As
filed with the Securities and Exchange Commission on
August
25, 2008
Registration
No. 333-152328
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
Florida
|
|
2834
|
|
65-1130026
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(Primary
Standard Industrial Classification Code Number)
|
|
(I.R.S.
Employer Identification
Number)
|
Middle
Section, Longmao Street,
Area
A, Laiyang Waixiangxing Industrial Park
Laiyang
City, Yantai, Shandong Province,
PRC
710075
+86
535 7282997
(Address,
including zip code, and telephone number including area code, of Registrant’s
principal executive offices)
Wubo
Cao
Chief
Executive Officer
Genesis
Pharmaceuticals Enterprises, Inc.
Middle
Section, Longmao Street,
Area
A, Laiyang Waixiangxing Industrial Park
Laiyang
City, Yantai, Shandong Province, PRC 710075
+86
535 7282997
(Name,
address, including zip code, and telephone number,including area code, of agent
for service)
Copies
to:
Mitchell
S. Nussbaum, Esq
Angela
M. Dowd, Esq
Loeb
& Loeb LLP
345
Park Avenue
New
York, New York 10154
Tel.
No.: 212-407-4159 Fax No.: 212-407-4990
Approximate
date of commencement of proposed sale to the public: From time to time after
this Registration Statement becomes effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) 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.
o
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.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
o
Accelerated
Filer
¨
Non-Accelerated
Filer
¨
Smaller
Reporting Company
x
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box.
¨
CALCULATION
OF REGISTRATION FEE
Title
of each class of securities to be registered
|
|
Amount
to be registered (1)
|
|
Proposed
maximum offering price per share (2)
|
|
Proposed
maximum aggregate offering price
|
|
Amount
of registration fee
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.00
1
par value per share
|
|
|
25,000,000
|
(3)
|
$
|
0.215
|
|
$
|
5,375,000
|
|
$
|
211.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.00
1
par value per share
|
|
|
16,000,000
|
(4)
|
$
|
0.215
|
|
$
|
3,440,000
|
|
$
|
135.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.00
1
par value per share
|
|
|
150,000,000
|
(5)
|
$
|
0.215
|
|
$
|
32,250,000
|
|
$
|
1,268.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, $.00
1
par value per share
|
|
|
75,000,000
|
(6)
|
$
|
0.215
|
|
$
|
16,125,000
|
|
$
|
633.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
266,000,000
|
|
|
—
|
|
$
|
57,190,000
|
|
$
|
2,248.15
|
|
(1)
|
Pursuant
to Rule 416 of the Securities Act of 1933, as amended, the shares
of
common stock offered hereby also include such presently indeterminate
number of shares of our common stock as shall be issued by us to
the
selling shareholders as a result of stock splits, stock dividends
or
similar transactions.
|
(2)
|
Estimated
solely for purposes of calculating the registration fee in accordance
with
Rule 457(c) under the Securities Act of 1933, as amended based on
the
average of the bid and asked prices, as reported on the Over the
Counter
Bulletin Board on July 8, 2008.
|
(3)
|
The
25,000,000 shares of common stock are being registered for resale
by the
Selling Stockholders named in this registration statement, which
shares
are issuable by the registrant upon the conversion of the Company’s 6%
Convertible Subordinated Debentures due November 30,
2010.
|
(4)
|
The
16,000,000 shares of common stock are being registered for resale
by the
Selling Stockholders named in this registration statement, which
shares
are issuable by the registrant upon the exercise of the Company’s warrants
issued in November 2007.
|
(5)
|
The
150,000,000 shares of common stock are being registered for resale
by the
Selling Stockholders named in this registration statement, which
shares
are issuable by the registrant upon the conversion of the Company’s 6%
Convertible Notes due May 30, 2011.
|
(6)
|
The
75,000,000 shares of common stock are being registered for resale
by the
Selling Stockholders named in this registration statement, which
shares
are issuable by the registrant upon the exercise of the Company’s Class A
Warrants issued in May 2008.
|
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, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said section
8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in
any
state where the offer or sale is not permitted.
Preliminary
Prospectus
Subject
To Completion, Dated
August
25, 2008
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
266,000,000
Shares of Common Stock
This
prospectus relates to the sale of up to a total of 266,000,000 shares of common
stock of Genesis Pharmaceuticals Enterprises, Inc., a Florida corporation,
that
may be sold from time to time by the selling stockholders named in this
prospectus on page 24 (“Selling Stockholders”) following the issuance by
the Company of (i) 25,000,000 shares upon the conversion of $5,000,000 principal
amount of the Company’s 6% Convertible Subordinated Debentures due November 30,
2010 (the “Debentures”) at a conversion price of $.20 per share, (ii) 16,000,000
shares upon the exercise of the Company’s warrants issued in November 2007 (the
“November Warrants”) at an exercise price of $.20 per share, (iii) 150,000,000
shares upon the conversion of $30,000,000 principal amount of the Company’s 6%
Convertible Notes due May 30, 2011 (the “Notes”) at a conversion price of $.20
per share and (iv) 75,000,000 shares upon the exercise of the Company’s Class A
Warrants (the “Class A Warrants”) issued in May 2008 at an exercise price of
$.25 per share.
We
will
not receive any of the proceeds from the sale of shares by the Selling
Stockholders. However, we will receive the proceeds from any exercise of the
November Warrants and/or the Class A Warrants to purchase shares to be sold
hereunder to the extent that the Selling Stockholders do not perform cashless
exercises. We will also receive the benefit of the reduction in our outstanding
indebtedness in consideration for the issuance of the shares issued upon
conversion of the Debentures and the Notes to be sold hereunder. See “Use of
Proceeds.”
The
prices at which the Selling Stockholders may sell their shares will be
determined by the prevailing market price for the shares or in privately
negotiated transactions. Information regarding the Selling Stockholders and
the
times and manner in which they may offer and sell the shares under this
prospectus is provided under “Selling Stockholders” and “Plan of Distribution”
in this prospectus.
Our
common stock is traded in the over-the-counter market and prices are reported
on
the Over-The-Counter (“OTC”) Bulletin Board under the symbol: “GTEC”. The last
closing price of our common stock on August 22, 2008 was $0.18. You are urged
to
obtain current market quotations of our common stock before purchasing any
of
the shares being offered for sale pursuant to this
prospectus.
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” BEGINNING
ON PAGE 5 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 __________, 2008
Table
of Contents
PROSPECTUS
SUMMARY
|
|
|
2
|
|
|
|
|
|
|
THE
OFFERING
|
|
|
4
|
|
|
|
|
|
|
CERTAIN
DISCLOSURE REGARDING CONVERSION OF THE DEBENTURES AND NOTES AND
EXERCISE
OF NOVEMBER WARRANTS AND CLASS A WARRANTS
|
|
|
4
|
|
|
|
|
|
|
SUMMARY
CONSOLIDATED FINANCIAL DATA
|
|
|
5
|
|
|
|
|
|
|
RISK
FACTORS
|
|
|
7
|
|
|
|
|
|
|
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
|
|
|
24
|
|
|
|
|
|
|
USE
OF PROCEEDS
|
|
|
24
|
|
|
|
|
|
|
SELLING
STOCKHOLDERS
|
|
|
24
|
|
|
|
|
|
|
PLAN
OF DISTRIBUTION
|
|
|
28
|
|
|
|
|
|
|
BUSINESS
|
|
|
46
|
|
|
|
|
|
|
DIRECTORS
AND EXECUTIVE OFFICERS
|
|
|
55
|
|
|
|
|
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
|
|
59
|
|
|
|
|
|
|
DESCRIPTION
OF CAPITAL STOCK
|
|
|
66
|
|
|
|
|
|
|
TRANSFER
AGENT AND REGISTRAR
|
|
|
67
|
|
|
|
|
|
|
LEGAL
MATTERS
|
|
|
|
|
|
|
|
|
|
EXPERTS
|
|
|
|
|
|
|
|
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
|
|
|
|
|
|
|
|
|
INDEX
TO AUDITED FINANCIAL STATEMENTS
|
|
|
F-1
|
|
PROSPECTUS
SUMMARY
This
summary highlights selected information appearing elsewhere in this prospectus.
While this summary highlights what we consider to be the most important
information about us, you should carefully read this prospectus and the
registration statement of which this prospectus is a part in their entirety
before investing in our common stock, especially the risks of investing in
our
common stock, which we discuss later in “Risk Factors,” and our consolidated
financial statements and related notes beginning on page F-1. Unless the context
requires otherwise, the words “we,” the “company,” “us,” and “our” refer
to Genesis Pharmaceuticals Enterprises, Inc. and our
subsidiaries.
The
Company
Overview
We
operate, control and beneficially own the pharmaceutical business of Laiyang
Jiangbo. Laiyang Jiangbo researches, develops, manufactures, markets and sells
pharmaceutical products and health supplements in the PRC. From our inception
in
2001 until our acquisition of Karmoya International Ltd. (“Karmoya”) in October
2007, we were a business development and marketing firm specializing in advising
and providing turn-key solutions for Chinese small and mid-sized companies
entering Western markets.
Corporate
Structure
The
following diagram illustrates our corporate structure:
About
the Offering
On
May
30, 2008, we entered into a Securities Purchase Agreement, pursuant to which,
on
May 30, 2008, we sold to the selling stockholders in this offering $30,000,000
principal amount of our Notes and Class A Warrants to purchase 75,000,000 shares
of our common stock, in transactions exempt from registration under the
Securities Act.
On
November 6, 2007, we entered into a Securities Purchase Agreement with Pope
Investments, LLC, one of the selling stockholders in this offering, pursuant
to
which, on November 7, 2007, we issued and sold to Pope Investments, LLC,
$5,000,000 principal amount of our Debentures and November Warrants to purchase
10,000,000 shares of our common stock (later adjusted to 16,000,000 shares
of
our common stock) in transactions exempt from registration under the Securities
Act.
The
terms
of these transactions are described in greater detail later in this prospectus
under “Management’s Discussion and Analysis and Plan of Operations - Recent
Financings” beginning on page 42.
This
prospectus covers the resale of 266,000,000 shares of our common stock by the
selling stockholders, including:
·
|
25,000,000
shares issuable upon the conversion of the Debentures at a conversion
price of $.20 per share,
|
·
|
16,000,000
shares issuable upon the exercise of the November Warrants at an
exercise
price of $.20 per share,
|
·
|
150,000,000
shares issuable upon the conversion of the Notes at a conversion
price of
$.20 per share, and
|
·
|
75,000,000
shares issuable upon the exercise of the Class A Warrants at an exercise
price of $.25 per share.
|
The
selling stockholders may resell their shares from time to time, including
through broker-dealers, at prevailing market prices. We will not receive any
proceeds from the resale of our shares by the selling stockholders. However,
we
will receive the proceeds from any exercise of November Warrants and/or Class
A
Warrants to purchase shares to be sold in this offering to the extent that
the
selling stockholders do not perform cashless exercises. We will also receive
the
benefit of the reduction in our outstanding indebtedness in consideration for
the issuance of the shares to be sold in this offering issued upon conversion
of
the Debentures and the Notes. We will pay all of the fees and expenses
associated with registration of the shares covered by this
prospectus.
Executive
Offices
Our
executive offices are located at Middle Section Longman Street, Area A, Laiyang
Waixiangxing Industrial Park, Laiyang City, Yantai, Shandong Province, PRC
710075. Our telephone number is 86-535-7282997. Our corporate website is
www.genesis-china.net. Information contained on or accessed through our website
is not intended to constitute and shall not be deemed to constitute part of
this
prospectus.
THE
OFFERING
Common
S
tock
being offered by Selling Stockholders
|
|
Up
to 266,000,000 shares
|
|
|
|
OTCBB
Symbol
|
|
GTEC
|
|
|
|
Risk
Factors
|
|
The
securities offered by this prospectus are speculative and involve
a high
degree of risk and investors purchasing securities should not purchase
the
securities unless they can afford the loss of their entire investment.
See
“Risk
Factors” beginning on page 7.
|
CERTAIN
DISCLOSURE REGARDING CONVERSION OF THE DEBENTURES AND NOTES AND EXERCISE
OF
NOVEMBER WARRANTS AND CLASS A WARRANTS
The
total
dollar value dollar value of the common stock underlying the 6% Convertible
Subordinate Debentures due November 30, 2010 (the “Debentures”) and the common
stock purchase warrants (the “November Warrants”) issued in connection with the
Company’s November 2007 private placement was $12,000,000 on November 7, 2007.
This number is based on the contractually agreed minimum number of underlying
securities to be registered for resale at such time (30,000,000) and
the market
price per share ($0.40) for the Company’s common stock on November 7, 2007, the
date of issuance of the Debentures and November Warrants.
The
total
dollar value dollar value of the common stock underlying the 6% Convertible
Notes due May 30, 2010 (the “Notes”) and the common stock purchase warrants (the
“Class A Warrants”) issued in connection with the Company’s May 2008 private
placement was $67,500,000 on May 30, 2008. This number is based on the
contractually agreed minimum number of underlying securities to be registered
for resale at such time (225,000,000) and the market price per share
($0.30) for
the Company’s common stock on May 30, 2008, the date of issuance of the Notes
and Class A Warrants.
November
2007 private placement
The
following are tables disclosing the dollar amount of each payment required
to be
made by the Company to any selling shareholder or any affiliate of a
selling
shareholder. There are no other persons with whom any selling shareholder
has a
contractual relationship with regarding the transactions.
Gross
proceeds from issuance of the Debentures:
|
|
$
|
5,000,000.00
|
|
Payments
in connection with the transaction that the Company has made
or will
make:
|
|
|
|
|
Finder's
fee (1)
|
|
$
|
250,000.00
|
|
Pope
Investments, LLC (legal fees reimbursement)(2)
|
|
$
|
20,000.00
|
|
Legal
fees (1)
|
|
$
|
69,000.00
|
|
Total
Payments made by the Company:
|
|
$
|
339,000.00
|
|
Net
proceeds to issuer:
|
|
$
|
4,661,000.00
|
|
(1)
Not
paid to a selling shareholder or any affiliate of a selling
shareholder.
(2)
Pope
Investments, LLC is a selling shareholder.
The
following is a table disclosing the interest payments required to be
made to
Pope Investments, LLC, one of the selling shareholders, during the life
of the
Debentures.
Date
|
|
Interest
Payment Amount
|
|
5/31/2008
|
|
$
|
150,000.00
|
|
11/30/2008
|
|
$
|
150,000.00
|
|
5/31/2009
|
|
$
|
150,000.00
|
|
11/30/2009
|
|
$
|
150,000.00
|
|
5/31/2010
|
|
$
|
150,000.00
|
|
Total
Interest Payments
|
|
$
|
750,000.00
|
|
The
net
proceeds to the Company from the sale of the Debentures was $4,661,00.00
on
November 7, 2007; such amount includes the payment of fees, including
legal fees
and finder’s fees, associated with the placement of the Debentures and November
Warrants. The total amount of possible payments, including interest payments
but
excluding the repayment of principal, to Pope Investments, LLC and any
of its
affiliates in the first year following November 7, 2007, the date of
sale of the
Debentures, and assuming that none of the Debentures are converted into
common
stock would be $300,000.00.
May
2008 private placement
The
following are tables disclosing the dollar amount of each payment required
to be
made by the Company to any selling shareholder or any affiliate of a
selling
shareholder. There are no other persons with whom any selling shareholder
has a
contractual relationship with regarding the transactions.
Gross
proceeds from issuance of the Notes:
|
|
$
|
30,000,000.00
|
|
Payments
in connection with the transaction that the Company has made
or will
make:
|
|
|
|
|
Placement
agent fees(1)
|
|
$
|
1,500,000.00
|
|
Legal
fees(1)
|
|
$
|
166,500.00
|
|
Pope
Investments, LLC (legal fees reimbursement)(2)
|
|
$
|
20,000.00
|
|
Bank
wire fees, printing and shipping fees (3)
|
|
$
|
3,510.00
|
|
Total
Payments made by the Company:
|
|
$
|
1,690,010.00
|
|
Net
proceeds to issuer:
|
|
$
|
28,309,990.00
|
|
(1)
Not
paid to a selling shareholder or any affiliate of a selling
shareholder.
(2)
Pope
Investments, LLC is a selling shareholder.
The
following is a table disclosing the interest payments required to be
made to the
selling shareholders during the life of the Notes.
Date
|
|
Interest
Payment Amount
|
|
11/30/2008
|
|
$
|
900,000.00
|
|
5/30/2009
|
|
$
|
900,000.00
|
|
11/30/2009
|
|
$
|
900,000.00
|
|
5/30/2010
|
|
$
|
900,000.00
|
|
11/30/2010
|
|
$
|
900,000.00
|
|
5/30/2011
|
|
$
|
900,000.00
|
|
Total
Interest Payments
|
|
$
|
5,400,000.00
|
|
The
net
proceeds to the Company from the sale of the Notes was $24,313,500 on
May 30,
2008; such amount includes the payment of fees, including legal fees,
finder’s
fees and bank wire, printing and shipping fees, associated with the placement
of
the Notes and Class A Warrants and holdback amounts. Subsequent to May
30, 2008,
the Company received the remaining $3,996,490 from the release of the
holdback
amounts. The total amount of possible payments, including interest payments
but
excluding the repayment of principal, to the selling shareholders and
any of
their affiliates in the first year following May 30, 2008, the date of
sale of
the Notes, and assuming that none of the Notes are converted into common
stock
would be $1,800,000.
The
following is a table disclosing the aggregate amount of possible profit
which
could be realized by the selling shareholders as a result of the conversion
discount for the securities underlying the Debentures and November
Warrants.
The
conversion price of $0.25 for the Debentures on the date of issuance
represents
a discount of $0.15 to $0.40 which was the market price per share for
our common
stock on November 7, 2007, the date of issuance of the Debentures and
November
Warrants. The exercise price of $0.32 for the November Warrants on the
date of
issuance represents a discount of $0.08.
Market
price per share on November 7, 2007 of common stock underlying
the
Debentures and November Warrants:
|
|
$
|
0.40
|
|
Conversion
price per share on November 7, 2007 of securities underlying
the
Debentures:
|
|
$
|
0.25
|
|
Exercise
price per share on November 7, 2007 of securities underlying
the November
Warrants
|
|
$
|
0.32
|
|
Total
shares underlying Debentures (at a conversion price of
$0.25)
|
|
|
20,000,000
|
|
Total
shares underlying November Warrants
|
|
|
10,000,000
|
|
Combined
market price of the total number of shares (20,000,000) underlying
the
Debentures using $0.40 market price
|
|
$
|
8,000,000
|
|
Combined
conversion price of shares underlying the Debentures
|
|
$
|
5,000,000
|
|
Total
possible discount to market price of shares underlying the
Debentures
|
|
$
|
3,000,000
|
|
Combined
market price of the total number of shares (10,000,000) underlying
the
November Warrants using $0.40 market price
|
|
$
|
4,000,000
|
|
Combined
exercise price of shares underlying the November Warrants
|
|
$
|
3,200,000
|
|
Total
possible discount to market price of shares underlying the
November
Warrants
|
|
$
|
800,000
|
|
Total
possible discount to market price:
|
|
$
|
3,800,000
|
|
Pursuant
to the terms of the Debentures, if the Company closes on the sale or
issuance of
common stock at a price, or issues convertible securities with a conversion
price or exercise price which is less than the conversion price then
in effect,
the conversion price will be reduced to the lower price.
Pursuant
to the terms of the November Warrants, if the Company closes on the sale
or
issuance of common stock at a price, or issues convertible securities
with a
conversion price or exercise price which is less than the conversion
price then
in effect, the exercise price will be reduced to the lower price and
the number
of shares of common stock underlying the November Warrants will be
adjusted.
As
a
result of the May 2008 private placement:
|
·
|
pursuant
to section 3(g)(ii) of the Debentures, the conversion price
was reduced
from $0.25 to $0.20 per share; and
|
|
·
|
pursuant
to sections 6(c) and 6(d) of the November Warrants, the exercise
price of
the November Warrants was reduced from $0.32 to $0.20 and the
total number
of shares of common stock underlying the November Warrants
was increased
to 16,000,000 from 10,000,000.
|
The
following is a table disclosing the aggregate amount of possible profit
which
could be realized by the selling shareholders as a result of the conversion
discount for the securities underlying the Notes and the Class A
Warrants.
The
conversion price of $0.20 for the Notes represents a discount of $0.10
to $0.30
which was the market price per share for our common stock on May 30,
2008, the
date of issuance of the Notes and the Class A Warrants. The exercise
price of
$0.25 for the Class A Warrants represents a discount of $0.05.
Market
price per share on May 30, 2008 of common stock underlying
the Notes and
Class A Warrants:
|
|
$
|
0.30
|
|
Conversion
price per share on May 30, 2008 of securities underlying the
Notes:
|
|
$
|
0.20
|
|
Exercise
price per share on May 30, 2008 of securities underlying the
Class A
Warrants
|
|
$
|
0.25
|
|
Total
shares underlying Notes (at a conversion price of $0.20)
|
|
|
150,000,000
|
|
Total
shares underlying Class A Warrants
|
|
|
75,000,000
|
|
Combined
market price of the total number of shares (150,000,000) underlying
the
Notes using $0.30 market price
|
|
$
|
45,000,000
|
|
Combined
conversion price of shares underlying the Notes
|
|
$
|
30,000,000
|
|
Total
possible discount to market price of shares underlying the
Notes
|
|
$
|
15,000,000
|
|
Combined
market price of the total number of shares (75,000,000) underlying
the
Class A Warrants using $0.30 market price
|
|
$
|
22,500,000
|
|
Combined
exercise price of shares underlying the Class A Warrants
|
|
$
|
18,750,000
|
|
Total
possible discount to market price of shares underlying the
November
Warrants
|
|
$
|
3,750,000
|
|
Total
possible discount to market price:
|
|
$
|
18,750,000
|
|
The
following is a table disclosing the gross proceeds paid or payable to
the
Company in connection with the November 2007 private placement of the
Debentures
and the November Warrants along with the payments required to be made
by the
issuer, the resulting net proceeds and the aggregate potential profit
realizable
by the selling shareholders as a result of discounts to the market price
relating to the conversion price of the Debentures and the exercise price
of the
November Warrants:
|
|
Amount
|
|
%
of Net Proceeds
|
|
Gross
proceeds paid to issuer:
|
|
$
|
5,000,000
|
|
|
|
|
All
payments that have been made by issuer:
|
|
$
|
339,000
|
|
|
7.27
|
%
|
Net
proceeds to issuer:
|
|
$
|
4,661,000
|
|
|
100.00
|
%
|
Combined
total possible profit as a result of discounted conversion
price of the
Debentures
|
|
$
|
3,000,000
|
|
|
64.36
|
%
|
Combined
total possible profit as a result of discounted exercise price
of the
November Warrants
|
|
$
|
800,000
|
|
|
17.16
|
%
|
The
following is a table disclosing the gross proceeds paid or payable to
the
Company in connection with the May 2008 private placement of the Notes
and the
Class A Warrants along with the payments required to be made by the issuer,
the
resulting net proceeds and the aggregate potential profit realizable
by the
selling shareholders as a result of discounts to the market price relating
to
the conversion price of the Notes and the exercise price of the Class
A Warrants
:
|
|
Amount
|
|
%
of Net Proceeds
|
|
Gross
proceeds paid to issuer:
|
|
$
|
30,000,000
|
|
|
-
|
|
All
payments that have been made by issuer:
|
|
$
|
1,690,010
|
|
|
5.97
|
%
|
Net
proceeds to issuer:
|
|
$
|
28,309,990
|
|
|
100.00
|
%
|
Combined
total possible profit as a result of discounted conversion
price of the
Notes
|
|
$
|
15,000,000
|
|
|
52.98
|
%
|
Combined
total possible profit as a result of discounted exercise price
of the
Class A Warrants
|
|
$
|
3,750,000
|
|
|
13.25
|
%
|
The
following is a table comparing the shares outstanding prior to the November
2007
and May 2008 private placement transactions, number of shares registered
by the
selling shareholders, or their affiliates, in prior registration statements
(along with that number still held and number sold pursuant to such prior
registration statement) and the number of shares registered for resale
in this
Registration Statement relating to the financing transaction.
Number
of shares outstanding prior to November 2007 private placement
held by
persons other than the selling shareholders, affiliates of
the Company and
affiliates of the selling shareholders
|
195,715,380
|
Number
of shares outstanding prior to May 2008 private placement held
by persons
other than the selling shareholders,
Affiliates
of the Company and affiliates of the selling shareholders
|
194,815,380
|
Number
of shares registered for resale by selling shareholders or
affiliates in
prior registration statements
|
0
|
Number
of shares registered for resale by selling shareholders or
affiliates of
selling shareholders continue to be held by selling shareholders
or
affiliates of selling shareholder
|
0
|
Number
of shares have been sold in registered resale by selling shareholders
or
affiliates of selling shareholders
|
0
|
Number
of shares registered for resale on behalf of selling shareholders
or
affiliates of selling shareholders in current transaction
(i)
|
266,000,000
|
(i)
Includes (a) 25,000,000 shares issuable upon the conversion of the Debentures,
(b) 16,000,000 shares issuable upon the exercise of the November Warrants,
(c)
150,000,000 shares issuable upon the conversion of the Notes and (iv)
75,000,000
shares issuable upon the exercise of the Class A Warrants.
The
Company has the intention, and the reasonable basis to believe, that
it will
have the financial ability to make all payments on the Debentures and
the Notes
when they become due and payable. The Company believes that because it
has
consistently strong revenues and net profit with a strong balance position,
it
will be able to meet its obligations under the Debentures and the Notes
using
the funds generated from its operations.
Other
than its issuance and sale of (a) the Debentures and November Warrants
in
connection with the November 2007 private placement and (b) the Notes
and Class
A Warrants in connection with the May 2008 private placement to the selling
shareholders, the Company has advised that in the past three years it
has not
engaged in any securities transaction with any of the selling shareholders,
any
affiliates of the selling shareholders, or, after due inquiry and investigation,
to the knowledge of the management of the Company, any person with whom
any
selling shareholder has a contractual relationship regarding the transaction
(or
any predecessors of those persons). In addition, other than in connection
with
the contractual obligations set forth in (i) the November Securities
Purchase
Agreement and the Securities Purchase Agreement, (ii) the Debentures,
November
Warrants, Notes and Class A Warrants and (iii) the November Registration
Rights
Agreement and the Registration Rights Agreement, the Company has advised
that it
does not have any agreements or arrangements with the selling shareholders
with
respect to the performance of any current or future
obligations.
SUMMARY
CONSOLIDATED FINANCIAL DATA
(in
thousands, except per share information)
The
following table presents summary consolidated financial data as of the dates
and
for the periods indicated. We have derived the summary of our consolidated
statements of operations data for the years ended June 30, 2007, 2006 and,
2005
and our consolidated balance sheet data as of June 30, 2007 and 2006
from the audited consolidated financial statements included elsewhere in
this prospectus. The summary consolidated historical financial data as of and
for the nine months ended March 31, 2008 and 2007 have been derived from the
unaudited condensed consolidated financial statements included elsewhere in
this
prospectus. The unaudited condensed consolidated financial statements include
all adjustments which we consider necessary for a fair presentation of our
financial position, results of operations and cash flows for the interim period
presented. Our historical results are not necessarily indicative of the results
that may be expected in the future. The summary of our consolidated financial
data set forth below should be read together with our consolidated financial
statements and the notes thereto, as well as “Selected Consolidated Financial
Data” and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” included elsewhere in this prospectus.
|
|
Nine
Months Ended
March
31,
|
|
Year
Ended
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
Statement
of Operations Information:
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
66,648
|
|
|
52,876
|
|
|
72,260
|
|
|
45,243
|
|
|
10,852
|
|
Sales-
related party
|
|
|
4,612
|
|
|
2,964
|
|
|
3,934
|
|
|
3,913
|
|
|
1,899
|
|
Cost
of sales
|
|
|
17,744
|
|
|
15,724
|
|
|
21,162
|
|
|
15,686
|
|
|
8,772
|
|
Gross
profit
|
|
|
53,516
|
|
|
40,116
|
|
|
55,032
|
|
|
33,470
|
|
|
3,979
|
|
Research
and development
|
|
|
2,171
|
|
|
10,441
|
|
|
11,144
|
|
|
13,642
|
|
|
1,240
|
|
General
and administrative
|
|
|
29,269
|
|
|
18,491
|
|
|
25,579
|
|
|
7,895
|
|
|
1,689
|
|
Income
from operations
|
|
|
22,076
|
|
|
11,184
|
|
|
18,309
|
|
|
11,933
|
|
|
1,050
|
|
Other
expenses (income), net
|
|
|
2,404
|
|
|
211
|
|
|
(6,375
|
)
|
|
387
|
|
|
253
|
|
Income
before provision for income taxes
|
|
|
19,672
|
|
|
10,973
|
|
|
24,684
|
|
|
11,546
|
|
|
797
|
|
Provision
for income taxes
|
|
|
6,809
|
|
|
3,568
|
|
|
2,631
|
|
|
3,810
|
|
|
263
|
|
Net
income
|
|
|
12,863
|
|
|
7,405
|
|
|
22,053
|
|
|
7,736
|
|
|
534
|
|
Other
comprehensive income
|
|
|
4,777
|
|
|
673
|
|
|
1,018
|
|
|
128
|
|
|
-
|
|
Comprehensive
income
|
|
|
17,640
|
|
|
8,078
|
|
|
23,071
|
|
|
7,864
|
|
|
534
|
|
1.
|
Other
income for 2007 includes $6,189 representing the reversal of tax
accruals
previously made as the result of the grant by the local tax agency
to
Laiyang Jiangbo of a special tax exemption and release from any unpaid
corporate income tax and value added tax liabilities and any related
penalties from January 1, 2007 through June 30,
2007.
|
|
|
|
|
|
|
|
|
As
of March 31,
|
|
As
of June 30,
|
|
|
|
2008
(unaudited)
|
|
2007
|
|
2006
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,574
|
|
$
|
17,737
|
|
$
|
3,372
|
|
Accounts
receivable, net
|
|
|
20,589
|
|
|
11,825
|
|
|
9,759
|
|
Accounts
receivable- related parties
|
|
|
2,019
|
|
|
499
|
|
|
414
|
|
Other
current assets
|
|
|
12,412
|
|
|
14,038
|
|
|
16,882
|
|
Property
and equipment, net
|
|
|
11,081
|
|
|
10,179
|
|
|
4,861
|
|
Other
assets, net
|
|
|
12,911
|
|
|
1,119
|
|
|
1,185
|
|
Total
assets
|
|
|
80,586
|
|
|
55,397
|
|
|
36,473
|
|
Total
Current Liabilities
|
|
|
25,835
|
|
|
28,101
|
|
|
27,032
|
|
Total
Liabilities
|
|
|
26,506
|
|
|
28,101
|
|
|
27,032
|
|
Total
Stockholders’ Equity
|
|
|
54,080
|
|
|
27,296
|
|
|
9,441
|
|
RISK
FACTORS
Investing
in our securities involves a great deal of risk. Careful consideration should
be
made of 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 all 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.
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
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
have a
limited operating history. Laiyang Jiangbo commenced operations in 2003 and
first achieved profitability in the fiscal year ended June 30, 2005.
Accordingly, you should consider our future prospects in light of the risks
and
uncertainties experienced by early stage companies in evolving industries such
as the pharmaceutical industry in China. Some of these risks and uncertainties
relate to our ability to:
|
·
|
maintain
our market position in the pharmaceuticals business in
China;
|
|
·
|
offer
new and innovative products to attract and retain a larger customer
base;
|
|
·
|
attract
additional customers and increase spending per
customer;
|
|
·
|
increase
awareness of our brand and continue to develop user and customer
loyalty;
|
|
·
|
respond
to competitive market conditions;
|
|
·
|
respond
to changes in our regulatory environment;
|
|
·
|
manage
risks associated with intellectual property
rights;
|
|
·
|
maintain
effective control of our costs and
expenses;
|
|
·
|
raise
sufficient capital to sustain and expand our
business;
|
|
·
|
attract,
retain and motivate qualified personnel;
and
|
|
·
|
upgrade
our technology to support additional research and development of
new
products.
|
If
we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
may need additional financing to execute our business
plan.
The
revenues from the production and sale of pharmaceutical products and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We may need substantial additional
funds to build our new production facilities, pursue further research and
development, obtain regulatory approvals, market our products, and file,
prosecute, defend and enforce our intellectual property rights. We will seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources. We could enter into collaborative
arrangements for the development of particular products that would lead to
our
relinquishing some or all rights to the related technology or
products.
There
are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures,
to
the extent necessary. The failure to fund our capital requirements would have
a
material adverse effect on our business, financial condition and results of
operations.
Our
success depends on collaborative partners over whom we have limited
control.
Due
to
the complexity of the process of developing pharmaceuticals, our core business
depends on arrangements with pharmaceutical institutes, corporate and academic
collaborators, licensors, licensees and others for the research, development,
clinical testing, technology rights, manufacturing, marketing and
commercialization of our products. We have several research collaborations.
Our
license agreements could obligate us to diligently bring potential products
to
market, make milestone payments and royalties that, in some instances, could
be
substantial, and incur the costs of filing and prosecuting patent applications.
There are no assurances that we will be able to establish or maintain
collaborations that are important to our business on favorable terms, or at
all.
