UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2007
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to _____________
Commission File Number 333-52721
GLOBAL PHARMATECH, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0976805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6
(Address of principal executive offices)
(905) 787-8225
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
There were 23,247,935 shares of the Company's common stock, par value $0.0001
per share, outstanding as of April 27, 2007.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION ............................................. 3
Item 1. Financial Statements and Notes thereto ............................. 3
Item 2. Management's Discussion and Analysis or Plan of Operation .......... 11
Item 3. Controls and Procedures ............................................ 14
PART II - OTHER INFORMATION ................................................ 15
Item 1. Legal Proceedings .................................................. 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........ 15
Item 3. Defaults Upon Senior Securities .................................... 15
Item 4. Submission of Matters To a Vote of Security Holders ................ 15
Item 5. Other Information .................................................. 15
Item 6. Exhibits ........................................................... 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Global Pharmatech Inc. and Subsidiaries
Consolidated Balance Sheet
March 31, 2007
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,410,616
Notes Receivable 42,437
Accounts receivable, net 369,503
Related party receivable 87,695
Inventories 743,067
Other current assets 1,018,229
Current assets of discontinued operations 1,327,554
------------
Total Current Assets 8,999,101
------------
PROPERTY, PLANT & EQUIPMENT, net 4,557,240
LAND LEASE, net 399,243
CONSTRUCTION IN PROGRESS 20,062
INTANGIBLE ASSETS, net 124,940
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS 1,882,767
------------
6,984,252
------------
Total Assets $ 15,983,353
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 267,488
Advances from customers 117,119
Other payables and accruals 11,859
Taxes Payable 59,583
Other current liabilities 74,919
Current liabilities of discontinued operations 677,242
------------
Total Current Liabilities 1,208,210
LONG-TERM BORROWINGS 2,325,311
NONCURRENT LIABILITIES OF DISCONTINUED OPERATIONS 316,500
MINORITY INTEREST 1,093,907
MINORITY INEREST IN DISCONTINUED OPERATIONS 49,231
STOCKHOLDERS' EQUITY
Preferred stock par value $ 0.0001 per share, 5,000,000
shares authorized, no shares issued and outstanding
Common stock par value $ 0.0001 per share, 95,000,000
shares authorized, 23,247,935 shares issued and outstanding 2,325
Additional paid in capital 11,374,300
Appropriated retained earnings 237,052
Unappropriated retained earnings (1,235,805)
Accumulated other comprehensive income 627,326
Subscription receivable (15,000)
------------
Total Stockholders' Equity 10,990,194
------------
Total Liabilities and Stockholders' Equity $ 15,983,353
============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
Global Pharmatech Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31, 2007 and 2006
(Unaudited)
2007 2006
------------ ------------
SALES $ 470,959 $ 688,470
COST OF SALES 205,441 228,236
------------ ------------
GROSS PROFIT 265,518 460,234
------------ ------------
OPERATING EXPENSES
Advertising 3,254 6,295
Research and development 119,534 171,647
Selling expenses 22,421 43,084
General and administrative expenses 293,787 481,077
------------ ------------
438,996 702,103
------------ ------------
LOSS FROM OPERATIONS (173,478) (241,869)
------------ ------------
OTHER INCOME (EXPENSES)
Miscellaneous Income (Expenses) (3,982) 37,280
Interest expense (43,987) (41,726)
------------ ------------
(47,969) (4,446)
------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (221,447) (246,315)
PROVISION FOR INCOME TAXES
Current 0 0
Deferred 0 0
------------ ------------
LOSS BEFORE MINORITY INTEREST (221,447) (246,315)
MINORITY INTEREST (4,338) (4,553)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (225,785) (250,868)
------------ ------------
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX (49,396)
NET LOSS $ (275,146) $ (250,868)
============ ============
BASIC NET LOSS PER SHARE
CONTINUING OPERATIONS $ (0.01) $ (0.01)
DISCONTINUED OPERATIONS 0.00
------------ ------------
$ (0.01) $ (0.01)
============ ============
DILUTED NET LOSS PER SHARE
CONTINUING OPERATIONS $ (0.01) $ (0.01)
DISCONTINUED OPERATIONS 0.00
------------ ------------
$ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,247,935 18,247,935
============ ============
