the Plan is to
attract and retain qualified individuals for positions of substantial
responsibility with the Company and to provide incentives to such individuals to
promote the success of the Company's business. The Plan will initially be
administered by the Board of Directors of the Company. A maximum of 2,000,000
shares of Common Stock will be available for issuance pursuant to options,
restricted stock, stock appreciation rights and/or performance stock
(collectively, "Awards") under the Plan. Awards may be granted to all employees,
officers and directors of and consultants or advisor to the Company and its
subsidiaries. To date, no Awards have been granted under the Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 22, 2006, the Company had the following amounts due from
related parties:
ADVANCES DUE FROM RELATED PARTIES
BCT Global Development Limited $ 18,662
Xiaobo Sun 23,464
STOCKHOLDERS:
Yun Peng Ming 6,944
Yuming Li 34,156
Ben Ji Wang 38,014
JUDGMENT AWARD:
Yuqi Li 410,000
--------
Total $531,240
========
BCT Global Development Limited ("BCT Global") owns 25% of Natural
Pharmatech China's subsidiary, BCT. Lianqin Qu is the chairperson of BCT Global.
Yuming Li is the brother-in-law of the Company's chairwoman.
26
Xiaobo Sun is the Company's former President, Chief Executive Officer
and director.
These advances have no stated terms for repayment and are not interest
bearing.
In May, 2006, the Company won a judgment of approximately $410,000 from the
Chinese Court of Final Appeal related to litigation involving the transfer of
drug technology to a research hospital. The Company's outside (PRC) counsel
advised the Company's management in July 2006 that the Company would receive the
money from the research hospital by the end of August 2006. However, the money
was not received by such date.
In early November 2006, a three-way legal arrangement was entered into
between the Company, the research hospital, and the spouse of the chairperson of
our Company. In exchange for waiving a pre-existing debt between the research
hospital and the spouse of our Company's chairperson, the spouse undertook to
pay the $410,000 judgment on behalf of the research hospital to our Company. As
of December 4, 2006, the judgment had been paid in full.
On April 28, 2006, the Company entered into a subscription agreement with
Zhengyou Zhang for the private sale of 5,000,000 shares of its common stock for
$5,000,000. At the time, Mr. Zhang was not a director of the Company. The
transaction was made in reliance on the provisions of Regulation S and
Regulation D under the Securities Act of 1933 and on Section 4(2) of the Act.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On February 11, 2005, the board of directors unanimously approved the
dismissal of Russell Brennan as its then certifying accountant and notified Mr.
Brennan that it was terminating his services. The Company dismissed Mr. Brennan
after it was advised by the SEC staff on December 26, 2004 that Mr. Brennan had
not applied for registration with the Public Company Accounting Oversight Board.
On the same date, the Company engaged its former accountant, Aaron Stein CPA, to
serve as its independent registered public accountant to review the Company's
financial statements for the periods ended June 30, September 30 and December
31, 2004.
During the period from September 28, 2004 through February 11, 2005 when
Mr. Brennan was retained by the Company, (i) there were no disagreements between
the Company and Mr. Brennan on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to Mr. Brennan's satisfaction, would have caused him to make reference
to the matter in his reports on the Company's financial statements, and (ii) Mr.
Brennan's reports on the Company's financial statements did not contain an
adverse opinion or disclaimer of opinion, and were not modified as to
uncertainty, audit scope or accounting principles. During the period of Mr.
Brennan's engagement, there were no reportable events described in Item
304(a)(1)(iv) of Regulation S-B.
During the two fiscal years ended December 31, 2003 and 2002, and until
September 28, 2004, Mr. Stein was retained as the Company's principal accountant
to audit and review the Company's financial statements during such periods.
During those two fiscal years and through April 20, 2005, the Company did not
consult with Mr. Stein regarding any matter or event described in Item
304(a)(2)(i) or (ii) of Regulation S-B.
On February 24, 2005, the Company provided Mr. Brennan with a copy of the
foregoing disclosure, and requested that he furnish it with a letter addressed
to the SEC stating whether he agrees with the above statements. Such letter has
been filed with the SEC and incorporated by reference in the registration
statement of which this prospectus is a part.
On April 20, 2005, the Company dismissed Mr. Stein, which dismissal was
effective immediately and was approved by the board of directors on that date.
Mr. Stein had been most recently engaged by the Company from February 11, 2005,
and had previously been engaged by the Company as its principal independent
accountant for the fiscal years ended December 31, 2002 and 2003, and through
September 28, 2004.
On the same date, the Company engaged Moore Stephens, P.C. as its new
principal independent registered public accounting firm, which engagement was
effective immediately and was approved by the Company's Board of Directors on
that date.
During his 2005 engagement period, Mr. Stein reviewed the Company's
consolidated financial statements as of and for the interim periods ended June
30, September 30 and December 31, 2004 in connection with the Company's filing
or amended filings of Quarterly Reports on Form 10-QSB for such periods. During
that engagement, Mr. Stein did not issue a report containing any adverse opinion
27
or disclaimer of opinion or that was qualified or modified as to uncertainty,
audit scope or accounting principles. There were also during that engagement no
disagreements between the Company and Mr. Stein on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to Mr. Stein's satisfaction, would have caused
him to make reference to the subject matter of the disagreement in connection
with his report. None of the reportable events described under Item
304(a)(1)(iv) of Regulation S-B occurred within the two most recent fiscal years
of the Company ended December 31, 2004.
The Company has provided Mr. Stein of with a copy of the foregoing
disclosures, and he has furnished a letter, addressed to the SEC stating that he
agrees with the foregoing statements, which has been filed with the SEC and
incorporated by reference in the registration statement of which this prospectus
is a part.
During the two most recent fiscal years of the Company, and through the
date of the engagement of Moore Stephens, P.C. on April 20, 2005, the Company
did not consult with Moore Stephens, P.C. regarding any of the matters or events
set forth in Item 304(a)(2)(i) or (ii) of Regulation S-B.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of January 11, 2007, the number of shares
of our common stock beneficially owned by (i) each person who is known by us to
be the beneficial owner of more than five percent of the Company's common stock;
(ii) each director; (iii) each of the named executive officers in the Summary
Compensation Table; and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the stockholders listed in the table have sole
voting and investment power with respect to the shares indicated.
Number of
Shares % of Common Stock
Name and Address Beneficially Beneficially
of Beneficial Owner(1) Owned(2) Owned(3)
---------------------- -------- --------
Lianqin Qu 14,762,951 (4) 63.5
Xiaobo Sun 0 0
Tom Du 0 0
Joseph J. Levinson 0 0
Zhenyou Zhang 5,000,000 21.51
All officers and directors
as a group (five persons) 19,762,951 84.96
- ----------
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Global Pharmatech, Inc., 89 Ravine Edge Drive, Richmond Hill, Ontario,
Canada L4E 4J6.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the shares shown. Except where indicated
by footnote and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of voting securities shown as beneficially owned by
them.
(3) Based on 23,247,935 shares outstanding.
(4) Includes 13,738,264 shares as to which Ms. Qu holds irrevocable proxies
given by stockholders who acquired shares of our common stock in the
acquisition of Natural Pharmatech, and as to which Ms. Qu disclaims
beneficial ownership, and 1,024,687 shares held by Dong Yuan Investment
(HK) Limited, of which Ms. Qu may be deemed to be the control person.
SELLING STOCKHOLDER
The following table sets forth as of January 11, 2007, information
regarding the current beneficial ownership of our common stock by Mr. Zhenyou
Zhang, a director of the Company, based on information provided to us by him,
which we have not independently verified. Although we have assumed for purposes
of the table that the selling stockholder will sell all of the shares offered by
this prospectus, because he may from time to time offer all or some of his
shares under this prospectus or in another manner, no assurance can be given as
to the actual number of shares that will be resold by him, or that will be held
28
after completion of the resale. In addition, a selling stockholder may have sold
or otherwise disposed of shares in transactions exempt from the registration
requirements of the Securities Act or otherwise since the date he or she
provided information to us. The selling stockholder is not making any
representation that the shares covered by this prospectus will be offered for
sale.
