UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2007
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period ____________ to ____________
Commission File Number 333-52721
GLOBAL PHARMATECH, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0976805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
89 Ravine Edge Drive, Richmond Hill, Ontario, Canada L4E 4J6
(Address of principal executive offices)
(905) 787-8225
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X ]
There were 23,247,935 shares of the Company's common stock, par value $0.0001
per share, outstanding as of June 30, 2007.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
EXPLANATORY NOTE REGARDING AMENDMENT NO. 1
This amends the original Form 10-QSB for the quarterly period ended June 30,
2007 based on SEC's comments on cash flow presentations and classification of
loan receivable for discontinued operation.
GLOBALPHARMATECH 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.................................................. 14
Item 1. Legal Proceedings............................................... 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 14
Item 3. Defaults Upon Senior Securities................................. 14
Item 4. Submission of Matters To a Vote of Security Holders............. 14
Item 5. Other Information............................................... 14
Item 6. Exhibits........................................................ 14
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2007
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,996,159
Accounts receivable, net 574,348
Related party receivable 83,513
Inventories 1,117,615
Other receivables and prepayments, net 1,513,079
------------
Total Current Assets 8,284,714
------------
PROPERTY, PLANT & EQUIPMENT, net 4,599,647
LAND LEASE, net 403,915
CONSTRUCTION IN PROGRESS 26,430
INTANGIBLE ASSETS, net 131,719
OTHER LONG-TERM ASSETS 734,110
------------
5,895,821
------------
Total Assets $ 14,180,535
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 295,715
Advances from customers 119,205
Other payables and accruals 297,458
Taxes payable 40,149
Other current liabilities 50,931
------------
Total Current Liabilities 803,458
LONG-TERM LOAN 2,366,082
MINORITY INTEREST 1,115,362
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
Accumulated loss (2,325,628)
Accumulated other comprehensive income 622,584
Subscription receivable (15,000)
------------
Total Stockholders' Equity 9,895,633
------------
Total Liabilities and Stockholders' Equity $ 14,180,535
============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
GLOBAL PHARMATECH INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
REVENUE $ 1,070,198 $ 1,155,187 $ 599,239 $ 621,439
COST OF REVENUE 366,704 213,553 161,263 144,580
----------- ----------- ----------- -----------
GROSS PROFIT 703,494 941,634 437,976 476,859
----------- ----------- ----------- -----------
OPERATING EXPENSES
Advertising 27,554 34,822 24,300 23,480
Research and development 385,387 234,153 265,853 62,506
Selling expenses 77,968 21,312 55,547 4,221
General and administrative expenses 641,276 674,017 347,489 270,569
Bad debt expense -- 37,472 -- 37,472
----------- ----------- ----------- -----------
1,132,185 1,001,776 693,189 398,248
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (428,690) (60,142) (255,213) 78,611
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Miscellaneous income (expense) 14,180 469,055 (18,419) 429,785
Interest expense (83,794) (86,169) (39,807) (50,214)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND DISCONTIUED OPERATIONS (498,305) 322,744 (276,601) 458,182
----------- ----------- ----------- -----------
MINORITY INTEREST 12,959 (1,780) (8,621) (203)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (511,264) 320,964 (285,222) 457,979
----------- ----------- ----------- -----------
Loss from discontinued operations (49,102) (86,841) -- (25,451)
Loss on sale of Jilin Yi Cao Tang Pharmacy
Co., Ltd. ("YCT") (804,600) -- (804,600) --
----------- ----------- ----------- -----------
LOSS) FROM DISCONTINUED OPERATIONS (853,702) (86,841) (804,600) (25,451)
NET INCOME (LOSS) $(1,364,966) $ 234,123 $(1,089,822) $ 432,528
=========== =========== =========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER
COMMON SHARE:
Continuing operations $ (0.02) $ 0.01 $ (0.01) $ 0.02
Discontinued operations $ (0.04) $ -- $ (0.03) $ --
----------- ----------- ----------- -----------
$ (0.06) $ 0.01 $ (0.04) $ 0.02
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,247,935 19,936,268 23,247,935 21,624,602
=========== =========== =========== ===========
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 SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2007 2006
----------- -----------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net Loss $(1,364,966) $ 234,123
Adjustments to reconcile income from continuing operations
to net cash used by continuing operating activities:
Minority interest 12,959 1,780
Depreciation 162,309 164,579
Bad debt expense -- 37,472
Amortization of land lease and intangible assets 4,589 35,000
Loss from discontinued operations 853,702 86,841
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable (25,761) 433,482
Notes receivable 42,560
Related party receivable 23,772 433,387
Inventories (96,427) (293,376)
Prepaid expenses 15,159 67,687
Other receivables and prepaid expenses 19,975 (304,585)
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 114,335 (304,842)