A
number
of risks arise from our dependence on collaborative agreements with third
parties. Product development and commercialization efforts could be adversely
affected if any collaborative partner:
|
·
|
terminates
or suspends its agreement with us;
|
|
·
|
fails
to timely develop or manufacture in adequate quantities a substance
needed
in order to conduct clinical trials;
|
|
·
|
fails
to adequately perform clinical trials;
|
|
·
|
determines
not to develop, manufacture or commercialize a product to which it
has
rights; or
|
|
·
|
otherwise
fails to meet its contractual
obligations.
|
Our
collaborative partners could pursue other technologies or develop alternative
products that could compete with the products we are developing.
The
profitability of our products will depend in part on our ability to protect
proprietary rights and operate without infringing the proprietary rights of
others
.
The
profitability of our products will depend in part on our ability to obtain
and
maintain patents and licenses and preserve trade secrets, and the period our
intellectual property remains exclusive. We must also operate without infringing
the proprietary rights of third parties and without third parties circumventing
our rights. The patent positions of pharmaceutical enterprises, including ours,
are uncertain and involve complex legal and factual questions for which
important legal principles are largely unresolved. The pharmaceutical patent
situation outside the U.S. is uncertain, is currently undergoing review and
revision in many countries, and may not protect our intellectual property rights
to the same extent as the laws of the U.S. Because patent applications are
maintained in secrecy in some cases, we cannot be certain that we or our
licensors are the first creators of inventions described in our pending patent
applications or patents or the first to file patent applications for such
inventions.
Most
of
our drug products have been approved by the PRC's Food and Drug Administration
(SFDA) but have not received patent protection. For instance, Clarithromycin
sustained-release tablets, one of our most profitable products, are produced
by
other companies in China. If any other company were to obtain patent protection
for Clarithromycin sustained-release tablets in China, or for any of our other
drug products, it would have a material adverse effect on our
revenue.
Other
companies may independently develop similar products and design around any
patented products we develop. We cannot assure you that:
|
·
|
any
of our patent applications will result in the issuance of
patents;
|
|
·
|
we
will develop additional patentable
products;
|
|
·
|
the
patents we have been issued will provide us with any competitive
advantages;
|
|
·
|
the
patents of others will not impede our ability to do business;
or
|
|
·
|
third
parties will not be able to circumvent our
patents.
|
A
number
of pharmaceutical, research, and academic companies and institutions have
developed technologies, filed patent applications or received patents on
technologies that may relate to our business. If these technologies,
applications or patents conflict with ours, the scope of our current or future
patents could be limited or our patent applications could be denied. Our
business may be adversely affected if competitors independently develop
competing technologies, especially if we do not obtain, or obtain only narrow,
patent protection. If patents that cover our activities are issued to other
companies, we may not be able to obtain licenses at a reasonable cost, or at
all; develop our technology; or introduce, manufacture or sell the products
we
have planned.
Patent
litigation is becoming widespread in the pharmaceutical industry. Such
litigation may affect our efforts to form collaborations, to conduct research
or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would
be
held valid or enforceable by a court or that a competitor's technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse outcome
to
such litigation. Similarly, we may need to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or equivalent
international authorities to determine priority of invention. We could incur
substantial costs and devote significant management resources to defend our
patent position or to seek a declaration that another company's patents are
invalid.
Much
of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership
of
proprietary rights to our technology, for example by asserting that they
developed the technology independently.
We
may encounter difficulties in manufacturing our products
.
Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including GMP, production and quality control regulations. If
we
cannot arrange for or maintain commercial-scale manufacturing on acceptable
terms, or if there are delays or difficulties in the manufacturing process,
we
may not be able to conduct clinical trials, obtain regulatory approval or meet
demand for our products. Production of our products could require raw materials
which are scarce or which can be obtained only from a limited number of sources.
If we are unable to obtain adequate supplies of such raw materials, the
development, regulatory approval and marketing of our products could be
delayed.
We
could need more clinical trials or take more time to complete our clinical
trials than we have planned.
Clinical
trials vary in design by factors including dosage, end points, length, and
controls. We may need to conduct a series of trials to demonstrate the safety
and efficacy of our products. The results of these trials may not demonstrate
safety or efficacy sufficiently for regulatory authorities to approve our
products. Further, the actual schedules for our clinical trials could vary
dramatically from the forecasted schedules due to factors including changes
in
trial design, conflicts with the schedules of participating clinicians and
clinical institutions, and changes affecting product supplies for clinical
trials.
We
rely
on collaborators, including academic institutions, governmental agencies and
clinical research organizations, to conduct, supervise, monitor and design
some
or all aspects of clinical trials involving our products. Since these trials
depend on governmental participation and funding, we have less control over
their timing and design than trials we sponsor. Delays in or failure to commence
or complete any planned clinical trials could delay the ultimate timelines
for
our product releases. Such delays could reduce investors' confidence in our
ability to develop products, likely causing our share price to
decrease.
We
may not be able to obtain the regulatory approvals or clearances that are
necessary to commercialize our products
.
The
PRC
and other countries impose significant statutory and regulatory obligations
upon
the manufacture and sale of pharmaceutical products. Each regulatory authority
typically has a lengthy approval process in which it examines pre-clinical
and
clinical data and the facilities in which the product is manufactured.
Regulatory submissions must meet complex criteria to demonstrate the safety
and
efficacy of the ultimate products. Addressing these criteria requires
considerable data collection, verification and analysis. We may spend time
and
money preparing regulatory submissions or applications without assurances as
to
whether they will be approved on a timely basis or at all.
Our
product candidates, some of which are currently in the early stages of
development, will require significant
additional
development and pre-clinical and clinical testing prior to their
commercialization. These steps and the
process
of obtaining required approvals and clearances can be costly and time-consuming.
If our potential products are not successfully developed, cannot be proven
to be
safe and effective through clinical trials, or do not receive applicable
regulatory approvals and clearances, or if there are delays in the
process:
|
·
|
the
commercialization of our products could be adversely
affected;
|
|
·
|
any
competitive advantages of the products could be diminished;
and
|
|
·
|
revenues
or collaborative milestones from the products could be reduced or
delayed.
|
Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product
receives regulatory approval and clearance, it may later exhibit adverse side
effects that limit or prevent its widespread use or that force us to withdraw
the product from the market.
Any
marketed product and its manufacturer will continue to be subject to strict
regulation after approval. Results of post-marketing programs may limit or
expand the further marketing of products. Unforeseen problems with an approved
product or any violation of regulations could result in restrictions on the
product, including its withdrawal from the market and possible civil
actions.
In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records
and
documentation. If we cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed
to
develop or market the product candidates. If we or our manufacturers fail to
comply with applicable regulatory requirements at any stage during the
regulatory process, we may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications,
total or partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal
prosecution.
Competitors
may develop and market pharmaceutical products that are less expensive, more
effective or safer, making our products obsolete or
uncompetitive
.
Some
of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than
we
do. Technological competition from pharmaceutical companies is intense and
is
expected to increase. Other companies have developed technologies that could
be
the basis for competitive products. Some of these products have an entirely
different approach or means of accomplishing the desired curative effect than
products we are developing. Alternative products may be developed that are
more
effective, work faster and are less costly than our products. Competitors may
succeed in developing products earlier than us, obtaining approvals and
clearances for such products more rapidly than us, or developing products that
are more effective than ours. In addition, other forms of treatment may be
competitive with our products. Over time, our technology or products may become
obsolete or uncompetitive.
Our
products
may not gain market acceptance.
Our
products may not gain market acceptance in the pharmaceutical community. The
degree of market acceptance of any product depends on a number of factors,
including establishment and demonstration of clinical efficacy and safety,
cost-effectiveness, clinical advantages over alternative products, and marketing
and distribution support for the products. Limited information regarding these
factors is available in connection with our products or products that may
compete with ours.
To
directly market and distribute our pharmaceutical products, we or our
collaborators require a marketing and sales force with appropriate technical
expertise and supporting distribution capabilities. We may not be able to
further establish sales, marketing and distribution capabilities or enter into
arrangements with third parties on acceptable terms. If we or our partners
cannot successfully market and sell our products, our ability to generate
revenue will be limited.
Our
operations and the use of our products could subject us to damages relating
to
injuries or accidental contamination.
Our
research and development processes involve the controlled use of hazardous
materials. We are subject to PRC national, provincial and local laws and
regulations governing the use, manufacture, storage, handling and disposal
of
such materials and waste products. The risk of accidental contamination or
injury from handling and disposing of such materials cannot be completely
eliminated. In the event of an accident involving hazardous materials, we could
be held liable for resulting damages. We are not insured with respect to this
liability. Such liability could exceed our resources. In the future we could
incur significant costs to comply with environmental laws and
regulations.
If
we
were successfully sued for product liability, we could face substantial
liabilities that may exceed our resources.
We
may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks are inherent in the
development of pharmaceutical products. We currently do not have product
liability insurance. We are not insured with respect to this liability. If
we
choose to obtain product liability insurance but cannot obtain sufficient
insurance coverage at an acceptable cost or otherwise protect against potential
product liability claims, the commercialization of products that we develop
may
be prevented or inhibited. If we are sued for any injury caused by our products,
our liability could exceed our total assets.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have
any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
Our
business depends substantially on the continuing efforts of our executive
officers and our ability to maintain a skilled labor force, and our business
may
be severely disrupted if we lose their services.
Our
future success depends substantially on the continued services of our executive
officers, especially Wubo Cao our chief executive officer and the chairman
of
our board. We do not maintain key man life insurance on any of our executive
officers. If one or more of our executive officers are unable or unwilling
to
continue in their present positions, we may not be able to replace them readily,
if at all. Therefore, our business may be severely disrupted, and we may incur
additional expenses to recruit and retain new officers. In addition, if any
of
our executives joins a competitor or forms a competing company, we may lose
some
of our customers.
Our
success depends on attracting and retaining qualified
personnel
.
We
depend
on a core management and scientific team. The loss of any of these individuals
could prevent us from achieving our business objective of commercializing our
product candidates. Our future success will depend in large part on our
continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in
clinical testing and government regulation. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If our recruitment and retention
efforts are unsuccessful, our business operations could suffer.
We
may not be able to manage the expansion of our operations effectively, which
may
have an adverse affect on our business and results of
operations.
The
revenues from the production and sale of our current product offerings and
the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We will need substantial additional
funds to expand our production facilities, pursue research and development,
obtain regulatory approvals; file, prosecute, defend and enforce our
intellectual property rights and market our products. We will seek additional
funds through public or private equity or debt financing, strategic transactions
and/or from other sources. We could enter into collaborative arrangements for
the development of particular products that would lead to our relinquishing
some
or all rights to the related technology or products. There are no assurances
that future funding will be available on favorable terms or at all. If
additional funding is not obtained, we will need to reduce, defer or cancel
development programs, planned initiatives or overhead expenditures, to the
extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.
Risks
Related to Our Corporate Structure
PRC
laws and regulations governing our businesses and the validity of certain of
our
contractual arrangements are uncertain. If we are found to be in violation,
we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our
business.
There
are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Laiyang Jiangbo, and its
shareholders. We are considered a foreign person or foreign invested enterprise
under PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Chinese companies. These laws and regulations are relatively new
and may be subject to change, and their official interpretation and enforcement
may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance
by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.
The
PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses
and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses.
We
cannot assure you that our current ownership and operating structure would
not
be found in violation of any current or future PRC laws or regulations. As
a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of
these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
The
PRC
government restricts foreign investment in pharmaceutical businesses in China.
Accordingly, we operate our business in China through Laiyang Jiangbo. Laiyang
Jiangbo holds the licenses and approvals necessary to operate our pharmaceutical
business in China. We have contractual arrangements with Laiyang Jiangbo and
its
shareholders that allow us to substantially control Laiyang Jiangbo. We cannot
assure you, however, that we will be able to enforce these
contracts.
Although
we believe we comply with current PRC regulations, we cannot assure you that
the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the
PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict
our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we
may
not be able to comply, impose restrictions on our business operations or on
our
customers, or take other regulatory or enforcement actions against us that
could
be harmful to our business.
We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of pharmaceutical business and companies, including limitations
on
our ability to own key assets.
The
PRC
government regulates the pharmaceutical industry including foreign ownership
of,
and the licensing and permit requirements pertaining to, companies in the
pharmaceutical industry. These laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to PRC
government regulation of the pharmaceutical industry include the
following:
|
·
|
we
only have contractual control over Laiyang Jiangbo. We do not own
it due
to the restriction of foreign investment in Chinese businesses;
and
|
|
·
|
uncertainties
relating to the regulation of the pharmaceutical business in China,
including evolving licensing practices, means that permits, licenses
or
operations at our company may be subject to challenge. This may disrupt
our business, or subject us to sanctions, requirements to increase
capital
or other conditions or enforcement, or compromise enforceability
of
related contractual arrangements, or have other harmful effects on
us.
|
The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, pharmaceutical businesses in China,
including our business.
Our
contractual arrangements with Laiyang Jiangbo and its shareholders may not
be as
effective in providing control over these entities as direct
ownership.
Since
the
law of the PRC limits foreign equity ownership in pharmaceutical companies
in
China, we operate our business through Laiyang Jiangbo. We have no equity
ownership interest in Laiyang Jiangbo and rely on contractual arrangements
to
control and operate such business. These contractual arrangements may not
be
effective in providing control over Laiyang Jiangbo as direct ownership.
For
example, Laiyang Jiangbo could fail to take actions required for our business
despite its contractual obligation to do so. If Laiyang Jiangbo fails to
perform
under its agreements with us, we may have to incur substantial costs and
resources to enforce such arrangements and may have to rely on legal remedies
under the law of the PRC, which may not be effective. In addition, we cannot
assure you that Laiyang Jiangbo’s shareholders would always act in our best
interests.
The
Chairman of the Board of Directors of Laiyang Jiangbo has potential conflicts
of
interest with us, which may adversely affect our
business.
Mr.
Cao
Wubo, our Chairman and Chief Executive Officer, is also the Chairman of the
Board of Directors and General Manager of Laiyang Jiangbo. Conflicts of
interests between his duties to our company and Laiyang Jiangbo may arise.
As
Mr. Cao is a director and executive officer of our company, he has a duty of
loyalty and care to us under Florida law when there are any potential conflicts
of interests between our company and Laiyang Jiangbo. We cannot assure you,
however, that when conflicts of interest arise, Mr. Cao will act completely
in
our interests or that conflicts of interests will be resolved in our favor.
In
addition, Mr. Cao could violate his legal duties by diverting business
opportunities from us to others. If we cannot resolve any conflicts of interest
between us and Mr. Cao, we would have to rely on legal proceedings, which could
result in the disruption of our business.
Risks
Related to Doing Business in China
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident stockholders
to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.
In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing
and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register
with the competent local SAFE branch before establishing or acquiring control
over an offshore special purpose company, or SPV, for the purpose of engaging
in
an equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. Internal implementing guidelines issued
by
SAFE, which became public in June 2007 (known as Notice 106), expanded the
reach
of Circular 75 by (i) purporting to cover the establishment or acquisition
of
control by PRC residents of offshore entities which merely acquire “control”
over domestic companies or assets, even in the absence of legal ownership;
(ii)
adding requirements relating to the source of the PRC resident’s funds used to
establish or acquire the offshore entity; (iii) covering the use of existing
offshore entities for offshore financings; (iv) purporting to cover situations
in which an offshore SPV establishes a new subsidiary in China or acquires
an
unrelated company or unrelated assets in China; and (v) making the domestic
affiliate of the SPV responsible for the accuracy of certain documents which
must be filed in connection with any such registration, notably, the business
plan which describes the overseas financing and the use of proceeds. Amendments
to registrations made under Circular 75 are required in connection with any
increase or decrease of capital, transfer of shares, mergers and acquisitions,
equity investment or creation of any security interest in any assets located
in
China to guarantee offshore obligations, and Notice 106 makes the offshore
SPV
jointly responsible for these filings. In the case of an SPV which was
established, and which acquired a related domestic company or assets, before
the
implementation date of Circular 75, a retroactive SAFE registration was required
to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant
establish that all foreign exchange transactions undertaken by the SPV and
its
affiliates were in compliance with applicable laws and regulations. Failure
to
comply with the requirements of Circular 75, as applied by SAFE in accordance
with Notice 106, may result in fines and other penalties under PRC laws for
evasion of applicable foreign exchange restrictions. Any such failure could
also
result in the SPV’s affiliates being impeded or prevented from distributing
their profits and the proceeds from any reduction in capital, share transfer
or
liquidation to the SPV, or from engaging in other transfers of funds into or
out
of China.
We
believe our stockholders who are PRC residents as defined in Circular 75 have
registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries. However, we cannot provide any assurances
that their existing registrations have fully complied with, or that they have
made all necessary amendments to their registration to fully comply with, all
applicable registrations or approvals required by Circular 75. Moreover, because
of uncertainty over how Circular 75 will be interpreted and implemented, and
how
or whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiaries’ ability to conduct foreign exchange activities,
such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with Circular 75 by our PRC resident beneficial
holders. In addition, such PRC residents may not always be able to complete
the
necessary registration procedures required by Circular 75. We also have little
control over either our present or prospective direct or indirect stockholders
or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident stockholders to comply with Circular
75, if SAFE requires it, could subject these PRC resident beneficial holders
to
fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries’ ability to make distributions or pay
dividends or affect our ownership structure, which could adversely affect our
business and prospects.
If
the PRC enacts regulations which forbid or restrict foreign investment, our
ability to grow may be severely impaired.
We
intend
to expand our business in areas relating to our present business. We may also
expand by making acquisitions of companies in related industries. Many of the
rules and regulations that we would face are not explicitly communicated, and
we
may be subject to rules that would affect our ability to grow, either internally
or through acquisition of other Chinese or foreign companies. There are also
substantial uncertainties regarding the proper interpretation of current laws
and regulations of the PRC. New laws or regulations that forbid foreign
investment could severely impair our businesses and prospects. Additionally,
if
the relevant authorities find us in violation of PRC laws or regulations, they
would have broad discretion in dealing with such a violation, including, without
limitation:
|
·
|
revoking
our business and other licenses;
and
|
|
·
|
requiring
that we restructure our ownership or operations.
|
Any
deterioration of political relations between the United States and the PRC
could
impair our operations and your investment in us.
The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. Changes in political conditions in the PRC
and
changes in the state of Sino-U.S. relations are difficult to predict and could
adversely affect our operations or cause potential acquisition candidates or
their goods and services to become less attractive. Such a change could lead
to
a decline in our profitability. Any weakening of relations between the United
States and the PRC could have a material adverse effect on our operations and
your investment in us, particularly in our efforts to raise capital to expand
our other business activities.
Adverse
changes in economic and political policies of the PRC government could have
a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China's economy
differs from the economies of most developed countries in many respects,
including with respect to:
|
·
|
the
amount of government involvement;
|
|
·
|
control
of foreign exchange; and
|
|
·
|
allocation
of resources.
|
While
the
PRC economy has experienced significant growth in the past 20 years, growth
has
been uneven across different regions and among various economic sectors of
China. The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us.
For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Since early 2004, the PRC government
has
implemented certain measures to control the pace of economic growth. Such
measures may cause a decrease in the level of economic activity in China, which
in turn could adversely affect our results of operations and financial
condition.
Price
controls may affect both our revenues and net income.
The
laws
of the PRC provide for the government to fix and adjust prices. Although we
are
not presently subject to price controls in connection with the sale of our
products, it is possible that price controls may be imposed in the future.
To
the extent that we are subject to price control, our revenue, gross profit,
gross margin and net income will be affected since the revenue we derive from
our sales will be limited and, unless there is also price control on the
products that we purchase from our suppliers, we may face no limitation on
our
costs. Further, if price controls affect both our revenue and our costs, our
ability to be profitable and the extent of our profitability will be effectively
subject to determination by the applicable regulatory authorities in the
PRC.
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 making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However, we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies of
most countries belonging to the Organization for Economic Cooperation and
Development (the “OECD”), an international group of member countries sharing a
commitment to democratic government and market economy. For
instance:
|
·
|
the
level of state-owned enterprises in the PRC, as well as the level
of
governmental control over the allocation of resources is greater
than in
most of the countries belonging to the
OECD;
|
|
·
|
the
level of capital reinvestment is lower in the PRC than in other countries
that are members of the OECD;
|
|
·
|
the
government of the PRC has a greater involvement in general in the
economy
and the economic structure of industries within the PRC than other
countries belonging to the OECD;
|
|
·
|
the
government of the PRC imposes price controls on certain products
and our
products may become subject to additional price controls;
and
|
|
·
|
the
PRC has various impediments in place that make it difficult for foreign
firms to obtain local currency, as opposed to other countries belonging
to
the OECD where exchange of currencies is generally free from
restriction.
|
As
a
result of these differences, our business may not develop in the same way or
at
the same rate as might be expected if the economy of the PRC were similar to
those of the OECD member countries.
Because
our some of our officers and directors reside outside of the United States,
it
may be difficult for you to enforce your rights against them or enforce United
States court judgments against them in the PRC.
Most
of
our executive officers and directors reside in the PRC and a substantial portion
of our assets are located in the PRC. It may therefore be difficult for United
States investors to enforce their legal rights, to effect service of process
upon our directors or officers or to enforce judgments of United States courts
predicated upon civil liabilities and criminal penalties of our directors and
officers under federal securities laws. Further, it is unclear if extradition
treaties now in effect between the United States and the PRC would permit
effective enforcement of criminal penalties of the federal securities
laws.
We
may have limited legal recourse under Chinese law if disputes arise under
contracts with third parties.
Almost
all of our agreements with our employees and third parties, including our
supplier and customers, are governed by the laws of the PRC. The legal system
in
the PRC is a civil law system based on written statutes. Unlike common law
systems, such as we have in the United States, it is a system in which decided
legal cases have little precedential value. The government of the PRC has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these
laws
and regulations is limited, and our ability to enforce commercial claims or
to
resolve commercial disputes is unpredictable. The resolution of these matters
may be subject to the exercise of considerable discretion by agencies of the
PRC, 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 are severely limited,
and
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.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer
a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject
us
to penalties and other adverse consequences.
We
are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, 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 and other consequences that may have a material adverse effect on
our
business, financial condition and results of operations.
A
downturn in the economy of the PRC may slow our growth and
profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business especially if it results in either a decreased use of products such
as
ours or in pressure on us to lower our prices. The Chinese economy has been
transitioning from a planned economy to a more market-oriented economy. Although
in recent years the Chinese government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the Chinese government. The continued control
of these assets and other aspects of the national economy by the
Chinese government could materially and adversely affect our business. The
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the
Chinese government to slow the pace of growth of the Chinese economy could
result in decreased capital expenditure by solar energy users, which in turn
could reduce demand for our products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level
of
renewable energy investments and expenditures in China, which in turn could
lead
to a reduction in demand for our products and consequently have a material
adverse effect on our businesses.
Downturns
in the economies of the U.S. and Europe may affect the PRC economy which
could
reduce the demand for our products.
The
rapid
growth of the PRC economy in recent years has been partially related to the
U.S.
and European countries’ demand for goods made in and exported from the PRC. The
downturns in the U.S. and European economies may reduce the demand for goods
exported by the PRC which could eventually affect the PRC economy as overseas
orders decrease. The downturn in the PRC economy may in turn negatively impact
the demand for our products.
If
certain tax exemptions within the PRC regarding withholding taxes are removed,
we may be required to deduct corporate withholding taxes from any dividends
we
may pay in the future.
Under
the
PRC’s current tax laws, regulations and rulings, companies are exempt from
paying withholding taxes with respect dividends paid to stockholders outside
of
the PRC. However, if the foregoing exemption is removed, we may be required
to
deduct certain amounts from any dividends we pay to our
stockholders.
Laiyang
Jiangbo is subject to restrictions on making payments to
us.
We
are a
holding company incorporated in the State of Florida and do not have any assets
or conduct any business operations other than our investments in our affiliated
entity in China, Laiyang Jiangbo. As a result of our holding company structure,
we rely entirely on payments from Laiyang Jiangbo under our contractual
arrangements. The PRC government also imposes controls on the conversion of
RMB
into foreign currencies and the remittance of currencies out of China. We may
experience difficulties in completing the administrative procedures necessary
to
obtain and remit foreign currency. See “Government control of currency
conversion may affect the value of your investment.” Furthermore, if our
affiliated entity in China incurs debt on its own in the future, the instruments
governing the debt may restrict its ability to make payments. If we are unable
to receive all of the revenues from our operations through these contractual
or
dividend arrangements, we may be unable to pay dividends on our ordinary
shares.
Uncertainties
with respect to the PRC legal system could adversely affect
us.
We
conduct our business primarily through our affiliated Chinese entity, Laiyang
Jiangbo. Our operations in China are governed by PRC laws and regulations.
We
are generally subject to laws and regulations applicable to foreign investments
in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based
in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result,
we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted
and
result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.
We
conduct substantially all of our operations in China and substantially all
of
our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon
our
senior executive officers, including with respect to matters arising under
U.S.
federal securities laws or applicable state securities laws. Moreover, our
PRC
counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Laiyang Jiangbo. Shortages in
the
availability of foreign currency may restrict the ability of our PRC
subsidiaries and our affiliated entity to remit sufficient foreign currency
to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be
made
in foreign currencies without prior approval from the PRC State Administration
of Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to
be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future
to
foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The
value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other
outbreaks.
Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks
Related to an Investment in Our Securities
We
do not anticipate paying any cash dividends.
We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends is within the
discretion of our Board of Directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.
Because
the OTC Bulletin Board is a quotation system, not an issuer listing service,
market or exchange, it may be difficult for you to sell your common stock or
you
may not be able to sell your common stock for an optimum trading price.
The
OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter securities. Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order
at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.
The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a
bid
price for securities bought and sold through the OTC Bulletin Board. Due to
the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.
The
application of the
“penny
stock” rules could adversely affect the market price of our common stock and
increase your transaction costs to sell those shares.
As
long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000
or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received
the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the SEC relating to the penny stock market. The broker-dealer
also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information on the
limited market in penny stocks. These additional burdens imposed on
broker-dealers may restrict the ability or decrease the willingness of
broker-dealers to sell our common shares, and may result in decreased liquidity
for our common shares and increased transaction costs for sales and purchases
of
our common shares as compared to other securities.
Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We
cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq National Market or other exchanges.
Our
common shares have historically been sporadically or “thinly-traded” on the OTC
Bulletin Board, meaning that the number of persons interested in purchasing
our
common shares at or near bid prices at any given time may be relatively small
or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came
to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As
a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could,
for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact
on
its share price. Secondly, we are a speculative or “risky” investment due to our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors
may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes;
the
termination of our contractual agreements with Laiyang Jiangbo; and additions
or
departures of our key personnel, as well as other items discussed under this
“Risk Factors” section, as well as elsewhere in this prospectus. Many of these
factors are beyond our control and may decrease the market price of our common
shares, regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our common shares
will
be at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect that the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price. However, we do not rule out the possibility of applying for
listing on the Nasdaq National Market or other exchanges.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
The
market price for our stock may be volatile
and the volatility in our common share price may subject us to securities
litigation..
The
market price for our stock may be volatile and subject to wide fluctuations
in
response to factors including the following:
|
·
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
|
·
|
changes
in financial estimates by securities research
analysts;
|
|
·
|
conditions
in pharmaceutical and agricultural
markets;
|
|
·
|
changes
in the economic performance or market valuations of other pharmaceutical
companies;
|
|
·
|
announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
addition
or departure of key personnel;
|
|
·
|
fluctuations
of exchange rates between RMB and the U.S.
dollar;
|
|
·
|
intellectual
property litigation; and
|
|
·
|
general
economic or political conditions in
China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
Our
corporate actions are substantially controlled by our principal shareholders
and
affiliated entities.
Our
principal shareholders and their affiliated entities own approximately 53%
of
our outstanding common shares, representing approximately 53% of our voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of
the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of our
company.
The
elimination of monetary liability against our directors, officers and employees
under
Florida
law and the existence of indemnification rights to our directors, officers
and
employees may result in substantial expenditures by us and may discourage
lawsuits against our directors, officers and employees.
Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Florida law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing
a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements
may
impact our future financial position and results of
operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results
of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes are likely
to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These
and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
Past
activities of Genesis and its affiliates may lead to future
liability.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our
shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from a proposed offering will be sufficient
to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may
seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to
our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
Existing
stockholders may experience some dilution as a result of the exercise of
warrants.
We
have
issued the Notes and, in conjunction with the Notes, the Class A Warrants
to purchase, collectively, up to 75,000,000 shares of our common
stock, subject to adjustment. We have also previously issued the
Debentures and, in connection with the Debentures, the November Warrants
to
purchase, collectively, up to 16,000,000 shares of our common
stock. Any issuances of shares upon any exercise of the Class A
Warrants, and the November Warrants will cause dilution in the
interests of our stockholders.
If
we fail to maintain an effective system of internal controls, we may not be
able
to accurately report our financial results or prevent
fraud.
We
will
be subject to reporting obligations under the U.S. securities laws. The SEC,
as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company's
internal controls over financial reporting in its annual report, which contains
management's assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to and report on management's assessment of the effectiveness
of our internal controls over financial reporting. Our management may conclude
that our internal controls over our financial reporting are not effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management's assessment or may issue
a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if
it
interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and
are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result
in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price
of
our stock. Furthermore, we anticipate that we will incur considerable costs
and
use significant management time and other resources in an effort to comply
with
Section 404 and other requirements of the Sarbanes-Oxley Act.
We
will incur increased costs as a result of being a public
company.
As
a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley
Act
and other new rules subsequently implemented by SEC have required changes in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance
costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount
of
additional costs we may incur or the timing of such costs.
NOTE
REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements that involve substantial risks
and uncertainties. These include statements about our expectations, beliefs,
intentions or strategies for the future, which are indicated by words or phrases
such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“management believes” and similar words or phrases. The forward-looking
statements are based on our current expectations and are subject to certain
risks, uncertainties and assumptions. Our actual results could differ
materially from results anticipated in these forward-looking statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to
update any such forward-looking statements.
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. There will be no proceeds to
us
from the sale of shares of common stock in this offering.
We
will
not receive any proceeds from the issuance of our common stock to the Selling
Stockholders other than the exercise price of any warrants and Class A Warrants
that are exercised by the Selling Stockholders who do not conduct cashless
exercises, the proceeds of which we expect to use for working capital. If all
16,000,000 of the warrants and all 75,000,000 of the Class A Warrants were
exercised in full for cash, the proceeds to the Company would be approximately
$21,950,000.
We
will
receive the benefit of the reduction in our outstanding indebtedness in
consideration for the issuance of shares of our Common Stock upon conversion
of
the Debentures and/or the Notes.
SELLING
STOCKHOLDERS
We
are
registering for resale shares of our common stock held by the selling
stockholders identified below. We are registering the shares to permit the
selling stockholders and their pledgees, donees, transferees and other
successors-in-interest that receive their shares from a selling stockholder
as a
gift, partnership distribution or other non-sale related transfer after the
date
of this prospectus to resell the shares when and as they deem
appropriate.
The
following tables set forth:
|
·
|
the
name of the selling stockholders,
|
|
·
|
the
number and percentage of shares of our common stock that the selling
stockholders beneficially owned prior to the offering for resale
of the
shares under this prospectus,
|
|
·
|
the
number of shares of our common stock that may be offered for resale
for
the account of the selling stockholders under this prospectus,
and
|
|
·
|
the
number and percentage of shares of our common stock to be beneficially
owned by the selling stockholders after the offering of the resale
shares
(assuming all of the offered resale shares are sold by the selling
stockholders).
|
The
number of shares in the column “Maximum Number of Shares Being Offered”
represents all of the shares that each selling stockholder may offer under
this
prospectus. We do not know how long the selling stockholders will hold the
shares before selling them or how many shares they will sell, and we currently
have no agreements, arrangements or understandings with any of the selling
stockholders regarding the sale of any of the resale shares. The shares offered
by this prospectus may be offered from time to time by the selling stockholders
listed below.
With
the
exception of 41,000,000 shares beneficially owned by Pope Investments LLC which
were acquired by Pope Investments LLC in connection with the private placement
of Debentures and November Warrants in November 2007, all the shares
beneficially owned by the selling stockholders which are being offered for
resale by the selling stockholders were acquired in connection with the private
placement transaction of Notes and Class A Warrants in May 2008.