Except as set forth below and Mr. Zhang's position as a director of the
Company and a party to a Director service contract as described in "Executive
Compensation," Mr. Zhang has not held any position nor had any material
relationship with us or our affiliates during the past three years.
Mr. Zhang acquired shares of our common stock pursuant to a Subscription
Agreement, dated as of April 27, 2006, between the Company and Mr. Zhang in a
private offering of common stock pursuant to Regulation S under the Securities
Act.
Shares Maximum Shares
Beneficially Number of Beneficially Percentage
Name of Owned Prior Shares to Owned After Ownership
Selling Stockholder to Offering Percentage be Sold Offering After Offering
- ------------------- ----------- ---------- ------- -------- --------------
Zhenyou Zhang 5,000,000 1,000,000 4,000,000 17.2%
TOTAL 5,000,000 1,000,000 4,000,000 17.2%
PLAN OF DISTRIBUTION
We are registering the common stock on behalf of the above selling
stockholder. As used in this prospectus, the term "selling stockholder" includes
pledgees, transferees or other successors-in-interest selling shares received
from the selling stockholder as pledgors, assignees, borrowers or in connection
with other non-sale-related transfers after the date of this prospectus. This
prospectus may also be used by transferees of the selling stockholder, including
broker-dealers or other transferees who borrow or purchase the shares to settle
or close out short sales of shares of common stock. The selling stockholder will
act independently of us in making decisions with respect to the timing, manner
and size of each sale or non-sale related transfer. We will not receive any of
the proceeds of sales by the selling stockholder.
The common stock may be sold by the selling stockholder from time to time
in one or more transactions at or on any stock exchange, market or trading
facility on which shares are traded or in private transactions. Sales may be
made at fixed or negotiated prices, and may be effected by means of one or more
of the following transactions (which may involve cross or block transactions):
* ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
* block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
* purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
* an exchange distribution in accordance with the rules of the
applicable exchange;
* privately negotiated transactions;
* settlement of short sales;
* transactions in which broker-dealers may agree with the selling
stockholder to sell a specified number of such shares at a stipulated
price per share;
* a combination of any such methods of sale;
* through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
* any other method permitted pursuant to applicable law.
29
The selling stockholder may also sell shares under Rule 144 of the
Securities Act, if available, rather than under this prospectus. To the extent
required, this prospectus may be amended and supplemented from time to time to
describe a specific plan of distribution.
Broker-dealers engaged by the selling stockholder may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as
agent for the purchase of shares, from the purchaser) in amounts to be
negotiated. The selling stockholder does not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
In connection with sales of common stock or interests therein, the selling
stockholder may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholder may also sell shares of common stock short and deliver these shares
to close out those short positions, or lend or pledge common stock to
broker-dealers that in turn may sell such securities. The selling stockholder
may also enter into option or other transactions with broker-dealers or other
financial institutions for the creation of one or more derivative securities
requiring the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus, as supplemented or
amended to reflect such transaction.
The selling stockholder and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act and any profit on the sale of such securities and any
discounts, commissions, concessions or other compensation received by any such
underwriter, broker-dealer or agent may be deemed to be underwriting discounts
and commissions under the Exchange Act. The selling stockholder has informed us
that he does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
Pursuant to a registration rights agreement with the selling stockholder,
all fees and expenses incurred by us incident to the registration of the common
stock will be paid by us, including, without limitation, SEC filing fees. The
selling stockholder will be indemnified by us against certain losses, claims,
damages and liabilities, including certain liabilities under the Securities Act.
We will be indemnified by the selling stockholder severally against certain
civil liabilities, including certain liabilities under the Securities Act, or
will be entitled to contribution in connection therewith.
The selling stockholder will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of common stock by him. The foregoing
may affect the marketability of such securities.
To comply with the securities laws of certain jurisdictions, if applicable,
the common stock will be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers.
DESCRIPTION OF SECURITIES
Our current authorized capital stock consists of 95,000,000 shares of
common stock, par value $.0001 per share, of which 23,247,935 shares were issued
and outstanding as of January 9, 2007, and 5,000,000 shares of preferred stock,
par value $.0001 per share, none of which were issued and outstanding as of that
date.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. Subject to the
preferential rights of the preferred stock, holders of common stock are entitled
to receive, when and if declared by the board of directors, out of the assets of
the corporation which are by law available therefor, dividends payable in cash,
property or shares of capital stock. In the event of our liquidation,
dissolution or winding up, after distribution in full of the preferential
amounts, if any, to be distributed to holders of preferred stock, holders of
common stock shall be entitled to received all of the remaining assets of the
Company of whatever kind available for distribution to stockholders ratably in
proportion to the number of shares of common stock held by them.
Holders of common stock, as such, have no preemptive, preferential or
subscription right to any stock of the Company or to any obligations convertible
into, or warrants or options for the purchase of, stock of the Company, except
to the extent provided by written agreement with the Company.
30
PREFERRED STOCK
Under our Certificate of Incorporation, as amended, the Board of Directors
is authorized, subject to any limitations prescribed by the laws of the State of
Delaware, but without any further action by our stockholders, to provide for the
issuance of up to 5,000,000 shares of preferred stock in one or more series, to
establish from time to time the number of shares to be included in such series,
to fix the designations, powers, preferences and rights of the shares of each
such series and any qualifications, limitations or restrictions thereof, and to
increase or decrease the number of shares of any such series. The board of
directors may authorize and issue preferred stock with voting or conversion
rights that could adversely affect the voting power or other rights of holders
of common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Florida Atlantic
Stock Transfer, Inc.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our articles of incorporation provide that none of our directors will be
personally liable to the Company or any of our shareholders for monetary damages
arising from the director's breach of fiduciary duty as a director, with certain
limited exceptions.
Pursuant to Delaware corporation law, every Delaware corporation has the
power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation or is or was serving in such a capacity at the request of the
corporation for another corporation, partnership, joint venture, trust or other
enterprise, against any and all expenses, judgments, fines and amounts paid in
settlement and reasonably incurred in connection with such action, suit or
proceeding. The power to indemnify applies only if such person acted in good
faith and in a manner such person reasonably believed to be in the best
interests, or not opposed to the best interests, of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself, and
with the further limitation that in such actions no indemnification shall be
made in the event of any adjudication of negligence or misconduct unless the
court, in its discretion, believes that in light of all the circumstances
indemnification should apply. Our articles of incorporation contain provisions
authorizing it to indemnify our officers and directors to the fullest extent
permitted by Delaware corporation law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers or controlling persons pursuant to
the foregoing provisions or otherwise, the Company has been advised that in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by one of our
directors, officers, or controlling persons in connection with the securities
being registered, we will, unless in the opinion of our legal counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for us
by Loeb & Loeb LLP, New York, New York.
EXPERTS
Our audited financial statements for the periods ended December 31, 2005
and 2004 included in this prospectus, have been audited by Moore Stephens, P.C.,
an independent registered public accounting firm, to the extent and for the
periods set forth in their report and are included in this prospectus in
reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
31
WHERE YOU CAN FIND MORE INFORMATION
We file all documents required to be filed pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act with the SEC through the Electronic Data
Gathering, Analysis and Retrieval system (EDGAR), and is publicly available
through the SEC's website located at http://www.sec.gov. The Form SB-2
registration statement, of which this prospectus is a part, including all
exhibits and schedules and amendments, has been filed with the SEC through
EDGAR. You may also inspect the Form SB-2, including all exhibits, without
charge at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain copies of these materials from the SEC's Public
Reference Room at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, upon
the payment of prescribed fees. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330.
This prospectus is only part of a registration statement on Form SB-2 that
we have filed with the SEC under the Securities Act of 1933 and therefore omits
certain information contained in the registration statement. We have also filed
exhibits and schedules to the registration statement that are excluded from this
Prospectus, and you should refer to the applicable exhibit or schedule for a
complete description of any statement referring to any contract or other
document. You may inspect or obtain a copy of the registration statement,
including the exhibits and schedules, as described in the previous paragraph at
no charge from us.