Net Loss (275,146) (250,868)
Foreign Currency Translation 169,497
------------ ------------
Comprehensive Income $ (105,649) $ (250,868
============ ============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
Global Pharmatech Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006
(Unaudited)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations $ (225,785) $ (250,868)
Adjustments to reconcile net income to net cash used by
operating activities:
Minority interest 4,338 4,553
Depreciation 90,455 126,000
Amortization of land lease and intangible assets 8,179 6,800
Changes in operating assets and liabilities Decrease
(Increase) in operating assets:
Accounts receivable (316,497) 83,529
Related party receivable (20,234) 52,748
Notes Receivable (344) 0
Inventories 251,025
Prepaid expenses 14,993 (12,758)
Other current assets (105,697) 84,979
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 233,556 (134,688)
Related party payable (57,630)
Advance from customers 27,663 68,144
Other payable and accruals 46,624 (64,129)
Taxes payable (7,847) 2,502
Other liabilities 3,000 3,726
----------- -----------
Net Cash Provided by Operating Activities 3,429 80,349
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (116,586) (217,867)
Purchase of intangible (15,812)
Construction in progress (11,439)
----------- -----------
Net Cash Used by Investing Activities (143,837) (217,867)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings (256,276)
Long-term borrowings 18,832
Contributions from minority interest 191,105
----------- -----------
Net Cash Used by Financing Activities (46,339)
----------- -----------
Effect of exchange rate changes on cash 43,585
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (143,162) (137,518)
CASH AND CASH EQUIVALENTS, beginning of period 5,553,778 690,835
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,410,616 $ 553,317
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 43,987 $ 41,726
=========== ===========
Income taxes paid $ 0 $ 0
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
Notes to the Unaudited Consolidated Financial Statements March 31, 2007
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.
During the quarter Natural Pharmatech China and Natural purchased 50% and 25%,
respectively, of the equity interest in Jilin Biotech Co., Ltd ("BIO"), a
Chinese company, for $3,000,000 Hong Kong dollars (approximately $385,000). The
25% owner invested 1,000,000 Hong Kong dollars. The US$ equivalent of
approximately $140,275 is included with contributions from minority interest in
financing activities in the March 31, 2007 statement of cash flows. BIO was
principally an inactive shell at the time of the acquisition and its main
business will be to manufacture and sell dietary supplements.
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. All significant
inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements as of March 31,
2007 and for the three month periods ended March 31, 2007 and 2006 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
three months ended March 31, 2007 are not necessarily indicative of the results
for the full fiscal year ending December 31, 2007. 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, 2006 as reported in Form 10-KSB.
6
b. Inventory
Inventories are stated at the lower of cost or market. Substantially all
inventory costs are determined using the first-in, first-out (FIFO) method.
Certain inventory goods purchased are subject to spoilage within a short period
of time while in possession of the Company. Inventory costs do not exceed net
realizable value.
c. Revenue Recognition
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues are $145,071 and $364,742 in 2007
and 2006, respectively.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $0 and $0 in
2007 and 2006, respectively.
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. The revenues earned are $325,888 and
$323,728 in 2007 and 2006, respectively.
Government grants are recognized as other income upon receipt. These revenues
are $0 and $37,280 in 2007 and 2006, respectively.
d. 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 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 transaction gains
and losses were immaterial for the periods ended March 31, 2007 and 2006..
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 ten 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 March 31, 2007, had a
balance of $237,052.
3. Inventory
Inventory is comprised of the following:
March 31, 2007
--------------
Raw materials $ 184,692
Work in progress $ 271,552
Finished goods $ 286,823
----------
Total $ 743,067
==========
4. Other Current Liabilities
The account comprises salaries and benefits payable to employees.