Related party payable -- (69,166)
Advances from customers 27,307 139,448
Other payables and accruals (213,440) (6,371)
Other current liabilities (49,989) (185,799)
----------- -----------
Net Cash Provided (Used) by Continuing Operating Activities (473,916) 469,660
Net Cash Provided (Used) by Discontinued Operating Activities (44,769) (22,400)
----------- -----------
Net Cash Provided (Used) by Operating Activities (518,685) 447,260
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (114,457) (146,247)
Purchase of intangible assets (10,164) --
Construction in progress (26,050) --
----------- -----------
Net Cash Used by Investing Activities (150,671) (146,247)
Net Cash Used by Discontinued Investing Activities
Including Proceeds from Sale of Subsidiary 50,504 24,224
----------- -----------
Net Cash Used by Investing Activities (100,167) (122,023)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings (259,115) 250,178
Common shares issued 4,625,000
Capital contributions from minority interests 124,553 --
----------- -----------
Net Cash Provided (Used) by Financing Activities (134,562) 4,875,178
Net Cash Provided (Used) by Discontinued Financing Activities 59,990 --
----------- -----------
Net Cash Provided (Used) by Discontinued Financing Activities (74,572) 4,875,178
Effect of exchange rate changes on cash 135,805 --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (557,619) 5,200,415
CASH AND CASH EQUIVALENTS, beginning of period 5,553,778 690,835
----------- -----------
CASH AND CASH EQUIVALENTS, end of period 4,996,159 5,891,250
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 83,794 $ 86,169
=========== ===========
Income taxes paid $ 0 $ 0
=========== ===========
See Note 1 for Non-Cash Investing and Financing Activities for Sale of
Subsidiary.
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
NOTE TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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.
During the first quarter,2007, 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 June 30, 2007 statement of cash
flows.
On March 29, 2007, Natural Pharmatech China invested RMB 100,000 (approximately
$13,145) to set up Changchun Jutai Dietary Supplements Sales Co., Ltd. ("Jutai
Sales"), Natural Pharmatech China holds 100% of the ownership of Jutai Sales.
Jutai Sales' main business is the sale, of Jutai and other dietary supplements.
In the second quarter, Jutai Sales has opened one retail store.
On May 11, 2007, the Company entered into an Equity and Liability Transfer
Agreement to sell Natural Pharmatech China's 95% equity interest in one of its
Chinese subsidiaries, Jilin Yi Cao Tang Pharmacy Co., Ltd ("YCT") to Mr. Daojun
Wang at for a price of RMB9,000,000 (approximately $1,163,000). The following
table details the payment schedule for the sale:
Due Date Amount Due (in RMB)
-------- -------------------
3 days after signing this agreement 500,000(approximately $66,500)
May 30, 2007 500,000(approximately $66,500)
November 30, 2007 1,000,000(approximately $133,000)
May 30, 2008 1,000,000(approximately $133,000)
November 30, 2008 1,000,000(approximately $133,000)
May 30, 2009 1,000,000(approximately $133,000)
November 30, 2009 1,000,000(approximately $133,000)
May 30, 2010 1,000,000(approximately $133,000)
November 30, 2010 1,000,000(approximately $133,000)
May 30, 2011 1,000,000(approximately $133,000)
The Company has converted the receivable to present value using a 5% discount
rate. The total discounted amount is $60,778, and this will be amortized over
the life of the payment schedule.
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.
6
The accompanying unaudited consolidated financial statements as of June 30, 2007
and for the six and three month periods ended June 30, 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
six and three months ended June 30, 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.
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.
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 $252,584 and $777,082 for the
six months ended June 30, 2007 and 2006, respectively. The contract revenues are
$106,551 and $412,340 for the three months ended June 30, 2007 and 2006,
respectively.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $33,341 and
$24,198 for the six months ended June 30, 2007 and 2006, respectively. Such
revenues are $33,341 and $24,198 for the three months ended June 30, 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 $784,273 and
$353,907 for the six months ended June 30, 2007 and 2006, respectively. The
revenues earned are $459,347 and $184,901 for the three months ended June 30,
2007 and 2006, respectively.
Government grants are recognized as other income upon receipt. These revenues
are $25,906 and $37,527 for the six months ended June 30, 2007 and 2006,
respectively. These revenues are $25,906 and $0 for the six months ended June
30, 2007 and 2006, respectively. This revenue is included in Miscellaneous
income (expense) on the statement of operations.
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 period-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. Translation 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 June 30, 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.
7
e. Appropriated retained earnings
In accordance with Chinese regulations, the Company's Chinese subsidiaries must
appropriate ten 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 June 30, 2007, had
a balance of $237,052.