This
table is prepared solely based on information supplied to us by the listed
selling stockholders, any Schedules 13D or 13G and Forms 3 and 4, and other
public documents filed with the SEC.
|
|
|
|
|
|
|
|
|
|
Name
of Selling Stockholder
|
|
Shares
Beneficially Owned Prior to Offering(1)
|
|
Maximum
Number of Shares to be Sold
|
|
Number
of Shares Beneficially Owned After Offering
|
|
Percentage
Ownership After Offering
|
|
|
|
|
|
|
|
|
|
|
|
Pope
Investments LLC
|
|
|
45,850,000
|
(2)
|
|
168,500,000
|
(3)
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ardsley
Partners Fund II, L.P.
|
|
|
11,812,500
|
(4)
|
|
11,812,500
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ardsley
Partners Institutional Fund L.P.
|
|
|
7,725,000
|
(5)
|
|
7,725,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ardsley
Partners Offshore Fund, Ltd.
|
|
|
7,912,500
|
(6)
|
|
7,912,500
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marion
Lynton
|
|
|
300,000
|
(7)
|
|
300,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MidSouth
Investor Fund LP
|
|
|
2,250,000
|
(8)
|
|
2,250,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sansar
Capital Special Opportunity Master Fund, LP
|
|
|
41,250,000
|
(9)
|
|
41,250,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ephraim
Fields
|
|
|
375,000
|
(10)
|
|
375,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hua-Mei
21
st
Century Partners, LP
|
|
|
13,500,000
|
(11)
|
|
13,500,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guerilla
Partners, LP
|
|
|
6,562,500
|
(12)
|
|
6,562,500
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guerilla
IRA Partners, LP
|
|
|
187,500
|
(13)
|
|
187,500
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excalibur
Special Opportunities, LP
|
|
|
3,750,000
|
(14)
|
|
3,750,000
|
|
|
-0-
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whalehaven
Capital Fund Ltd.
|
|
|
1,875,000
|
(15)
|
|
1,875,000
|
|
|
-0-
|
|
|
-0-
|
|
(1)
|
Beneficial
ownership is determined in accordance with the rules and regulations
of
the SEC. In computing the number of shares beneficially owned by
a person
and the percentage ownership of that person, securities that are
currently
convertible or exercisable into shares of our common stock, or
convertible
or exercisable into shares of our common stock within 60 days of
the date
hereof are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership
of any
other person. Except as indicated in the footnotes to the following
table,
each stockholder named in the table has sole voting and investment
power
with respect to the shares set forth opposite such stockholder’s name. The
percentage of beneficial ownership is based on 412,986,078
shares
of common stock outstanding as of August 25,
2008.
|
(2)
|
Includes
(i) 25,000,000 shares of Common Stock issuable to Pope Investments
LLC, a
Delaware limited liability company (“Pope Investments”), upon conversion
of $5,000,000 aggregate principal amount of the Debentures and
16,000,000
shares of Common Stock issuable upon exercise of the November Warrants
and
(ii) up to an additional 4,850,000 shares of Common Stock of the
85,000,000 shares of Common Stock issuable to Pope Investments
upon
conversion of $17,000,000 aggregate principal amount of the Company’s
Notes and 42,500,000 shares of Common Stock issuable upon exercise
of the
Company’s Class A Warrants. Pursuant to the terms of the Notes and the
Class A Warrants, each of the Selling Stockholders has agreed that
it will
not convert any Notes or exercise any Class A Warrants to the extent
that
such conversion or exercise would result in it, together with its
affiliates, beneficially own more than 9.99% of the number of shares
of
our common stock outstanding at the time of conversion or exercise.
Any
Selling Stockholder may waive these beneficial ownership limitations
as to
itself upon no less than 61 days prior written notice to the Company.
Pope
Asset Management LLC, a Tennessee limited liability company (“Pope Asset”)
serves as an investment adviser and/or manager to Pope Investments.
Pope
Asset is the sole manager for Pope Investments and has sole voting
control
and investment and disposition power and discretion with respect
to all
securities held by Pope Investments. Pope Asset may be deemed to
beneficially own shares owned or held by, or held for the account
or
benefit of, Pope Investments. William P. Wells is the sole manager
of Pope
Asset. Mr. Wells may be deemed to own shares owned or held by,
or held for
the account or benefit of, Pope Investments. Pope Asset and Mr.
Wells do
not directly own any shares of Common Stock.
|
(3)
|
Includes
(i) 25,000,000 shares of Common Stock issuable to Pope Investments
upon
conversion of $5,000,000 aggregate principal amount of the Debentures;
(ii) 16,000,000 shares of Common Stock issuable upon exercise of
the
November Warrants; (iii) 85,000,000 shares of Common Stock issuable
to
Pope Investments upon conversion of $17,000,000 aggregate principal
amount
of the Notes; and (iv) 42,500,000 shares of Common Stock issuable
upon
exercise of Class A Warrants.
|
(4)
|
Includes
7,875,000 shares of common stock issuable to Ardsley Partners Fund
II,
L.P., a Delaware limited partnership, upon conversion of $1,575,000
aggregate principal amount of the Company’s Notes and 3,937,500 shares of
common stock issuable upon exercise of the Company’s Class A Warrants.
Ardsley Partners Fund II, L.P. has direct beneficial ownership
with
respect to the shares. Philip J. Hempelman has voting and dispositive
power over the shares.
|
(5)
|
Includes
5,150,000 shares of common stock issuable to Ardsley Partners
Institutional Fund L.P., a Delaware limited partnership, upon conversion
of $1,030,000 aggregate principal amount of the Company’s Notes and
2,575,000 shares of common stock issuable upon exercise of the
Company’s
Class A Warrants. Ardsley Partners Institutional Fund L.P. has
direct
beneficial ownership with respect to the shares. Philip J. Hempelman
has
voting and dispositive power over the
shares.
|
(6)
|
Includes
5,275,000 shares of common stock issuable to Ardsley Partners Offshore
Fund Ltd., a British Virgin Islands corporation, upon conversion
of
$1,055,000 aggregate principal amount of the Company’s Notes and 2,637,500
shares of common stock issuable upon exercise of the Company’s Class A
Warrants. Ardsley Partners Offshore Fund Ltd. has direct beneficial
ownership with respect to the shares. Philip J. Hempelman has voting
and
dispositive power over the
shares.
|
(7)
|
Includes
200,000 shares of common stock issuable to Marion Lynton upon conversion
of $40,000 aggregate principal amount of the Company’s Notes and 100,000
shares of common stock issuable upon exercise of the Company’s Class A
Warrants. Philip J. Hempelman has voting and dispositive power
over the
shares.
|
(8)
|
Includes
1,500,000 shares of common stock issuable to
MidSouth
Investor Fund LP
upon
conversion of $300,000 aggregate principal amount of the Company’s Notes
and 750,000 shares of common stock issuable upon exercise of the
Company’s
Class A Warrants. Lyman O. Heidtke has voting and dispositive power
over
the shares.
|
(9)
|
Includes
27,500,000 shares of common stock issuable to
Sansar
Capital Special Opportunity Master Fund, LP
upon
conversion of $5,500,000 aggregate principal amount of the Company’s Notes
and 13,750,000 shares of common stock issuable upon exercise of the
Company’s Class A Warrants. Sanjay Motwani has voting and
dispositive power over the
shares.
|
(10)
|
Includes
250,000 shares of common stock issuable to
Ephraim
Fields
upon
conversion of $50,000 aggregate principal amount of the Company’s Notes
and 125,000 shares of common stock issuable upon exercise of the
Company’s
Class A Warrants.
|
(11)
|
Includes
9,000,000 shares of common stock issuable to
Hua-Mei
21
st
Century Partners, LP
upon
conversion of $1,800,000 aggregate principal amount of the Company’s Notes
and 4,500,000 shares of common stock issuable upon exercise of
the
Company’s Class A Warrants. Peter Siris and Leigh S. Curry have voting
and
dispositive power over the
shares.
|
(12)
|
Includes
4,375,000 shares of common stock issuable to
Guerilla
Partners, LP
upon
conversion of $875,000 aggregate principal amount of the Company’s Notes
and 2,187,500 shares of common stock issuable upon exercise of
the
Company’s Class A Warrants. Peter Siris and Leigh S. Curry have voting
and
dispositive power over the
shares.
|
(13)
|
Includes
125,000 shares of common stock issuable to
Guerilla
IRA Partners, LP
upon
conversion of $25,000 aggregate principal amount of the Company’s Notes
and 62,500 shares of common stock issuable upon exercise of the
Company’s
Class A Warrants. Peter Siris and Leigh S. Curry have voting and
dispositive power over the
shares.
|
(14)
|
Includes
2,500,000 shares of common stock issuable to
Excalibur
Special Opportunities, LP
upon
conversion of $500,000 aggregate principal amount of the Company’s Notes
and 1,250,000 shares of common stock issuable upon exercise of
the
Company’s Class A Warrants. William Hechter has voting and dispositive
power over the shares.
|
(15)
|
Includes
1,250,000 shares of common stock issuable to
Whalehaven
Capital Fund Ltd.
upon
conversion of $250,000 aggregate principal amount of the Company’s Notes
and 625,000 shares of common stock issuable upon exercise of the
Company’s
Class A Warrants. Arthur Jones, Trevor Williams and Brian Mazzella
have
voting and dispositive power over the
shares.
|
PLAN
OF DISTRIBUTION
The
Selling Stockholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of Common Stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed or negotiated prices. The Selling Stockholders may use any
one
or more of the following methods when selling shares:
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits Investors;
|
·
|
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;
|
·
|
to
cover short sales made after the date that this Registration Statement
is
declared effective by the Commission;
|
·
|
broker-dealers
may agree with the Selling Stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
·
|
a
combination of any such methods of sale;
and
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
Selling Stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
Selling Stockholders may from time to time pledge or grant a security interest
in some or all of the Notes owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of Common Stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as selling stockholders under this prospectus.
Upon
the
Company being notified in writing by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Common
Stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to
this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and
of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of Common Stock were sold, (iv)the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference
in
this prospectus, and (vi) other facts material to the transaction. In addition,
upon the Company being notified in writing by a Selling Stockholder that a
donee
or pledgee intends to sell more than 500 shares of Common Stock, a supplement
to
this prospectus will be filed if then required in accordance with applicable
securities law.
The
Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
Selling Stockholders 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 in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the Selling Stockholder and/or the purchasers. Each
Selling Stockholder has represented and warranted to the Company that it
acquired the securities subject to this Registration Statement in the ordinary
course of such Selling Stockholder’s business and, at the time of its purchase
of such securities such Selling Stockholder had no agreements or understandings,
directly or indirectly, with any person to distribute any such securities.
The
Company has advised each Selling Stockholder that it may not use shares
registered on this Registration Statement to cover short sales of Common Stock
made prior to the date on which this Registration Statement shall have been
declared effective by the Commission. If a Selling Stockholder uses this
prospectus for any sale of the Common Stock, it will be subject to the
prospectus delivery requirements of the Securities Act. The Selling Stockholders
will be responsible to comply with the applicable provisions of the Securities
Act and Exchange Act, and the rules and regulations thereunder promulgated,
including, without limitation, Regulation M, as applicable to such Selling
Stockholders in connection with resales of their respective shares under this
Registration Statement.
The
Company is required to pay all fees and expenses incident to the registration
of
the shares, but the Company will not receive any proceeds from the sale of
the
Common Stock. The Company has agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The
following information should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this
report.
Company
Overview
We
were
originally incorporated on August 15, 2001 in the State of Florida under the
name Genesis Technology Group, Inc. On October 12, 2001, we consummated a merger
with NewAgeCities.com, an Idaho public corporation originally formed in 1969.
We
were the surviving entity after the merger with the Idaho public corporation.
On
October 1, 2007, we completed a share exchange transaction by and among us,
Karmoya International Ltd., a British Virgin Islands company (“Karmoya”), and
Karmoya’s shareholders. As a result of the share exchange transaction, Karmoya,
a company which was established as a “special purpose vehicle” for the foreign
capital raising activities of its Chinese subsidiaries, became our wholly owned
subsidiary and our new operating business. Karmoya was incorporated under the
laws of the British Virgin Islands on July 17, 2007 and owns 100% of the capital
stock of Union Well International Limited, a Cayman Islands company (“Union
Well”). Karmoya conducts its business operations through Union Well’s wholly
owned subsidiary, Genesis Jiangbo (Laiyang) Biotech Technology Co., Ltd.
(“GJBT”). GJBT was incorporated under the laws of the People’s Republic of China
("PRC") on September 16, 2007 and registered as a wholly foreign owned
enterprise (WOFE) on September 19, 2007. GJBT has entered into consulting
service agreements and equity-related agreements with Laiyang Jiangbo
Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability company
incorporated on August 18, 2003.
As
a
result of the share exchange transaction, our primary operations consist of
the
business and operations of Karmoya and its subsidiaries, which are conducted
by
Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide.
Basis
of Presentation
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) and the requirements of
Regulation S-X promulgated by the SEC. These accounting principles require
us to
make certain estimates, judgments and assumptions. We believe that the
estimates, judgments and assumptions upon which we rely are reasonable based
upon information available to us at the time that these estimates, judgments
and
assumptions are made. These estimates, judgments and assumptions can affect
the
reported amounts of assets and liabilities as of the date of the financial
statements as well as the reported amounts of revenues and expenses during
the
periods presented. Our financial statements would be affected to the extent
there are material differences between these estimates and actual results.
In
many cases, the accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management’s judgment in its application.
There are also areas in which management’s judgment in selecting any available
alternative would not produce a materially different result.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A
summary
of significant accounting policies is included in Note 2 to the audited
consolidated financial statements included in this Form S-1. Management believes
that the application of these policies on a consistent basis enables us to
provide useful and reliable financial information about the company's operating
results and financial condition.
Use
of Estimates
The
preparation of our consolidated financial statements requires us 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 as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates
and
assumptions. We base our estimates on historical experience and on various
other
factors that we believe are reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying value of assets
and
liabilities that are not readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or conditions.
Significant estimates in 2008, 2007 and 2006 include the allowance for doubtful
accounts, the allowance for obsolete inventory, the useful life of property
and
equipment and intangible assets, and accruals for taxes due.
Inventories
Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average method.
The Company reviews its inventory periodically for possible obsolete goods
or to
determine if any reserves are necessary.
Marketable
Securities
Marketable
equity securities consist of investments in equity of publicly traded and
non-public domestic companies and are stated at market value based on the most
recently traded price of these securities at the balance sheet dates. Marketable
securities are classified as trading and available for sale securities at
balance sheet dates. Realized and unrealized gains and losses on trading
securities are included in earnings. Unrealized gains and losses on available
for sale securities, determined by the difference between historical purchase
price and the market value at each balance sheet date, are recorded as a
component of Accumulated Other Comprehensive Income in Stockholders' Equity.
Realized gains and losses are determined by the difference between historical
purchase price and gross proceeds received when the marketable securities are
sold. Realized gains or losses on the sale or exchange of equity securities
and
declines in value judged to be other than temporary are recorded in gains
(losses) on equity securities, net. Marketable equity securities are presumed
to
be impaired if the fair value is less than the cost basis continuously for
three
consecutive quarters, absent evidence to the contrary.
Our
investment impairment analysis generally included analysis of several factors,
including:
1.
Discussions
with each company's respective management to review the status of key internally
established development milestones. As a result of our strategic alliance with
partner companies, we regularly had access to information regarding technology
developments and business initiatives that was generally not available to the
investor community.
2.
Our
knowledge of partner company's activities relating to new agreements, new
investor funding and milestone achievements.
3.
Our
review of financial position, primarily the cash resources and operating cash
flow, to determine if cash levels were sufficient to continue to fund projected
operations and ongoing technology development.
Additionally,
we consider EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-01"). According
to EITF 03-01, a security is impaired when its fair value is less than its
carrying value, and an impairment is other than- temporary if the investor
does
not have the "ability and intent" to hold the investment until a forecasted
recovery of its carrying amount. EITF 03-01 holds that the impairment of each
security must be assessed using the ability-and-intent-to-hold criterion
regardless of the severity or amount of the impairment. We intend to hold its
investment in marketable securities for a period of time sufficient to allow
for
any anticipated recovery in market value.
Paragraph
16 of SFAS 115 and SAB Topic 5M provide that numerous factors must be
considered, including the following, in determining whether a decline in value
requires a write-down to a new cost basis for an individual security, which
we
consider:
|
·
|
The
length of time and extent to which the market value has been less
than
cost;
|
|
·
|
The
financial condition and near-term prospects of the issuer, including
any
specific events that may influence the operations of the issuer (e.g.,
changes in technology, or the planned discontinuance of a line of
business); and
|
|
·
|
The
intent and ability of the holder to retain its investment in the
issuer
for a period of time sufficient to allow for any anticipated recovery
in
market value.
|
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the SEC’s (SEC) Staff Accounting Bulletin (SAB)
No. 101, “
Revenue
Recognition in Financial Statements
”
as
amended by SAB No. 104 (together, “SAB 104”), and Statement of
Financial Accounting Standards (SFAS) No. 48 “
Revenue
Recognition When Right of Return Exists
.”
SAB 104 states that revenue should not be recognized until it is
realized or realizable and earned. In general, the Company records revenue
when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured.
The
Company is generally not contractually obligated to accept returns. However,
on
a case-by-case negotiated basis, the Company permits customers to return their
products. In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 48, “Revenue Recognition when the Right of Return Exists,” revenue
is recorded net of an allowance for estimated returns. Such reserves are based
upon management's evaluation of historical experience and estimated costs.
The
amount of the reserves ultimately required could differ materially in the near
term from amounts included in the consolidated financial
statements.
Variable
Interest Entities
Pursuant
to Financial Accounting Standards Board Interpretation No. 46 (Revised),
“Consolidation of Variable Interest Entities - an Interpretation of ARB No.
51”
(“FIN 46R”) we are required to include in our consolidated financial statements
the financial statements of variable interest entities. FIN 46R requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss for the variable interest entity
or is
entitled to receive a majority of the variable interest entity’s residual
returns. Variable interest entities are those entities in which we, through
contractual arrangements, bear the risk of, and enjoy the rewards normally
associated with ownership of the entity, and therefore we are the primary
beneficiary of the entity.
The
accounts of Laiyang Jiangbo are consolidated in the accompanying financial
statements pursuant to FIN 46R. As a VIE, Laiyang Jiangbo sales are included
in
our total sales, its income from operations is consolidated with our, and our
net income includes all of Laiyang Jiangbo net income. We do not have any
non-controlling interest and accordingly, did not subtract any net income in
calculating the net income attributable to us. Because of the contractual
arrangements, we have pecuniary interest in Laiyang Jiangbo that require
consolidation of our financial statements and Laiyang Jiangbo financial
statements.
Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair
Value Measurements
”
(SFAS 157), which provides guidance for how companies should measure fair
value when required to use a fair value measurement for recognition or
disclosure purposes under generally accepted accounting principle (GAAP).
SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently assessing the impact, if any, the adoption of
SFAS 157 will have on its financial statements.
In
December 2006, FASB Staff Position No. EITF 00-19-2, “
Accounting
for Registration Payment Arrangements
,”
was
issued. The FSP specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured
in
accordance with SFAS No. 5, “
Accounting
for Contingencies
.”
The
Company believes that its current accounting is consistent with the FSP.
Accordingly, adoption of the FSP had no effect on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “
The
Fair Value Option for Financial Assets and Financial
Liabilities
,
Including an Amendment of FASB Statement No. 115,
”
under
which entities will now be permitted to measure many financial instruments
and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This Statement is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if
any, the adoption of SFAS 159 will have on its financial statements.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed. The
Company is currently evaluating the effect of this pronouncement on financial
statements.
In
December 2007, the FASB issued SFAS 141(R),“Business Combinations”, which
replaces SFAS 141. SFAS No. 141(R) establishes principles and requirements
for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008. The adoption
of
SFAS 141(R) will have an impact on accounting for business combinations once
adopted, but the effect is dependent upon acquisitions at that
time.
In
December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary
is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between
the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The Company
has not determined the effect that the application of SFAS 160 will have on
its
consolidated financial statements.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS 161”),
which changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a)
how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company has not
determined the effect of the application of SFAS 161 on its consolidated
financial statements.
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in
the United States (the GAAP hierarchy). This Statement will not have and impact
on the Company’s financial statements.
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of
FASB
Statement No. 60
.”
The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does
not
apply to financial guarantee contracts issued by enterprises excluded from
the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such
as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of
FASB
Statement No. 133
,
“Accounting for Derivative Instruments and Hedging Activities.” This Statement
will not have and impact on the Company’s financial statements
.
RESULTS
OF OPERATIONS
Comparison
of nine months and three months ended March 31, 2008 and
2007
The
following table sets forth the results of our operations for the periods
indicated (unaudited):
|
|
Three
Months Ended
|
|
Nine Months
Ended
|
|
|
|
March
31,
|
|
March
31
|
|
|
|
2008
|
|
2007
|
|
Change $
|
|
Change %
|
|
2008
|
|
2007
|
|
Change $
|
|
Change %
|
|
Change %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
26,231,191
|
|
$
|
18,472,649
|
|
$
|
7,758,542
|
|
|
42
|
%
|
$
|
66,648,051
|
|
$
|
52,876,082
|
|
$
|
13,771,969
|
|
|
26.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES-
RELATED PARTIES
|
|
|
1,869,092
|
|
|
455,580
|
|
|
1,413,512
|
|
|
310.27
|
%
|
|
4,611,849
|
|
|
2,963,871
|
|
|
1,647,978
|
|
|
55.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
6,337,822
|
|
|
5,388,811
|
|
|
949,011
|
|
|
17.61
|
%
|
|
17,744,379
|
|
|
15,724,047
|
|
|
2,020,332
|
|
|
12.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
21,762,461
|
|
|
13,539,418
|
|
|
8,223,043
|
|
|
60.73
|
%
|
|
53,515,521
|
|
|
40,115,906
|
|
|
13,399,615
|
|
|
33.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
967,930
|
|
|
953,560
|
|
|
14,370
|
|
|
1.51
|
%
|
|
2,170,240
|
|
|
10,441,060
|
|
|
(8,270,820
|
)
|
|
(79.21
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
12,136,164
|
|
|
9,658,803
|
|
|
2,477,361
|
|
|
25.65
|
%
|
|
29,269,330
|
|
|
18,491,304
|
|
|
10,778,026
|
|
|
58.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
8,658,367
|
|
|
2,927,055
|
|
|
5,731,312
|
|
|
195.8
|
%
|
|
22,075,951
|
|
|
11,183,542
|
|
|
10,892,409
|
|
|
97.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
1,972,269
|
|
|
80,457
|
|
|
1,891,812
|
|
|
2351.33
|
%
|
|
2,404,038
|
|
|
210,313
|
|
|
2,193,725
|
|
|
1043.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
6,686,098
|
|
|
2,846,598
|
|
|
3,839,500
|
|
|
134.88
|
%
|
|
19,671,913
|
|
|
10,973,229
|
|
|
8,698,684
|
|
|
79.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,211,265
|
|
|
970,025
|
|
|
1,241,240
|
|
|
127.96
|
%
|
|
6,808,625
|
|
|
3,567,857
|
|
|
3,240,768
|
|
|
90.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
4,474,833
|
|
|
1,876,573
|
|
|
2,598,260
|
|
|
138.46
|
%
|
|
12,863,288
|
|
|
7,405,372
|
|
|
5,457,916
|
|
|
73.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
1,690,597
|
|
|
368,537
|
|
|
1,322,060
|
|
|
358.73
|
%
|
|
4,776,631
|
|
|
673,047
|
|
|
4,103,584
|
|
|
609.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
6,165,430
|
|
|
2,245,110
|
|
|
3,920,320
|
|
|
174.62
|
%
|
|
17,639,919
|
|
|
8,078,419
|
|
|
9,561,500
|
|
|
118.36
|
%
|
Revenues
.
During
the nine months ended March 31, 2008, we had revenues of $71,259,900 as compared
to revenues of $55,839,953 for the nine months ended March 31, 2007, an increase
of $15,419,947 or approximately 27.61%. Our revenues include sales to related
parties of $4,611,849 as compared to $2,963,871for the nine months ended March
31, 2007, an increase of $1,647,978 or approximately 55.60%. For the three
months ended March 31, 2008, we had revenues of $28,100,283 as compared to
revenues of $18,928,229 for the three months ended March 31, 2007, and increase
of $9,172,054 or 48.46%. For the three months ended March 31, 2008, we had
revenues from related parties sales of $1,869,092 as compared to $455,580 for
the three months ended March 31, 2007, an increase of $1,413,512 or 310.27%.
The
overall increase in total revenue in the third quarter and the nine months
of
fiscal 2008 was primarily attributable to the increase of sales volume of our
best selling products: Clarithromycin sustained-release tablets and Itopride
Hydrochloride Granules. Additionally, we released a new product, Baobaole
chewable tablets in the second quarter of fiscal 2008. We believe that our
sales
will continue to grow as we continue strengthening our sales force, enhancing
our brand name recognition and improving the quality of our
products.
Cost
of Sales
.
Cost of
sales for the nine months ended March 31, 2008 increased $2,020,332 or 12.85%,
from $ 15,724,047 for the nine months ended March 31, 2007 to $17,744,379 for
the nine months ended March 31, 2008. Cost of sales for the three months ended
March 31, 2008 increased $949,011 or 17.61% from $5,388,811 for the three months
ended March 31, 2007 to $6,337,822 for the three months ended March 31, 2008.
The decrease in cost of sales as a percentage of net revenues for the nine
months ended March 31, 2008, approximately 24.90% as compared to the nine months
ended March 31, 2007, approximately 28.16%, and the decrease in cost of sales
as
a percentage of net revenue for the three months ended March 31, 2008,
approximately 22.55% as compared to the three months ended March 31, 2007
approximately 28.47%, was primarily attributable to our ability to better manage
raw material purchase prices, the high margin on the new product Baobaole
chewable tables, more sales being generated from products with higher profit
margins and more efficient production.
Gross
Profit
.
Gross
profit was $53,515,521 for the nine months ended March 31, 2008 as compared
to
$40,115,906 for the nine months ended March 31, 2007, representing gross margins
of approximately 75.10% and 71.84%, respectively. Gross profit was $21,762,461
for the three months ended March 31, 2008 as compared to $13,539,418 for the
three months ended March 31, 2007, representing gross margins of approximately
77.45% and 71.53%, respectively. The increase in our gross profits was mainly
due to decrease in cost of sales as a percentage of net revenue as we better
managed raw material purchase prices and our product sales mixture to generate
more sales from products with higher profit margins.
Selling,
General and Administrative Expenses
.
Selling, general and administrative expenses totaled $29,269,330 for the nine
months ended March 31, 2008, as compared to $ 18,491,304 for the nine months
ended March 31, 2007, an increase of $10,778,026 or approximately 58.29%.
Selling, general and administrative expenses totaled $12,136,164 for the three
months ended March 31, 2008, as compared to $ 9,658,803 for the three months
ended March 31, 2007, an increase of $2,477,361 or approximately 25.65% as
summarized below (Unaudited):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
March 31,
2008
|
|
March 31,
2007
|
|
March 31,
2008
|
|
March 31,
2007
|
|
Advertisement,
marketing and promotion
|
|
$
|
6,969,491
|
|
$
|
7,295,921
|
|
$
|
19,483,894
|
|
$
|
13,884,825
|
|
Travel
and entertainment—
sales
related
|
|
|
96,519
|
|
|
9,265
|
|
|
404,321
|
|
|
306,501
|
|
Depreciation
and amortization
|
|
|
126,866
|
|
|
80,527
|
|
|
311,471
|
|
|
174,931
|
|
Shipping
and handling
|
|
|
106,116
|
|
|
69,833
|
|
|
253,366
|
|
|
209,667
|
|
Salaries,
wages, commissions and related benefits
|
|
|
4,577,685
|
|
|
2,160,925
|
|
|
7,255,133
|
|
|
2,916,535
|
|
Travel
and entertainment—
non
sales related
|
|
|
58,263
|
|
|
4,958
|
|
|
214,589
|
|
|
18,471
|
|
Other
|
|
|
201,224
|
|
|
37,374
|
|
|
1,346,556
|
|
|
980,374
|
|
Total
|
|
$
|
12,136,164
|
|
$
|
9,658,803
|
|
$
|
29,269,330
|
|
$
|
18,491,304
|
|
The
changes in these expenses during the nine months and three months ended March
31, 2008, as compared to the corresponding period in 2007 included the
following:
|
·
|
An
increase of $5,599,069 or approximately 40.33% in advertisement,
marketing
and promotion spending for the nine months ended March 31, 2008 and
an
decrease of $326,430 or approximately 4.47% for the three months
ended
March 31, 2008 as compared to the corresponding period in fiscal
2007 were
primarily due to TV commercials and magazine advertisements expenses
to
establish our Baobaole Chewable tablets brand name. Additionally,
we also
increase our marketing and promotional activities to promote our
two other
best selling products.
|
|
·
|
Travel
and entertainment -sales related expenses increased by $97,820 or
approximately 31.92% for the nine months ended March 31, 2008 and
$87,254
or approximately 941.76% for the three months ended March 31, 2008
as
compared to the corresponding period in fiscal 2007 was primarily
due to
our marketing and sales travel related activities related to promoting
our
Baobole Chewable tablets and establishing the distribution network
for the
product.
|
|
·
|
Shipping
and handling expenses increased by $43,699 or approximately 20.84%
for the
nine months ended March 31, 2008 and $36,283 or 51.96% for the three
months ended March 31, 2008 as compared to the corresponding period
of
fiscal 2007, primarily because increase in sales volume in fiscal
year
2008.
|
|
·
|
Depreciation
and amortization increased by $136,540 or 78.05% for the nine months
ended
March 31, 2008 and $46,339 for the three months ended March 31, 2008
as
compared to the corresponding period of fiscal 2007, primarily due
to
additional amortization expenses on the new patent obtained in late
fiscal
2007 and additional land use right obtained in the 3
rd
quarter of fiscal 2008.
|
|
·
|
Salaries,
wages, commissions and related benefits increased by $4,338,598 or
148.76%
for the nine months ended March 31, 2008 and $2,416,760 for the three
months ended March 31, 2008 as compared to the corresponding period
of
fiscal 2007. The increases were primarily due to increase in commission
payments to sales representatives as well as an increase in number
of
employees and sales representatives as a result of expanding our
distribution network from 26 provinces and regions to 30 provinces
and
regions in fiscal 2008.
|
|
·
|
An
increase of $196,118 or approximately 1061.76% in travel and entertainment
-non sales related expenses for the nine months ended March 31, 2008
and
$53,305 or 1075.13% for the three months ended March 31, 2007 were
primarily due to increase in corporate executives’ and managers’ travel
related to public company related activities.
|
|
·
|
Other
selling, general and administrative expenses, which includes professional
fees, utilities, office supplies and expenses increased by $366,182
or
37.35% for the nine months ended March 31, 2008 and increased by
$163,850
or 438.41% for the three months ended March 31, 2008 as compared
to the
corresponding period in fiscal 2008 primarily due to more professional
fees and other miscellaneous expense in fiscal 2008.
|
Research
and Development Costs
.
Research and development costs, which consist of cost of material used and
salaries paid for the development of the Company’s products and fees paid to
third parties, totaled $2,170,240 for the nine months ended March 31, 2008,
as
compared to $10,441,060 for the nine months ended March 31, 2007, a decrease
of
$8,270,820 or approximately 79.21%. Research and development costs totaled
$967,930 for the three months ended March 31, 2008, as compared to $953,560
for
the three months ended March 31, 2007, an increase of $14,370 or approximately
1.51%. The significant decrease in research and development expenses for the
nine months ended March 31, 2008 was mainly due to major spending on a research
and development project conducted as well as payments for new drug clinical
trials and project expenses in the second quarter of fiscal 2007. The Company
completed several research and development projects in fiscal 2007 and those
drugs are currently in the final process of being approved from the Chinese
SFDA.
Other
Expenses
.
Our
other expenses consisted of financial expenses and non-operating expenses.
We
had other expenses of $2,404,038 for the nine months ended March 31, 2008 as
compared to other expenses $210,313for the nine months ended March 31, 2007,
an
increase of $2,193,725or approximately 1043.08%. For the three months ended
March 31, 2008, we had other expense of $1,972,269 as compared to $80,457 for
the three months ended March 31, 2007, an increase of $1,891,812 or 2351.33%.
The increase in other expenses was mainly due to unrealized loss on trading
securities, amortization of the debt discount on convertible debenture created
by the intrinsic value of the beneficial conversion feature in the debt and
the
fair value of the warrants issued in conjunction with the debt as well as loss
from discontinued operation. Amortization expense on debt discount amounted
to
$671,296 for the nine months and $416,666 for three months ended March 31,
2008
and the amortization of debt issuance cost amounted to $47,583 for the nine
months and $29,534 three months ended March 31, 2008.
Net
Income income
.
Our net
income for the nine months ended March 31, 2008 was $12,863,288 as compared
to
$7,405,372for the nine months ended March 31, 2007, an increase of $5,457,916
or
73.70%. The net income for the three months ended March 31, 2008 was
$4,474,833as compared to $1,876,573 for the three months ended March 31, 2007,
an increase of $2,598,260 or 138.46%. The increase in net income is primarily
attributable to increase in sales volume of our best selling products, as well
as improved profit margin. Our management believes that net income will continue
to improve as we will continue to offer better and more products and improve
our
manufacturing efficiency.
Comparison
of Years Ended June 30, 2007, 2006 and 2005
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales:
|
|
Year
Ended June 30,
|
|
%
of
|
|
Year
Ended June 30,
|
|
%
of
|
|
Year
Ended June 30,
|
|
%
of
|
|
|
|
2007
|
|
Revenue
|
|
2006
|
|
Revenue
|
|
2005
|
|
Revenue
|
|
SALES
|
|
$
|
72,259,812
|
|
|
94.84
|
%
|
$
|
45,242,987
|
|
|
92.04
|
%
|
$
|
10,852,106
|
|
|
85.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES—RELATED
PARTIES
|
|
|
3,933,881
|
|
|
5.16
|
%
|
|
3,913,452
|
|
|
7.96
|
%
|
|
1,899,266
|
|
|
14.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
21,161,530
|
|
|
27.77
|
%
|
|
15,686,233
|
|
|
31.91
|
%
|
|
8,771,942
|
|
|
68.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
55,032,163
|
|
|
72.23
|
%
|
|
33,470,206
|
|
|
68.09
|
%
|
|
39,79,430
|
|
|
31.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
25,579,361
|
|
|
33.57
|
%
|
|
7,894,672
|
|
|
16.06
|
%
|
|
1,689,004
|
|
|
13.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
11,143,830
|
|
|
14.63
|
%
|
|
13,642,200
|
|
|
27.75
|
%
|
|
1,240,252
|
|
|
9.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
18,308,972
|
|
|
24.03
|
%
|
|
11,933,334
|
|
|
24.28
|
%
|
|
1,050,174
|
|
|
8.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSES
|
|
|
(6,375,340
|
)
|
|
(8.37
|
)%
|
|
386,816
|
|
|
0.79
|
%
|
|
253,319
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
24,684,312
|
|
|
32.40
|
%
|
|
11,546,518
|
|
|
23.49
|
%
|
|
796,855
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,631,256
|
|
|
3.45
|
%
|
|
3,810,351
|
|
|
7.75
|
%
|
|
262,962
|
|
|
2.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
22,053,056
|
|
|
28.94
|
%
|
|
7,736,167
|
|
|
15.74
|
%
|
|
533,893
|
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
Foreign
currency translation adjustment
|
|
|
1,018,130
|
|
|
1.34
|
%
|
|
128,311
|
|
|
0.26
|
%
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
23,071,186
|
|
|
30.28
|
%
|
|
7,864,478
|
|
|
16.00
|
%
|
|
533,893
|
|
|
4.19
|
%
|
Comparison
of Years Ended June 30, 2007 and 2006
Revenues
.