7
5. Property and Equipment
Property and equipment is comprised of the following:
March 31, 2007
--------------
Office equipment $ 159,104
Machinery and Equipment 1,955,287
Furniture and Fixtures 4,295
Computer equipment 58,998
Vehicles 109,513
Buildings and improvements 591,274
Buildings pledged as security to creditor 2,821,820
----------
TOTAL AT COST 5,700,291
----------
ACCUMULATED DEPRECIATION AND AMORTIZATION 1,143,051
----------
NET 4,557,240
==========
Depreciation and amortization expense for each of the three months ended March
31, 2007 and 2006 was approximately $90,000 and $126,000 , respectively.
6. Income Taxes
The deferred tax liability as of March 31, 2007 is immaterial and is included
with other liabilities.
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 of 33%.
Natural Pharmatech China's Chinese subsidiary, BIO, is a foreign joint venture,
so the income tax rate is 15%.
The Company is also subject to value added tax (VAT), business tax and surtax
totaling 5.5 percent of gross sales.
8
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 March 31, 2007, the Company has a credit risk exposure of uninsured cash in
banks of $5,410,616.. The Company does not require collateral or other
securities to support financial instruments that are subject to credit risk.
For the three months ended March 31, 2007, two customers accounted for $191,347
(41%) of total sales as follows: Customer A at $126,755 (27%), Customer B at
$64,592 (14%).
For the three months ended March 31, 2006, three customers accounted for
$368,368 (53%) of total sales as follows: Customer A at $161,545 (23%), Customer
B at $124,265 (18%), Customer C at $82,558 (12%).
8. Debt
The Company has one long-term loans from one financial institutions totaling
approximately $2,325,311 at March 31, 2007. The weighted average interest rate
of these loans at March 31, 2007 was approximately 6.18 percent. The loan,
secured by Natural Pharmatech China's office building, and matures in one lump
sum payment on November 15, 2008.
Interest expense and related service charges were approximately $44,000 and
$41,700 for the three months ended March 31, 2007 and 2006, respectively.
9. Related Party Transactions
As of March 31, 2007, the Company has the following amounts due from and to
related parties:
Advances Due From Related Parties
Xiao Bo Sun $ 35,327
Stockholders
Yun Pen Min $ 5,152
Ben Ji Wang $ 42,045
Dong Hai Zhang $ 5,171
--------
Total $ 87,695
========
9
Donghai Zhang is employed by Natural Pharmatech China, and owns more than 5% of
the Company's issued shares.
Xiao Bo Sun is the Company's former president.
These balances have no stated terms for repayment and are not interest bearing.
10. Sale of Subsidiary
Due to consistent operating losses at its YCT subsidiary, in March 2007, the
Company's Board of Directors approved a plan to sell to sell the Natural
Pharmatech China's 95% equity interest in YCT to Mr. Daojun Wang at for a price
of RMB9,000,000 (approximately $1,163,000). On May 11, 2007, the Company and Mr.
Wang signed the Equity and Liability Transfer Agreement. The following table
details the payment schedule for the sale:
Due Date Amount Due (in RMB)
-------- -------------------
3 days after signing this agreement 500,000
May 30, 2007 500,000
November 30, 2007 1,000,000
May 30, 2008 1,000,000
November 30, 2008 1,000,000
May 30, 2009 1,000,000
November 30, 2009 1,000,000
May 30, 2010 1,000,000
November 30, 2010 1,000,000
May 30, 2011 1,000,000
The accompanying financial statements present YCT as discontinued operations.
The sales price has been discounted at a 5% rate for the long-term payments.
11. Subsequent Events
In March, 2007, the Company has signed a transfer agreement with Jilin Xiuzheng
Pharmaceuticals, Co. Ltd ("Xiuzheng") to transfer its new product Guanxinkang
Capsules.. The aggregate value of the transfer is $335,878, including $38,700 of
revenue realized in this quarter, with approximately $297,300 of revenue to be
realized in the future.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-QSB.