3. Inventory
Inventory is comprised of the following:
June 30, 2007
--------------
Raw materials $ 187,315
Work in progress 577,012
Finished goods 353,288
----------
Total $1,117,615
==========
4. Other Current Liabilities
The account consists principally of approximately $38,800 of salaries and
benefits payable to employees.
5. Property and Equipment
Property and equipment is comprised of the following:
June 30, 2007
-------------
Office Equipment $ 149,848
Machinery and Equipment 2,070,592
Vehicles 114,418
Computer Equipment 78,556
Furniture Fixtures 25,981
Building and improvement 505,562
Building Pledged as security creditor 2,869,791
----------
Total $5,814,748
----------
Accumulated Depreciation 1,215,101
----------
Net $4,599,647
==========
Depreciation and amortization expense for each of the six months ended June 30,
2007 and 2006 was approximately $162,000 and $221,000, respectively.
Depreciation and amortization expense for each of the three months ended June
30, 2007 and 2006 was approximately $72,000 and $96,000, respectively.
6. Income Taxes
The deferred tax liability as of June 30, 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%.
8
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%.
BIO, is a foreign joint venture, so the income tax rate is 15%.
Jutai Sales' income tax rate is 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 its customers in
this geographic region. Although China is considered economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Company's operations.
At June 30, 2007, the Company has a credit risk exposure of uninsured cash in
banks of $4,966,159. The Company does not require collateral or other securities
to support financial instruments that are subject to credit risk.
For the six months ended June 30, 2007, two customers accounted for $297,105
(28%) of total sales as follows: Customer D at $167,505 (16%), Customer E at
$129,600 (12%).
For the six months ended June 30, 2006, three customers accounted for $580,851
(50%) of total sales as follows: Customer A at $249,828 (22%), Customer B at
$168,634 (15%), Customer C at $162,388 (13%).
8. Debt
The Company has one long-term loan from one financial institution totaling
approximately $2,366,082 at June 30, 2007. The weighted interest rate of the
loan at June 30, 2007 was approximately 6.75 percent. The loan is secured by
Natural Pharmatech China's office building and matures in one lump sum payment
on November 15, 2008.
On June 4, 2007, BCT, a subsidiary of Natural Pharmatech China, signed a new
loan agreement with Changchun Merchant Bank Tongzhi Street Branch ("Changchun
Merchant Bank") to obtain a loan of RMB 2,000,000. The funds were received on
July 20, 2007 and, prior to receiving them, BCT settled the RMB 2,000,000 loan
it previously had with Changchun Merchant Bank. Natural Pharmatech has pledged a
building and land to secure this loan. Before signing this loan, which is the
same collateral that secured the previous loan .
Interest expense and related service charges were approximately $84,000 and
$86,000 for the six months ended June 30, 2007 and 2006, respectively.
Interest expense and related service charges were approximately $40,000 and
$50,000 for the three months ended June 30, 2007 and 2006, respectively.
9
9. Related Party Transactions
As of June 30, 2007, the Company has the following amounts due from related
parties:
Advances Due From Related Parties
Stockholders
Yun Peng Min $ 5,243
Ben Ji Wang 39,496
--------
$ 44,739
Yuming Li 38,774
--------
Total $83,513
========
Yuming Li is the brother-in-law of the Company's chairwoman.
These balances have no stated terms for repayment and are not interest bearing.
10. Discontinued Operations
Due to consistent operating losses at its YCT subsidiary, in March 2007, the
Company's Board of Directors approved a plan to sell Natural Pharmatech China's
95% equity interest in YCT to Mr. Daojun Wang 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. As of June 30, 2007, the above transfer
has been executed, and YCT's ownership has been transferred to Mr. Wang. The
Company has recorded a loss of $804,600 on the sale.
The following table represents the results of the discontinued operations and
net of minority interest:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Sales - YCT $ -- $ 1,026 $ 138,606 $ 155,748
========= ========= ========= =========
Loss from operations -YCT $ -- $ (26,932) $ (51,960) $ (91,895)
========= ========= ========= =========
Net loss from discontinued
Operations - YCT $ -- $ (25,451) $ (49,102) $ (86,841)
========= ========= ========= =========
Loss on sale of YCT $(853,702) $ -- $(853,702) $ --
========= ========= ========= =========
As of June 30, 2007, the Company has received RMB 500,000 (approximately
$65,725) from Mr. Daojun Wang as payment for YCT. According to the contract, the
Company should have received RMB 1,000,000 (approximately $133,000) by that
date, however, the Company anticipates that the full amount of the agreement
will be collectible.
As of June 30, 2007, the Company's long term receivable is RMB6, 000,000
(approximately $734,110). This is the outstanding balance to be paid between
November 2008 and 2011 as stated in the YCT contract. This balance is classified
as other long term asset.