32
INDEX TO FINANCIAL STATEMENTS
Interim Financial Statements for the periods ending
September 30, 2006 and 2005 Q-1 to Q-8
Audited Financial Statements for the periods ending
December 31, 2005 and 2004 F-1 to F-13
33
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 2006
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 5,295,147
Accounts receivable, net 949,663
Related party receivable 531,240
Inventories 1,757,757
Other current assets 1,767,160
Prepaid expenses 164,490
------------
Total Current Assets 10,465,457
------------
PROPERTY, PLANT & EQUIPMENT, net 6,186,550
LAND LEASE, net 455,935
CONSTRUCTION IN PROGRESS 9,497
INTANGIBLE ASSETS, net 119,955
------------
6,771,937
------------
Total Assets $ 17,237,394
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 50,132
Short-term borrowings 253,036
Accounts payable and accrued expenses 432,642
Advances from customers 115,643
Other payables and accruals 653,387
Taxes Payable 12,427
Other current liabilities 39,754
------------
Total Current Liabilities 1,557,021
LONG-TERM BORROWINGS 2,562,469
------------
MINORITY INTEREST 881,271
------------
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, 23,307,935 shares
issued and outstanding 2,331
Additional paid in capital 11,442,177
Appropriated retained earnings 237,052
Retained earnings 233,979
Accumualted other comprehensive income 336,094
Subscription receivable (15,000)
------------
Total Stockholders' Equity 12,236,633
------------
Total Liabilities and Stockholders' Equity $ 17,237,394
============
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
Q-1
GLOBAL PHARMATECH INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
SALES $ 1,685,200 $ 2,263,868 $ 374,265 $ 252,607
COST OF SALES 606,672 1,056,899 233,565 187,192
------------ ------------ ------------ ------------
GROSS PROFIT 1,078,528 1,206,969 140,700 65,415
------------ ------------ ------------ ------------
OPERATING EXPENSES
Advertising 35,386 167,296 564 9,970
Research and development 98,979 260,883 (135,174) 38,526
Selling expenses 56,277 109,500 17,414 56,160
General and administrative expenses 1,302,464 970,821 571,129 220,437
Bad Debt Expense 22,634
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (437,212) (301,531) (313,233) (259,678)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Miscellaneous income 541,491 419,800 74,373 40,517
Interest expense (152,191) (127,352) (54,738) (46,564)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (47,912) (9,083) (293,598) (265,725)
INCOME TAXES - Current 0 6,603 0 0
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (47,912) (15,686) (283,598) (265,725)
MINORITY INTEREST 8,163 70,768 (11,437) 35,365
------------ ------------ ------------ ------------
NET INCOME/(LOSS) $ (39,749) $ 55,082 $ (305,035) $ (230,360)
Comprehensive Income
Foreign Exchange Translation 336,094 336,094
Total Comprehensive Income 296,345 31,059
============ ============ ============ ============
INCOME/(LOSS) PER COMMON SHARE
Basic and Diluted $ 0.00 $ 0.00 $ (0.01) $ (0.01)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 21,044,602 17,474,031 23,291,268 17,830,544
============ ============ ============ ============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
Q-2
GLOBAL PHARMATECH INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (39,749) $ 55,082
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest (8,163) (70,768)
Depreciation 316,861 334,922
Bad debt expense 22,634
Common stock issued for services 59,376
Amortization of land lease and intangible assets 24,538 16,839
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable 854,049 (1,131,768)
Related party receivable 547,228 (121,338)
Inventories (579,815) (224,521)
Prepaid expenses (119,489) 40,024
Other current assets (1,163,057) (425,242)
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses (131,418) 183,040
Related party payable (69,884) (171,576)
Advances from customers 47,507 94,709
Other payables and accruals 56,486 (235,097)
Taxes payable (22,297)
Other liabilities (22,313) (78,569)
----------- -----------
Net Cash Used by Operating Activities (227,506) (1,734,263)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (96,439) (441,665)
Construction in Progress (8,727)
----------- -----------
Net Cash Used by Investing Activities (105,166) (441,665)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings 247,825 895,619
Common shares issued 4,601,621 1,328,007
Proceeds from/(payment of) Long-term borrowing (24,783) 370,737
----------- -----------
Net Cash Provided by Financing Activities 4,824,663 2,594,363
----------- -----------
Effect of exchange rate change on cash 112,321
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,604,312 418,435
CASH AND CASH EQUIVALENTS, beginning of period 690,835 192,924
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,295,147 $ 611,359
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 152,191 $ 127,352
=========== ===========
Income taxes paid $ 0 $ 6,603
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
Q-3
GLOBAL PHARMATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The Company
Global Pharmatech, Inc. ("Global" or the "Company") was incorporated in Delaware
on June 26, 2001 under the name Autocarbon.com, Inc. After engaging, under prior
management, in several businesses unrelated to its current one, on February 9,
2005, Global acquired Jilin Tian Yao Science and Technology Limited Company
("Natural Pharmatech China"), by acquiring Natural Pharmatech China's parent,
Natural Pharmatech, Inc. ("Natural"), through the issuance to Natural's
shareholders of 13,703,125 of its common shares for all of the outstanding
common shares of Natural. Located in Changchun, China, Natural Pharmatech China
is a Chinese limited liability company, organized on February 7, 2001, which,
together with its subsidiaries, is principally engaged in the research and
development of modernized traditional Chinese medicine and bio-pharmacy, the
sale of this technology, and the manufacture and sale of Chinese medicine and
vitamins throughout China. Natural was incorporated in the British Virgin
Islands on February 2, 2004, and acquired Natural Pharmatech China on June 15,
2004 by issuing 43,800,000 of its common shares for all of the outstanding
common shares of Natural Pharmatech China.
Under generally accepted accounting principles, these acquisitions are
considered in substance to be capital transactions rather than business
combinations. In each case, for accounting purposes, the acquired company is
deemed to have issued its stock for the net monetary assets of the acquiring
company. Each transaction is accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition, except
that no goodwill is recorded. Under reverse takeover accounting, the comparative
historical financial statements are primarily those of Natural Pharmatech China.
In June 2005, Natural Pharmatech China, the Company's wholly owned subsidiary,
acquired an 80% equity interest in a new company, Changchun Xiandai Technology
Inc. ("XD").
On December 11, 2005 the Company sold its entire 51% interest in Jilin Mai Di
Xing ("MDX"). Because the sale price of the Company's interest was the same as
book value, there was no gain or loss on the transaction. MDX had been
established in July 2003 and had focused on research and development and
technique consulting.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation and Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and include the
accounts of Global and its majority owned subsidiaries as of September 30, 2006
and for the nine months then ended . The comparative consolidated financial
statements for the nine months ended September 30, 2005 include Natural and its
majority owned subsidiaries for the whole period and Global from the date of the
merger. All significant inter-company balances and transactions have been
eliminated in consolidation.
The accompanying unaudited consolidated financial statements as of September 30,
2006 and for the three and nine month periods ended September 30, 2006 and 2005
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. In the opinion of management, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to make the financial statements not misleading. The results of
operations for the nine months ended September 30, 2006 are not necessarily
indicative of the results for the full fiscal year ending December 31, 2006. The
unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2005 as reported in Form 10-KSB.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Q-4
GLOBAL PHARMATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 during the nine month periods
ended September 30, 2006 and 2005 were $328,192 and $1,031,630, respectively.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues during the nine
month periods ended September 30, 2006 and 2005 were $7,916 and $184,414,
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 during the nine
month periods ended September 30, 2006 and 2005 were $1,349,092 and $1,047,824,
respectively.
Government grants are recognized as other income upon receipt. These revenues
during the nine month periods ended September 30, 2006 and 2005 were
approximately $115,000 and $419,800, respectively.
d. Foreign Currency Translation
The functional currency of Natural Pharmatech China and its subsidiaries is the
Chinese Yuan [RMB] and its reporting currency is the U.S. dollar. Natural
Pharmatech China's consolidated 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 stockholders'
equity. Transaction gains and losses that arise from exchange rate fluctuations
from transactions denominated in a currency other than the functional currency
are included in the statement of operations as incurred.