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business strategy and expectations, including but
not limited to the following:
* 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;
* our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including our good faith assumptions being
incorrect, our business expenses being greater than anticipated due to
competitive factors or unanticipated development or sales costs; revenues not
resulting in the manner anticipated due to a continued slow down in technology
spending, particularly in the telecommunications market; our failure to generate
investor interest or to sell certain of our assets or business segments. The
forward-looking statements may also be impacted by the additional risks faced by
us as described in this Report and in our filings with the Securities and
Exchange Commission (the "SEC"). All forward-looking statements included in this
Report are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.
BACKGROUND
Global Pharmatech, Inc. ("Global Pharmatech," the "Company", "we", "us" or
"ours") was incorporated under the laws of the State of Delaware in 2001 under
the name Autocarbon.com, Inc. On November 1, 2002, we filed a Certificate of
Ownership with the Secretary of State of the State of Delaware whereby we merged
with our wholly-owned subsidiary and amended our Certificate of Incorporation,
changing our name to Autocarbon, Inc.
On January 24, 2005, our company entered into a Share Purchase Agreement with
Natural Pharmatech, Inc., a British Virgin Islands corporation ("Natural
Pharmatech"), and the shareholders of Natural Pharmatech. Under the terms of the
Share Purchase Agreement, we agreed to acquire 100% of Natural Pharmatech's
shares in exchange for 80% of our common stock, to be issued to the Natural
Pharmatech shareholders. Our acquisition of Natural Pharmatech was completed on
11
February 9, 2005. In connection with this transaction, we amended our
Certificate of Incorporation on January 31, 2005, changing our name to Global
Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market proprietary drugs
and nutritional supplements that are based on traditional Chinese medicine. We
also offer a full range of "start to finish" biotechnology services, including
research and development, testing, manufacturing drugs in liquid and solid dose
forms, sales and marketing. We utilize unique extraction methods and innovative
techniques that have been developed by our research and development team. Our
core business is to license our patents and technologies for
botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China,
U.S, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. Sales outside China
are made either directly to foreign distributors by our subsidiary, Jilin Ben
Cao Tang Pharmacy Co., Ltd. ("BCT"), or through China Ben Cao Tang International
Development Ltd. ("BCT HK"), which sells on to those areas indicated above.
Natural Pharmatech was formed on February 2, 2004 under the laws of the British
Virgin Islands. Natural Pharmatech was formed as a holding company to own the
five subsidiaries that made up Natural Pharmatech's business operations. Natural
Pharmatech (Jilin China) Co., Ltd. ("Natural Pharmatech China" or "JTY") is a
wholly owned subsidiary of Natural Pharmatech located in Changchun in Jilin
Province of China. Natural Pharmatech China originated as a research department
within the Affiliated Hospital of Changchun Traditional Chinese Medicine
College. It was organized as a separate private for-profit entity in
February2001.
Natural Pharmatech China has four subsidiaries: BCT, Jilin Yi Cao Tang Pharmacy
Co., Ltd. ("YCT"), Jilin Tian Yao Drug Safety Evaluation Co., Ltd. ("JDE") and
Changchun Xiandai Technology Inc. ("XD"). Natural Pharmatech China owns 75% of
the shares of BCT, which was established in September 2002 as a Sino-foreign
joint venture with BCT HK, a Hong Kong distributor of natural drugs. BCT 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.
On March, 2007, Natural Pharmatech China, through direct investment, acquired a
50% equity interest in Jilin Biotech Co., Ltd ("BIO"). Natural purchased another
25% equity interest in BIO. The Company currently holds 75% of equity interest
of BIO. BIO's main business is to manufacture and sell dietary supplements.
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.
12
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2007 AND MARCH
31, 2006.