Our
revenues include sales to third parties and to related parties of $72,259,812
and $3,933,881, respectively for the year ended June 30, 2007. During the year
ended June 30, 2007, we had revenues from sales of $72,259,812 as compared
to
$45,242,987 for the year ended June 30, 2006, an increase of approximately
59.71%. During the year ended June 30, 2007, we had sales to a related parties
of $3,933,881 as compared to $3,913,452 for the year ended June 30, 2006, an
increase of approximately 0.52%. These increases are attributable to continued
strong sales of our best selling products, Ciprloxacin Hydrochloride tablets,
and Paracetamol tablets. We believe that our sales will continue to grow because
we are strengthening our sales force, improving the quality of our products
and
continuing developing new products that will be well accepted in the market.
Cost
of Revenues
.
Cost of
revenues for 2007 increased $5,475,297 or 34.91%, from $15,686,233 for the
year
ended June 30, 2006 to $21,161,530 for the year ended June 30, 2007. The
decrease in cost of revenue as a percentage of net revenues for the year ended
June 30, 2006, approximately 27.77% as compared to the year ended June 30,
2006,
approximately 31.91%, was attributable to our better control on the raw material
purchase prices and more efficient manufacturing production.
Gross
Profit
.
Gross
profit was $55,032,163 for the year ended June 30, 2007 as compared to
$33,470,206 for the year ended June 30, 2006, representing gross margins of
approximately 72.23% and 68.09%, respectively. The increase in our gross profits
was mainly due to strong product sale and decrease in cost of revenue as a
percentage of net revenue.
Selling,
General and Administrative Expenses
.
Selling, general and administrative expenses totaled $25,579,361for the year
ended June 30, 2007, as compared to $7,894,672 for the year ended June 30,
2006,
an increase of approximately 224.01%. This increase is primarily attributable
to
increase in product advertisement, marketing and promotion spending.
Additionally, the travel and entertainment expenses were also increased due
to
increased sales related travel and entertainment in 2007.
Research
and Development Costs
.
Research and development costs, which consist of cost of material used and
salaries paid for the development of the Company’s products and fees paid to
third parties, totaled $11,143,830 for the year ended June 30, 2007, as compared
to $13,642,200 for the year ended June 30, 2006, an decrease of approximately
18.31%. The decrease was mainly because we conducted fewer product development
projects in 2007.
Other
(Income) Expenses
.
Our
other (income) expenses consisted of corporate income tax and valued added
tax
exemption from the government, financial expenses and non-operating expenses.
We
had other income of $6,375,340 for the year ended June 30, 2007 as compared
to
other expense $386,816 for the year ended June 30, 2006, an decrease of
approximately 1748.16%. The decrease in other expenses is mainly due to
receiving of corporate income tax and value added tax exemption from the
government.
Net
Income
.
Our net
income for the year ended June 30, 2007 was $22,053,056 as compared to
$7,736,167 for the year ended June 30, 2006. The increase in net income is
attributable to increased sales volume, lower average costs as well as
government income tax and value added tax exemption. Our management believes
that net income will continue to increase because we will continue to offer
better and more products and improve our manufacturing efficiency.
Comparison
of Years Ended June 30, 2006 and 2005
Revenues
.
Our
revenues include sales to third parties and to related parties of
$45,242,987 and $3,913,452, respectively for the year ended June 30, 2006.
During the year ended June 30, 2006, we had revenues from sales to third parties
of $45,242,987 as compared to sales of $10,852,106 for the year ended June
30,
2005, an increase of approximately 316.91%. During the year ended June 30,
2006,
we had revenues from sales to related parties of $3,913,452 as compared to
$1,899,266 for the year ended June 30, 2005, an increase of approximately
106.05%. These increases are attributable to continued strong sales of our
best
selling products, Ciprloxacin Hydrochloride tablets, and Paracetamol tablets.
Cost
of Revenues
.
Cost of
revenues for 2006 increased by $6,914,291or 78.82%, from $8,771,942 for the
year
ended June 30, 2005 to $15,686,233 for the year ended June 30, 2006. The
decrease in cost of revenue as a percentage of total revenues for the year
ended
June 30, 2006, approximately 31.91% as compared to the year ended June 30,
2005,
approximately 68.79%, was attributable to lower material costs and better and
more efficient manufacturing production.
Gross
Profit
.
Gross
profit was $33,470,206 for the year ended June 30, 2006 as compared to
$3,979,430 for the year ended June 30, 2005, representing gross margins of
approximately 68.09% and 31.21%, respectively. The increase in our gross profits
was mainly due to strong product sale and decrease in cost of revenue as a
percentage of net revenue.
Selling,
General and Administrative Expenses
.
Selling, general and administrative expenses totaled $7,894,672 for the year
ended June 30, 2006, as compared to $1,689,004 for the year ended June 30,
2005,
an increase of approximately 367.42%. This increase is primarily attributable
to
increase in product advertisement, marketing and promotion spending.
Additionally, the travel and entertainment expenses were also increased due
to
increased sales related travel and entertainment in 2007.
Research
and Development Costs
.
Research and development costs, which consist of cost of material used and
salaries paid for the development of the Company’s products and fees paid to
third parties, totaled $13,642,200 for the year ended June 30, 2006, as compared
to $1,240,252 for the year ended June 30, 2005, an increase of approximately
999.95%. The increase was mainly because we conducted fewer product development
projects and the average spending on each project was higher in
2006.
Other
(Income) Expenses
.
Our
other (income) expenses consisted of corporate income tax and valued added
tax
exemption from the government, financial expenses and non-operating expenses.
We
had other expense of $386,816 for the year ended June 30, 2006 as compared
to
other expense of $253,319 for the year ended June 30, 2005, an increase of
approximately 52.70%. The increase in other expenses was mainly due to high
interest expenses in 2006.
Net
Income
.
Our net
income for the year ended June 30, 2006 was $7,736,167 as compared to $533,893
for the year ended June 30, 2005. The increase in net income is attributable
to
largely increased sales volume and lower average costs.
LIQUIDITY
AND CAPITAL RESOURCES
Our
working capital position increased $14,761,942 to $30,759,382 at March 31,
2008
from $15,997,440 at June 30, 2007. This increase in working capital is primarily
attributable to an increase in cash balance of $3.8 million primarily due to
the
receipt of proceeds from our November 2007 financing which amounted to $5
million, an increase in marketable equity securities of approximately $2.1
million obtained from the October 1, 2007 reverse merger, an increase in
accounts receivable of approximately $8.8 million due to increase in sales,
an
increase in accounts receivable-related parties of approximately $1.5
million, a decrease in notes payable of $4.9 million, a decrease in
other payable-related parties of $1 million, and a payment of dividend of
$10.5 million, and offset by a decrease in restricted cash of $4.9 million,
an
increase in accounts payable of $1.4 million, an increase in other payable
of
$2.4 million, an increase in liabilities assumed from reorganization of $1.4
million and an increase in taxes payable of $10.5 million.
Net
cash
provided in operating activities for the nine months ended March 31, 2008 was
$17,697,452 as compared to net cash provided by operating activities of
$4,283,404 for the nine months ended March 31, 2007. For the nine months ended
March 31, 2008, net cash provided in operating activities was primarily
attributable to income from continued operations of $13.2 million, increase
in
accounts payable of $1.2 million, increase in other payable of $2.1 million,
and
increase in taxes payable of $10 million, offset by increase in our accounts
receivable and accounts receivable-related parties of $8.6 million as a result
of increase in sales, and increase in liabilities assumed from reorganization
of
$1.2 million. For the nine months ended March 31, 2007, net cash provided by
operating activities was attributable primarily to our net income of $7.4
million, decrease in inventories of $1.1 million, decrease in our other assets
of $1.3 million and increase in our tax payable of $2 million and offset by
increases in our accounts receivable and accounts receivable-related parties
of
$3.5 million, decrease in accounts payable of $2.3 million, and decrease in
other payable and other payable-related parties of $ 1.9 million.
Net
cash
used by investing activities for the nine months ended March 31, 2008 was
$7,507,300 attributable to payments on land use rights of $8.2 million and
purchases of equipments of $0.4 million and offset by cash acquired in reverse
merger of $0.5 million and proceeds from the sale of marketable securities
totaling $0.6 million. Net cash used in investing activities for the nine months
ended March 31, 2007 amounted to $58,469 which attributable to purchases of
equipment.
Net
cash
used in financing activities was $7,678,043 for the nine months ended March
31,
2008 and was primarily attributable to payments on debt issuance cost of $0.4
million, payments on dividend payable of $10.5 million, payments for bank loans
of $5.4 million and a decrease in notes payable of $5.4 million and offset
by
proceeds from bank loans of $3.3 million, proceeds from issuance of convertible
debt of $5 million, and decrease in restricted cash of $5.4 million. Net cash
used in financing activities for the nine months ended March 31, 2007 amounted
to $1.3 million which attributable to payments for bank loans of $1.3 million
and decrease in notes payable of $0.7 million and offset by increase in
restricted cash of $0.7 million.
We
reported a net increase in cash for the nine months ended March 31, 2008 of
$3,836,836 as compared to a net increase in cash of $3,117,736 for the nine
months ended March 31, 2007.
On
November 6, 2007, the Company entered into a Securities Purchase Agreement
with
Pope Investments, LLC (“Pope”) pursuant to which the Company issued and sold to
Pope for $5,000,000 (a) 6% convertible subordinated debentures due November
30,
2010 and (b) a three-year warrant to purchase 10,000,000 shares of the Company’s
common stock, par value $0.001 per share, at an exercise price of $0.32 per
share, subject to adjustment as provided therein.
On
May
30, 2008, the Company entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”), with Karmoya International Ltd., a British
Virgin Islands company, Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
Ltd., a wholly owned foreign enterprise in the People’s Republic of China, Wubo
Cao (“Mr. Cao”) and the Selling Stockholders, pursuant to which, on May 30,
2008, the Company sold to the Selling Stockholders 6% convertible notes and
warrants to purchase shares of the Company’s common stock for the aggregate
amount of $30,000,000.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of March 31, 2008,
and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
Payments
Due by
Period
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years
+
|
|
|
|
In
Thousands
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Indebtedness
|
|
$
|
6,201,804
|
|
$
|
6,201,804
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Research
and Development Obligations
|
|
$
|
11,936,320
|
|
$
|
4,069,200
|
|
$
|
6,510,720
|
|
$
|
1,356,400
|
|
$
|
-
|
|
Purchase
Obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Total
Contractual Obligations:
|
|
$
|
18,138,124
|
|
$
|
10,271,004
|
|
$
|
6,510,720
|
|
$
|
1,356,400
|
|
$
|
-
|
|
Bank
Indebtedness amounts include the short term bank loans amount and notes payable
amount.
Off-balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered
into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest
in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest
in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Recent
Financings
May
2008 Financing
On
May
30, 2008, we entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”) with Karmoya, Genesis Jiangbo, Wubo Cao (“Mr Cao”) and
certain investors, pursuant to which, on May 30, 2008, we sold to investors
$30,000,000 principal amount of our 6% Notes and Class A Warrants to purchase
75,000,000 shares of our common stock, in transactions exempt from registration
under the Securities Act. We are using the net proceeds from May 2008 financing
for working capital purposes.
The
Notes
are due May 30, 2011 and are convertible into shares of our common stock at
a
conversion price equal to $0.20, subject to adjustment pursuant to customary
anti-dilution provisions and automatic downward adjustments in the event of
certain sales or issuances by us of common stock at a price per share less
than
$0.20. Interest on the outstanding principal balance of the notes is payable
at
the rate of 6% per annum, in semi-annual installments payable on November
30
th
and May
30
th
of each
year, with the first interest payment due on November 30, 2008. At any time
after the issuance of the Notes, any Investor may convert its Note, in whole
or
in part, into shares of our common stock, provided that such investor shall
not
effect any conversion if immediately after such conversion, such investor and
its affiliates would in the aggregate beneficially own more than 9.99% of the
our outstanding common stock. The Notes are convertible at our option if the
following four conditions are met: (i) effectiveness of a registration statement
with respect to the shares of our common stock underlying the notes and the
warrants; (ii) the VWAP of our common stock has been equal to or greater than
250% of the conversion price, as adjusted, for 20 consecutive trading days
on
its principal trading market; (iii) the average dollar trading volume of our
common stock exceeds $500,000 on its principal trading market for the same
20
days; and (iv) we achieve 2008 Guaranteed EBT (as hereinafter defined) and
2009
Guaranteed EBT (as hereinafter defined). A holder of a Note may require us
to
redeem all or a portion of such Note for cash at a redemption price as set
forth
in the Notes, in the event of a change in control of the company, an event
of
default or if any governmental agency in the PRC challenges or takes action
that
would adversely affect the transactions contemplated by the securities purchase
agreement.
In
connection with the May 2008 financing, we agreed, among other things, to
increase the number of authorized shares of our common stock to 900,000,000
by
no later than August 31, 2008, which increase became effective on August
19,
2008. We have also agreed that on and after November 30, 2008 neither we
nor any
of our subsidiaries will engage in any transactions (“Related Party
Transactions”) with any of Yantai Jiangbo Pharmaceuticals Co., Ltd. (“Yantai
Jiangbo”), Laiyang Jiangbo Medicals Co., Ltd. (“Laiyang Jiangbo”) and Laiyang
Jiangbo Western and Chinese Pharmacy Co., Ltd. (“Jiangbo Pharmacies”) (each, a
“Related Party” and collectively, the “Related Parties”) without the prior
written consent of Pope Investments LLC. As a precondition to the Company
or any
of our subsidiaries engaging in any Related Party Transaction, we will obtain,
from such Related Party, a commitment in writing that such Related Party
will,
at no time in the future, seek to enter the business of developing and
manufacturing drugs. During the period commencing on May 30, 2008 and ending
on
November 30, 2008, we (i) may continue to make sales to Yantai Jiangbo and
Laiyang Jiangbo, which sales shall constitute no more than 4% of our total
sales
in any fiscal quarter and (ii) shall provide to each investor no less frequently
than quarterly, receivables, payables and inventory reports which set forth
the
details of any transactions with Yantai Jiangbo and Laiyang Jiangbo that
have
occurred during such quarterly period. Notwithstanding the foregoing, we
may
continue to make sales to Jiangbo Pharmacies, which sales shall constitute
no
more than 2% of our total sales in any fiscal quarter. In connection therewith,
we have agreed to provide to each investor no less frequently than quarterly,
receivables, payables and inventory reports which set forth the details of
any
transactions with Jiangbo Pharmacies that have occurred during such quarterly
period.
The
Class
A Warrants are exercisable for a five-year period beginning on May 30, 2008
at
an initial exercise price of $0.25 per share.
In
connection with the May 2008 financing, we entered into a Holdback Escrow
Agreement dated as of May 30, 2008, with the investors and Loeb & Loeb LLP,
as escrow agent, pursuant to which $4,000,000 of the purchase price was
deposited into an escrow account with the escrow agent at the closing of
the
financing. Pursuant to the terms of the holdback escrow agreement, (i)
$2,000,000 of the escrowed funds will be released to us upon our satisfaction
no
later than 120 days following the closing of the financing of an obligation
that
our board of directors be comprised of at least five members (at least two
of
whom are to be fluent English speakers who possess necessary experience to
serve
as a director of a public company), a majority of whom will be independent
directors acceptable to Pope Investments LLC and (ii) $2,000,000 of the escrowed
funds will be released to us upon our satisfaction no later than six months
following the closing of the financing of an obligation to hire a full-time
chief financial officer acceptable to Pope who has experience as the chief
financial officer of a U.S. public company and who is a certified public
accountant, fluent in English and an expert in GAAP and auditing procedures
and
compliance for U.S. public companies. In the event that either or both of
these
obligations is not so satisfied, the applicable portion of the escrowed funds
will be released pro rata to the investors. On June 16, 2008, $2,000,000
of the
escrowed funds were released to us upon our hiring of Elsa Sung as our chief
financial officer. On July 18, 2008, we met our obligation relating to the
composition of our board of directors and on July 29, 2008, the remaining
escrowed funds were released to us.
In
connection with May 2008 financing, Mr. Cao, our chief executive officer and
chairman of the board, placed 150,000,000 shares of our common owned by him
into
an escrow account pursuant to a Make Good Escrow Agreement, dated as of May
30,
2008. In the event that either (i) our adjusted 2008 earnings before taxes
is
less than US$26,700,000 (“2008 Guaranteed EBT”) or (ii) our 2008 adjusted fully
diluted earnings before taxes per share is less than US$0.040 (“2008 Guaranteed
Diluted EBT”), 60,000,000 of such shares (the “2008 Make Good Shares”) are to be
released pro rata to the investors. In the event that either (i) our adjusted
2009 earnings before taxes is less than US$38,400,000 (“2009 Guaranteed EBT”) or
(ii) our adjusted fully diluted earnings before taxes per share is less than
US$0.058 (or US$0.056 if the 20,000,000 shares of common stock held in escrow
in
connection with the November 2007 financing have been released from
escrow)(“2009 Guaranteed Diluted EBT”), 90,000,000 of such shares (the “2009
Make Good Shares”) are to be released pro rata to the Investors. Should we
successfully satisfy these respective financial milestones, the 2008 Make Good
Shares and 2009 Make Good Shares will be returned to Mr. Cao. In addition,
Mr.
Cao is required to deliver shares of common stock owned by him to the investors
on a pro rata basis equal to the number of shares (the “Settlement Shares”)
required to satisfy all costs and expenses associated with the settlement of
all
legal and other matters pertaining to the Company prior to or in connection
with
the completion of the our October 2007 share exchange in accordance with
formulas set forth in the Securities Purchase Agreement.
In
connection with the May 2008 financing, we entered into a Registration Rights
Agreement dated as of May 30, 2008 with the investors. Pursuant to the
Registration Rights Agreement, we agreed to file a registration statement
covering the resale of (i) the shares of common stock underlying the Notes
and
Class A Warrants that are being registered in this offering, (ii) the 2008
Make
Good Shares, (iii) the 2009 Make Good Shares, and (iv) the Settlement Shares.
We
are required to file an initial registration statement covering the shares
of
common stock underlying the notes and warrants no later than 45 days from the
closing of the May 2008 financing and to have such registration statement
declared effective no later than 180 days from the closing of May 2008
financing. If we do not timely file such registration statement or cause it
to
be declared effective by the required dates, then we will be required to pay
liquidated damages to the investors equal to 1.0% of the aggregate purchase
price paid by such investors for each month that we do not file the registration
statement or cause it to be declared effective. Notwithstanding the foregoing,
in no event shall liquidated damages exceed 10% of the aggregate amount of
the
purchase price. The registration statement of which this prospectus forms a
part
is being filed to satisfy our obligations under the registration rights
agreement. In connection with the May 2008 financing, we and the purchaser
of
our Debentures and November Warrants, agreed that such securities shall be
included in this registration statement. See “November 2007
Financing”.
In
connection with the May 2008 financing, Mr. Cao entered into a Lock-Up Agreement
dated May 30, 2008 with us, pursuant to which he agreed not to transfer any
shares of our common stock owned by him until 18 months after the effective
date
of the registration statement of which this prospectus forms a
part.
November
2007 Financing
On
November 6, 2007, we entered into a Securities Purchase Agreement (the “November
Securities Purchase Agreement”) with Pope Investments, LLC, pursuant to which,
on November 7, 2007, we issued and sold to Pope Investments (i) $5,000,000
principal amount of our Debentures and (ii) the November Warrants to purchase
10,000,000 shares of our common stock at an exercise price of $0.32 per share,
subject to adjustment as provided therein. The exercise price and number of
shares for which the November Warrants are exercisable were adjusted to
16,000,000 shares of common stock at $.20 per share in connection with the
May
2008 financing.
The
Debentures bear interest at the rate of 6% per annum, payable in semi-annual
installments on May 31 and November 30 of each year, with the first interest
payment being due on May 31, 2008. The initial conversion price of the Debenture
was $0.25 per share. If we issue common stock at a price that is less than
the
effective conversion price, or common stock equivalents with an exercise or
conversion price less than the then effective conversion price, the conversion
price of the debenture and the exercise price of the warrant will be reduced
to
such price. The exercise price of the Debentures was reduced to $.20 per share
in connection with the May 2008 financing. The Debentures may not be prepaid
without the prior written consent of the holder.
In
connection with the November 2007 financing, Mr. Cao placed in escrow 20,000,000
shares of common stock, which will be replaced by 20,000,000 shares issued
by us
in the name of the escrow agent, at which time the shares delivered by Mr.
Cao
will be returned. In the event our consolidated Net Income Per Share (as defined
in the November Securities Purchase Agreement), for the year ended June 30,
2008
is less than $0.038, the escrow agent will deliver the 20,000,000 shares to
Pope
Investments.
Pursuant
to the November Securities Purchase Agreement, the we entered into a
Registration Rights Agreement (the “November Registration Rights Agreement”),
pursuant to which we must file on each Filing Date (as defined therein) a
registration statement to register the portion of the Registrable Securities
(as
defined therein) as permitted by the SEC’s guidance.
Pursuant
to the November Registration Rights Agreement, the initial registration
statement with respect to the shares of common stock issuable upon conversion
of
the Debentures and exercise of the November Warrants was required to be filed
within 90 days of the November 7, 2007 closing date and declared effective
within 180 days following such closing date. Any subsequent registration
statements that are required to be filed on the earliest practical date on
which
we are permitted by the SEC’s guidance to file such additional registration
statement. Such additional registration statements must be effective 90 days
following the date on which it is required to be filed. In the event that the
registration statement was not timely filed or declared effective, we were
required, pursuant to the November registration rights agreement to pay
liquidated damages. Such liquidated damages shall be, at the investor’s option,
either $1,643.83 or 6,575 shares of our common stock per day that the
registration statement is not timely filed or declared effective as required
pursuant to the November registration rights agreement, subject to an amount
of
liquidated damages not exceeding either $600,000, 2,400,000 shares of common
stock, or a combination thereof based upon 12% liquidated damages in the
aggregate. In connection with the May 2008 financing , Pope Investments waived
the initial filing and effectiveness deadlines set forth in the November
registration rights agreement and agreed that the we would be required to
include the Registrable Securities covered by the November Registration Rights
Agreement in the Registration Rights Agreement executed in connection with
the
May 2008 financing.
BUSINESS
Business
Overview
We
operate, control and beneficially own the pharmaceutical business of Laiyang
Jiangbo. Laiyang Jiangbo researches, develops, manufactures, markets and sells
pharmaceutical products and health supplements in the PRC. From our inception
in
2001 until our acquisition of Karmoya International Ltd. in October 2007, we
were a business development and marketing firm specializing in advising and
providing turn-key solutions for Chinese small and mid-sized companies entering
Western markets. Following the acquisition of Karmoya, we discontinued our
former operations in the business development and marketing segment and
administratively dissolved the subsidiaries that had been involved in those
operations.
Corporate
Structure
The
following diagram illustrates our current corporate structure and the place
of
formation and affiliation of each of our subsidiaries and our affiliated entity
as of the date of this prospectus:
1
1.
|
For
risks relating to our current corporate structure, see “Risk Factors—Risks
Associated with Doing Business in
China.”
|
2.
|
Agreements
that provide us with effective control over Laiyang Jiangbo include
irrevocable powers of attorney, equity pledge agreements, purchase
options
and cooperation agreement. See “—Contractual Agreements with Laiyang
Jiangbo and Its Shareholders.”
|
3.
|
The
economic benefits and losses of Laiyang Jiangbo accrue to Laiyang
Jiangbo
pursuant to a business cooperation agreement. See “—Contractual Agreements
with Laiyang Jiangbo and Its
Shareholders.”
|
Contractual
Arrangements with Laiyang Jiangbo and Its Shareholders
PRC
law
currently places certain limitations on foreign ownership of Chinese companies.
To comply with these foreign ownership restrictions, we operate our business
in
China through contractual arrangements with Laiyang Jiangbo. Our relationships
with Laiyang Jiangbo and its shareholders are governed by a series of
contractual arrangements primarily between two entities associated with our
wholly owned subsidiary Karmoya: (1) GJBT, Karmoya’s wholly foreign owned
enterprise in PRC, and (2) Laiyang Jiangbo, Karmoya’s operating company in PRC.
Under PRC laws, each of GJBT and Laiyang Jiangbo is an independent legal person
and neither of them is exposed to liabilities incurred by the other party.
The
contractual arrangements constitute valid and binding obligations of the parties
of such agreements. Each of the contractual arrangements, as amended and
restated, and the rights and obligations of the parties thereto are enforceable
and valid in accordance with the laws of the PRC. Other than pursuant to the
contractual arrangements described below, Laiyang Jiangbo does not transfer
any
other funds generated from its operations to any other member of the LJ Group.
On September 21, 2007, we entered into the following contractual arrangements
(collectively, the “LJ Agreements”):
Consulting
Services Agreement
.
Pursuant to the exclusive consulting services agreement between GJBT and Laiyang
Jiangbo, GJBT has the exclusive right to provide to Laiyang Jiangbo general
consulting services related to pharmaceutical business operations, as well
as
consulting services related to human resources and technological research and
development of pharmaceutical products and health supplements (the “Services”).
Under this agreement, GJBT owns the intellectual property rights developed
or
discovered through research and development while providing the Services for
Laiyang Jiangbo. Laiyang Jiangbo pays a quarterly consulting service fee in
RMB
to GJBT that is equal to all of Laiyang Jiangbo's revenue for such quarter.
Operating
Agreement
.
Pursuant to the operating agreement among GJBT, Laiyang Jiangbo and the
shareholders of Laiyang Jiangbo who collectively hold 100% of the outstanding
shares of Laiyang Jiangbo (collectively, the “Laiyang Shareholders”), GJBT
provides guidance and instructions on Laiyang Jiangbo's daily operations,
financial management and employment issues. The Laiyang Shareholders must
appoint the candidates recommended by GJBT as members of Laiyang Jiangbo's
board
of directors. GJBT has the right to appoint senior executives of Laiyang
Jiangbo. In addition, GJBT agrees to guarantee Laiyang Jiangbo's performance
under any agreements or arrangements relating to Laiyang Jiangbo's business
arrangements with any third party. Laiyang Jiangbo, in return, agrees to pledge
its accounts receivable and all of its assets to GJBT. Moreover, Laiyang Jiangbo
agrees that without the prior consent of GJBT, Laiyang Jiangbo will not engage
in any transactions that could materially affect the assets, liabilities, rights
or operations of Laiyang Jiangbo, including, but not limited to, incurrence
or
assumption of any indebtedness, sale or purchase of any assets or rights,
incurrence of any encumbrance on any of its assets or intellectual property
rights in favor of a third party, or transfer of any agreements relating to
its
business operation to any third party. The term of this agreement is ten (10)
years from September 21, 2007 unless early termination occurs in accordance
with
the provisions of the agreement and may be extended only upon GJBT's written
confirmation prior to the expiration of the this agreement, with the extended
term to be mutually agreed upon by the parties.
Equity
Pledge Agreement
.
Pursuant to the equity pledge agreement among GJBT, Laiyang Jiangbo and the
Laiyang Shareholders, the Laiyang Shareholders pledged all of their equity
interests in Laiyang Jiangbo to GJBT to guarantee Laiyang Jiangbo's performance
of its obligations under the consulting services agreement. If either Laiyang
Jiangbo or any of the Laiyang Shareholders breaches its respective contractual
obligations, GJBT, as pledgee, will be entitled to certain rights, including
the
right to sell the pledged equity interests. The Laiyang Shareholders also
granted GJBT an exclusive, irrevocable power of attorney to take actions in
the
place and stead of the Laiyang Shareholders to carry out the security provisions
of the equity pledge agreement and take any action and execute any instrument
that GJBT may deem necessary or advisable to accomplish the purposes of the
equity pledge agreement. The Laiyang Shareholders agreed, among other things,
not to dispose of the pledged equity interests or take any actions that would
prejudice GJBT's interest. The equity pledge agreement will expire two years
after Laiyang Jiangbo obligations under the exclusive consulting services
agreement have been fulfilled.
Option
Agreement
.
Pursuant to the option agreement among GJBT, Laiyang Jiangbo and the Laiyang
Shareholders, the Laiyang Shareholders irrevocably granted GJBT or its
designated person an exclusive option to purchase, to the extent permitted
under
PRC law, all or part of the equity interests in Laiyang Jiangbo for the cost
of
the initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. GJBT or its designated person
has
sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from September 21, 2007
unless early termination occurs in accordance with the provisions of the
agreement and may be extended only upon GJBT's written confirmation prior to
the
expiration of the this agreement, with the extended term to be mutually agreed
upon by the parties.
Proxy
Agreement
.
Pursuant to the proxy agreement among GJBT and the Laiyang Shareholders, the
Laiyang Shareholders agreed to irrevocably grant and entrust all the rights
to
exercise their voting power to the person(s) appointed by GJBT. GJBT may from
time to time establish and amend rules to govern how GJBT shall exercise the
powers granted to it by the Laiyang Shareholders, and GJBT shall take action
only in accordance with such rules. The Laiyang Shareholders shall not transfer
their equity interests in Laiyang Jiangbo to any individual or company (other
than GJBT or the individuals or entities designated by GJBT). The Laiyang
Shareholders acknowledged that they will continue to perform this agreement
even
if one or more than one of them no longer hold the equity interests of Laiyang
Jiangbo. This agreement may not be terminated without the unanimous consent
of
all of the parties, except that GJBT may terminate this agreement by giving
thirty (30) days prior written notice to the Laiyang Shareholders.
Company
Background
On
October 1, 2007, we completed a share exchange transaction by and among us,
Karmoya International Ltd., a British Virgin Islands company (“Karmoya”), and
Karmoya’s shareholders. As a result of the share exchange transaction, Karmoya,
a company which was established as a “special purpose vehicle” for the foreign
capital raising activities of its Chinese subsidiaries, became our wholly
owned subsidiary and our new operating business. Karmoya was incorporated under
the laws of the British Virgin Islands on July 17, 2007 and owns 100% of the
capital stock of Union Well International Limited, a Cayman Islands company
(“Union Well”). Karmoya conducts its business operations through Union Well’s
wholly owned subsidiary, Genesis Jiangbo (Laiyang) Biotech
Technology Co., Ltd. (“GJBT”). GJBT was incorporated under the laws of
the PRC on September 16, 2007 and registered as a wholly foreign owned
enterprise on September 19, 2007. GJBT has entered into consulting service
agreements and equity-related agreements with Laiyang Jiangbo Pharmaceutical
Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability company incorporated on
August 18, 2003.
As
a
result of the share exchange transaction, our primary operations consist of
the
business and operations of Karmoya and its subsidiaries, which are conducted
by
Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide.
We
were
originally incorporated on August 15, 2001 in the State of Florida under the
name Genesis Technology Group, Inc. On October 12, 2001, we consummated a merger
with NewAgeCities.com, an Idaho public corporation originally formed in 1969.
We
were the surviving entity after the merger with the Idaho public corporation.
Products
Laiyang
Jiangbo is engaged in research, development, production, marketing and sales
of
pharmaceutical products. It is located in Northeast China in an Economic
Development Zone in Laiyang City, Shandong province and is one of the major
pharmaceutical companies in China producing tablets, capsules, and granules
for
both Western medical drugs and Chinese herbal-based medical drugs. Laiyang
Jiangbo is also a major manufacturer of liquid chemical supply for medical
use
in China. Approximately 33% of its current products are Chinese herbal-based
drugs and 67% are Western medical drugs and liquid chemicals. Laiyang Jiangbo
has several Certificates of Good Manufacturing Practices for Pharmaceutical
Products (GMP Certificates) issued by the Shandong State Drug Administration
(SDA) and currently produces over five types of drugs.
Laiyang
Jiangbo’s top four products in fiscal 2007 were Clarithromycin sustained-release
tablets, Itopride Hydrochloride granules, Ciprofloxacin Hydrochloride tablets,
and Paracetamol tablets.
Drug
Development and Production
Development
and production of pharmaceutical products is Laiyang Jiangbo’s largest and most
profitable business. Its principal pharmaceutical products include:
Clarithromycin
sustained-release tablets
Clarithromycin
sustained-release tablets, Chinese Drug Approval Number H20052746, are
semi-synthetic antibiotics for curing Clarithromycin sensitive microorganism
infections. Laiyang Jiangbo is one of only two domestic Chinese pharmaceutical
companies having the technology to manufacture this drug. Laiyang Jiangbo’s
sales of this drug were over RMB 248.4 million ($31.82 million) in fiscal 2007,
which is approximately 50% of the market share in China for this type of
drug.