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 (seems to contradict statement that R&D spending is up the 6 months to
June 30, 2006 below) , 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
11
shares in exchange for 80% of our common stock, to be issued to the Natural
Pharmatech shareholders. Our acquisition of Natural Pharmatech was completed on
February 9, 2005. In connection with this transaction, we amended our
Certificate of Incorporation on January 31, 2005, changing our name to Global
Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market proprietary drugs
and nutritional supplements that are based on traditional Chinese medicine. We
also offer a full range of "start to finish" biotechnology services, including
research and development, testing, manufacturing drugs in liquid and solid dose
forms, sales and marketing. We utilize unique extraction methods and innovative
techniques that have been developed by our research and development team. Our
core business is to license our patents and technologies for
botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China,
U.S, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. Sales outside 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 February
2001.
As of June 30, 2007, Natural Pharmatech China has five subsidiaries: BCT, Safety
Evaluation Co., Ltd. ("JDE"). Jilin Biotech Co., Ltd ("BIO"), Changchun Jutai
Dietary Supplements Sales Co., Ltd. ("Jutai Sales") 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.
On March 29, 2007, Natural Pharmatech China invested RMB 100,000 to set up
Changchun Jutai Dietary Supplements Sales Co., Ltd. ("Jutai Sales"), Natural
Pharmatech China holds 100% of the ownership of Jutai Sales. Jutai Sales' main
business is the sale, of Jutai and other dietary supplements. In the second
quarter, Jutai Sales has opened one retail store.
Until June 4, 2007, Natural Pharmatech China also owned 95% of the shares of
YCT, which was established in September 2003. YCT was engaged in the
manufacturing and sale of Chinese and Western medicine. On June 4, 2007, Natural
Pharmatech China sold its 95% equity interest in YCT to Mr. Daojun Wang.
Since inception, our revenues have been mainly generated from technical-related
services, including the sale of patents and research services. Sales from our
BCT and BIO subsidiaries have grown steadily since the beginning of 2007.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2007 AND JUNE 30,
2006.
REVENUE
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues are $252,584 and $777,082 and in
2007 and 2006, respectively. The decrease was primarily attributable to the
effect of a major, disproportionately large contract in 2006. The Company did
not experience a similar contract during the first six months of 2007.
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Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $33,341 and
$24,198 in 2007 and 2006, respectively. This increase was due to the inclusion
of XD's revenue in 2007 where XD did not exist in the same period of 2006.
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 $784,273 and
$353,907 in 2007 and 2006, respectively. This increase was due to the increased
sales efforts, Jutai and some other TCM products that had higher than average
sales growth.
GOVERNMENT GRANTS
Government Grants were $25,906 for the six months ended June 30, 2007, compared
to $37,527 for the six months ended June 30, 2006. Government grants are
opportunistically granted and therefore may fluctuate widely from period to
period.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES
R&D expenses were $385,387, as compared to $234,153 for the same period last
year. The increase was principally due to the Company's widening scope and
quantity of research and development projects, as the Company strives to develop
more drugs.
GROSS PROFIT
Gross profit in 2007 was $703,494, as compared to $941,634 as 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 period 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 half of 2006,
however, there was no such transfer in the first half of 2007.
GROSS PROFIT PERCENTAGE
Gross profit percentage decreased from 82% in the first half of 2006 to 66% in
the first half of 2007. The main reason is that we had less income from transfer
of technology in this period compared to the same period last year. Although we
realized an increase in the sale of goods compared to the same period 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.
OPERATING EXPENSES
Operating expenses increased to $1,132,185 compared to $1,001,776 in the same
period last year. The main reasons for the increase are:1) R&D expense increased
$151,234 compared to same period last year and 2) administrative expense
decreased $32,741 compared to the same period last year. This is achieved
through more efficient management.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2007, we had cash of $4,996,159. For the six months then ended,
we used cash of $473,916 in our operating activities. The significant reasons
for the use of cash are:
1) the loss from continuing operations for the six months ended of $511,264; 2)
the decrease in other payable and accruals of $213,440; 3) the increase in
accounts payable and accrued expenses of $114,335;
During the first half of 2007, the Company used $114,457 towards purchasing
machinery, and $259,115 paying off a short term loan. Contributions from
minority interest were $124,553 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. We do not anticipate any material cash needs in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance arrangements.
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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
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2007. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of June 30, 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.
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.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL PHARMATECH, INC.
Date: November 19, 2007 By: /s/ Lianqin Qu
-----------------------------------------
Name: Lianqin Qu
Title: President and Chief Executive Officer
Date: November 19, 2007 By: /s/ Zongsheng Zhang
-----------------------------------------
Name: Zongsheng Zhang
Title: Chief Financial Officer
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