The 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 Company's Chinese subsidiaries must
appropriate fifteen percent of their annual profits as computed under Chinese
generally accepted accounting principles, which is reflected in the consolidated
balance sheet as appropriated retained earnings and which, at September 30,
2006, had a balance of $237,052.
Q-5
GLOBAL PHARMATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Inventory
Inventory is comprised of the following:
September 30, 2006
------------------
Raw materials $ 498,815
Work in progress 882,229
Finished goods 376,713
----------
Total $1,757,757
==========
4. Other Current Liabilities
The account consists principally of approximately $40,000 of salaries and
benefits payable to employees.
5. Property and Equipment
Property and equipment is comprised of the following:
September 30, 2006
------------------
Office Equipment $ 58,507
Machinery and Equipment 2,961,498
Vehicles 49,523
Computer Equipment 69,092
Furniture Fixtures 15,222
Building 2,525,498
Building Pledged 2,536,940
----------
Total 8,216,280
----------
Accumulated Depreciation 2,029,730
----------
Net $6,186,550
==========
Depreciation and amortization expense for each of the nine months ended
September 30, 2006 and 2005 was approximately $317,000 and $335,000
respectively.
6. Income Taxes
The Company and each of its subsidiaries file separate income tax returns.
Natural Pharmatech China qualifies as a "high-technology foreign joint venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. Since its first profitable year was 2005,
Natural Pharmatech China is entitled to an exemption from PRC tax for the years
2005 and 2006.. Because Natural Pharmatech China qualifies as a "high-technology
joint venture" and is located in an economic development zone, it is entitled to
a reduced tax rate of 10% for the three years beginning in 2007 through 2009.
Thereafter, it will be taxed at the standard income tax rate of 15%.
Q-6
GLOBAL PHARMATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Jilin BCT Pharmacy Company, Ltd ("BCT") is a "wholly-owned foreign venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. After these two years, it is entitled to a
reduced income tax rate of 10% for three additional years. After these three
years, it will be taxed at the standard income tax rate for a "wholly-owned
foreign venture" of 15%.
Jilin Tian Yao Drug Safety Evaluation Co., Ltd ("JDE") is a "high technology
joint venture" and is exempt from income taxes for two years beginning with its
first profitable year. It is thereafter taxed at a standard income tax rate of
15%.
XD is considered a "high technology joint venture" and so is entitled to full
exemptions from income tax for two years, beginning with its first profitable
year. Thereafter, it is assessed at the standard income tax rate for joint
ventures of 15%.
Natural Pharmatech China's other Chinese subsidiary, Jilin Yi Cao Tang Pharmacy
Co., Ltd. ("YCT"), is not a foreign joint venture and so is assessed at the
ordinary tax rate for Chinese companies of 33%.
The Company is also subject to value added tax (VAT), business tax and surtax
totaling 5.5 percent of gross sales.
The Company is still in the full-tax-exemption period for the Chinese
subsidiaries which reported positive net income for the nine months ended
September 30, 2006, and therefore no tax was due for the period. The only
subsidiary that is currently subject to income tax, YCT, incurred a net loss for
the period, and therefore no tax was due.
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 September 30, 2006, the Company has a credit risk exposure of uninsured cash
in banks of $5,295,147. The Company does not require collateral or other
securities to support financial instruments that are subject to credit risk.
For the nine months ended September 30, 2006, three customers accounted for
approximately $250,000 (15%), $ 169,000 (10%), and $163,000 (10%) of total
sales.
For the nine months ended September 30, 2005, three customers accounted for
approximately $846,000 (37%), at $319,000 (14%), and $319,000 (14%) of total
sales.
8. Debt
The Company had two long-term loans from two separate financial institutions
totaling approximately $2,613,000 at September 30, 2006. The weighted average
interest rate of these loans at September 30, 2006 was approximately 6.18
percent. One loan, secured by Natural Pharmatech China's office building, is for
approximately $2,250,000 and matures in one lump sum payment on November 15,
2008. The other loan is for approximately $360,000 and is unsecured.
Additionally, during the beginning of the quarter ended June 30, 2006, the
Company incurred a short-term bank loan of approximately $250,000. The loan is
due in one year, and is secured by certain machinery and equipment of the
Company. The interest rate on the loan is 6.045%.
Q-7
GLOBAL PHARMATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Approximate annual principal payments on all loans for the quarter ended
September 30 are as follows:
Amounts Due
-----------
2006 $ 303,000
2007 70,000
2008 2,351,000
2009 142,000
----------
Total $2,866,000
==========
Interest expense and related service charges were approximately $152,000 and
$127,000 for the nine months ended September 30, 2006 and 2005, respectively.
9. Related Party Transactions
As of September 30, 2006, the Company had the following amounts due from related
parties:
Advances Due From Related Parties
BCT Global Development Ltd $ 18,662
Xiaobo Sun 23,464
Stockholders
Yun Peng Ming 6,944
Yuming Li 34,156
Ben Ji Wang 38,014
Judgment Award
Yuqi Li 410,000
--------
Total $531,240
========
BCT Global Development Limited ("BCT Global") owns 25% of Natural Pharmatech
China's subsidiary, BCT. Lianqin Qu, chairperson of our Board of Directors is
the chairperson of BCT Global.
Yuming Li is the brother-in-law of the Company's chairperson.
Xiao Bo Sun is the Company's president.
These advances have no stated terms for repayment and are not interest bearing.
In May, the Company won a judgment of approximately $410,000 from the Chinese
Court of Final Appeal related to litigation involving the transfer of drug
technology to a research hospital. The Company's outside (PRC) counsel advised
the Company's management in July 2006 that the Company would receive the money
from the research hospital by the end of August 2006. However, the money was not
received by August 2006.
In early November 2006, a three-way legal arrangement was entered into between
the Company, the research hospital, and Mr. Yuqi Li, the spouse of the
chairperson of our Company. In exchange for waiving a pre-existing debt between
the research hospital and the spouse of our Company's chairperson, the spouse
will undertake to pay the $410,000 judgment on behalf of the research hospital
to our Company. According to the terms of the arrangement, the money will be
paid by November 30, 2006.
As the Company has still determined the judgment has a high probability of being
paid, the Company has made a full accrual for this revenue for the first nine
months of 2006.
Q-8
GLOBAL PHARMATECH INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Major Loans
In July 2006, the Company lent approximately $500,000 to a potential distributor
of the Company's products. The loan is for three months with repayment due in
October 2006 at an annual interest rate of 6.24%. Although the loan agreement
expressly states that the principal and interest were fully due by October 2006,
as of the first week of November 2006 no part of the principal or interest had
been paid. Although the short length of time since the maturity of the loan
still gives the Company confidence in its eventual repayment, the Company will
continue to closely monitor the loan.
Additionally during the second quarter of 2006, approximately $250,000 was
advanced to a separate company based in Northeastern China. The loan was
advanced with no interest or stated maturity. The Company will continue to
closely monitor the repayment of this loan.
Both loans are recorded under "Other Current Assets" in the Balance Sheet.
11. Issuance of Common Stock
In April 2006, the Company entered into a common stock subscription agreement
with a private, non-U.S. investor. The investor received 5,000,000 shares of
Company common stock at a price of $1 per share. The net proceeds received,
after investment and finders fees, were approximately $4,602,000. An 8-K was
filed with the Securities and Exchange Commission to reflect this subscription
agreement in May 2006.
12. Bad Debt Expense
The Company recorded a bad debt expense of approximately $23,000 for the nine
months ended September 30, 2006 in connection with a related party loan to a
senior employee in 2005. The loan was advanced to assist in paying for medical
expenses incurred by the employee's family. The length of time since the loan
was advanced has since cast doubt over the employee's ability to repay the debt,
and the Company has accordingly made a provision for the full amount of the
loan.
Q-9
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Global Pharmatech Inc.