Clarithromycin
is the second generation of macrolide antibiotic and replaces the older
generation of Erythromycin. Clarithromycin first entered the pharmaceutical
market in Ireland in 1989, and as of 2007, it is one of thirty medicines which
generate the greatest sales revenue all over the world. Chemically,
Clarithromycin has a wider antimicrobial spectrum and longer duration of acid
resistance. Its activity is 2 to 4 times better than Erythromycin, but the
toxicity is 2-12 times lower.
Clarithromycin
sustained-release tablets utilize sustained-release technology, which requires
a
high degree of production technology. Because of the high degree of technology
required to produce this product, PRC production requirements are very strict
and there are very few manufacturers who gain permission to produce this
product. Therefore, there is a significant barrier to entry in the PRC market.
Currently, our Clarithromycin sustained-release tablets are the leading product
in the PRC domestic antibiotic sustained-release tablets market. Our goal is
to
maintain our current market share for this product.
Itopride
Hydrochloride granules
Itopride
Hydrochloride granules, Chinese Drug Approval Number H20050932, are a stomach
and intestinal drug for curing digestive system-related diseases. Laiyang
Jiangbo’s sales for this drug reached RMB 228.08 million ($29.22 million) in
fiscal 2007, which is approximately 12.6% of the market share in China for
this
type of drug. This product is widely regarded for its pharmacological
properties, i.e. rapid absorption, positive clinical effects, and few side
effects. Based on clinical observation, it has been shown that Itopride
Hydrochloride granules can improve 95.1% of gastrointestinal indigestion
symptoms.
Itopride
Hydrochloride granules are the fourth generation of gastrointestinal double
dynamic medicines, which are used for curing most symptoms due to functional
indigestion. The older generations are Metoclopramide Paspertin, Domperidone
and
Cisapride.
Itopride
Hydrochloride granules are SDA-approved and entered the PRC pharmaceutical
market in June 2005. Since 2005, Laiyang Jiangbo has seized the opportunity
presented by this product by rapidly establishing a domestic sales network
and
developing the market for this product. Currently, this product has competition
from two other famous stomach medicines, namely Dompendone Tablets and Vitamin
U
Belladonna and Aluminum Capsules II. Itopride Hydrochloride granules are a
new
product for Laiyang Jiangbo, but it already has a nationwide sales network
in
China. Laiyang Jiangbo’s goal is to have sales of Itopride Hydrochloride
granules exceed sales of the other two medicines in the near
future.
Ciprofloxacin
Hydrochloride tablets
Ciprofloxacin
Hydrochloride tablets, Chinese Drug Approval Number H37022737, are an antibiotic
drug used to cure infection caused by bacteria. Laiyang Jiangbo’s sales for this
drug reached RMB 91.73 million ($11.75 million) in fiscal 2007, which is
approximately 19.61% of the total market for this type of antibiotic drug in
China.
Due
to a
stoppage in production of raw material manufacturing in PRC in 2004, the price
of certain raw materials which are used to produce Ciprofloxacin Hydrochloride
tablets rose rapidly and Laiyang Jiangbo seized this opportunity by using its
stored raw materials to produce a significant amount of Ciprofloxacin
Hydrochloride tablets. As a result, Laiyang Jiangbo’s sales of this product won
a large percentage of the market in PRC from 2004 to 2006. However, other
companies resumed production in 2007, which has lead to stronger competition
and
a decrease in Laiyang Jiangbo’s profits for this product. Despite the recent
decrease in profits for this product, Laiyang Jiangbo’s goal is to continue
producing Ciprofloxacin Hydrochloride tablets as a principal product to promote
the popularity of its product and brand.
Paracetamol
tablets
Paracetamol
tablets, Chinese Drug Approval Number H37022733, are a nonprescription analgesic
drug, mainly used for curing fever due to common flu or influenza. It is also
used for relief of aches and pains. Laiyang Jiangbo’s sales for this drug
reached RMB 26.61 million ($3.41 million) in fiscal 2007, which is approximately
0.6% of the total market for similar types of drugs in China.
Laiyang
Jiangbo is authorized by the PRC Ministry of Health to be an appointed producer
of common antibiotics in Jiangsu Province, Guangdong Province, Zhejiang
Province, Fujian Province, Shandong Province and Guangxi Province. Paracetamol
tablets are one of PRC’s national A-level Medicare medicines. This product
entered the Chinese market in July 2004.
Baobaole
Chewable tablets
Baobaole
Chewable tablets, Chinese Drug Approval Number Z20060294, are a new product
of
Laiyang Jiangbo and entered the market in November 2007. Baobaole Chewable
tablets are nonprescription drugs for gastric cavity aches. This drug stimulates
the appetite and promotes digestion. Baobaole is used to cure deficiencies
in
the spleen and stomach, abdomen aches, loss of appetite, and loose bowels.
Its
effects are mild and lasting.
Laiyang
Jiangbo has completed its entire distribution network for this product and
started selling this product in late November 2007. Its goal is to reach sales
volume of RMB 96 million ($13.7 million) for this product for the fiscal year
ended June 30, 2008.
Radix
Isatidis
Disperable Tablet
Radix
Isatidis Disperable Tablets, Chinese Drug Approval Number Z20080142,
nonprescription Traditional Chinese Medicine, is used to cure virus influenza
and sour throat. Laiyang Jiangbo recently obtained the approval for this drug
and is the only company owns this manufacture technology in China. It clears
away heat, detoxify and promote pharynx. The research study indicates Radix
Isatidisthe’s ingredients included Indole, hapoxanthineuraci, quina-alkaloids,
amino acid, etc., have anti-inflammation and anti-virus effects.
Compared
with similar existing Radix Isatidis products, Radix Isatidis Disperable Tablet
utilizes the new disperable tablet formula, which is convenient to take and
fast
to dissolve. It is also easy to absorb and has high stability.
Raw
Materials
Laiyang
Jiangbo has strategic relationships with many research institutions in PRC
developing new drugs, such as Pharmaceutical Institute of Shandong University,
The Institute of Microbiology and Shandong Chinese Traditional Medicine
Technical School. These relationships help to ensure that Laiyang Jiangbo
maintains a continuing pipeline of high quality drugs into the future. Laiyang
Jiangbo designs, creates prototypes and manufactures its products at its
manufacturing facilities located in Laiyang City, Shandong province. Its
principal raw materials include Ciprofloxacin Hydrochlorides and Clarithromycin.
The prices for these raw materials are subject to market forces largely beyond
our control, including energy costs, organic chemical prices, market demand,
and
freight costs. The prices for these raw materials have varied significantly
in
the past and may vary significantly in the future.
Research
and Development
Laiyang
Jiangbo places great emphasis on product research and development and maintains
strategic relationships with many research institutions in PRC developing new
drugs, such as Pharmaceutical Institute of Shandong University, The Institute
of
Microbiology and Shandong Chinese Traditional Medicine Technical School. These
relationships help to ensure that Laiyang Jiangbo maintains a continuing
pipeline of high quality drugs into the future. Other than a number of potential
R&D projects that are currently under evolution and yet to be locked in, the
major project currently being undertaken by Laiyang Jiangbo is:
Ligustrazine
Ferulic Acid Acetate (LFAA)
LFAA
is a
Cardiac Cerebral Vascular innovative medicine, researched by Pharmaceutical
Institute of Shandong University. It is protected by patent. Its PRC invention
patent application number is 02135989X, publication number is CN1424313A and
patent number is ZL02135989X filed in December 2005.
LFAA
is a
synthetic innovation medicine based on Liqustrazine. It is the successor of
Liqustrazine, which has independent intellectual property rights. LFAA helps
to
reduce blood clotting and prevent platelets in the blood from clumping together.
Based on clinical studies, LFAA’s artery endothelium cell proliferation
stimulating function is 20 times better than Liqustrazine, its protecting
function for endothelium cell is 40 times better than Liqustrazine, and its
anti-cerebral ischemia activity is 4 times better than Liqustrazine. Laiyang
Jiangbo’s goal is to reach sales revenue of RMB $300 million for LFAA after it
is put into production.
For
the
fiscal year ended June 30, 2007, Laiyang Jiangbo spent approximately US $11
million or approximately 14.6% of its fiscal 2007 revenue on research and
development of various pharmaceutical products. For the fiscal year ended June
30, 2006, Laiyang Jiangbo spent approximately US $13.6 million or approximately
27.8% of its fiscal 2006 revenue on research and development of
products.
Competition
As
a
pharmaceutical manufacturing and distribution company in PRC, overall, Laiyang
Jiangbo has two major competitors in the PRC: Zhuhai Lizhu and Beijing Nohua.
These companies have number of popular pharmaceutical products, strong financial
position and a large market share in the industry. Laiyang Jiangbo is able
to
compete with these competitors because of its favorable geographic position,
strong R&D capability, unique products, extensive sales network, and lower
prices.
Our
major
competitors in China on individual product basis are Jiangsu Hengrui
Pharmaceuticals (Clarithromycin sustained release tablets), Xi'an Yangsen (
Itopride Hydrochloride Granules) and Jiangzhong Pharmaceuticals (Baobaole
Chewable tablets), respectively. We are able to compete with Jiangsu Hengrui
Pharmaceuticals because of our extensive sales network as well as flexible
and favorable incentive policy. Compared with Motihium of Xi'an Yangsen, a
gastro dynamic only drug, our Itopride Hydrochloride Granules have
better efficacy due to its gastro-intestinal dynamic characteristic, higher
security and less side effects. Referring to Children Jiangwei
Xiaoshi Tablets of Jiangzhong Pharmaceutcials, our Baobaole Chewable
tablet is able to significantly stimulate appetite
and fundamentally nurse children's gastro-intestinal system. Also, it
is very convenient for children to take. As such, we believe we have
competitive advantages for those products.
Sales
and Marketing
Laiyang
Jiangbo has a well-established sales network across China. It has a distribution
network covering 26 provinces in the PRC. Currently, Laiyang Jiangbo has
approximately 1,060 distribution agents throughout the PRC. Laiyang Jiangbo
will
continue to establish more representative offices and engage additional
distribution agents in order to strengthen its distribution network.
Laiyang
Jiangbo recognizes the importance of branding as well as packaging. All of
Laiyang Jiangbo’s products bear a uniform brand but have specialized designs to
differentiate the different categories of Laiyang Jiangbo's
products.
Laiyang
Jiangbo conducts promotional marketing activities to publicize and enhance
its
image as well as to reinforce the recognition of its brand name
including:
|
1.
|
publishing
advertisements and articles in national as well as specialized and
provincial newspapers, magazines, and in other media, including the
Internet;
|
|
2.
|
participating
in national meetings, seminars, symposiums, exhibitions for pharmaceutical
and other related industries;
|
|
3.
|
organizing
cooperative promotional activities with distributors;
and
|
|
4.
|
sending
direct mail to major physician offices and
laboratories.
|
Intellectual
Property
Laiyang
Jiangbo relies on a combination of trademark, copyright and trade secret
protection laws in PRC and other jurisdictions, as well as confidentiality
procedures and contractual provisions to protect its intellectual property
and
brand. Laiyang Jiangbo has been issued design patents in PRC for drug packaging
and drug containers, each valid for 10 years, and it intends to apply for more
patents to protect its core technologies. Laiyang Jiangbo is currently in the
process of acquiring the rights to a new Class I drug recently patented and
made
available to Laiyang Jiangbo through its relationship with the Pharmaceutical
Institute of Shandong University. This is a Class I drug which means that all
PRC national hospitals and other major medical facilities must carry this drug.
Laiyang Jiangbo also enters into confidentiality, non-compete and invention
assignment agreements with its employees and consultants and nondisclosure
agreements with third parties. “Jiangbo” and a certain circular design
affiliated with our brand are our registered trademarks in the PRC.
Pharmaceutical
companies are at times involved in litigation based on allegations of
infringement or other violations of intellectual property rights. Furthermore,
the application of laws governing intellectual property rights in the PRC and
abroad is uncertain and evolving and could involve substantial risks to
us
Customers
Currently,
Laiyang Jiangbo has approximately 1,200 terminal clients. Terminal clients
are
hospitals and medical institutions which purchase large supplies of
pharmaceutical drugs. Laiyang Jiangbo is also authorized by the PRC Ministry
of
Health as an appointed Medicare medication supplier in six provinces, namely
Jiangsu Province, Shandong Province, Zhejiang Province, Fujian Province,
Guangdong Province and Guangxi Province.
For
the
fiscal years ended June 30, 2007, 2006 and 2005, five customers accounted for
approximately 33.3%, 30.5% and 47.39%, respectively, of Laiyang Jiangbo’s sales.
These five customers represent 28.9% and 26.5% of Laiyang Jiangbo’s total
accounts receivable as of June 30, 2007 and 2006, respectively. Three customers
accounted for approximately 16.5%, of the Company's sales for the nine months
ended March 31, 2008. These three customers represent 11.2% of the Company's
total accounts receivable as of March 31, 2008.
Governmental
Regulation
General
PRC Government Approval
The
Drug
Administration Law of the PRC governs Laiyang Jiangbo and its products. The
State Food & Drug Administration of the PRC regulates and implements PRC
drug laws. The State FDA has granted Laiyang Jiangbo government permits to
produce the following products: Clarithromycin sustained-released tablets,
Itopride Hydrochloride granules, Ciprofloxacin Hydrochloride tablets,
Paracetamol tablets, Baobaole Chewable tablets, Compound Sufamethoxazole
tablets, and Vitamin C tablets.
The
drug
approval process takes about two years: including local SFDA approval, Local
SFDA test, State SFDA processing, state SFDA expert valuation, clinical trial,
final approval.
No
enterprise may start production at its facilities until it receives approval
from the PRC Ministry of Agriculture to begin operations. Laiyang Jiangbo
currently has obtained the requisite approval and licenses from the Ministry
of
Agriculture in order to operate its production facilities.
Circular
106 Compliance and Approval
On
May
31, 2007, the PRC State Administration of Foreign Exchange (“
SAFE
”)
issued
an official notice known as “Circular 106,” which requires the owners of any
Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure for foreign financing as well as subsequent
acquisition matters in China.
In
early
September 2007, the three owners of 100% of the equity in Laiyang Jiangbo,
Cao
Wubo, Xun Guihong and Zhang Yihua, submitted their application to SAFE. On
September 19, 2007, SAFE approved their application, permitting these Chinese
citizens to establish an offshore company, Karmoya International Ltd., as a
“special purpose vehicle” for any foreign ownership and capital raising
activities by Laiyang Jiangbo.
After
SAFE’s approval, Cao Wubo, Xun Guihong and Zhang Yihua became the majority
owners of Karmoya International Ltd. on September 20, 2007
C
osts
and Effects of Compliance with Environmental Laws
In
compliance with PRC environmental regulations, Laiyang Jiangbo spent
approximately $1,500 in fiscal 2005, $1,600 in fiscal 2006, and approximately
$2,000 in fiscal 2007, mainly for the wastewater treatment in connection with
its production facilities
Legal
Proceedings
Except
as
discussed below, we are not a party to any pending legal proceeding, nor are
we
aware of any legal proceedings being contemplated against us by any governmental
authority:
Elizabeth
Hiromoto et al v. Telecom Communications, Inc. et al. - Case No.
2:07-cv-07858-PSG-E, United States District Court, Central District of
California (Western Division - Los Angeles)
On
December 3, 2007, two individuals filed a lawsuit against the Company, its
former Chief Executive Officer James Wang, and certain others, alleging breach
of contract. On July 2, 2008,
the
Company and the plaintiffs settled the lawsuit with prejudice and claims and
plaintiffs have agreed to file a Request for Dismissal with Prejudice of the
lawsuit.
Fernando
Praca, Plaintiff v.s. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises,
Inc.- Case No. 50 2005 CA 005317, Palm Beach County, Florida
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from
the
sale of Extrema LLC to Genesis Technology Group, Inc. Praca had filed a Motion
of Temporary Injunction but had not proceeded to move this case forward. The
plaintiff has decided to reinitiate the legal action in March 2008. In June
2008
the Company and Praca entered into a Settlement Agreement whereby Praca agreed
to dismiss this action against the Company and to surrender to the Company
for
cancellation, 100,000 shares of common stock in the Company held by him and
the
Company agreed to provide Praca with a legal opinion of its counsel removing
the
restrictive legend on the 1,269,607 shares of common stock held by Praca.
CRG
Partners, Inc. and Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals
Enterprises, Inc. (ARBITRATION) - Case No. 32 145 Y 00976 07, American
Arbitration Association, Southeast Case Management Center
On
December 4, 2007, CRG Partners, Inc. (“CRG”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach
of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by
the
claimant is equal to the dollar value as of 29,978,900 shares of the Company’s
common stock which the claimant alleges are due and owing to CRG. On December
5,
2007, we gave notice of termination of our relationship with CRG under the
consulting agreement. The arbitration is scheduled to be conducted in Miami
Dade
County, Florida. We plan to vigorously defend our position.
As
of the
date of this filing, the Company is unable to estimate a loss, if any, the
Company may incur related expenses to this lawsuit.
Kenneth
Clinton vs. Genesis Pharmaceuticals Enterprises, Inc., GTEC Holdings, Capital
Growth Financial, Inc., Gary L. Wolfson and Pacific Rim Consultants, Inc. -
Case
No. 50 2007 CA 023923, Palm Beach County, Florida
On
December 21, 2007, Kenneth Clinton, a former director and former President
of
the Company, filed a lawsuit against the Company and certain entities and
persons related to our predecessor Genesis Technology Group, Inc. The complaint
alleged, among other things, breach of contract against the Company for an
agreement to pay the plaintiff certain shares of other public companies
(collectively, the “Reverse Merger Shares”) in connection with reverse merger
transactions arranged by our predecessor, and breach of contract against the
Company for failure to allow the plaintiff to exercise certain stock options
for
shares in the Company or exchange such options for new shares in the Company.
The plaintiff sought relief in the form of (1) delivery of the Reverse Merger
Shares, or in the alternative damages in the amount of those shares, (2) a
judgment against the Company to allow the plaintiff to exchange and exercise
his
stock options for shares in the Company, or in the alternative damages in the
amount of those shares, and (3) a declaratory judgment regarding a pledge and
escrow agreement with defendant Capital Growth Financial.
In
February 2008, the Company entered into a settlement agreement and general
release with Mr. Clinton whereby the Company agreed to allow Mr. Clinton to
exercise 1.5 million stock options issued under the Company’s 2007 stock option
plan for shares in the Company and released and discharged Mr. Clinton from
any
and all claims, demands or obligations. Mr. Clinton agreed to waive and release
the Company from any and all claims, demands or obligations.
Property
Our
principal executive offices are located at Middle Section, Longmao Street,
Area
A, Laiyang Waixiangxing Industrial Park, Laiyang City, Yantai, Shandong
Province, PRC 710075, where we have developed approximately 45,356 square meters
of production, office, and garage space. Our total building area is 7172 square
meters and our production workshop area is more than 3132 square
meters.
On
August
13, 2003, the Laiyang Development Planning Agency approved Laiyang Jiangbo’s
plan to invest in Section A of the Industrial Park for construction of garage
and office space. On August 18, 2003, the Laiyang Industrial Park Administration
certified Laiyang Jiangbo’s investment of RMB $10 million (US $1.33 million) in
Section A of the Industrial Park for a total construction of 13,000 square
meters.
We
currently do not lease any real property.
Employees
Laiyang
Jiangbo currently has more than 1,430 employees, including 50 administrative
staff, 320 production crew, 440 full-time salespersons and 620 part-time
salespersons. Approximately 200 of these employees are represented by Laiyang
City Jiangbo Pharmaceuticals Union, which is governed by the City of Laiyang.
Laiyang Jiangbo has not experienced a work stoppage since inception and does
not
anticipate any work stoppage in the foreseeable future. Management believes
that
its relations with its employees and the union are good.
DIRECTORS
AND EXECUTIVE OFFICERS
Set
forth
below is information regarding our current directors and executive
officers.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Cao
Wubo
|
|
43
|
|
Chief
Executive Officer and Chairman of the Board
|
|
|
|
|
|
Elsa
Sung
|
|
34
|
|
Chief
Financial Officer
|
|
|
|
|
|
Xu
Hibo
|
|
3
7
|
|
Chief
Operating Officer and Director
|
|
|
|
|
|
Dong
Lining
|
|
4
9
|
|
Vice
President, Director of Technology
|
|
|
|
|
|
Yang
Weidong
|
|
3
7
|
|
Vice
President, Director of Sales
|
|
|
|
|
|
Xin
Jingsheng
|
|
5
3
|
|
Director
of Equipment
|
|
|
|
|
|
Xue
Hong
|
|
40
|
|
Controller
|
|
|
|
|
|
Feng
Xiaowei
|
|
40
|
|
Director
|
|
|
|
|
|
Huang
Lei
|
|
26
|
|
Director
|
|
|
|
|
|
Ge
Jian
|
|
3
7
|
|
Director
|
|
|
|
|
|
Robert
Cain
|
|
45
|
|
Director
|
|
|
|
|
|
Michael
Marks
|
|
36
|
|
Director
|
Cao
Wubo
,
age 43,
has served as our chief executive officer and chairman of the board since
October 2007. He has served as the chairman and general manager of Laiyang
Jiangbo since 2003. From 1981 to 1988, Mr. Cao completed his military service
in
the Chinese Army, during which he was sales section director in Laiyang Yongkang
Pharmaceutical Factory. From 1988 to 1998, he continued working in Laiyang
Yongkang Pharmaceutical Factory as Marketing Manager. From 1998 to 2003, he
was
general manager of Laiyang Jiangbo Pharmacy Co. Ltd. and Laiyang Jiangbo Chinese
and Western Pharmacy Co. Ltd. He is the founder of Laiyang Jiangbo Pharmacy
Co.
Ltd., Laiyang Jiangbo Chinese and Western Pharmacy Co. Ltd., and Laiyang Jiangbo
Pharmaceutical Co. Ltd.
Elsa
Sung
,
age 34,
has served as our Chief Financial Officer since October 2007. Prior to June
2008, she was also Vice President of CFO Oncall, Inc. Prior to joining CFO
Oncall, Inc., Ms. Sung was an Audit Manager at Sherb & Co., Boca Raton,
Florida, responsible for managing, monitoring, as well as performing audits
for
domestic and international clients. Before joining Sherb & Co., Ms. Sung was
a Senior Internal Auditor at Applica Consumer Products, Inc., a U.S. public
traded company. Prior to this, Ms. Sung was with Ernst & Young, LLP in West
Palm Beach, Florida as a Senior Auditor in the Assurance and Advisory Business
Service Group. Ms. Sung is a licensed CPA in the State of Georgia and a member
of the American Institute of Certified Public Accountants. She received her
Master of Business Administration and Bachelor’s Degree, graduated “Cum Laude,”
in Accounting from Florida Atlantic University. She also holds a Bachelor’s
Degree in Sociology from National Chengchi University in Taipei,
Taiwan.
Xu
Haibo
,
age 37,
has served as our chief operating officer and director since October 2007.
He
has served as a deputy general manager of Laiyang Jiangbo since August 2006.
He
graduated from Shanghai Financial and Economic University in 1993 and has
engaged in a banking career for more than ten years. From July 1993 to July
2004, he worked in the Bank of China Yantai Branch as Credit Clerk in the Credit
Department, Section Chief in the Operation Department, Governor of the Bank
of
China Yantai Fushan Branch, and Director of the Risk Control Department in
the
Bank of China Yantai Branch. From August 2004 to July 2006, he was general
manager of Shandong Province Licheng Investment Co. Ltd.
Dong
Lining,
age 49,
has served as our vice president and director of technology since October 2007.
He has served as deputy manager of Laiyang Jiangbo since July 2003. He graduated
from Shandong Pharmacy University in 1995. From July 1986 to July 2003, he
worked in Laiyang Biochemistry Pharmaceutical Factory, where he was a checker,
technologist, workshop director, product technology section chief, technology
deputy factory director, and factory director. He has published several
pharmaceutical thesis articles in magazines such as, Chinese Biochemical Medical
Magazine, Food and Drug, and China New Clinical Medicine.
Yang
Weidong
,
age 37,
has served as our vice president and director of sales since October 2007.
He
has served as a deputy general manager for Laiyang Jiangbo since August 2004.
He
graduated from Nanjing University with a masters degree. From February 1995
to
March 2000, he worked at Jiangsu Yangtze Pharmaceutical Co. Ltd as a sales
clerk. From April 2000 to July 2004, he was area director in Jiangsu Jizhou
Pharmaceutical Co. Ltd.
Xin
Jingsheng
,
age 53,
has served as our director of equipment since October 2007. He has served as
a
deputy general manager of Laiyang Jiangbo since October 2003. He graduated
from
the Chinese People’s Liberation Army Shengqing Engineering Institute in August
1978. Mr. Xin has experience as a member of a group of trained personnel at
54685 Army Pharmacy from April 1983 to August 2001 and at China Laiyang
Construction Bureau from August 2001 to September 2003. He has been engaged
in
the pharmaceutical industry for more than 20 years, and his varied experience
includes positions as a technician, engineer assistant, engineer, deputy factory
director, factory director and deputy general manager. He has participated
in
industry training held by the Chinese National Drug Supervising Department
and
Shandong Drug Supervising Department and is very familiar with laws and statutes
in the Chinese pharmaceutical industry.
Xue
Hong
,
age 40,
has served as our controller since October 2007. He has served as finance
controller of Laiyang Jiangbo since April 2003. From July 1988 to March 1989,
she worked in Qingzhou Iron and Steel Works as quality control inspector and
auditor. From March 1999 to March 2000, she worked as an accountant at Laiyang
Yongkang Company. From March 2000 to September 2003, she was the chief
accountant of Laiyang Jiangbo Pharmacy.
Feng
Xiaowei
,
age 40,
has served as a director since October 2007. Mr. Feng graduated from Dalian
Jiaotong University Railway Locomotive & Car Department with a bachelors
degree and Jilin University Postgraduate Research Institute Foreign Economic
Law
Department with a masters degree. Over the course of his career, he has been
procurator in Shenyang Railroad Transportation Procuratorate, associate
professor in Jilin University, counsel in China Jilin International Trust and
Investment Corporation, expert commissary of China Strategy and Administration
Association, and deputy secretary-general of the “China Strengthening
Self-Innovative Capacity and Building Innovative Nation Forum.” He has
participated in the Research on National Economic Development Strategy and
in
the subject investigation of Beijing Olympic Games, Guangzhou Development Zone
and Tianjin Development Zone. He has been commissioner of Yunnan Province Policy
and Economic Development Task Team, commissioner of the Xinjiang Uygur
Autonomous Region Policy and Economic Development Task Team and commissioner
of
the China Shi Hezi National Economic Development Zone Task Team. He is the
founder of the Chinese Young People Network Home Co. Ltd., and has presided
over
the China Young People Card Project.
Huang
Lei
,
age 26,
has served as a director since October 2007. Ms. Huang graduated from Kwantlen
University College in Canada. She also earned her MBA degree from the University
of British Columbia in October 2006. From November 2006 to 2007, she was a
marketing manager in CúC Top Enterprises Ltd. While a student, Ms. Huang has
published articles on business administration at Canada Weekly and school
magazines, and earned the Best International Student Scholarship and a full
scholarship. Ms. Huang speaks English, French, Mandarin and Cantonese, and
has a
working knowledge of accountancy and business administration.
Ge
Jian
,
age 36,
has served as a director since October 2007. Mr. Ge Jian graduated from Shandong
University Management Sciences Department with a Bachelor of Business
Administration in 1992. From 1992 to the end of 2000, he worked for the
Development and Reform Commission of Yantai. From 2001 to 2006, he was the
minister of the Capital Operation Department and the minister of the Development
Department in Zhenghai Group Co. Ltd., and a director of Yantai Hualian
Development Group Co. Ltd. At present, he is general manager of Yantai Zhenghai
Pawn Co. Ltd.
Robert
D. Cain
,
age 45,
has served as a director since January 2007. Mr. Cain has sixteen years of
experience in the entertainment and Internet industries, primarily as a
production, finance, strategy and corporate development expert. He has consulted
to most of Hollywood's major studios and talent guilds, and to numerous
entertainment, Internet and software industry startups. Mr. Cain earned his
MBA
from the Wharton School at the University of Pennsylvania, after completing
his
undergraduate work in East Asian Studies at Harvard University. With decades
of
study, he speaks Chinese and has traveled extensively throughout the country
since 1987. Mr. Cain resides in Los Angeles, California.
Michael
Marks
,
age 36,
has served as a director since July 2008.. Since 2007, he has served as an
independent director of China Housing & Land Development, Inc., a property
developer in China. In 2006, Mr. Marks became the President of Middle Kingdom
Alliance Corp., a publicly traded Special Purpose Acquisition Corporation
active
in China. In January 2003, Mr. Marks founded the China practice of Sonnenblick
Goldman, a real estate investment bank, and served as its Managing Director
in
China until December 2007. In 2001, he founded B2Globe, providing technology
solutions to international internet businesses in Asia. In 1999, he co-founded
Metro Corporate Training in Shanghai to offer training and management
development, and was its Chief Executive Officer until 2001. From 1998 to
1999,
Mr. Marks worked as a management consultant with Horwath Asia Pacific in
Australia and China. From 1995 to 1998, Mr. Marks worked in the audit, corporate
finance and advisory divisions of PricewaterhouseCoopers in South Africa.
Mr.
Marks received a Bachelor of Commerce (Honors) in 1994 and Masters of Commerce
in 1997 from the University of the Witwatersrand in Johannesburg, South Africa.
In 1998, he graduated with a Bachelor of Arts (Psychology) degree from the
University of South Africa. In 1997, Mr. Marks became a Chartered Accountant
in
South Africa, and a Fellow of the Association of International Accountants
in
the United Kingdom in 1999. He speaks fluent Mandarin, French and English.
Corporate
Governance
Director
Independence
Although
we are not currently subject to any law, rule or regulation, however, requiring
that all or any portion of our board of directors include “independent”
directors, we do believe that Huang Lei, Ge Jian, Feng Xiaowei, Robert Cain
and
Michael Marks
are
considered “independent” under Rule 4200(a)(15) of the National Association of
Securities Dealers listing standards.
Board
Committees
We
are
currently listed on the OTC Bulletin Board and are not required to have an
audit
committee, nominating committee or a compensation committee. Notwithstanding
this, on July 18, 2008, we established an audit committee consisting of Michael
Marks and Feng Xiaowei and a compensation committee consisting of Feng Xiaowei
and Ge Jian. Prior to this time, our board of directors performed the
functions delegated to the audit committee.
Code
of Ethics
In
January 2006, we adopted a Code of Ethics and Business Conduct to provide
guiding principles to our officers, directors and employees. Our Code of Ethics
and Business Conduct also strongly recommends that all directors and employees
of our company comply with the code in the performance of their duties.
Generally, our Code of Ethics and Business Conduct provides guidelines
regarding:
·
|
compliance
with laws, rules and regulations,
|
·
|
corporate
opportunities
|
·
|
competition
and fair dealing,
|
·
|
discrimination
and harassment,
|
·
|
protection
and proper use of company assets,
and
|
·
|
payments
to government personnel.
|
A
copy of
the Code of Ethics and Business Conduct is included as Exhibit 14 to our 2007
annual report on Form 10-K filed with the SEC. A printed copy of the Code of
Ethics may also be obtained free of charge by writing to Genesis Pharmaceuticals
Enterprises, Inc., Middle Section, Longmao Street, Area A, Laiyang Waixiangxing
Industrial Park, Laiyang City, Yantai, Shandong Province, PRC
265200.
Director
Compensation
Effective
October 1, 2007 in connection with our change in control, we pay annual
compensation of RMB 28,000 ($4,000) to our directors who reside in China and
$35,000 and 50,000 shares of our common stock to our directors who reside in
the
U.S.
Executive
Compensation
The
following executive compensation disclosure reflects all compensation for fiscal
year 2007 received by Laiyang Jiangbo’s principal executive officer, principal
financial officer, and most highly compensated executive officers. We refer
to
these individuals in this prospectus as “named executive officers.”
Summary
Compensation
The
following table reflects all compensation awarded to, earned by or paid to
our
named executive officers for Laiyang Jiangbo’s fiscal years ended June 30, 2007
and June 30, 2006:
Summary
Compensation for Laiyang Jiangbo’s Fiscal Years-Ended June 30, 2007 and June 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
and Principal Position
|
|
|
Fiscal
Year Ended
|
|
|
Salary(1)
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive Plan Compensa-tion
($)
|
|
|
Nonqualified
Deferred Compensa-tion Earnings
($)
|
|
|
All
Other Compensa-tion ($)
|
|
|
Total
($)
|
|
Cao
Wubo,
Chief
Executive Officer, President
|
|
|
2007
2006
|
|
|
2,460
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elsa
Sung,
Chief
Financial Officer (2)
|
|
|
2007
2006
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
—
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xu
Haibo,
Vice
President, Chief Operating Officer
|
|
|
2007
2006
|
|
|
1,845
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
1,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Expressed
in U.S. Dollars based on the average interbank exchange rate of 7.8070
PRC
Dollars for each 1.00 U.S. Dollar for fiscal year ended June 30,
2007.
|
(2)
|
Ms.