REVENUE
Revenues for the three months ended March 31, 2007 were $470,959, a decrease of
31% from $688,470 for the same quarter of 2006. The main reason of the decrease
is that 1. we sold our subsidiary YCT, and YCT's income is not reflected in this
quarter's financials; 2. we had less income from transfer of technology compared
with the same quarter in 2006.
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues are $145,071 and $364,742 in 2007
and 2006, respectively. Main reason of the decrease is that we realized a larger
amount of income for the transfer of technologies in the last year. This
decrease is not essential.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $0 and $0 in
2007 and 2006, respectively..
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. The revenues earned are $325,888 and
$323,728 in 2007 and 2006, respectively. The main reason for the increase is
that BCT put more effort into its marketing during the quarter, which resulted
in an increase in sales..
GOVERNMENT GRANTS
Government Grants were $0 for the three months ended March 31, 2007, a decrease
of 100% from the $37,280 for the three months ended March 31, 2006. Government
grants are opportunistically granted and therefore will fluctuate widely from
quarter to quarter.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES
R&D expenses were $119,534, a decrease of 30% from the $171,647 for the same
quarter last year. This decrease was due to the refinement of our research
project management.. After the refinement, we were able to concentrate our
efforts in the projects that have better market potential, therefore the overall
R&D expense has decreased.
GROSS PROFIT
Gross profit was $265,518, a decrease of 42% from the $460,234 reported in the
same period last year. The main reason for the decrease is that we had less
income from technology transfer compared to the same quarter in 2006. The income
from transfer of technology is not steady, as we had a relatively large amount
of income from a single transfer of technology in the first quarter of 2006,
however, there was not any transfer of technology which resulted in similar
amount in the first quarter of 2007.
GROSS PROFIT PERCENTAGE
Gross profit percentage decreased from 67% in the first quarter of 2006 to 56%
in the first quarter of 2007. The main reason is that we had less income from
transfer of technology in this quarter compared to the same quarter last year.
Although we realized an increase in the sale of goods compared to the same
quarter last year, the gross profit percentage for the sale of goods is much
smaller than it is from the transfer of technology. This brings down the overall
gross profit percentage.
13
OPERATING EXPENSES
Operating expenses decreased to $438,996 compared to $702,103 in the same period
last year. The main reasons for the decrease are,:1) R&D expense decreased
$52,113 compared to same quarter last year and 2) administrative expense
decreased $187,290 compared to the same quarter last year. This is achieved
through more efficient management.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2007, we have cash of $5,410,616. For the three months then
ended, we generated cash of $3,429 in our operating activities. The significant
reasons for the provision of cash are:
1) the decrease in inventories of $251,025 ; 2) a increase in Accounts payable
and accrued expenses of $233,556.. During this quarter, the Company used
$116,586 towards purchasing machinery, and $256,276 paying off a short term
loan. Contributions from minority interest were $191,105 during the period. We
had no other material investing or financing activities.
We anticipate steady revenue growth over time, as drugs currently under
development come to market. Additionally, we are also instituting procedures to
create a more effective credit policy, and reduce our accounts receivable and
shorten the aging of them. Additionally, the Company anticipates it will engage
in certain merger and/or acquisition later in 2007 that may require substantial
liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2007. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2007 our disclosure controls and procedures were effective
at the reasonable assurance level in ensuring that material information relating
to us, is made known to the Chief Executive Officer and Chief Financial Officer
by others within our company during the period in which this report was being
prepared.
There were no changes in our internal controls or in other factors during the
most recent quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any pending material legal proceeding.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of the Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Principal Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Principal Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL PHARMATECH, INC.
Date: May 21, 2007 By: /s/ Lianqin Qu
-----------------------------------------
Name: Lianqin Qu
Title: President and Chief Executive Officer
Date: May 21, 2007 By: /s/ Zongsheng Zhang
-----------------------------------------
Name: Zongsheng Zhang
Title: Chief Financial Officer
15