We have audited the accompanying consolidated balance sheet of Global Pharmatech
Inc. and Subsidiaries as of December 31, 2005 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Global Pharmatech
Inc. and Subsidiaries as of December 31, 2005 and the results of their
operations and their cash flows for each of the two years in the period then
ended in conformity with United States generally accepted accounting principles.
/s /Moore Stephens, P.C.
-------------------------------
Moore Stephens, P.C.
Certified Public Accounts
New York, New York
January 26, 2006, except for Note 17,
as to which the date is March 24, 2006
F-2
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
CURRENT ASSETS
Cash $ 690,835
Accounts Receivable, net 1,775,404
Related Party Receivable 660,353
Inventories 1,114,158
Other Current Assets 995,958
Prepaid Expenses 42,847
------------
TOTAL CURRENT ASSETS 5,279,555
------------
PROPERTY PLANT & EQUIPMENT, NET 6,277,282
LAND LEASE, NET 453,140
INTANGIBLE ASSETS 165,631
------------
TOTAL ASSETS $ 12,175,608
============
CURRENT LIABILITIES
Current portion of long-term debt $ 49,566
Accounts payable and accrued expenses 553,810
Related party payable 69,166
Advance from customers 66,245
Other payables and accruals 584,041
Taxes payable 34,239
Other current liabilities 61,020
------------
TOTAL CURRENT LIABILITIES 1,418,087
------------
LONG TERM DEBT 2,534,077
MINORITY INTEREST 976,039
STOCKHOLDERS' EQUITY
Preferred stock, par value .0001 per share
5,000,000 shares authorized, no shares
issued and outstanding
Common Stock par value .0001 per share, 95,000,000 shares
authorized, 18,247,935 issued and outstanding 1,825
Additional paid-in capital 6,749,800
Appropriated Retained Earnings 20,642
Unappropriated Retained Earnings 490,138
Subscription receivable (15,000)
------------
TOTAL STOCKHOLDERS' EQUITY 7,247,405
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,175,608
============
See accompanying Notes to Consolidated Financial Statements
F-3
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
2005 2004
------------ ------------
Sales $ 3,085,175 $ 1,555,670
Cost of Sales 1,400,014 533,770
------------ ------------
Gross Profit 1,685,161 1,021,900
------------ ------------
Operating Expenses
Advertising 173,828 17,802
Research and Development 508,405 507,578
Selling Expenses 91,980 40,832
General and Administrative 1,290,053 886,528
------------ ------------
2,064,266 1,452,740
------------ ------------
(Loss) from Operations (379,105) (430,840)
------------ ------------
Other Income (Expenses)
Government Grants 695,160 892,845
Interest Expense (187,530) (129,609)
------------ ------------
507,630 763,236
------------ ------------
Income before Income Taxes and
Minority Interest 128,525 332,396
------------ ------------
Provision for Income Taxes
Current 1,162 17,776
Deferred 0 0
------------ ------------
Income Before Minority Interest 127,363 314,620
Minority Interest 73,332 (4,535)
------------ ------------
Net Income $ 200,695 $ 310,085
============ ============
Earnings Per Common Share Basic and Diluted $ 0.01 $ 0.02
============ ============
Weighted Average Common Shares Outstanding 17,658,543 17,118,752
============ ============
See accompanying Notes to Consolidated Financial Statements
F-4
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
Common Stock
------------------------- Paid-in Comprehensive
Shares Amount Capital Income
------ ------ ------- ------
Balance at December 31, 2003 34,156,195 3,416 1,046,450
Reverse 10:1 split (30,740,568) (3,074) 3,074
Issuance of common stock in reverse merger 13,703,125 1,370 5,230,897
Accumulated deficit acquired in reverse merger (1,072,521)
Reimbursed dividend paid in 2002
through additional paid-in capital 262,790
Net income 310,085
Earnings appropriated in accordance
with Chinese law
----------- ------ --------- -------
Balance at December 31, 2004 17,118,752 1,712 5,470,690 310,085
----------- ------ --------- -------
Common stock issued for cash 1,114,183 111 1,264,110
Common stock issued, not paid for 15,000 2 15,000
Stock subscription receivable
Net income for the period 200,695
----------- ------ --------- -------
Balance at December 31, 2005 18,247,935 1,825 6,749,800 200,695
=========== ====== ========= =======
Appropriated Unappropriated Stock
Retained Retained Subscription Stockholders'
Earnings Earnings Receivable Equity
-------- -------- ---------- ------
Balance at December 31, 2003 (1,072,521) (22,655)
Reverse 10:1 split 0
Issuance of common stock in reverse merger 392,866 73,441 5,698,574
Accumulated deficit acquired in reverse merger 1,072,521 0
Reimbursed dividend paid in 2002
through additional paid-in capital (262,790) 0
Net income 310,085 310,085
Earnings appropriated in accordance
with Chinese law (392,866) 189,349 (203,517)
---------- -------- ---------- ---------
Balance at December 31, 2004 0 310,085 5,782,487
---------- -------- ---------- ---------
Common stock issued for cash 1,264,221
Common stock issued, not paid for 15,002
Stock subscription receivable (15,000) (15,000)
Net income 20,642 180,053 200,695
---------- -------- ---------- ---------
Balance at December 31, 2005 20,642 490,138 (15,000) 7,247,405
========== ======== ========== =========
See accompanying Notes to Consolidated Financial Statements
F-5
GLOBAL PHARMATECH, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 200,695 $ 310,085
Adjustments to reconcile net income to net
cash used by operating activities
Minority interest (73,332) 4,535
Depreciation 503,093 394,607
Amortization of land lease and intangible assets 27,077 22,027
Grant of fixed assets (567,187)
Grant of land lease (60,139)
DECREASE (INCREASE) IN OPERATING ASSETS
Accounts receivable (1,114,427) (154,496)
Related party receivable (581,302) 151,130
Inventories (48,576) (463,091)
Other receivables (409,389) 860,063
Prepaid expenses 17,058 12,116
INCREASE (DECREASE) IN OPERATING LIABILITIES
Accounts payable and accrued expenses 26,645 341,002
Related party advance (244,108) 280,852
Advance from customers (48,257) 27,420
Other payables and accruals (91,164) 50,286
Income taxes payable (27,673) (48,405)
Other liabilities 3,331 8,177
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,860,329) 1,168,982
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (363,431) (978,697)
Purchase of intangible assets (17,896)
----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (381,327) (978,697)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings (1,362,900) (465,080)
Net change in long term borrowing 2,583,315
Contributions from minority interest 247,800 297,671
Sales of common stock 1,264,110 500
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,732,325 (166,909)
----------- -----------
Effect of exchange rate changes on cash 7,176 0
NET INCREASE IN CASH $ 497,845 $ 23,376
CASH AT BEGINNING OF YEAR $ 192,924 $ 169,548
----------- -----------
CASH AT END OF YEAR $ 690,769 $ 192,924
=========== ===========
Supplemental Data
Cash paid during the year for:
Interest $ 187,530 $ 129,609
=========== ===========
Income taxes $ 172,005 $ 17,776
=========== ===========
See accompanying Notes to Consolidated Financial Statements
F-6
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 in Delaware
on June 26, 2001 under the name Autocarbon.com, Inc. After engaging, under prior
management, in several businesses unrelated to its current one, on February 9,
2005, Global acquired Jilin Tian Yao Science and Technology Limited Company
("Natural Pharmatech China"), by acquiring Natural Pharmatech China's parent,
Natural Pharmatech, Inc. ("Natural"), through the issuance to Natural's
shareholders of 13,703,125 of its common shares for all of the outstanding
common shares of Natural. Located in Changchun, China, Natural Pharmatech China
is a Chinese limited liability company, organized on February 7, 2001, which,
together with its subsidiaries, is principally engaged in the research and
development of modernized traditional Chinese medicine and bio-pharmacy, the
sale of this technology, and the manufacture and sale of Chinese medicine and
vitamins throughout China. Natural was incorporated in the British Virgin
Islands on February 2, 2004, and acquired Natural Pharmatech China on June 15,
2004 by issuing 43,800,000 of its common shares for all of the outstanding
common shares of Natural Pharmatech China.