Sung was appointed as our Chief Financial Officer effective October
1,
2007, subsequent to the end of the most recent fiscal year ended
June 30,
2007. Accordingly, no compensation information is available for Ms.
Sung
for these periods.
|
Employment
Contracts and Termination of Employment, and
Change-in-Control
We
entered into an employment agreement with Elsa Sung effective as of June 10,
2008. In accordance with the terms of the agreement, Ms. Sung receives an annual
base salary of $120,000 and is entitled to receive performance bonuses of (i)
$18,000 if the Company is successfully listed or quoted on the New York Stock
Exchange, the American Stock Exchange, the NASDAQ Select Market, the NASDAQ
Global Market or the NASDAQ Capital Market; (ii) $8,000 if the Company meets
its
2008 Guaranteed EBT; and (iii) $20,000 if the Company meets its 2009 Guaranteed
EBT. In addition, Ms. Sung will be granted 300,000 options in accordance with
the vesting and pricing schedule set forth in the agreement.
Grants
of Plan-Based Awards
None
Outstanding
Equity Awards at Fiscal Year-End
None
Option
Exercise and Stock Vested
None
Pension
Benefits
We
do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We
do not
maintain any non-qualified defined contribution or deferred compensation
plans.
Compensation
Committee Interlocks and Insider Participation
We
did
not have a compensation committee during either of the fiscal years ended June
30, 2007. or June 30, 2006.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth, as of August 25, 2008, certain information
concerning the beneficial ownership of our Common Stock by (i) each shareholder
known by us to own beneficially five percent or more of our outstanding Common
Stock; (ii) each director; (iii) each executive officer; and (iv) all of
our
executive officers and directors as a group, and their percentage ownership
and
voting power.
Named
Executive Officers and Directors
|
|
Number
of Shares of Common Stock Beneficially
Owned
(1) (2)
|
|
Percentage
of Outstanding Common Stock
|
|
Cao
Wubo, Chief Executive Officer and Chairman of the Board†
|
|
|
194,263,661
|
(3)
|
|
47.04
|
%
|
Elsa
Sung, Chief Financial Officer†
|
|
|
20,000
|
|
|
|
*
|
Xu
Haibo, Vice President, Chief Operating Officer and Director†
|
|
|
0
|
|
|
|
|
Dong
Lining, Vice President, Director of Technology†
|
|
|
0
|
|
|
|
|
Yang
Weidong, Vice President, Director of Sales†
|
|
|
0
|
|
|
|
|
Xin
Jingsheng, Director of Equipment†
|
|
|
0
|
|
|
|
|
Xue
Hong, Controller†
|
|
|
0
|
|
|
|
|
Feng
Xiaowei, Director†
|
|
|
0
|
|
|
|
|
Huang
Lei, Director†
|
|
|
0
|
|
|
|
|
Ge
Jian, Director†
|
|
|
399,719
|
|
|
|
*
|
Robert
Cain, Director†
|
|
|
550,000
|
|
|
|
*
|
Michael
Marks, Director†
|
|
|
—
|
|
|
—
|
|
Total
Held by Directors and Executive Officers (thirteen
individuals)
|
|
|
195,233,380
|
|
|
47.27
|
%
|
5%
Shareholders
|
|
|
|
|
|
|
|
Verda
International Limited
A-1
Building Dasi Street
Laiyan
City, Shandong Province, PRC
|
|
|
194,263,661
|
(4)
|
|
47.04
|
%
|
Wang
Renhui
No.
57-2-14-1 Chaoyang Street
Dalin,
PRC
|
|
|
22,384,290
|
|
|
5.42
|
%
|
Pope
Investments LLC(5)(6)
5100
Poplar Avenue, Suite 805
Memphis,
Tennessee 38137
|
|
|
41,257,309
|
|
|
9.99
|
%
|
Ardsley
Advisory Partners(7)
262
Harbor Drive
Stamford,
Connecticut 06902
|
|
|
27,750,000
|
|
|
6.72
|
%
|
Ardsley
Partners I(7)
262
Harbor Drive
Stamford,
Connecticut 06902
|
|
|
27,450,000
|
|
|
6.64
|
%
|
*
Less
than one percent.
†Address
of referenced person is c/o Genesis Pharmaceuticals Enterprises, Inc., Middle
Section, Longmao Street, Area A, Laiyang Waixiangxing Industrial Park, Laiyang
City, Yantai, Shandong Province, People’s Republic of China 265200.
(1)
Based
on
412,986,078 outstanding shares of Common Stock as of August 25,
2008.
(2)
Unless
otherwise noted, the Company believes that all persons named in the table
have
sole voting and investment power with respect to all shares of the Common
Stock
beneficially owned by them. A person is deemed to be the beneficial owner
of
securities which may be acquired by such person within sixty (60) days from
the
date indicated above upon the exercise of options, warrants or convertible
securities. Each beneficial owner’s percentage of ownership is determined by
assuming that options, warrants or convertible securities that are held by
such
person (not those held by any other person) and which are exercisable within
sixty (60) days of the date indicated above, have been
exercised.
(3)
Includes
194,263,661 shares of common stock owned by Verda International Limited,
a
company of which Mr. Cao is the Executive Director and owner of 100% of the
equity interest.
(4)
The
natural person with voting power and investment power on behalf of Verda
International Limited is Mr. Cao Wubo.
(5)
Includes
(i) 25,000,000 shares of Common Stock issuable to Pope Investments LLC,,
upon
conversion of $5,000,000 aggregate principal amount of the Company’s Debentures
and 16,000,000 shares of Common Stock issuable upon exercise of the November
Warrants and (ii) up to an additional 4,850,000 shares of Common Stock of
the
85,000,000 shares of Common Stock issuable to Pope Investments upon conversion
of $17,000,000 aggregate principal amount of the Company’s Notes and 42,500,000
shares of Common Stock issuable upon exercise of 42,500,000 Class A Warrants.
Pope Asset Management LLC, a Tennessee limited liability company (“Pope Asset”)
serves as an investment adviser and/or manager to Pope Investments. Pope
Asset
is the sole manager for Pope Investments and has sole voting control and
investment and disposition power and discretion with respect to all securities
held by Pope Investments. Pope Asset may be deemed to beneficially own shares
owned or held by, or held for the account or benefit of, Pope Investments.
Mr.
William P. Wells is the sole manager of Pope Asset. Mr. Wells may be deemed
to
own shares owned or held by, or held for the account or benefit of, Pope
Investments. Pope Asset and Mr. Wells do not directly own any shares of Common
Stock.
(6)
The
percentage of shares of Common Stock that may be beneficially owned by Pope
Investments is limited to 9.99% and no shares of Common Stock in excess of
this
beneficial ownership limitation may be issued by the Company to Pope
Investments. This limitation may be waived by Pope Investments at any time
upon
61 days’ notice to the Company.
(7)
Beneficial
ownership information derived from a Schedule G filed with the SEC on June
10,
2008 by Ardsley Partners Fund II, L.P., Ardsley Partners Institutional Fund,
L.P., Ardsley Offshore Fund Ltd., Ardsley Advisory Partners, Ardsley Partners
I
and Philip J. Hempleman.
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL
PERSONS
Agreement
and Plan of Share Exchange
On
October 1, 2007, we executed a Share Exchange Agreement (“Exchange Agreement”)
by and among Karmoya International Limited, a British Virgin Islands company
(“Karmoya”), and the shareholders of 100% of Karmoya’s capital stock (the
“Karmoya Shareholders”) on the one hand, and us and the majority shareholders of
our capital stock (the “Genesis Shareholders”) on the other hand. Separately,
Karmoya owns 100% of the capital stock of Union Well International Limited,
a
Cayman Islands company (“Union Well”), which has established and owns 100% of
the equity in Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., a wholly
foreign owned enterprise in the People’s Republic of China (“GJBT”). GJBT has
entered into consulting service agreements and equity-related agreements with
Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a limited
liability company headquartered in, and organized under the laws of,
China.
Under
the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock, which were converted into
299,789,000 shares of our common stock on October 26, 2007. As a result of
this
transaction, the Karmoya Shareholders became our controlling shareholders and
Karmoya became our wholly owned subsidiary. In connection with Karmoya becoming
our wholly owned subsidiary, we acquired the business and operations of the
LJ
Group, and our principal business activities continued to be conducted through
the LJ Group’s operating company in China, Laiyang Jiangbo.
Our
Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders
PRC
law
currently limits foreign equity ownership of Chinese companies. To comply with
these foreign ownership restrictions, we operate our business in China through
a
series of contractual arrangements with Laiyang Jiangbo and its shareholders
that were executed on September 21, 2007. For a description of these contractual
arrangements, see “Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders” under the “Business” section above.
Related
Party Transactions of Laiyang Jiangbo
Set
forth
below are the related party transactions since June 30, 2007 between Laiyang
Jiangbo’s shareholders, officers and/or directors, and Laiyang Jiangbo. As a
result of the Exchange Transaction, we have contractual arrangements with
Laiyang Jiangbo which give us the ability to substantially influence Laiyang
Jiangbo's daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.
Accounts
receivable - related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd and Yantai Jiangbo
Pharmaceuticals Co., Ltd. For the nine months ended March 31, 2008 and 2007,
the
Company recorded net revenues of $4,611,849 and $2,963,871, respectively, from
sales to related parties. For the three months ended March 31, 2008 and 2007,
the Company recorded net revenues of $1,869,092 and $455,580, respectively,
from
sales to related parties. As of March 31, 2008, accounts receivable-related
parties consisted of the following:
|
|
March
31, 2008
(Unaudited)
|
|
Receivable
from product sales due from Jiangbo Chinese-Western
Pharmacy
|
|
$
|
615,934
|
|
Receivable
from product sales due from Laiyang Jiangbo Medicals, Co.,
Ltd.
|
|
|
616,966
|
|
Receivable
from product sales due from Yantai Jiangbo Pharmaceuticals Co.,
Ltd.
|
|
|
786,378
|
|
Total
accounts receivable-related parties
|
|
$
|
2,019,278
|
|
Accounts
receivable due from related parties are expected to be paid in cash within
three
to six months.
Other
receivable - related parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy with
annual lease rate of 800,000 RMB (approximately $108,512). The Company recorded
other income of $81,384 for the nine months ended March 31, 2008 from rent
revenue from the buildings leased to the related party company. For the three
months ended March 31, 2008, the Company recorded other income of $81,384
related to this lease. As of March 31, 2008, the Company’s other receivable
related party amounted to $85,680.
Other
payable - related parties
From
time
to time, the Company received advances from its director, shareholders and
related parties for its operating activities. These advances are short-term
in
nature. As of March 31, 2008, the Company’s other payable- related party balance
amounted to $28,560.
Related
Party Transactions of Genesis Technology Group, Inc.
Set
forth
below are the related party transactions since June 30, 2007 between the
shareholders, officers and/or directors of Genesis Technology Group, Inc
(“Genesis”), our predecessor, and Genesis.
On
June
29, 2007, Genesis issued a $325,000 secured promissory note to a
director/officer in connection with a loan to provide Genesis with cash to
satisfy certain contractual obligations under its agreement with one of its
then
consulting clients. The principal balance was $325, 000 and payable on December
31, 2007. In lieu of interest, the director/officer received 20% interest in
the
capital stock position in Gold Horse International, Inc. (“GHII”), formerly
known as Speedhaul Holdings, Inc. obtained by Genesis Equity Partners, LLC
(“GEP”), a then subsidiary of Genesis.. Accordingly, this officer received
3,350,000 shares of GHII common stock obtained by GEP. Genesis valued these
shares at $0.18 per share or $603,000 and for the six months ended June 30,
2007
recorded as compensation expense of $603,000. The note is secured by 3,250,000
shares of Lotus Pharmaceuticals, Inc.'s ("LTUS") common stock owned by us,
which
shares were held in escrow. GEP was subsequently dissolved and we assumed its
obligations under this note. As of March 31, 2008, we have fully repaid the
promissory note amount to the former director/officer and the LTUS shares held
in escrow as were released to us.
On
July
31, 2007, Genesis’s then 51% owned subsidiary, Genesis Equity Partners LLC, II
(“GEP II”), issued a promissory note to a member of GEP II in the amount of
$190,000 for working capital purposes. The note bears interest at 10% per annum
and is due on July 31, 2008 GEP II was subsequently dissolved and we assumed
this obligation. Upon receipt by us of shares or other equity distribution
in
connection with the reverse merger transaction with a certain GEP II client
and
distribution of 24.5% of the reverse merger distribution to the note holder
in
accordance with the terms of GEP II’s operating agreement, our obligation under
this note shall terminate. The note is secured by 2,000,000 shares of our common
stock which may be adjusted from time to time.
On
July
23, 2007, Genesis entered into a one-year consulting agreement for business
advisory and investor relations services with a company related to a member
of
its then-subsidiary, GEP. In connection with this agreement, it transferred
100,000 shares of LTUS to this consultant with a fair market value of $100,000.
The consulting agreement has been terminated..
MARKET
FOR OUR COMMON STOCK, DIVIDENDS AND
RELATED
STOCKHOLDER INFORMATION
Our
common stock is quoted on the Over the Counter Bulletin Board, or OTCBB, under
the symbol “GTEC”.
The
following table shows by each fiscal quarter the range of high and low bid
quotations reported by the OTCBB in each fiscal Quarter from July 1, 2005
through June 30, 2008. The OTCBB quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
2008
|
|
High
|
|
Low
|
|
First
Quarter
|
|
|
0.16
|
|
|
0.19
|
|
Second
Q
uarter
|
|
|
0.49
|
|
|
0.10
|
|
Third
Quarter
|
|
|
0.37
|
|
|
0.17
|
|
Fourth Quarter
|
|
|
0.36
|
|
|
0.20
|
|
2007
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
0.19
|
|
|
0.09
|
|
Second
Quarter
|
|
|
0.19
|
|
|
0.09
|
|
Third
Quarter
|
|
|
0.19
|
|
|
0.12
|
|
Fourth
Quarter
|
|
|
0.19
|
|
|
0.10
|
|
2006
|
|
|
High
|
|
|
Low
|
|
First
Quarter
|
|
|
0.09
|
|
|
0.04
|
|
Second
Quarter
|
|
|
0.07
|
|
|
0.03
|
|
Third
Quarter
|
|
|
0.51
|
|
|
0.01
|
|
Fourth
Quarter
|
|
|
0.37
|
|
|
0.16
|
|
Holders
of Record
As
of
August 25, 2008, there were 955 holders of record of our common
stock.
The
transfer agent for the common stock is Computershare Limited. The transfer
agent’s address is 350 Indiana Street, Suite 800, Golden, CO80401, telephone
(303) 262-0600.
Dividends
We
have
never paid any dividends and we plan to retain earnings, if any, for use in
the
development of our business. Payment of future dividends, if any, will be at
the
discretion of the Board of Directors after taking into account various factors,
including current financial condition, operating results and current and
anticipated cash needs.
Equity
Compensation Plan Information
The
following table sets forth information as of September 30, 2007 regarding
securities authorized for issuance under equity compensation plans, including
individual compensation arrangements, by us under our 2002 Stock Option Plan
and
our 2003 Stock Option, our 2004 Stock Plan as amended and any compensation
plans
not previously approved by our shareholders as of September 30,
2007.
Equity
Compensation Plan Information
Plan
category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights (a)
|
|
Weighted-average
exercise price of outstanding options warrants and rights
(b)
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a))
(c)
|
|
2002
Stock Option Plan and 2003 Stock Option Plan
|
|
|
3,150,000
|
|
$
|
0.079
|
|
|
0
|
|
2004
Stock Plan
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
Equity
Compensation Plans or Individual Compensation Arrangements Not Approved
by
Security Holders (1)
|
|
|
16,396,954
|
|
$
|
0.13
|
|
|
0
|
|
Total
|
|
|
19,546,954
|
|
$
|
0.122
|
|
|
0
|
|
(1)
|
Equity
compensation plan not approved by shareholders is comprised of options
granted and/or restricted stock to be issued to employees and
non-employees, including directors, consultants, advisers, suppliers,
vendors, customers and lenders for purposes including to provide
continued
incentives, as compensation for services and/or to satisfy outstanding
indebtedness to them.
|
DESCRIPTION
OF CAPITAL STOCK
General
Our
authorized common stock consists of 900,000,000 shares of common stock, $0.001
par value per share.
Our
authorized preferred stock consists of 20,000,000 shares of preferred stock,
$0.001 par value per share, of which (i) on January 15, 2004 our board of
directors designated 218,000 shares as Series A 6% Cumulative Convertible
Preferred Stock and (ii) on September 30, 2007 our board of directors designated
8,000,000 shares as Series B Voting Convertible Preferred Stock. As of August
25, 2008, there were 412,986,078 shares of common stock outstanding and no
shares of preferred stock outstanding.
Common
Stock
Holders
of common stock are entitled to one vote for each share on all matters submitted
to a shareholder vote. Holders of common stock do not have cumulative voting
rights. Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of common stock are entitled to share in all dividends
that the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, subject
to
preferences that may be applicable to any then-outstanding preferred stock,
each
outstanding share entitles its holder to participate in all assets that remain
after payment of liabilities and after providing for each class of stock, if
any, having preference over the common stock.
Holders
of common stock have no conversion, preemptive or other subscription rights,
and
there are no redemption or sinking fund provisions applicable to the common
stock. The rights of the holders of common stock are subject to any rights
that
may be fixed for holders of preferred stock, when and if any preferred stock
is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
Preferred
Stock
Our
board
of directors, without further shareholder approval, may issue preferred stock
in
one or more series from time to time and fix or alter the designations, relative
rights, priorities, preferences, qualifications, limitations and restrictions
of
the shares of each series. The rights, preferences, limitations and restrictions
of different series of preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. Our board
of
directors may authorize the issuance of preferred stock which ranks senior
to
our common stock for the payment of dividends and the distribution of assets
on
liquidation. In addition, our board of directors can fix limitations and
restrictions, if any, upon the payment of dividends on our common stock to
be
effective while any shares of preferred stock are outstanding. The rights
granted to the holders of any series of preferred stock could adversely affect
the voting power of the holders of common stock and issuance of preferred stock
may delay, defer or prevent a change in our control.
TRANSFER
AGENT AND REGISTRAR
The
Transfer Agent and Registrar for shares of our common stock is Computershare
Trust Company, 350 Indiana St., #800, Golden, Colorado 80401. Our Transfer
Agent
and Registrar’s telephone number is (303) 262-0600.
LEGAL
MATTERS
The
validity of the securities offered hereby have been passed upon for us by
Schneider
Weinberger & Beilly LLP
,
Boca
Raton
,
Florida.
EXPERTS
Our
financial statements as of June 30, 2007 and 2006 and for each of the years
in
the three-year period ended June 30, 2007 included in this prospectus and in
the
registration statement have been included in reliance on the reports of Moore
Stephens Wurth Frazer and Torbet, LLP, an independent registered public
accounting firm, given on the authority of this firm as an expert in accounting
and auditing in issuing reports.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form S-1 under the Securities
Act
of 1933 with respect to the common stock offered hereby. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits of the registration
statement. For further information with respect to us and the shares being
offered under this prospectus, we refer you to the registration statement,
including the exhibits and schedules thereto.
You
may
read and copy the registration statement of which this prospectus is a part
at
the SEC’s Public Reference Room, which is located at 100 F Street, N.E.,
Washington, D.C. 20549. You can request copies of the registration statement
by
writing to the SEC and paying a fee for the copying cost. Please call the SEC
at
1-800-SEC-0330 for more information about the operation of the SEC’s Public
Reference Room. In addition, the SEC maintains an Internet web site, which
is
located at www.sec.gov, which contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
You may access the registration statement of which this prospectus is a part
at
the SEC’s Internet web site. We are subject to the information reporting
requirements of the Securities Exchange Act of 1934, and we will file reports,
proxy statements and other information with the SEC.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
AND
ITS SUBSIDIARIES
INDEX
TO AUDITED FINANCIAL STATEMENTS
Interim
Financial Statements (unaudited)
|
|
|
Consolidated
Balance Sheet as of March
31,
2008
|
|
F-2
|
Consolidated
Statements of
Income
and Other Comprehensive Income for the nine months ended March 31,
2008 and 2007
|
|
F-3
|
Consolidated
Statements of Cash Flows for the three months ended March
31,
2008 and 2007
|
|
F-4
|
Notes
to Interim Financial Statements
|
|
F-5
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-30
|
|
|
|
Audited
Financial Statements:
|
|
|
Consolidated
Balance Sheets as of
June
30, 2007 and 2006
|
|
F-31
|
Consolidated
Statements of
Income
and Other Comprehensive Income for the years ended June 30, 2007,
2006 and 2005
|
|
F-32
|
Consolidated
Statement of S
hareholders’
Equity for the years ended June 30, 2007, 2006 and
2005
|
|
F-33
|
Consolidated
Statement of Cash Flows for the years ended
June 30,
2007, 2006 and 2005
|
|
F-34
|
Notes
to Audited Financial Statements
|
|
F-35
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
AS
OF
MARCH 31, 2008
ASSETS
|
|
|
|
(Unaudited)
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
|
$
|
21,574,044
|
|
Restricted
cash
|
|
|
3,488,604
|
|
Marketable
equity securities
|
|
|
2,112,500
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$62,625
|
|
|
20,589,289
|
|
Accounts
receivable - related parties
|
|
|
2,019,278
|
|
Inventories
|
|
|
5,542,846
|
|
Other
receivables
|
|
|
284,908
|
|
Other
receivables - related parties
|
|
|
85,680
|
|
Advances
to suppliers
|
|
|
894,741
|
|
Other
assets
|
|
|
2,271
|
|
Total
current assets
|
|
|
56,594,161
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
11,081,056
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
Restricted
marketable securities
|
|
|
2,826,413
|
|
Debt
issuance cost, net
|
|
|
306,825
|
|
Intangible
assets, net
|
|
|
9,777,832
|
|
Total
other assets
|
|
|
12,911,070
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
80,586,287
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
Accounts
payable
|
|
$
|
3,448,086
|
|
Short
term bank loans
|
|
|
2,713,200
|
|
Notes
payable
|
|
|
3,488,604
|
|
Other
payables
|
|
|
3,736,397
|
|
Other
payables - related parties
|
|
|
28,560
|
|
Accrued
liabilities
|
|
|
545,885
|
|
Liabilities
assumed from reorganization
|
|
|
1,352,997
|
|
Taxes
payable
|
|
|
10,521,050
|
|
Total
current liabilities
|
|
|
25,834,779
|
|
|
|
|
|
|
CONVERTIBLE
DEBT, net of discount $4,328,704 as of March 31, 2008
|
|
|
671,296
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
Common
Stock ($0.001 par value, 600,000,000 shares authorized, 390,478,760
shares
issued and outstanding)
|
|
|
390,480
|
|
Paid-in-capital
|
|
|
22,803,151
|
|
Captial
contribution receivable
|
|
|
(7,711,000
|
)
|
Retained
earnings
|
|
|
28,934,053
|
|
Statutory
reserves
|
|
|
3,740,456
|
|
Accumulated
other comprehensive income
|
|
|
5,923,072
|
|
Total
shareholders' equity
|
|
|
54,080,212
|
|
Total
liabilities and shareholders' equity
|
|
$
|
80,586,287
|
|
The
accompanying notes are an integral part of these statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
March
31
|
|
March
31
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
26,231,191
|
|
$
|
18,472,649
|
|
$
|
66,648,051
|
|
$
|
52,876,082
|
|
Sales
- related party
|
|
|
1,869,092
|
|
|
455,580
|
|
|
4,611,849
|
|
|
2,963,871
|
|
TOTAL
REVENUE
|
|
|
28,100,283
|
|
|
18,928,229
|
|
|
71,259,900
|
|
|
55,839,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
6,337,822
|
|
|
5,388,811
|
|
|
17,744,379
|
|
|
15,724,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
21,762,461
|
|
|
13,539,418
|
|
|
53,515,521
|
|
|
40,115,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT EXPENSE
|
|
|
967,930
|
|
|
953,560
|
|
|
2,170,240
|
|
|
10,441,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
12,136,164
|
|
|
9,658,803
|
|
|
29,269,330
|
|
|
18,491,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
8,658,367
|
|
|
2,927,055
|
|
|
22,075,951
|
|
|
11,183,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSE, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenese, net
|
|
|
1,217,477
|
|
|
-
|
|
|
1,136,534
|
|
|
-
|
|
Non-operating
(income) expense
|
|
|
(529
|
)
|
|
11,224
|
|
|
(232
|
)
|
|
5,642
|
|
Interest
expense, net
|
|
|
526,509
|
|
|
69,233
|
|
|
925,993
|
|
|
204,671
|
|
Loss
from discontinued business
|
|
|
228,812
|
|
|
-
|
|
|
341,743
|
|
|
-
|
|
OTHER
EXPENSE, NET
|
|
|
1,972,269
|
|
|
80,457
|
|
|
2,404,038
|
|
|
210,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
6,686,098
|
|
|
2,846,598
|
|
|
19,671,913
|
|
|
10,973,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,211,265
|
|
|
970,025
|
|
|
6,808,625
|
|
|
3,567,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
4,474,833
|
|
|
1,876,573
|
|
|
12,863,288
|
|
|
7,405,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on marketable securities
|
|
|
(270,351
|
)
|
|
-
|
|
|
1,347,852
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
1,960,948
|
|
|
368,537
|
|
|
3,428,779
|
|
|
673,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
6,165,430
|
|
$
|
2,245,110
|
|
$
|
17,639,919
|
|
$
|
8,078,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGITED
AVERAGE NUMBER OF SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
389,605,134
|
|
|
84,545,655
|
|
|
260,297,377
|
|
|
84,131,121
|
|
Dilulted
|
|
|
393,292,698
|
|
|
90,950,796
|
|
|
263,271,624
|
|
|
89,658,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.05
|
|
$
|
0.09
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
0.05
|
|
$
|
0.08
|
|
The
accompanying notes are an integral part of these statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
|
|
2008
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,863,288
|
|
$
|
7,405,372
|
|
Loss
from discontinued operations
|
|
|
341,743
|
|
|
-
|
|
Income
from continued operations
|
|
|
13,205,031
|
|
|
7,405,372
|
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
375,456
|
|
|
253,063
|
|
Amortization
of intangible assets
|
|
|
113,578
|
|
|
75,772
|
|
Amortization
of debt issuance costs
|
|
|
47,583
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
671,296
|
|
|
-
|
|
Allowance
for bad debts
|
|
|
(112,459
|
)
|
|
|
|
Loss
on sale of marketable securities
|
|
|
19,819
|
|
|
-
|
|
Unrealized
loss on marketable securities
|
|
|
1,150,516
|
|
|
-
|
|
Deferred
compensation expense
|
|
|
28,750
|
|
|
-
|
|
Change
in operating assets and liabilities
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(7,246,740
|
)
|
|
(3,308,650
|
)
|
Accounts
receivable - related parties
|
|
|
(1,403,383
|
)
|
|
(245,420
|
)
|
Notes
receivables
|
|
|
59,790
|
|
|
(29,473
|
)
|
Inventories
|
|
|
27,542
|
|
|
1,065,113
|
|
Other
receivables
|
|
|
(254,886
|
)
|
|
(937
|
)
|
Other
receivables - related parties
|
|
|
(81,384
|
)
|
|
|
|
Advances
to suppliers
|
|
|
(488,064
|
)
|
|
(10,316
|
)
|
Other
assets
|
|
|
96,538
|
|
|
1,282,175
|
|
Accounts
payable
|
|
|
1,159,105
|
|
|
(2,324,940
|
)
|
Accrued
liabilities
|
|
|
301,290
|
|
|
58,191
|
|
Other
payables
|
|
|
2,146,659
|
|
|
(1,355,440
|
)
|
Other
payables - related parties
|
|
|
(962,509
|
)
|
|
(592,232
|
)
|
Liabilities
from discontinued operations
|
|
|
(1,162,133
|
)
|
|
-
|
|
Taxes
payable
|
|
|
10,006,057
|
|
|
2,011,128
|
|
Net
cash provided by operating activities
|
|
|
17,697,452
|
|
|
4,283,404
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
605,882
|
|
|
-
|
|
Payment
for land use right
|
|
|
(8,246,830
|
)
|
|
-
|
|
Purchase
of equipment
|
|
|
(401,302
|
)
|
|
(58,469
|
)
|
Cash
receipt from reverse acquisition
|
|
|
534,950
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(7,507,300
|
)
|
|
(58,469
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from sale of common stock
|
|
|
337,500
|
|
|
-
|
|
Proceeds
from sale of treasury stock
|
|
|
1,977
|
|
|
-
|
|
Payments
for dividend
|
|
|
(10,520,000
|
)
|
|
-
|
|
Payments
for debt issuance cost
|
|
|
(354,408
|
)
|
|
-
|
|
Proceeds
from convertible debt
|
|
|
5,000,000
|
|
|
-
|
|
Proceed
from officers
|
|
|
27,128
|
|
|
-
|
|
Payments
for bank loans
|
|
|
(5,425,600
|
)
|
|
(1,273,300
|
)
|
Proceeds
from bank loans
|
|
|
3,255,360
|
|
|
-
|
|
Notes
payable
|
|
|
5,361,849
|
|
|
725,702
|
|
Restricted
cash
|
|
|
(5,361,849
|
)
|
|
(725,702
|
)
|
Net
cash used in financing activities
|
|
|
(7,678,043
|
)
|
|
(1,273,300
|
)
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
1,324,727
|
|
|
166,101
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
3,836,836
|
|
|
3,117,736
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of the period
|
|
|
17,737,208
|
|
|
3,371,598
|
|
|
|
|
|
|
|
|
|
CASH,
end of the period
|
|
$
|
21,574,044
|
|
$
|
6,489,334
|
|
The
accompanying notes are an integral part of these statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
1 - Organization
Genesis
Pharmaceuticals Enterprises, Inc., (the “Company” or “Genesis”), was originally
incorporated in Florida on August 15, 2001 under the name Genesis Technology
Group, Inc. with a principal business objective to operate as a business
development and marketing firm that specialized in advising and providing
a
turnkey solution for small and mid-sized Chinese companies entering Western
markets. On October 1, 2007, Genesis executed a Share Acquisition and Exchange
Agreement (“Exchange Agreement”) by and among Genesis, Karmoya International
Ltd., a British Virgin Islands company (“Karmoya”), and the shareholders of 100%
of Karmoya’s capital stock (the “Karmoya Shareholders”). After the closing of
the share exchange transaction, Karmoya became the Company’s wholly owned
subsidiary and the Company’s primary operations now consist of the business and
operations of Karmoya and its subsidiaries. The following table summarizes
the
estimated fair values of the assets acquired and liabilities assumed at the
date
of the acquisition:
Cash
|
|
$
|
534,950
|
|
Prepaid
expenses
|
|
|
40,620
|
|
Marketable
equity securities
|
|
|
370,330
|
|
Other
assets
|
|
|
7,083
|
|
Restricted
marketable securities
|
|
|
1,746,809
|
|
Restricted
marketable securities held for short term loans
|
|
|
3,250,000
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,085,323
|
)
|
Loan
payable
|
|
|
(515,000
|
)
|
Other
liabilities assumed from acquisition
|
|
|
(452,001
|
)
|
Minority
interest
|
|
|
(121,063
|
)
|
Net
assets acquired
|
|
$
|
3,776,405
|
|
Subsequent
to the share exchange agreement in October 2007, the Company discontinued
the
business development and marketing segment that the Company focused on prior
to
the reverse merger as described in Note 6. The business development and
marketing segment represented 100% of the Company’s sales prior to October 1,
2007. Liabilities of the business development and marketing segment are
reclassified as liabilities assumed from reorganizations in the Consolidated
Balance Sheet. The results of operations and cash flows of the business
development and marketing segment have been reported in the Consolidated
Financial Statements as discontinued operations. Except for Genesis
Pharmaceuticals Enterprises, Inc., all other entities that were consolidated
into the Company prior to October 1, 2007 have been administratively
dissolved.
Karmoya
was established on July 18, 2007, under the laws of British Virgin Islands.
Karmoya was established as a “special purpose vehicle” for the foreign capital
raising activities of Laiyang Jiangbo Pharmaceutical Co., Ltd (“Laiyang
Jiangbo”), a limited liability company formed under the laws of the People’s
Republic of China (the “PRC” or “China”). China’s State Administration of
Foreign Exchange (“SAFE”) requires the owners of any Chinese companies to obtain
SAFE’s approval before establishing any offshore holding company structure for
foreign financing as well as subsequent acquisition matters under an official
notice known as “Circular 106” in PRC. On September 19, 2007, Karmoya was
approved by local Chinese SAFE as a “special purpose vehicle” offshore
company.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
On
September 20, 2007, Karmoya acquired 100% of Union Well International Limited
(“Union Well”), a Cayman Islands corporation established on May 9, 2007. On
September 17, 2007, Union Well established a wholly owned subsidiary, Genesis
Jiangbo (Laiyang) Biotech Technology Co., Ltd. (“GJBT”), in the PRC as a wholly
owned foreign limited liability company with registered capital of $12 million.
GJBT develops, manufactures and sells health medicines.
Laiyang
Jiangbo was formed under laws of the People’s Republic of China in August 2003
with registered capital of $1,210,000 (RMB 10,000,000). On December 1, 2006,
Laiyang Jiangbo’s registered capital increased to $6,664,000 (RMB 50,000,000),
on December 22, 2006, the registered capital has been funded by contribution
of
buildings to the Company. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide. Laiyang Jiangbo
operates in 26 provinces in the PRC and is headquartered in Laiyang City,
Shandong province, China.
On
September 21, 2007, GJBT entered into a series of contractual arrangements
(the
“Contractual Arrangements”) with Laiyang Jiangbo and its shareholders. Under the
terms of the Contractual Arrangements, GJBT has control over the management
of
the business activities of Laiyang Jiangbo and holds a 100% variable interest
in
Laiyang Jiangbo. The Contractual Arrangements are comprised of a series of
agreements, including a Consulting Services Agreement and an Operating
Agreement, through which GJBT has the right to advise, consult, manage and
operate each of Laiyang Jiangbo, and collect and own all of their respective
net
profits. Additionally, Laiyang Jiangbo’s shareholders have granted their voting
rights over Laiyang Jiangbo to GJBT. In order to further reinforce GJBT’s rights
to control and operate Laiyang Jiangbo, Laiyang Jiangbo and its shareholders
have granted GJBT, the exclusive right and option to acquire all of their
equity
interests in Laiyang Jiangbo or, alternatively, all of the assets of Laiyang
Jiangbo. Further Laiyang Jiangbo Shareholders have pledged all of their rights,
titles and interests in Laiyang Jiangbo to GJBT. As both companies are under
common control, this has been accounted for as a reorganization of entities
and
the financial statements have been prepared as if the reorganization had
occurred retroactively. The Company consolidates Laiyang Jiangbo’s results,
assets and liabilities in its financial statements.
The
reasons that Karmoya used the contractual arrangements to acquire control
of
Laiyang Jiangbo, instead of using a complete acquisition of Laiyang Jiangbo’s
assets or equity to make Laiyang Jiangbo a wholly-owned subsidiary of Karmoya,
were as follows: (i) PRC laws governing share exchanges with foreign entities,
which became effective on September 8, 2006, make the consequences of such
acquisitions uncertain and (ii) other than by share exchange, PRC law would
require Karmoya to acquire Laiyang Jiangbo be acquired for cash consideration
and, at the time of the acquisition, Karmoya was unable to raise sufficient
funds to pay the full appraised cash value for Laiyang Jiangbo’s assets or
shares as required under PRC law.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
2 - Summary of significant accounting policies
Basis
of presentation
The
financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America ("US GAAP"). In the
opinion of management, the accompanying balance sheet, and related interim
statements of income, stockholders’ equity and cash flows include all
adjustments, consisting only of normal recurring items.
Principles
of consolidation
The
accompanying consolidated financial statements include the following
entities:
Consolidated
entity name:
|
|
Percentage
of ownership
|
|
Karmoya
International Ltd
|
|
|
100
|
%
|
Union
Well International Limited
|
|
|
100
|
%
|
Genesis
Jiangbo (Laiyang) Biotech Technology Co., Ltd.
|
|
|
100
|
%
|
Laiyang
Jiangbo Pharmaceuticals Co., Ltd
|
|
|
Variable
Interest Entity
|
|
All
significant inter-company transactions and balances have been eliminated
in
consolidation.
In
accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities ("FIN 46R"), variable interest entities (“VIEs”) are generally entities
that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate
decision making ability. All VIEs with which the Company is involved must
be
evaluated to determine the primary beneficiary of the risks and rewards of
the
VIE. The primary beneficiary is required to consolidate the VIE for financial
reporting purposes.
In
connection with the adoption of FIN 46R, the Company concluded that Laiyang
Jiangbo is a VIE and the Company is the primary beneficiary. Under FIN 46R
transition rules, the financial statements of Laiyang Jiangbo are then
consolidated into the Company’s consolidated financial statements.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency
of
the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
operations and cash flows are translated at average exchange rates during
the
period, assets and liabilities are translated at the unified exchange rate
as
quoted by the People’s Bank of China at the end of the period, and equity is
translated at historical exchange rates. Transaction gains and losses that
arise
from exchange rate fluctuations on transactions denominated in a currency
other
than the functional currency are included in the results of operations as
incurred.
Asset
and
liability accounts at March 31, 2008 were translated at 7.02 RMB to $1.00.
Equity accounts were stated at their historical rate. The average translation
rates applied to income statements for the nine months ended March 31, 2008
and
2007 were 7.40 RMB and 7.87 RMB to $1.00, respectively. In accordance with
Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows,"
cash flows from the Company's operations is calculated based upon the local
currencies using the average translation rate. As a result, amounts related
to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheet.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included
in the
results of operations as incurred. Gains and losses from foreign currency
transactions are included in the results of operation and there are no material
transaction gains or losses for the nine months ended March 31, 2008 and
2007.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred
to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s Staff
Accounting Bulletin ("SAB") No. 104 and Statement of Financial Accounting
Standards No. (“SFAS”) 48 “
Revenue Recognition When Right of Return Exists.
”
SAB 104 states that revenue should not be recognized until it is
realized or realizable and earned. In general, the Company records revenue
when
persuasive evidence of an arrangement exists, services have been rendered
or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured.
The
Company is generally not contractually obligated to accept returns. However,
on
a case by case negotiated basis, the Company permits customers to return
their
products. In accordance with SFAS 48, revenue is recorded net of an allowance
for estimated returns. Such reserves are based upon management's evaluation
of
historical experience and estimated costs. The amount of the reserves ultimately
required could differ materially in the near term from amounts included in
the
accompanying consolidated financial statements.
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs. Shipping and handling costs amounted to
$107,018 and $70,405, respectively, for the three months period ended March
31,
2008, and 2007. Shipping and handling costs amounted to $253,366 and $209,628,
respectively, for the nine months ended March 31, 2008, and 2007.
Research
and development
Research
and development costs are expensed as incurred. The costs of material and
equipment that are acquired or constructed for research and development
activities, and have alternative future uses, either in research and
development, marketing, or sales are classified as plant and equipment and
depreciated over their estimated useful lives.
Use
of
estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates include the allowance for doubtful accounts
and
sales returns, the allowance for obsolete inventory, the useful life of property
and equipment and intangible assets, and accruals for taxes due.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Financial
instruments
SFAS
107,
“Disclosures about Fair Value of Financial Instruments” requires disclosure of
the fair value of financial instruments held by the Company. SFAS 107 defines
the fair value of financial instruments as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
Company
considers the carrying amount of cash, accounts receivable, notes receivable,
other
receivables, prepayments, accounts payable, other payable, accrued liabilities,
customer deposits, tax payable, and loans to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of
interest.
Statement
of cash flows
In
accordance with SFAS 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies using
the
average translation rate. Cash and cash equivalents are translated at the
rate
as of each reporting period. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily
agree
with changes in the corresponding balances on the balance sheet.
Stock-based
compensation
The
Company records stock based compensation expense pursuant to SFAS 123R. The
Company estimates the fair value of the award using the Black-Scholes Option
Pricing Model. Under SFAS 123R, the Company’s expected volatility assumption is
based on the historical volatility of Company’s stock. The expected life
assumption is primarily based on historical exercise patterns and employee
post-vesting termination behavior. The risk-free interest rate for the expected
term of the option is based on the U.S. Treasury yield curve in effect at
the
time of grant.
Stock
compensation expense is recognized based on awards expected to vest, and
there
were no estimated forfeitures as the Company has a short history of issuing
options. SFAS 123R requires forfeitures to be estimated at the time of grant
and
revised in subsequent periods, if necessary, if actual forfeitures differ
from
those estimates.
Concentration
of risk
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China. For purposes of the
statements of cash flows, the Company considers all highly liquid instruments
purchased with a maturity of three months or less and money market accounts
to
be cash equivalents. Balances at financial institutions or state owned banks
within the PRC are not covered by insurance. Total cash (including restricted
cash balances) in banks at March 31, 2008 amounted to $25,178,370. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any risks on its cash in bank accounts.
For
the
three months ended March 31, 2008 and 2007, three products accounted for
95% and
96%, respectively, of the Company’s total sales For the nine months ended March
31, 2008 and 2007, three products accounted for 95% and 96% of the Company’s
total sales.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Three
customers accounted for approximately 14.0% and 26.3%, respectively, of the
Company's sales for the three months ended March 31, 2008 and 2007 and for
16.5%
and 25.0% of sales for the nine months ended March 31, 2008 and 2007. These
three customers represent 11.2% of the Company's total accounts receivable
as of
March 31, 2008.
Three
suppliers accounted for approximately 66.2% and 83.8% respectively, of the
Company's purchases for the three months ended March 31, 2008 and 2007 and
for
59.5% and 77.5% of the purchases for the nine months ended March 31, 2008
and
2007. These three suppliers represent 60.1% of the Company's total accounts
payable as of March 31, 2008.
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the
political, economic and legal environments in the PRC, and by the general
state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in the North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environments
and foreign currency exchange. The Company's results may be adversely affected
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and
rates
and methods of taxation, among other things.
Restricted
cash
The
Company had restricted cash of $3,488,604 as of March 31, 2008. The restricted
funds are kept as security deposits for bank acceptance related to the Company’s
notes payable.
Investment
in marketable securities and restricted marketable securities
The
Company determines the appropriate classification of its investments in debt
and
equity securities at the time of purchase and re-evaluates such determinations
at each balance-sheet date. Marketable securities that are bought and held
principally for the purpose of selling them in the near term are classified
as
trading securities and are reported at fair value, with unrealized gains
and
losses recognized in earnings. Marketable equity securities not classified
as
held-to-maturity or as trading, are classified as available-for-sale, and
are
carried at fair market value, with the unrealized gains and losses, net of
tax,
included in the determination of comprehensive income and reported in
shareholders’ equity. The fair value of substantially all securities is
determined by quoted market prices. The estimated fair value of securities
for
which there are no quoted market prices is based on similar types of securities
that are traded in the market.
For
marketable equity securities for which there is an other-than-temporary
impairment, an impairment loss is recognized as a realized loss. The Company's
investment impairment analysis generally includes review and analysis of
several
factors, including:
1.
|
Discussions
with each company's management to review the status of key internally
established development milestones. As a result of the Company's
strategic
alliance with partner companies, the Company regularly has information
regarding technology developments and business initiatives that
was
generally not available to the
community.
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
2.
|
The
Company's knowledge of partner company's activities relating to
new
agreements, new investor funding and
achievements.
|
3.
|
The
Company's review of financial position, primarily the cash resources
and
operating cash flow, to determine if it was sufficient to continue
to fund
projected operations and ongoing technology
development.
|
Additionally,
the Company considers EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-01"). According
to EITF 03-01, a security is impaired when its fair value is less than its
value, and an impairment is other than-temporary if the investor does not
have
the "ability and intent" to hold the investment forecasted recovery of its
carrying amount. EITF 03-01 holds that the impairment of each security must
be
assessed ability-and-intent-to-hold criterion regardless of the severity
or
amount of the impairment. The Company intends to hold investment in marketable
securities for a period of time sufficient to allow for any anticipated recovery
in market value.
Accounts
receivable
The
Company has a policy of reserving for uncollectible accounts based on its
best
estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past
due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are written
off
after all means of collection have been exhausted and the potential for recovery
is considered remote. Accounts receivable and accounts receivable-related
parties, net of allowance for doubtful accounts outstanding at March 31,
2008
amounted to $22,608,567.
The
activity in the allowance for doubtful accounts for accounts receivable for
the
period ended March 31, 2008 is as follows:
Beginning
allowance for doubtful accounts
|
|
$
|
166,696
|
|
Recovery
from bad debt expense
|
|
|
(112,459
|
)
|
Foreign
currency translation adjustments
|
|
|
8,388
|
|
Ending
allowance for doubtful accounts
|
|
$
|
62,625
|
|
Inventories
Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average
method.
The Company reviews its inventory periodically for possible obsolete goods
in
order to determine if any reserves are necessary. As of March 31, 2008, the
Company has determined that no reserves are necessary.
Advances
to suppliers
The
Company advances monies to certain vendors for purchase of its material.
The
advances to suppliers are interest free and unsecured.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Plant
and equipment
Plant
and
equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
|
|
Useful
Life
|
|
Building
and building improvements
|
|
|
5-40
|
|
|
Years
|
|
Manufacturing
equipment
|
|
|
5-20
|
|
|
Years
|
|
Office
equipment and furniture
|
|
|
5-10
|
|
|
Years
|
|
Vehicle
|
|
|
5
|
|
|
Years
|
|
The
cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the
cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
The
Company evaluates the carrying value of long-lived assets at least annually
in
accordance with SFAS 144. When estimated cash flows generated by those assets
are less than the carrying amounts of the assets, the Company recognizes
an
impairment loss. Based on its review, the Company believes that, as of March
31,
2008, there were no impairments of its long-lived assets.
Intangible
assets
Land
use
right - all land in the People’s Republic of China is owned by the government.
However, the government grants rights to use land for limited periods of
time,
depending on the planned use. The Company purchased land use rights on February
2008 and August 2004 for approximately $8,682,153 and $878,702, respectively.
The costs of these rights are amortized using the straight-line method over
the
term of the land use rights of 50 years.
Patents
and licenses include purchased technological know-how, secret formulas,
manufacturing processes, technical, procedural manuals and the certificate
of
drugs production and is amortized using the straight-line method over the
expected useful economic life of 5 years, which reflects the period over
which
the formulas, manufacturing processes, technical and procedural manuals are
kept
secret to the Company as agreed between the Company and the selling
parties.
Intangible
assets of the Company are reviewed at least annually or more often if
circumstances dictate, to determine whether their carrying value has become
impaired. The Company considers assets to be impaired if the carrying value
exceeds the future projected cash flows from related operations. The Company
also reevaluates the periods of amortization to determine whether subsequent
events and circumstances warrant revised estimates of useful lives.
|
|
Useful
Life
|
|
Land
Use Right
|
|
|
50
|
|
|
Years
|
|
Patents
|
|
|
5
|
|
|
Years
|
|
Licenses
|
|
|
5
|
|
|
Years
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Income
taxes
The
Company utilizes SFAS 109, "Accounting for Income Taxes," which requires
the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. The Company adopted FASB Interpretation 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. A tax position
is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination
being
presumed to occur. The amount recognized is the largest amount of tax benefit
that is greater than 50% likely of being realized on examination. For tax
positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no affect on the Company’s financial
statements.
Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized.
A
tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination.
For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no affect on the Company’s financial
statements.
Deferred
tax is calculated using tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it is related to items credited
or
charged directly to equity, in which case the deferred tax is also dealt
with in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Company intends
to
settle its current tax assets and liabilities on a net basis.
Value
added tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT tax rate is 17% for
products sold in the PRC. The amount of VAT liability is determined by applying
the applicable tax rate to the invoiced amount of goods sold (output VAT)
less
VAT paid on purchases made with the relevant supporting invoices (input VAT).
Under the commercial practice of the PRC, the Company paid
VAT
based on tax invoices issued. The tax invoices may be issued subsequent to
the
date on which revenue is recognized, and there may be a considerable delay
between the date on which the revenue is recognized and the date on which
the
tax invoice is issued. In the event that the PRC tax authorities dispute
the
date of which revenue is recognized for tax purposes, the PRC tax office
has the
right to assess a penalty, which can range from zero to five times the amount
of
the taxes which are determined to be late or deficient. According to the
PRC tax
laws, any potential tax penalty payable on late or deficient payments of
this
tax could be between zero and five times the amount of the late or deficient
tax
payable, and will be expensed as a period expense if and when a determination
has been made by the taxing authorities that a penalty is due.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
VAT
on
sales and VAT on purchases amounted to $4,806,574 and $259,075 for the three
months ended March 31, 2008, and $3,216,601 and $120,401 for the three months
ended March 31, 2007, respectively. VAT on sales and VAT on purchases amounted
to $12,114,274 and $443,114 for the nine months ended March 31, 2008, and
$9,494,356 and $223,104 for the nine months ended March 31, 2007, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company
acts as an agent for the government. VAT taxes are not impacted by the income
tax holiday.
Advertising
Advertising
is expensed as incurred. Advertising expenses amounted to $2,018,895 and
$3,529,481 for the three months ended March 31, 2008 and 2007, respectively.
Advertising expenses amounted to $6,148,010 and $5,279,282 for the nine months
ended March 31, 2008 and 2007, respectively.
Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS 157,
“Fair
Value Measurements”,
which
provides guidance for how companies should measure fair value when required
to
use a fair value measurement for recognition or disclosure purposes under
generally accepted accounting principle (GAAP). SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact, if any; the adoption of SFAS 157 will have on its
financial statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115 (“FAS 159”). FAS 159 permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently
required to be measured at fair value. The objective of FAS 159 is to provide
opportunities to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply hedge
accounting provisions. FAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities.
SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year
that begins after November 15, 2007. The Company is currently assessing the
impact, if any; the adoption of SFAS 159 will have on its financial
statements.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in
Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
The
Company is currently evaluating the effect of this pronouncement on financial
statements.
In
December 2007, the FASB issued SFAS 141(R),
“Business
Combinations”
,
which
replaces SFAS 141. SFAS No. 141(R) establishes principles and requirements
for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141(R) is
effective for fiscal years beginning after December 15, 2008. The adoption
of
SFAS 141(R) will have an impact on accounting for business combinations once
adopted, but the effect is dependent upon acquisitions at that
time.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
In
December 2007, the FASB issued SFAS No. 160,
“Noncontrolling
Interests in Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No. 51”
(“SFAS
160”), which establishes accounting and reporting standards for ownership
interests
in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when
a
subsidiary is deconsolidated. The Statement also establishes reporting
requirements that provide sufficient disclosures that clearly
identify
and distinguish between the interests of the parent and the interests of
the
non-controlling owners. SFAS 160 is effective for
fiscal
years beginning after December 15, 2008. The Company has not determined the
effect that the application of SFAS 160 will
have on
its consolidated financial statements.
Company
reporting year end
For
US
financial statement reporting purposes beginning from 2007, the Company adopted
June 30 as its fiscal year end.
Note
3 - Earnings per share
The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings Per Share.” SFAS 128 requires presentation of basic and diluted
earnings per share in conjunction with the disclosure of the methodology
used in
computing such earnings per share. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.
The
following is a reconciliation of the basic and diluted earnings per share
computations for the three months and nine months ended March 31, 2008 and
2007:
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
|
|
2008
|
|
2007
|
|
For
the three months ended March 31, 2008 and 2007
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$
|
4,474,833
|
|
$
|
1,876,573
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
389,605,134
|
|
|
84,545,655
|
|
Diluted
effect of stock options and warrants
|
|
|
3,687,564
|
|
|
6,405,141
|
|
Weighted
average shares used in diluted computation
|
|
|
393,292,698
|
|
|
90,950,796
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
0.01
|
|
$
|
0.02
|
|
|
|
2008
|
|
2007
|
|
For
the nine months ended March 31, 2008 and 2007
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$
|
12,863,288
|
|
$
|
7,405,372
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in basic computation
|
|
|
260,297,377
|
|
|
84,131,121
|
|
Diluted
effect of stock options and warrants
|
|
|
2,974,247
|
|
|
5,527,801
|
|
Weighted
average shares used in diluted computation
|
|
|
263,271,624
|
|
|
89,658,922
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.09
|
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.08
|
|
For
the
three months and nine months ended March 31, 2008, 2,963,361 and 10,000,000
stock options and warrants at an exercise price of $0.25 and $0.32,
respectively, were not included in the diluted earnings per share calculation
because of the anti-diluted effect.
For
the
three months and nine months ended March 31, 2007, the following options
and
warrants are not included in the diluted earnings per share calculation because
of the anti-diluted effect:
For
three months ended March 31, 2007
|
|
For
nine months ended March 31, 2007
|
Outstanding
option / warrants
|
|
Exercise
price
|
|
Outstanding
option / warrants
|
|
Exercise
price
|
2,963,361
|
|
$
0.304
|
|
2,963,361
|
|
$
0.304
|
250,000
|
|
$
0.310
|
|
7,400,000
|
|
$
0.145
|
|
|
|
|
250,000
|
|
$
0.310
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
4 - Supplemental disclosure of cash flow information
Income
taxes paid for the three month period ended March 31, 2008 and 2007 amounted
to
$132,957 and $19,103, respectively. Income taxes paid for the nine month
period
ended March 31, 2008 and 2007 amounted to $3,615,867 and $4,008,062,
respectively
Interest
paid for the three month period ended March 31, 2008 and 2007 amounted to
$126,183 and $92,095, respectively. Interest paid for the nine month period
ended March 31, 2008 and 2007 amounted to $331,341 and $232,727,
respectively.
For
the
nine months period ended March 31, 2008, holders of preferred stock converted
15,400 shares of Series A Convertible Preferred Stock into 663,793 shares
of
common stock, par value $0.001 per share and holders of preferred stock
converted 5,995,780 shares of Series B Convertible Preferred Stock into
299,789,000 shares of common stock, par value $0.001 per share. In Connection
with the Exchange Agreement, the holders of options converted 8,806,250 options
in a cashless exercise into 1,761,250 shares of common stock.
Note
5 - Marketable securities and restricted marketable
securities
Marketable
equity securities consist of investments in equity of publicly traded companies
and are stated at market value based on the most recently traded price of
these
securities at March 31, 2008. The Company classifies marketable securities
(current assets) as trading securities and restricted marketable securities,
as
available for sale securities (long-term assets).If the Company reclassifies
its
securities from available for sale securities to trading securities, the
unrealized gains and losses on those re-classified securities are re-classified
from the accumulated other comprehensive income in stockholders’ equity to the
earnings. For the three months ended March 31, 2008 and 2007, total unrealized
losses related to re-classifications of accumulated comprehensive income
to
earnings amounted to $641,689 and $0. For the nine months ended March 31,
2008
and 2007, total unrealized losses related to re-classifications of accumulated
comprehensive income to earnings amounted to $641,689 and $0.
Realized
gains and losses are determined by the difference between historical purchase
price and gross proceeds received when the marketable securities are sold.
For
the purpose of computing realized gains and losses, cost is identified on
a
specific identification basis. For the three months ended March 31, 2008
and
2007, the Company recognized a loss of $95,504 and $0, respectively, from
the
sale of trading securities. For the nine months ended March 31, 2008 and
2007,
the Company recognized a loss of $19,819 and $0, respectively, from the sale
of
trading securities. The Company also recognized an unrealized loss on trading
securities of $1,159,509 and $0, respectively, for the three months ended
March
31, 2008 and 2007 and $1,150,516 and $0 for the nine months ended March 31,
2008
and 2007, respectively, which has been reflected in the accompanying
consolidated statements of income.
For
the
three months ended March 31, 2008 and 2007, the Company recorded an unrealized
loss on available for sales securities of $270,351 and $0, respectively.
For the
nine months ended March 31, 2008 and 2007, the Company recorded an unrealized
gain of $1,347,852 and $0, respectively. All unrealized gains and losses
related
to available for sale securities have been properly reflected as a component
of
accumulated other comprehensive income in stockholders’ equity.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
6 - Discontinued operations
In
connection with the reverse merger with Karmoya on October 1, 2007, the Company
determined its operating strategy no longer supports its business development
and marketing operations. Accordingly, the entire business development and
marketing operation segment is reported as a discontinued
operation.
The
remaining liabilities of discontinued operations are presented in the balance
sheet under the caption "liabilities assumed from reorganization", totaling
$1,352,997.
The
following table sets forth for the three months ended March 31, 2008 and
2007
indicated selected financial data of the Company's discontinued
operations.
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
-
|
|
$
|
|
|
Cost
of sales
|
|
|
-
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
|
Operating
and other non-operating expenses
|
|
|
228,812
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
228,812
|
|
$
|
|
|
The
following table sets forth for the nine months ended March 31, 2008 and 2007
indicated selected financial data of the Company's discontinued
operations.
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
$
|
-
|
|
$
|
|
|
Cost
of sales
|
|
|
-
|
|
|
|
|
Gross
profit
|
|
|
-
|
|
|
|
|
Operating
and other non-operating expenses
|
|
|
341,743
|
|
|
|
|
Loss
from discontinued operations
|
|
$
|
341,743
|
|
$
|
|
|
Note
7 - Inventories
As
of
March 31, 2008, inventories consisted of the following:
Raw
materials
|
|
$
|
3,083,214
|
|
Packaging
materials
|
|
|
240,839
|
|
Finished
goods
|
|
|
2,218,793
|
|
Total
|
|
$
|
5,542,846
|
|
Note
8 - Plant and equipment
As
of
March 31, 2008, property and equipment consist of the following:
Building
and building improvements
|
|
$
|
10,694,208
|
|
Manufacturing
equipment
|
|
|
1,083,159
|
|
Office
equipment and furniture
|
|
|
325,624
|
|
Vehicle
|
|
|
330,581
|
|
Total
|
|
|
12,433,572
|
|
Less:
accumulated depreciation
|
|
|
1,352,516
|
|
Total
|
|
$
|
11,081,056
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
For
the
three months ended March 31, 2008 and 2007, depreciation expense amounted
to
$134,174 and $24,227, respectively. For the nine months ended March 31, 2008
and
2007, depreciation expense amounted to $375,456 and $253,063,
respectively.
Note
9 - Intangible assets
At
March
31, 2008, intangible assets consist of the following:
Land
use right
|
|
$
|
9,719,167
|
|
Patents
|
|
|
528,360
|
|
License
|
|
|
22,777
|
|
Total
|
|
|
10,270,304
|
|
Less:
accumulated amortization
|
|
|
492,472
|
|
Total
|
|
$
|
9,777,832
|
|
Total
amortization expense for the three months ended March 31, 2008, and 2007
amounted to $55,289 and $20,526, respectively. Total amortization expense
for
the nine months ended March 31, 2008, and 2007 amounted to $113,578 and $75,772,
respectively.
Note
10 - Advance to suppliers
The
Company makes advances to certain vendors’ for inventory purchases. The advances
on inventory purchases amounted to $894,741 as of March 31, 2008.
Note
11 - Short term loans
Short
term bank loans represent amounts due to various banks which are due within
one
year, and these loans can be renewed with the banks. The Company’s short term
bank loans consisted of the following:
Loan
from Communication Bank, due September 2008. Interest Rate at 7.34%
per
annum, monthly interest payment. Guaranteed by related party, Jiangbo
Chinese-Western Pharmacy
|
|
$
|
2,713,200
|
|
Total
|
|
$
|
2,713,200
|
|
Total
interest expense on the short term loans amounted to $126,183 and $92,095
for
the three months ended March 31, 2008. Total interest expense amounted to
$370,884 and $232,727 for the nine months ended March 31, 2008 and
2007.
Note
12 - Notes payable
Notes
payable represent amounts due to various banks which are normally secured
and
are typically renewed. All notes payable are secured by the Company’s restricted
cash. The Company’s notes payables consist of the following:
|
|
|
|
Commercial
Bank, various amounts, due from April 2008 to August 2008.
|
|
$
|
3,488,604
|
|
Total
|
|
$
|
3,488,604
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
13 - Related party transactions
Accounts
receivable - related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd and Yantai Jiangbo
Pharmaceuticals Co., Ltd. For the three months ended March 31, 2008 and 2007,
the Company recorded net revenues of $1,869,092 and $455,580, respectively,
from
sales to related parties. For the nine months ended March 31, 2008 and 2007,
the
Company recorded net revenues of $4,611,849 and $2,963,871, respectively,
from
sales to related parties. As of March 31, 2008, accounts receivable-related
parties consisted of the following:
Receivable
from product sales due from Jiangbo Chinese-Western
Pharmacy
|
|
$
|
615,934
|
|
Receivable
from product sales due from Laiyang Jiangbo Medicals, Co.,
Ltd.
|
|
|
616,966
|
|
Receivable
from product sales due from Yantai Jiangbo Pharmaceuticals Co.,
Ltd.
|
|
|
786,378
|
|
Total
accounts receivable-related parties
|
|
$
|
2,019,278
|
|
Accounts
receivable due from related parties are expected to be paid in cash within
three
to six months.
Other
receivable - related parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy.
For the
nine months ended March 31, 2008 and 2007, the Company also recorded other
income $81,384 and $76,398 from leasing the two buildings. As of March 31,
2008,
the Company had $85,680 other receivable from related parties.
Other
payable - related parties
Prior
to
fiscal year 2007, the Company received advances from its director, shareholders
and related parties for its operating activities. The Company paid off these
advances in March 2008 with cash. As of March 2008, the Company received
$28,560
additional advances from it director for its operating activities. These
advances are due on demand and bear interest at 7.05% for March 31, 2008.
The
interest rates for March 31, 2008 were calculated by using the Company’s 2007
average outstanding bank loan interest rate. The amount is expected to be
repaid
in cash.
At
March
31, 2008, other payable-related parties consisted of the following:
Payable
to Cao Wubo, Chief Executive Officer and Chairman of the Board,
with
annual interest at 7.05% for March 31, 2008 and unsecured
|
|
$
|
28,560
|
|
Total
other payable-related parties
|
|
$
|
28,560
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
14 - Taxes payable
The
Company is subject to the United States federal income tax at a tax rate
of 34%.
No provision for income taxes in the U.S. has been made as the company had
no
U.S. taxable income during the nine months ended March 31, 2008.
The
Company’s wholly owned subsidiaries Karmoya International Ltd. and Union Well
International Ltd. were incorporated in the British Virgin Island (BVI) and
Cayman Island. Under the current laws of the BVI and Cayman Island, the two
entities are not subject to income taxes.
Before
January 1, 2008, companies established in the PRC were generally subject
to an
enterprise income tax ("EIT") rate of 33.0%, which included a 30.0% state
income
tax and a 3.0% local income tax. The PRC local government has provided various
incentives to companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. On March 16, 2007,
the
National People's Congress of China passed the new Enterprise Income Tax
Law
("EIT Law"), and on November 28, 2007, the State Council of China passed
the
Implementing Rules for the EIT Law ("Implementing Rules") which took effect
on
January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT
of
25.0% on all domestic-invested enterprises and FIEs, unless they qualify
under
certain limited exceptions. Therefore, nearly all FIEs are subject to the
new
tax rate alongside other domestic businesses rather than benefiting from
the
FEIT, and its associated preferential tax treatments, beginning January 1,
2008.
In
addition to the changes to the current tax structure, under the EIT Law,
an
enterprise established outside of China with "de facto management bodies"
within
China is considered a resident enterprise and will normally be subject to
an EIT
of 25.0% on its global income. The Implementing Rules define the term "de
facto
management bodies" as "an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise." If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise,
then
the organization's global income will be subject to PRC income tax of
25.0%.
Laiyang
Jianbo and GJBT were originally subject to 33% income tax rate and have not
received any further tax exemption after the fiscal year ended June 30, 2007.
Starting January 1, 2008, Laiyang Jianbo and GJBT are subject to an EIT rate
of
25%.
The
table
below summarizes the differences between the U.S. statutory federal rate
and the
Company’s effective tax rate and as follows for the nine months period ended
March 31, 2008.
|
|
2008
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
Foreign
income not recognized in the U.S
|
|
|
(34.0
|
%)
|
China
income taxes
|
|
|
30.2
|
%
|
Total
provision for income taxes
|
|
|
30.2
|
%
|
Taxes
payable as of March 31, 2008 are as follows:
Value
added taxes
|
|
$
|
5,850,440
|
|
Income
taxes
|
|
|
3,425,169
|
|
Other
taxes
|
|
|
1,245,441
|
|
Total
|
|
$
|
10,521,050
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
15 - Convertible Debt
On
November 7, 2007, the Company entered into a Securities Purchase Agreement
(the
“Purchase Agreement”) with Pope Investments, LLC (the “Investor”) pursuant to
the agreement, the Company issued and sold to the Investor, for $5,000,000
(a)
6% convertible subordinated debentures due November 30, 2010 (the “Debenture”)
and (b) a three-year warrant to purchase 10,000,000 shares of Genesis’s common
stock, par value $0.001 per share, at an exercise price of $0.32 per share,
subject to adjustment as provided therein. The Debenture bears interest at
the
rate of 6% per annum and the initial conversion price of the Debentures is
$0.25
per share. In connection with the offering, the Company placed in escrow
20,000,000 shares of its common stock.
The
Company evaluated the application of EITF 98-5, “
Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,”
and EITF
00-27,
“Application
of Issue No. 98-5 to Certain Convertible Instruments”
and
concluded that the convertible debenture has a beneficial conversion
feature. The Company estimated the fair value of the beneficial
conversion feature of the Debenture at $2,904,093 as a discount to par value.
The fair value of the warrants was estimated at $2,095,907. The two amounts
are
recorded together as debt discount and amortized using the effective interest
method over the three-year term of Debenture.
The
fair
value of the warrants granted with this private placement was computed using
the
Black-Scholes option-pricing model. Variables used in the option-pricing
model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends. The total estimated fair value of
the warrants granted and beneficial conversion feature of the Debenture should
not exceed the $5,000,000 Debenture, the calculated warrant value was used
to
determine the allocation between the fair value of the beneficial conversion
feature of the Debenture and the fair value of the warrants.
In
connection with the private placement, the Company paid the placement agents
a
fee of $250,000 and incurred other expenses of $104,408, which were capitalized
as deferred debt issuance costs and will be amortized to interest expense
over
the life of the debenture. During the nine months ended March 31, 2008,
amortization debt issuance costs were $47,583. The remaining balance of debt
issuance costs at March 31, 2008 was $306,825. The amortization of debt
discounts was $416,666 and $671,296 for the three months and nine months
ended
March 31, 2008, which has been included in interest expense on the accompanying
statement of operations. The balance of the debt discount is $4,328,704 at
March
31, 2008.
The
Company evaluated whether or not the secured convertible debentures contain
embedded conversion options, which meet the definition of derivatives under
SFAS
133 "Accounting for Derivative Instruments and Hedging Activities" and related
interpretations. The Company concluded that since the secured convertible
debentures had a fixed conversion rate of $0.25, the secured convertible
debt
was not a derivative instrument.