Under generally accepted accounting principles, these acquisitions are
considered in substance to be capital transactions rather than business
combinations. In each case, for accounting purposes, the acquired company is
deemed to have issued its stock for the net monetary assets of the acquiring
company. Each transaction is accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition, except
that no goodwill is recorded. Under reverse takeover accounting, the comparative
historical financial statements are primarily those of Natural Pharmatech China.
In June 2005, Natural Pharmatech China, the Company's wholly owned subsidiary,
acquired an 80% equity interest in a new company, Changchun Xiandai Technology
Inc. ("XD").
On December 11, 2005 the Company sold its entire 51% interest in Jilin Mai Di
Xing ("MDX"). Because the sale price of the Company's interest was the same as
book value, there was no gain or loss on the transaction. MDX had been
established in July 2003 and had focused on research and development and
technique consulting.
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 December 31, 2005;
for the year then ended, the accounts include Natural and its majority-owned
subsidiaries for the whole period and Global from February 9, 2005, the date of
Global's acquisition of the subsidiaries. The comparative consolidated financial
statements for the year ended December 31, 2004 are those of Natural Pharmatech
China and its subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
B. USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reported
periods. Significant estimates include depreciation and allowance for doubtful
accounts receivable. Actual results could differ from those estimates.
F-7
C. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents. As of
December 31, 2005 the Company did not have any cash equivalents.
D. 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.
E. PROPERTY AND EQUIPMENT, NET
Property and equipment is stated at cost. Depreciation and amortization is
provided principally by use of the straight-line method over the useful lives of
the related assets. Expenditures for maintenance and repairs, which do not
improve or extend the expected useful life of the assets, are expensed to
operations while major repairs are capitalized. The company uses a residual
value when computing depreciation.
F. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards (`SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
G. REVENUE RECOGNITION
Contract revenues earned from the transfer of technology (licensing
arrangements) are recognized in accordance with contract terms. Such revenues
were approximately $1,150,000 and $476,000 for the years ended December 31, 2005
and 2004, respectively.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues were
approximately $241,000 and $137,000 for the years ended December 31, 2005 and
2004, respectively.
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. Such revenues were approximately
$1,694,000 and $942,000 for the years ended December 31, 2005 and 2004,
respectively.
Government grants are recognized as other income upon receipt. Such revenues
were $695,160 and $892,000 for the years ended 2005 and 2004, respectively.
H. IMPAIRMENT
In accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets" the Company evaluates its long-lived assets to determine
whether later events and circumstances warrant revised estimates of useful lives
or a reduction in carrying value due to impairment. If indicators of impairment
exist and if the value of an asset is impaired, an impairment loss would be
recognized for the difference between the fair value of the asset and its
carrying value.
I. FOREIGN CURRENCY TRANSLATION
The functional currency of Natural Pharmatech China and its subsidiaries is the
Chinese Yuan (RMB) and their reporting currency is the US dollar. Natural
Pharmatech China's consolidated balance sheet accounts are translated into US
dollars at the period-end exchange rate and all revenue and expenses are
translated into U.S. dollars at the average exchange rate prevailing during the
period in which these items arise. Translation gains and losses are deferred and
accumulated as a component of other comprehensive income in shareholders'
equity. Transaction gains and losses that arise from exchange rate fluctuations
affecting transactions denominated in a currency other than the functional
F-8
currency are included in the statement of operations as incurred. The
translation gains and losses were immaterial for the years ended December 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.
J. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income represents the change in equity of the
Company during the periods presented from foreign currency translation
adjustments. These transactions are deemed immaterial for the years presented
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires
disclosing fair value to the extent practicable for financial instruments that
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts, related party and
other receivables, accounts payable, other payables and accrued expenses and
short term debt, it was assumed that the carrying amounts approximate fair value
because of the near term maturities of such obligations. For long-term debt, the
carrying amount is assumed to approximate fair value based on the current rates
at which the Company could borrow funds with similar remaining maturities.
L. ADVERTISING COSTS
Advertising costs are charged to operations when incurred. Advertising costs for
each of the years ended December 31, 2005 and 2004 are approximately $173,800
and $17,800, respectively.
M. EARNINGS PER SHARE
Basic earnings per share is computed by dividing the earnings for the year by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities by including
other potential common stock, including stock options and warrants, in the
weighted average number of common shares outstanding for a period, if dilutive.
At December 31, 2005 and 2004, there were no common stock equivalents.
N. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company recognizes an allowance for doubtful accounts to ensure accounts
receivable are not overstated due to uncollectibility. Bad debt reserves are
maintained for all customers based on a variety of factors, including the length
of time the receivables are past due, significant one-time events and historical
experience. An additional reserve for individual accounts is recorded when the
Company becomes aware of a customer's inability to meet its financial
obligation, such as in the case of bankruptcy filings or deterioration in the
customer's operating results or financial position. If circumstances related to
customers change, estimates of the recoverability of receivables would be
further adjusted. As of December 31, 2005, the allowance for doubtful accounts
was $0.
O. APPROPRIATED RETAINED EARNINGS
In accordance with Chinese regulations, the Company's Chinese subsidiaries must
appropriate 15% of their annual profits as computed under Chinese generally
accepted accounting principles, which is reflected in the consolidated financial
statements as appropriated retaining earnings and which, at December 31, 2005,
had a $20,642 balance.
F-9
3. INVENTORY
Inventory is comprised of the following:
December 31, 2005
-----------------
Raw materials $ 279,340
Work in progress 654,955
Finished goods 179,863
----------
Total $1,114,158
==========
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of approximately $30,400 of salaries payable,
$22,300 of benefits payable and $8,300 of deferred Chinese taxes.
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
December 31, 2005
-----------------
Office equipment $ 153,567
Machinery and Equipment 1,879,256
Furniture and Fixtures 631,622
Computer equipment 58,805
Vehicles 43,804
Buildings and improvements 2,235,909
Buildings pledged as security to creditor 2,708,167
TOTAL AT COST 7,711,130
----------
ACCUMULATED DEPRECIATION AND AMORTIZATION 1,433,848
----------
NET $6,277,282
==========
Depreciation and amortization expense for the years ended December 31, 2005 and
2004 was approximately $503,000 and $392,000, respectively.
Depreciation and amortization expenses included in research and development, and
general and administrative expenses were approximately $410,000 and $93,000,
respectively, for 2005. For 2004, such expenses were approximately $326,000, and
$66,000, respectively.
6. INCOME TAXES
The deferred tax liability as of December 31, 2005 is immaterial and is included
with other liabilities.
A reconciliation between taxes computed at the statutory rate of 15% and the
Company's effective tax rate is as follows:
2005 2004
-------- --------
Income tax on pretax income
at statutory rate $ 30,020 $ 49,900
Effect of income tax exemption $(28,858) $(32,124)
Effect of subsidiary losses not
consolidated for income tax purposes
Income tax at effective rate $ 1,162 $ 17,776
F-10
As at December 31, 2005 and 2004, the Company had accumulated net operating loss
carryforwards for United States federal tax purposes of $1,033,000 that are
available to offset future taxable income. Realization of the net operating loss
carryforwards is dependent upon future profitable operations. In addition, the
carryforwards may be limited upon a change of control in accordance with
Internal Revenue Code Section 382, as amended. Accordingly, management has
recorded a valuation allowance to reduce deferred tax asset of approximately
$361,000 associated with the net operating loss carryforwards to zero at
December 31, 2005.
Additionally, as of December 31, 2005 and 2004, the Company had accumulated net
operating loss carryforwards for Chinese tax purposes of approximately $447,000
and $118,500, respectively. Realization of the Chinese tax net operating loss
carryforwards is dependent on future profitable operations, as well as a maximum
five-year carryforward period. Accordingly, management has recorded a valuation
allowance to reduce the deferred tax associated with the net operating loss
carryforwards to zero at December 31, 2005. These tax losses yield deferred tax
assets of approximately $67,000 and $18,000, respectively, as of December 31,
2005 and 2004. Valuation allowance of an equal amount has been recorded as of
December 31, 2005.The valuation allowance has increased approximately $49,000
from 2004 to 2005.
The Company and each of its subsidiaries file separate income tax returns.
Natural Pharmatech China qualifies as a "high-technology foreign joint venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. Since its first profitable year was 2005,
Natural Pharmatech China is entitled to an exemption from PRC tax for the years
2005 and 2006. Because Natural Pharmatech China qualifies as a "high-technology
joint venture" and is located in an economic development zone, it is entitled to
a reduced tax rate of 10% for the three years beginning in 2007 through 2009.
Thereafter, it will be taxed at the standard income tax rate of 15%.
Jilin BCT Pharmacy Company, Ltd ("BCT") is a "wholly-owned foreign venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. After these two years, it is entitled to a
reduced income tax rate of 10% for three additional years. After these three
years, it will be taxed at the standard income tax rate for a "wholly-owned
foreign venture" of 15%.
Jilin Tian Yao Drug Safety Evaluation Co., Ltd ("JDE") is a "high technology
joint venture" and is exempt from income taxes for two years beginning with its
first profitable year. It is thereafter taxed at a standard income tax rate of
15%.
XD is considered a "high technology joint venture" and so is entitled to full
exemptions from income tax for two years, beginning with its first profitable
year. Thereafter, it is assessed at the standard income tax rate for joint
ventures of 15%.
Natural Pharmatech China's other Chinese subsidiary, Jilin Yi Cao Tang Pharmacy
Co., Ltd. ("YCT"), is not a foreign joint venture and so is assessed at the
ordinary tax rate for Chinese companies at 33%.
The Company is also subject to value added tax (VAT), business tax and surtax
totaling 5.5 percent of gross sales.
7. CONCENTRATIONS AND CREDIT RISK
The Company operates principally in China and grants credit to customers located
there. Although China is considered economically stable, it is possible that
unanticipated events there or in foreign countries could disrupt the Company's
operations.
At December 31, 2005, the Company has a credit risk exposure of uninsured cash
in banks of approximately $690,800. The Company does not require collateral or
other securities to support financial instruments that are subject to credit
risk.
For the year ended December 31, 2005, three customers accounted for $ 854,701
(28%), $277,045 (9%) and $275,799 (9%) of total sales, respectively. For 2004,
three customers accounted for $513,000 (31%), $338,000 (20%) and $175,000 (11%)
of total sales, respectively.
8. LONG-TERM DEBT
The Company had two long-term loans from two separate financial institutions
totaling approximately $2,583,600 at December 31, 2005. The weighted average
interest rate of these loans at December 31, 2005 was approximately 6.18
percent. One loan, secured by Natural Pharmatech China's office building, is for
approximately $2,230,500 and matures in one lump sum payment on November 15,
2008. The other loan is for approximately $353,200. Total annual principal
payments on both loans for the years ending December 31 are as follows:
F-11
Amounts Due
-----------
2006 $ 49,566
2007 68,154
2008 2,323,420
2009 142,503
----------
Total $2,583,643
==========
Interest expense and related service charges were $187,530 and $129,609 for the
years ended December 31, 2005 and 2004, respectively.
9. RELATED PARTY TRANSACTIONS
As of December 31, 2005, the Company has the following amounts due from and to
related parties:
ADVANCES DUE FROM RELATED PARTIES
BCT Global Development Limited $ 18,277
Dong Yuan Investment (HK) Limited 598,848
STOCKHOLDERS
Wang Ben Ji 37,206
Min Yun Peng 6,022
--------
TOTAL $660,353
========
ADVANCES DUE TO RELATED PARTIES
BCT Global Development Limited $ 29,946
STOCKHOLDERS
Donghai Zhang $ 39,220
--------
TOTAL $ 69,166
========
These balances have no stated terms for repayment and are not interest bearing.
Dong Yuan Investment (HK) Limited ("DYI") is a British Virgin Island company.
Lianqin Qu, Chair of the Company's Board of Directors, is the chairperson of
both DYI and Natural Pharmatech China, and majority shareholder of DYI. DYI does
not hold any shares of Natural Pharmatech China; neither does Natural Pharmatech
China hold any shares of DYI.
BCT Global Development Limited ("BCT Global") owns 25% of Natural Pharmatech
China's subsidiary BCT. Lianqin Qu is the chairperson of BCT Global.
Donghai Zhang is employed by Natural Pharmatech China, and owns more than 5% of
the Company's issued shares.
10. MINORITY INTEREST
In March 2004 and May 2004, respectively, Natural Pharmatech China terminated
its investments in Hainan Gong An Detoxification and Rehabilitation Center
("HGAR") and Hainan Gong An Health-care Products Co., Ltd. ("HGA"), each
effective as of January 1, 2004. These terminations resulted in a decrease in
minority interest of approximately $162,000.
11. UNREGISTERED SALES OF EQUITY SECURITIES
During the year, the company issued 1,129,183 shares for aggregate net proceeds
of $1,264,110. These share have not been and will not be registered under the
Securities Act of 1933, and, if in the future a shareholder decides to offer,
resell, pledge or otherwise transfer any of these shares, they may be offered,
resold, pledged or otherwise transferred only (a) pursuant to an effective
registration statement filed under the Securities Act, (b) to non-U.S. persons
in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation
S under the Securities Act, (c) pursuant to the resale limitations of, and
F-12
otherwise in compliance with, Rule 905 of Regulation S under the Securities Act,
or (d) pursuant to an exemption from registration under the Securities Act
provided by Rule 144. The net proceeds from this issuance are being used for
working capital and general corporate purposes.
12. DISPOSITION OF SUBSIDIARY
On December 11, 2005, the Company sold its interest in MDX for approximately
$63,000, the same amount as its book value.
13. INTANGIBLE ASSETS
The Company's intangible assets of approximately $212,600 consist primarily of
purchased technology of $130,000 and self-developed patents of $82,600. No
patent has any significant residual value. Each patent has an estimated useful
life of twenty years but the legal rights are limited to ten years by the
Chinese government, therefore, the company uses ten years as its amortization
period. Amortization expense was approximately $18,300 and $13,400 for 2005 and
2004, respectively.
At December 31, 2005 the accumulated amortization was approximately $35,800 and
$11,200 for the purchased technology and self-developed patents, respectively.
Amortization for each of the next five years is estimated to be $18,300 each
year.
14. EMPLOYEE BENEFITS
The Company is required by statutory Chinese employment laws to fund certain
government sponsored employee benefits. The expense incurred by the Company for
the years ended December 31, 2005 and 2004 was approximately $32,000 and
$16,400, respectively.
15. INVESTMENT IN LAND LEASE
As of December 31, 2005 the Company had a parcel of land leased from the Chinese
government. The term of the lease is fifty years. The consideration under the
agreement amounts to approximately $498,100. The Company classifies the leases
as operating and therefore amortizes the cost using the straight-line method
over the life of the lease. Rent expense was approximately $8,650 for the year
ended December 31, 2005 and $8,600 for the year ended December 31, 2004.
Accumulated amortization at December 31, 2005 was approximately $45,000. The
estimated amount of amortization expense for each of the five succeeding fiscal
years is $8,650 annually.
16. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment, an
Amendment of SFAS No. 123." SFAS No. 123R requires companies to recognize in the
statement of operations the grant-date fair value of stock options and other
equity-based compensation issued to employees. SFAS No. 123R is effective for
the Group for the year ending December 31, 2006. The adoption of SFAS No. 123R
is expected to have no material impact on the Group's consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets." The Statement is an amendment of APB Opinion No. 29. SFAS No. 153
eliminates the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. SFAS No. 153 is effective for the year
ending December 31, 2006. The adoption of SFAS No. 153 is expected to have no
material impact on the Group's consolidated financial statements.
17. SUBSEQUENT EVENTS
In March 2006, the Company entered into an agreement with one of its major
customers in 2005 to transfer real property to the Company to settle an account
receivable as of December 31, 2005 of approximately $619,500.
According to an independent valuation completed on the building in March 2006,
the appraised value of the building exceeds the receivable owed to the Company
by the customer.
Additionally, in January 2006, the Company advanced a short-term loan of
approximately $124,000 to an unrelated third party.
F-13
1,000,000 SHARES OF COMMON STOCK
GLOBAL PHARMATECH, INC.
PROSPECTUS
JANUARY , 2007
DEALER PROSPECTUS DELIVERY OBLIGATION
Until March 27, 2007 (90 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligations to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that to the fullest extent
permitted by the Delaware General Corporation Law, directors of the registrant
shall not be liable to it or its stockholders for monetary damages for breach of
fiduciary duty as a director. The Company is also subject to Section 145 of the
Delaware General Corporation Law, set forth below.
"Section 145. Indemnification of officers, directors, employees and agents;
insurance.
"(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
"(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
"(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection therewith.
"(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made, with
respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (4)
by the stockholders.
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"(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if any, as
the corporation deems appropriate.
"(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
"(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under this section.
"(h) For purposes of this section, references to (the corporation) shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to the resulting or surviving
corporation as such person would have with respect to such constituent
corporation if its separate existence had continued.
"(i) For purposes of this section, references to (other enterprises) shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
"(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
"(k) The Court of Chancery is hereby vested with exclusive jurisdiction to
hear and determine all actions for advancement of expenses or indemnification
brought under this section or under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses (including attorneys'
fees)."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered are as follows:
SEC Registration Fee $ 83
Printing Expenses $ 2,000
Legal Fees and Expenses $50,000
Accounting Fees and Expenses $10,250
-------
Total $62,333
=======
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ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On February 20, 2004, as reported in its Form 8-K filed with the SEC on
July 13, 2004, the Company authorized the issuance of 31,295,000 shares of its
common stock to the shareholders of New Concepts Nutraceuticals, Inc. in
exchange for all of the issued and outstanding common shares of New Concepts.
The offering was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
On January 24, 2005, the Company entered into a Share Purchase Agreement
with Natural Pharmatech, Inc. and Natural Pharmatech's stockholders, providing
for the acquisition by the Company of all of Natural Pharmatech's issued and
outstanding capital stock in exchange for a total of 13,703,125 shares of its
common stock. The offering was made pursuant to Regulation S under the
Securities Act; resales of these securities are being registered under this
registration statement.
On March 14, 2005, the Company entered into subscription agreements with
ten non-U.S. persons pursuant to which the Company issued 279,183 shares of
common stock for gross proceeds of US$368,025. The offering was made pursuant to
Regulation S under the Securities Act; resales of these securities are being
registered under this registration statement.
On August 18, 2005, the Company entered into a subscription agreement with
a non-U.S. entity pursuant to which the Company issued 800,000 shares of common
stock for gross proceeds of $960,000. The offering was made pursuant to
Regulation S under the Securities Act; resales of these securities are being
registered under this registration statement.
On April 28, 2006, the Company entered into a subscription agreement with a
non-U.S. person pursuant to which the Company issued 5,000,000 shares of common
stock for gross proceeds of US$5,000,000. The offering was made pursuant to
Regulation S under the Securities Act; resales of 1,000,000 shares of these
securities are being registered under this registration statement.
ITEM 27. EXHIBITS
3(i) Certificate of incorporation of the registrant. Incorporated by
reference to Exhibit 3.1 to the Company's registration statement on Form SB-2
filed with the SEC on August 17, 2001.
3(ii) By-laws of the registrant. Incorporated by reference to Exhibit 3.2
to the Company's registration statement on Form SB-2 filed with the SEC on
August 17, 2001.
5 Opinion of Loeb & Loeb LLP.*
10.1 Share Purchase Agreement, dated as of January 24, 2005, by and among
Autocarbon, Inc., Natural Pharmatech, Inc. and the shareholders of Natural
Pharmatech, Inc. Incorporated by reference to Exhibit 4.1 to the Company's Form
8-K filed with the SEC on January 28, 2005.
10.2 Executive Employment Agreement dated February 8, 2005 with Xiaobo Sun.
Incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed with
the SEC on February 15, 2005.
10.3 Executive Services Agreement dated February 8, 2005 with Lianqin Qu.
Incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed with
the SEC on February 15, 2005.
10.4 Director and Chief Technology Officer service contract dated February
14, 2005 with Tom Du. Incorporated by reference to Exhibit 10.6 to the Company's
Form 8-K filed with the SEC on February 15, 2005.
10.5 Chief Financial Officer service contract dated January 1, 2006 with
Joseph J. Levinson. Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed with the SEC on January 5, 2006.
10.6 Executive Employment Agreement dated February 8, 2005 with Zhuojun Li.
Incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed with
the SEC on February 15, 2005.
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10.7 Director Service Contract by and between the Company and Mr. Zhengyou
Zhang, dated October 9, 2006. Incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed with the SEC on October 11, 2006.
10.8 Director and Chief Financial Officer Service Contract by and between
the Company and Mr. Joseph J. Levinson, dated October 9, 2006. Incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K filed with the SEC on
October 11, 2006.
16.1 Letter of Russell Brennan, dated February 11, 2005. Incorporated by
reference to Exhibit 16.1 to the Company's Form 8-K filed with the SEC on
February 28, 2005.
16.2 Letter of Aaron Stein, dated April 25, 2005. Incorporated by reference
to Exhibit 16.1 to the Company's Form 8-K dated April 20, 2005, filed with the
SEC on April 25, 2005.
21 Subsidiaries of the registrant. Incorporated by reference to Exhibit 21
to the Company's Registration Statement on Form SB-2 (File No. 333-131-039).
23.1 Consent of Moore Stephens, P.C.*.
23.2 Consent of Loeb & Loeb LLP (included in Exhibit 5).*
24.1 Power of Attorney (following the signature page hereto).
- -------------
* Filed herewith.
ITEM 28. UNDERTAKINGS.
Undertaking Required by Item 512 of Regulation S-B.
(a) The undersigned registrant will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii)Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer
under the Securities Act to any purchaser in the initial distribution of
the securities, the undersigned small business issuer undertakes that in a
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primary offering of securities of the undersigned small business issuer
pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to the purchaser, if the securities are
offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be a seller to
the purchaser and will be considered to offer or sell such securities to
such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
small business issuer relating to the offering required to be filed
pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned small business issuer or
used or referred to by the undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating
to the offering containing material information about the undersigned
small business issuer or its securities provided by or on behalf of
the undersigned small business issuer; and
(iv) Any other communication that is an offer in the offering
made by the undersigned small business issuer to the purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this registration
statement to be signed on its behalf by the undersigned in the City of
Changchun, People's Republic of China, on January 9, 2007.
GLOBAL PHARMATECH, INC.
By: /s/ Lianqin Qu
----------------------------------
Name: Lianqin Qu
Title: Chief Executive Officer and
President
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated:
Date: January 9, 2007 /s/ Lianqin Qu
--------------------------------------
Lianqin Qu
Director, Principal Executive Officer
and Chair of the Board
Date: January 9, 2007 /s/ Tom Du
--------------------------------------
Tom Du
Director
Date: January 9, 2007 /s/ Joseph J. Levinson
--------------------------------------
Joseph J. Levinson
Director, Principal Financial and
Accounting Officer
Date: January 9, 2007 /s/ Zhenyou Zhang
--------------------------------------
Zhenyou Zhang
Director
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lianqin Qu and Joseph J. Levinson, and
each of them, his or her true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this registration statement and any and
all related registration statements pursuant to Rule 462(b) of the Securities
Act, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
Name Title Date
---- ----- ----
/s/ Lianqin Qu Principal Executive Officer, January 9, 2007
- -------------------------- Director and Chair of the Board
Lianqin Qu
/s/ Joseph J. Levinson Principal Financial, January 9, 2007
- -------------------------- Principal Accounting Officer
Joseph J. Levinson (Controller) and Director
/s/ Zhenyou Zhang Director January 9, 2007
- --------------------------
Zhenyou Zhang
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