The
Debenture bears interest at the rate of 6% per annum, payable in semi-annual
installments on May 31 and November 30 of each year, with the first interest
payment being due on May 31, 2008. The initial conversion price (“Conversion
Price”) of the Debentures is $0.25 per share. If the Company issues common stock
at a price that is less than the effective Conversion Price, or common stock
equivalents with an exercise or conversion price less than the then effective
Conversion Price, the Conversion Price of the Debenture and the exercise
price
of the Warrant will be reduced to such price. The Debenture may not be prepaid
without the prior written consent of the Holder. In connection with the
Offering, the Company placed in escrow 20,000,000 shares of Common Stock
issued
by the Company in the name of the escrow agent. In the event the Company’s
consolidated Net Income Per Share (as defined in the Purchase Agreement),
for
the year ended June 30, 2008 is less than $0.038, the escrow agent shall
deliver
the 20,000,000 shares to the Investor.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Pursuant
to the Purchase Agreement, the Company entered into a Registration Rights
Agreement. Pursuant to the Registration Rights Agreement, the Company must
file
on each Filing Date (as defined in the Registration Rights Agreement) a
registration statement to register the portion of the Registrable Securities
(as
defined therein) as permitted by the Securities and Exchange Commission’s
guidance. The initial registration statement must be filed within 90 days
of the
Closing Date and declared effective within 180 days following the Closing
Date.
Any subsequent registration statements that are required to be filed on the
earliest practical date on which the Company is permitted by the Securities
and
Exchange Commission’s guidance to file such additional registration statement.
Such additional registration statements must be effective 90 days following
the
date on which it is required to be filed. In the event that the registration
statement is not timely filed or declared effective, the Company will be
required to pay liquidated damages. Such liquidated damages shall be, at
the
investor’s option, either $1,643.83 or 6,575 shares of Common Stock per day that
the registration statement is not timely filed or declared effective as required
pursuant to the Registration Rights Agreement, subject to an amount of
liquidated damages not exceeding either $600,000, 2,400,000 shares of Common
Stock, or a combination thereof based upon 12% liquidated damages in the
aggregate. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting
for
Registration Payments" which was effective immediately. This FSP amends EITF
00-19 to require potential registration payment arrangements treated as a
contingency pursuant to FASB Statement 5 rather than at fair value.
The
financing was completed through a private placement to accredited investors
and
is exempt from registration pursuant to Section 4(2) of the Securities Act
of
1933, as amended ("Securities Act"). The Company has not filed its registration
statement as of May 14, 2008, and the investor has agreed to extend the initial
registration filing date. For the nine months ended March 31, 2008, liquidated
damage penalty has no material impact to the Company’s financial
statement.
The
convertible debenture liability is as follows at March 31, 2008:
Convertible
debenture note payable
|
|
$
|
5,000,000
|
|
Less:
unamortized discount on debentures
|
|
|
(4,328,704
|
)
|
Convertible
debentures, net
|
|
$
|
671,296
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
16 - Shareholder's equity
Common
stock
On
October 1, 2007, the Company executed a Share Acquisition and Exchange Agreement
by and among the Company and Karmoya and the shareholders of 100% of the
Karmoya’s capital stock. At closing, the Company issued 5,995,780 shares of its
Series B Voting Convertible Preferred Stock and 597 shares of its common
stock
to Karmoya’s shareholders in exchange for 100% of Karmoya’s capital
stock.
On
October 1, 2007, holders of 8,806,250 options converted the options into
1,761,250 shares of common stock, which reduced the Company’s total number of
outstanding options and warrants to 10,740,704.
In
October 2007, the Company received $180,000 in funding from Greenview Capital
through the sale of its common stock and issued 1,500,000 shares of its common
stock with a Rule 144 restrictive legend.
On
October 8, 2007, Series A preferred stockholder converted 15,400 shares of
Series A Preferred Stock into 663,793 shares of common stock.
On
October 11, 2007, the Company’s board of directors and the majority holders of
its capital stock approved amendments to its Articles of Incorporation by
written consent, including: (1) a change of our corporate name to our current
name, Genesis Pharmaceuticals Enterprises, Inc, (the “Name Change”), (2) a
change of our principal officers and mailing address to our current address
in
the PRC (the “Address Change”), (3) a change in our registered agent and
registered office in Florida (the “Registered Agent Change”), and (4) an
increase in our authorized common stock from 200,000,000 to 600,000,000 shares
(the “Authorized Share Amendment”). The Certificate of Amendment and Certificate
of Change to our Articles of Incorporation to affect the Name Change, Address
Change, Registered Agent Change and the Authorized Share Amendment was filed
with Florida’s Secretary of State on October 16, 2007.
On
October 26, 2007, the shares of Series B Preferred Stock issued were converted,
in the aggregate, into 299,789,000 shares of the Company's common
stock.
At
inception, Karmoya issued 1,000 shares of common stock to its founder. The
shares were valued at par value. On September 20, 2007, the Company issued
9,000
shares of common stock to nine individuals at par value. The balance of $10,000
is shown in capital contribution receivable on the accompanying consolidated
financial statements. As part of its agreements with shareholders, the Company
will receive the entire $10,000 in October 2007; As of March 31, 2008, the
Company has not received the entire $10,000.
On
September 20, 2007, Karmoya acquired 100% of Union Well. Union Well was
established on May 9, 2007 with a registered capital of $1,000. The amount
is
shown in capital contribution receivable on the accompanying consolidated
financial statements. The $1,000 is due in October 2007. As of March 31,
2008,
the Company has not received the $1,000.
In
February 2008, in conjunction with a settlement between the Company and one
of
the Company’s former officers, the former officer exercised 1,500,000 of stock
options for 1,500,000 shares of common stock and the remaining 941,406 options
held by the former officer were cancelled, which reduced the Company’s total
number of outstanding options and warrants to 18,299,298.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Distribution
payable
On
September 30, 2007, the Company paid off its distribution due to its
shareholders by a cash payment in the amount of $10,520,000.
Registered
capital contribution receivable
On
September 17, 2007, Union Well established GJBT in PRC as a 100% wholly owned
foreign limited liability subsidiary (“WFOE”) with registered capital of $12
million. PRC laws require the owner of the WFOE to contribute at least 15%
of
the registered capital within 90 days of its business license issuance date
and
the remaining balance is required to be contributed within two years of the
business license issuance date. The Company funded $4,300,000 on November
8,
2007, and the remaining balance of $7,711,000 by September 17, 2009 required
under the PRC law. These amounts are shown in registered capital contribution
receivable in the accompanying consolidated financial statements.
Note
17 - Warrants
The
exercise price of warrants issued in 2004 to purchase 2,963,361 shares of
common
stock was reduced to $0.25 per share in November 2007. The 2004 warrants
contain
full ratchet anti-dilution provisions to the exercise price, which due to
the
Company’s November 2007 financing, resulted in the 2004 warrants to be
exercisable at $0.25 per share. The provisions of the 2004 Warrants which
result
in the reduction of the exercise price remain in place. Of the 2,963,361
warrants, 2,305,172 shares are exercisable through January 15, 2009 and 658,189
are exercisable through March 29, 2009.
In
Connection with the $5,000,000, 6% convertible subordinated debentures note,
the
Company issued a three-year warrant to purchase 10,000,000 shares of common
stock, at an exercise price of $0.32 per share. The calculated fair value
of the
warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing
model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends.
A
summary
of the warrants as of March 31, 2008 and changes during the period is presented
below:
|
|
|
Number
of warrants outstanding
|
|
|
Number
of warrants exercisable
|
|
|
Weighted
average exercise price
|
|
|
Average
remaining life (years)
|
|
Balance,
October 1, 2007
|
|
|
2,963,361
|
|
|
2,963,361
|
|
$
|
0.25
|
|
|
1.01
|
|
Granted
|
|
|
10,000,000
|
|
|
10,000,000
|
|
|
0.32
|
|
|
2.61
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance,
March 31, 2008
|
|
|
12,963,361
|
|
|
12,963,361
|
|
$
|
0.30
|
|
|
2.24
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
18 - Stock options
At
March
31, 2008, an aggregate of 5,335,937 stock options at an exercise price of
$0.105
per share were held by two former officers. Those options were granted on
July
1, 2007 and the fair value of this option grant was estimated on the date
of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions dividend yield of -0- percent; expected volatility
of 195 percent; risk-free interest rate of 4.5 percent and an expected holding
periods of 3.5 years.
|
|
Expected
Life
|
|
Expected
Volatility
|
|
Dividend
Yield
|
|
Risk
Free Interest Rate
|
|
Grant
Date Fair Value
|
|
Former
Executives
|
|
|
3.50
yrs
|
|
|
195
|
%
|
|
0
|
%
|
|
4.50
|
%
|
$
|
0.13
|
|
The
following is a summary of the option activity:
|
|
|
Number
of options outstanding
|
|
|
Weighted
average exercise price
|
|
|
Aggregate
intrinsic value
|
|
Balance
at October 1, 2007
|
|
|
16,583,593
|
|
$
|
0.10
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Converted
|
|
|
(8,806,250
|
)
|
|
0.09
|
|
|
-
|
|
Cancelled
|
|
|
(941,406
|
)
|
|
0.11
|
|
|
-
|
|
Exercised
|
|
|
(1,500,000
|
)
|
|
0.11
|
|
|
-
|
|
Balance
at March 31, 2008
|
|
|
5,335,937
|
|
$
|
0.11
|
|
$
|
880,430
|
|
Following
is a summary of the status of option outstanding at March 31, 2008:
.
Outstanding
options
|
|
Exercisable
options
|
Exercise
price
|
|
Number
|
|
Average
remaining contractual life (years)
|
|
Average
exercise price
|
|
Number
|
|
Weighted
average exercise price
|
$0.105
|
|
5,335,937
|
|
2.75
|
|
$0.11
|
|
5,335,937
|
|
$0.11
|
Note
19 - Employee pension
The
employee pension in the Company generally includes two parts: the first part
to
be paid by the Company is 30.6% of $128 for each qualified employee each
month.
The other part, paid by the employees, is 11% of $128 each month. For the
three
months ended March 31, 2008 and 2007, the Company made pension contributions
in
the amount of $9,337 and $7,394, respectively. For the nine months ended
March
31, 2008 and 2007, the Company made pension contributions in the amount of
$25,061 and $20,789, respectively.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Note
20 - Statutory reserves
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of People's Republic of China ("PRC GAAP"). Appropriation to the
statutory surplus reserve is required to be at least 10% of the after tax
net
income determined in accordance with PRC GAAP until the reserve is equal
to 50%
of the entities' registered capital. Appropriations to the discretionary
surplus
reserve are made at the discretion of the Board of Directors.
The
statutory surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may
be
utilized for business expansion or converted into share capital by issuing
new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that
the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
The
discretionary surplus fund may be used to acquire fixed assets or to increase
the working capital to expend on production and operation of the business.
The
Company's Board of Directors decided not to make an appropriation to this
reserve for 2007.
According
to the Company's articles, the Company should appropriate 10% of the net
profit
as statutory surplus reserve. For the nine months ended March 31, 2008 and
2007,
the Company appropriated to the statutory surplus reserve $1,582,820 and
$740,537, respectively.
Note
21 - Accumulated other comprehensive income
The
components of accumulated other comprehensive income as follows:
Balance
at June 30, 2007
|
|
$
|
1,146,441
|
|
Foreign
currency translation gain
|
|
|
3,428,779
|
|
Unrealized
gain on marketable securities
|
|
|
1,347,852
|
|
Balance
at March 31, 2008
|
|
$
|
5,923,072
|
|
Note
22 - Commitments and contingencies
In
September 2007, the Company entered into a three year Cooperative Research
and
Development Agreement (CRADA) with a provincial university. Under the CRADA,
the
University is responsible for designing, researching and developing designated
pharmaceutical projects for the Company. Additionally, the University will
also
provide technical services and training to the Company. As part of the
CRADA, the Company will pay RMB 24,000,000 (approximately $3.4 million) plus
out
of pocket expenses to the University annually and provide internship
opportunities for students of the University. The Company will have the
primary ownership of the designated research and development project
results.
In
November 2007, the Company entered into a five year cooperative Research
and
Development Agreement (CRADA) with a research institute. Under the CRADA,
the
institute is responsible for designing, researching and developing designated
pharmaceutical projects for the Company. Additionally, the university will
also
provide technical services and trainings to the Company. As part of the
CRADA, the Company will pay 6,000,000 RMB (approximately $814,000) to the
institute annually. The Company will have the primary ownership of the
designated research and development project results.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
For
the
nine months ended March 31, 2008, the Company expensed $2,170,240 as research
and development expense.
Legal
proceedings
The
following summarized the Company’s pending and settled legal proceedings as of
March 31, 2008:
Elizabeth
Hiromoto et al v. Telecom Communications, Inc. et al. - Case No.
2:07-cv-07858-PSG-E, United States District Court, Central District of
California (Western Division - Los Angeles)
On
December 3, 2007, two individuals filed a lawsuit against the Company, its
former Chief Executive Officer James Wang, and certain others, alleging breach
of contract. As the date of this report, the Company is unable to estimate
a
loss, if any, the Company may incur related to this lawsuit. The Company
plans
to vigorously defend its position.
Fernando
Praca, Plaintiff v.s. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises,
Inc.- Case No. 50 2005 CA 005317, Palm Beach County, Florida
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from
the
sale of Extrema LLC to Genesis Technology Group, Inc. Praca had filed a Motion
of Temporary Injunction but had not proceeded to move this case forward.
The
plaintiff has decided to reinitiate the legal action in March 2008. There
has
been no action in this case since September of 2005, and this case is not
currently set for trial. As of the date of this report, the Company is unable
to
estimate a loss, if any, the Company may incur related expenses to this lawsuit.
The Company plans to vigorously defend its position. If the case proceeds,
we
intend to respond aggressively.
Kenneth
Clinton vs. Genesis Pharmaceuticals Enterprises, Inc., GTEC Holdings, Capital
Growth Financial, Inc., Gary L. Wolfson and Pacific Rim Consultants, Inc.
- Case
No. 50 2007 CA 023923, Palm Beach County, Florida
On
December 21, 2007, Kenneth Clinton, a former director and former President
of
the Company, filed a lawsuit against the Company and certain entities and
persons related to our predecessor Genesis Technology Group, Inc. The complaint
alleges, among other things, breach of contract against the Company for an
agreement to pay the plaintiff certain shares of other public companies
(collectively, the “Reverse Merger Shares”) in connection with reverse merger
transactions arranged by our predecessor, and breach of contract against
the
Company for failure to allow the plaintiff to exercise certain stock options
for
shares in the Company or exchange such options for new shares in the Company.
The plaintiff is seeking relief in the form of (1) delivery of the Reverse
Merger Shares, or in the alternative damages in the amount of those shares,
(2)
a judgment against the Company to allow the plaintiff to exchange and exercise
his stock option for shares in the Company, or in the alternative damages
in the
amount of those shares, and (3) a declaratory judgment regarding a pledge
and
escrow agreement with defendant Capital Growth Financial.
In
February 2008, the Company entered into a settlement agreement and general
release with Mr. Clinton whereby the Company agreed to allow Mr. Clinton
exercise 1.5 million stock options issued under the Company’s 2007 stock option
plan for shares in the Company and released and discharged Mr. Clinton from
any
and all claims, demands or obligations. Mr. Clinton agreed to waive and releases
the Company from any and all claims, demands or
obligations.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31,
2008
(UNAUDITED)
Other
litigation
The
Company currently has pending before the American Arbitration Association
the
case of
CRG
Partners, Inc.(“CRG”) and Genesis Technology Group, Inc. n/k/a Genesis
Pharmaceuticals Enterprises, Inc.
In that
matter, CRG seeks breach of contract damages from the Company for approximately
30 million shares of the Company’s stock or a dollar amount equal to the value
of the stock, estimated by CRG at approximately $10 million. As of the date
of
this report, the Company is unable to estimate a loss, if any, the Company
may
incur related expenses to this lawsuit. The Company plans to vigorously defend
its position.
Note
23- Subsequent Event
In
May
2008, the Company reached an agreement with Mr. Yang Lainkaun to amend a
settlement agreement signed in September 2007. Mr. Yang agreed to accept
1,000,000 shares of Gold Horse International Inc. shares and $60,000 in cash
instead of the previously agreed 840,000 shares and $120,000 in cash to
settle the Company’s obligation related to financing of Gold Horse
International, Inc. At March 31, 2008, the Company recognized a loss of $133,800
which is recorded in loss from discontinued operations.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of Karmoya International Limited and
Subsidiaries
We
have
audited the accompanying balance sheets of Karmoya International Limited
and
Subsidiaries as of June 30, 2007 and 2006, and the related statements of
income
and other comprehensive income, stockholders’ equity, and cash flows for each of
the years in the three-year period ended June 30, 2007. These financial
statements are the responsibility of the company’s management. Our
responsibility is to express an opinion on these 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. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, 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 financial statements referred to above present fairly, in all
material respects, the financial position of Karmoya International Limited
and
Subsidiaries as of June 30, 2007 and 2006, and the results of its operations
and
its cash flows for each of the years in the three-year period ended June
30,
2007 in conformity with accounting principles generally accepted in the United
States of America.
/s/
Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut,
California
September
28, 2007
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF JUNE 30, 2007 AND 2006
|
|
2007
|
|
2006
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
17,737,208
|
|
$
|
3,371,598
|
|
Restricted
cash
|
|
|
8,410,740
|
|
|
8,432,999
|
|
Accounts
receivable, net of allowance for doubtful accounts of
$166,696
|
|
|
|
|
|
|
|
and
$158,710 as of June 30, 2007 and 2006, respectively
|
|
|
11,825,442
|
|
|
9,758,715
|
|
Accounts
receivable - related parties
|
|
|
498,940
|
|
|
413,850
|
|
Notes
receivable
|
|
|
57,965
|
|
|
29,162
|
|
Inventories
|
|
|
5,130,934
|
|
|
6,573,362
|
|
Other
receivables
|
|
|
23,623
|
|
|
2,073
|
|
Advance
to suppliers
|
|
|
313,018
|
|
|
232,708
|
|
Deferred
expense
|
|
|
88,815
|
|
|
1,613,077
|
|
Tax
prepayment
|
|
|
12,153
|
|
|
-
|
|
Total
current assets
|
|
|
44,098,838
|
|
|
30,427,544
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
10,179,134
|
|
|
4,860,561
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
1,119,087
|
|
|
1,184,843
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
55,397,059
|
|
$
|
36,472,948
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,051,506
|
|
$
|
3,935,433
|
|
Short
term bank loans
|
|
|
4,602,500
|
|
|
5,634,000
|
|
Notes
payable
|
|
|
8,410,740
|
|
|
8,432,999
|
|
Other
payables
|
|
|
1,367,052
|
|
|
2,071,905
|
|
Other
payables - related parties
|
|
|
933,132
|
|
|
4,649,691
|
|
Accrued
liabilities
|
|
|
216,468
|
|
|
161,558
|
|
Taxes
payable
|
|
|
-
|
|
|
2,146,887
|
|
Dividend
payable
|
|
|
10,520,000
|
|
|
-
|
|
Total
current liabilities
|
|
|
28,101,398
|
|
|
27,032,473
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Common
Stock, $1 par value, 10,000 shares authorized,
|
|
|
|
|
|
|
|
10,000
shares issued and outstanding
|
|
|
10,000
|
|
|
10,000
|
|
Paid-in-capital
|
|
|
18,339,000
|
|
|
13,211,000
|
|
Subscription
receivable
|
|
|
(11,000
|
)
|
|
(11,000
|
)
|
Captial
contribution receivable
|
|
|
(12,000,000
|
)
|
|
(12,000,000
|
)
|
Retained
earnings
|
|
|
17,653,583
|
|
|
7,453,497
|
|
Statutory
reserves
|
|
|
2,157,637
|
|
|
648,667
|
|
Accumulated
other comprehensive income
|
|
|
1,146,441
|
|
|
128,311
|
|
Total
shareholders' equity
|
|
|
27,295,661
|
|
|
9,440,475
|
|
Total
liabilities and shareholders' equity
|
|
$
|
55,397,059
|
|
$
|
36,472,948
|
|
See
report of independent registered public accounting firm.
The accompanying
notes are an integral part of these statements.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
|
|
2007
|
|
2006
|
|
2005
|
|
Sales
|
|
$
|
72,259,812
|
|
$
|
45,242,987
|
|
$
|
10,852,106
|
|
Sales
- related party
|
|
|
3,933,881
|
|
|
3,913,452
|
|
|
1,899,266
|
|
TOTAL
REVENUE
|
|
|
76,193,693
|
|
|
49,156,439
|
|
|
12,751,372
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
21,161,530
|
|
|
15,686,233
|
|
|
8,771,942
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
55,032,163
|
|
|
33,470,206
|
|
|
3,979,430
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT EXPENSE
|
|
|
11,143,830
|
|
|
13,642,200
|
|
|
1,240,252
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
25,579,361
|
|
|
7,894,672
|
|
|
1,689,004
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
18,308,972
|
|
|
11,933,334
|
|
|
1,050,174
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
-
|
|
|
7,176
|
|
|
-
|
|
Non-operating
income
|
|
|
(6,593,145
|
)
|
|
-
|
|
|
-
|
|
Non-operating
expense
|
|
|
6,189
|
|
|
1,230
|
|
|
3,752
|
|
Interest
(expense) income, net
|
|
|
211,616
|
|
|
378,410
|
|
|
249,567
|
|
OTHER
EXPENSE (INCOME), NET
|
|
|
(6,375,340
|
)
|
|
386,816
|
|
|
253,319
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
24,684,312
|
|
|
11,546,518
|
|
|
796,855
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,631,256
|
|
|
3,810,351
|
|
|
262,962
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
22,053,056
|
|
|
7,736,167
|
|
|
533,893
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
1,018,130
|
|
|
128,311
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
23,071,186
|
|
$
|
7,864,478
|
|
$
|
533,893
|
|
See
report of independent registered public accounting firm.
The accompanying
notes are an integral part of these statements.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR
THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
|
|
|
Number
of
shares
|
|
|
Common
stock
|
|
|
Additional
Paid-in
capital
|
|
|
Subscription
receivable
|
|
|
Capital
contribution
receivable
|
|
|
Statutory
reserves
|
|
|
Retained
earnings
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Totals
|
|
BALANCE,
June 30, 2004
|
|
|
10,000
|
|
$
|
10,000
|
|
$
|
13,211,000
|
|
$
|
(11,000
|
)
|
$
|
(12,000,000
|
)
|
$
|
-
|
|
$
|
(167,896
|
)
|
$
|
-
|
|
$
|
1,042,104
|
|
Recapitalization
of Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,409
|
|
|
(136,409
|
)
|
|
|
|
|
-
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
533,893
|
|
|
|
|
|
533,893
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
BALANCE,
June 30, 2005
|
|
|
10,000
|
|
$
|
10,000
|
|
$
|
13,211,000
|
|
$
|
(11,000
|
)
|
$
|
(12,000,000
|
)
|
$
|
136,409
|
|
$
|
229,588
|
|
$
|
-
|
|
$
|
1,575,997
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512,258
|
|
|
(512,258
|
)
|
|
|
|
|
-
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,736,167
|
|
|
|
|
|
7,736,167
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,311
|
|
|
128,311
|
|
BALANCE,
June 30, 2006
|
|
|
10,000
|
|
$
|
10,000
|
|
$
|
13,211,000
|
|
$
|
(11,000
|
)
|
$
|
(12,000,000
|
)
|
$
|
648,667
|
|
$
|
7,453,497
|
|
$
|
128,311
|
|
$
|
9,440,475
|
|
Capital
contribution
|
|
|
|
|
|
|
|
|
5,128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,128,000
|
|
Dividend
distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,344,000
|
)
|
|
|
|
|
(10,344,000
|
)
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,508,970
|
|
|
(1,508,970
|
)
|
|
|
|
|
-
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,053,056
|
|
|
|
|
|
22,053,056
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018,130
|
|
|
1,018,130
|
|
BALANCE,
June 30, 2007
|
|
|
10,000
|
|
$
|
10,000
|
|
$
|
18,339,000
|
|
$
|
(11,000
|
)
|
$
|
(12,000,000
|
)
|
$
|
2,157,637
|
|
$
|
17,653,583
|
|
$
|
1,146,441
|
|
$
|
27,295,661
|
|
See
report of independent registered public accounting firm.
The accompanying
notes are an integral part of these statements.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2007, 2006 AND 2005
|
|
2007
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
22,053,056
|
|
$
|
7,736,167
|
|
$
|
533,893
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
|
|
|
|
|
|
|
provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
364,417
|
|
|
255,602
|
|
|
198,936
|
|
Amortization
of intangible assets
|
|
|
122,126
|
|
|
111,786
|
|
|
91,541
|
|
Bad
debt expense
|
|
|
-
|
|
|
157,214
|
|
|
-
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,534,814
|
)
|
|
(6,945,531
|
)
|
|
(2,763,440
|
)
|
Accounts
receivable - related parties
|
|
|
(62,599
|
)
|
|
(12,538
|
)
|
|
(208,171
|
)
|
Notes
receivables
|
|
|
(26,626
|
)
|
|
(28,888
|
)
|
|
-
|
|
Inventories
|
|
|
1,727,215
|
|
|
(3,680,020
|
)
|
|
(2,469,894
|
)
|
Other
receivables
|
|
|
(20,889
|
)
|
|
3,359
|
|
|
23,675
|
|
Advance
to suppliers
|
|
|
(66,821
|
)
|
|
264,641
|
|
|
36,231
|
|
Deferred
expense
|
|
|
1,563,800
|
|
|
(1,445,205
|
)
|
|
(148,951
|
)
|
Tax
prepayment
|
|
|
(11,837
|
)
|
|
-
|
|
|
-
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(2,027,968
|
)
|
|
764,749
|
|
|
2,488,262
|
|
Other
payables
|
|
|
(827,498
|
)
|
|
(630,146
|
)
|
|
653,413
|
|
Other
payables - related parties
|
|
|
(3,848,086
|
)
|
|
(1,470,501
|
)
|
|
3,263,419
|
|
Accrued
liabilities
|
|
|
45,567
|
|
|
70,348
|
|
|
68,346
|
|
Taxes
payable
|
|
|
(2,157,075
|
)
|
|
1,905,120
|
|
|
156,352
|
|
Net
cash provided by (used in) operating activities
|
|
|
15,291,968
|
|
|
(2,943,843
|
)
|
|
1,923,612
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of intangible assets
|
|
|
-
|
|
|
(34,106
|
)
|
|
(827,223
|
)
|
Purchase
of equipment
|
|
|
(183,237
|
)
|
|
(531,890
|
)
|
|
(356,135
|
)
|
Net
cash used in investing activities
|
|
|
(183,237
|
)
|
|
(565,996
|
)
|
|
(1,183,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from bank loans
|
|
|
4,471,600
|
|
|
5,568,750
|
|
|
-
|
|
Payments
for bank loans
|
|
|
(5,688,450
|
)
|
|
-
|
|
|
-
|
|
Notes
payable
|
|
|
(435,022
|
)
|
|
4,544,294
|
|
|
3,716,467
|
|
Restricted
cash
|
|
|
435,022
|
|
|
(4,544,212
|
)
|
|
(3,716,546
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(1,216,850
|
)
|
|
5,568,832
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
473,729
|
|
|
74,821
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH
|
|
|
14,365,610
|
|
|
2,133,814
|
|
|
740,175
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of the year
|
|
|
3,371,598
|
|
|
1,237,784
|
|
|
497,609
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of the year
|
|
$
|
17,737,208
|
|
$
|
3,371,598
|
|
$
|
1,237,784
|
|
See
report of independent registered public accounting firm.
The accompanying
notes are an integral part of these statements.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Note
1 - Organization
Karmoya
International Limited (“Karmoya” or the “Company”) was established on July 18,
2007, under the laws of British Virgin Islands. The majority shareholders
of
Karmoya are Chinese citizens who own 100% of Laiyang Jiangbo Pharmaceutical
Co.,
Ltd (“Laiyang Jiangbo”) which is a limited liability company and was formed
under laws of the People’s Republic of China (“PRC”). Karmoya was established as
a “special purpose vehicle” for the foreign fund rising for Laiyang Jiangbo.
China State Administration of Foreign Exchange (“SAFE”) requires the owners of
any Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure for foreign financing as well as subsequent
acquisition matter under the “Circular 106” in PRC. On September 19, 2007,
Karmoya was approved by local Chinese SAFE as a “special purpose vehicle”
offshore company.
On
September 20, 2007, Karmoya acquired 100% of Union Well International Limited
(“Union Well”), a Cayman Islands corporation established on May 9, 2007. On
September 17, 2007, Union Well established a 100% subsidiary, Genesis Jiangbo
(Laiyang) Biotech Technology Co., Ltd. (“GJBT”), in PRC as a wholly owned
foreign limited liability company with registered capital of $12 million.
GJBT
is engaged in the developing, manufacturing and selling healthy
medicines.
Laiyang
Jiangbo was formed under laws of the People’s Republic of China in August, 2003
with registered capital of $1,210,000 (RMB 10,000,000). On December 1, 2006,
Laiyang Jiangbo’s registered capital increased to $6,664,000 (RMB 50,000,000).
Laiyang Jiangbo produces and sells western pharmaceuticals. Further, Laiyang
Jiangbo is focused on the development of innovative medicines to address
various
medical needs for patients worldwide. Laiyang Jiangbo’s operates in 26 provinces
and is headquartered in Laiyang City, Shandong province, China.
On
September 21, 2007, GJBT entered a series of contractual arrangements (the
“Contractual Arrangements”) with Laiyang Jiangbo and its shareholders in which
GJBT takes over management of business activities of Laiyang Jiangbo and
holds a
100% variable interest in Laiyang Jiangbo. The Contractual Arrangements are
comprised of a series of agreements, including a Consulting Services Agreement
and an Operating Agreement, through which GJBT has the right to advise, consult,
manage and operate each of Laiyang Jiangbo, and collect and own all of their
respective net profits. Additionally, Laiyang Jiangbo’s Shareholders have
granted their voting rights over Laiyang Jiangbo to GJBT. In order to further
reinforce GJBT’s rights to control and operate Laiyang Jiangbo, Laiyang Jiangbo
and its shareholders have granted GJBT, the exclusive right and option to
acquire all of their equity interests in Laiyang Jiangbo or, alternatively,
all
of the assets of Laiyang Jiangbo. Further Laiyang Jiangbo Shareholders have
pledged all of their rights, titles and interests in the Laiyang Jiangbo
to
GJBT. As both companies are under common control, this has been accounted
for as
a reorganization of entities and the financial statements have been prepared
as
if the reorganization had occurred retroactively. The Company consolidates
Laiyang Jiangbo’s results, assets and liabilities in its financial
statements.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Through
GJBT, Karmoya operates and controls Laiyang Jiangbo through the Contractual
Arrangements. The reasons that Karmoya used the contractual arrangements
to
acquire control of Laiyang Jiangbo, instead of using a complete acquisition
of
Laiang Jiangbo’s assets or equity to make Laiyang Jiangbo a wholly-owned
subsidiary of Karmoya, are that (i) new PRC laws governing share exchanges
with
foreign entities, which became effective on September 8, 2006, make the
consequences of such acquisitions uncertain and (ii) other than by share
exchange, PRC law requires Laiyang Jiangbo be acquired for cash and Karmoya
was
not able to raise sufficient funds to pay the full appraised value for Laiyang
Jiangbo’s assets or shares as required under PRC law.
Note
2 - Summary of significant accounting policies
Basis
of presentation
The
financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America ("US GAAP").
Principles
of consolidation
The
accompanying consolidated financial statements include the financial statements
of Karmoya International Limited and it’s wholly owned subsidiaries, Union Well,
GJBT, and its 100% variable interest entity Laiyang Jiangbo. All significant
inter-company transactions and balances have been eliminated in
consolidation.
In
accordance with Interpretation No. 46R, Consolidation of Variable Interest
Entities ("FIN 46R"), variable interest entities (“VIEs”) are generally entities
that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack adequate
decision making ability. All VIEs with which the Company is involved must
be
evaluated to determine the primary beneficiary of the risks and rewards of
the
VIE. The primary beneficiary is required to consolidate the VIE for financial
reporting purposes.
In
connection with the adoption of FIN 46R, the Company concludes that Laiyang
Jiangbo is a VIE and the Company is the primary beneficiary. Under FIN 46R
transition rules, the financial statements of Laiyang Jiangbo are then
consolidated into the Company’s consolidated financial statements.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency
of
the Company is the local currency, the Chinese Renminbi (“RMB”). Results of
operations and cash flows are translated at average exchange rates during
the
period, assets and liabilities are translated at the unified exchange rate
as
quoted by the People’s Bank of China at the end of the period, and equity is
translated at historical exchange rates. Transaction gains and losses that
arise
from exchange rate fluctuations on transactions denominated in a currency
other
than the functional currency are included in the results of operations as
incurred.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Translation
adjustments amounted to $1,146,441 and $128,311 as of June 30, 2007 and 2006,
respectively. Asset and liability accounts at June 30, 2007 were translated
at
7.60 RMB to $1.00 USD as compared to 7.99 RMB at June 30, 2006. Equity accounts
were stated at their historical rate. The average translation rates applied
to
income statements for the year ended June 30, 2007, 2006 and 2005 were 7.81
RMB,
8.06 RMB and 8.26 RMB, respectively. In accordance with Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows," cash flows from the
Company's operations is calculated based upon the local currencies using
the
average translation rate. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred
to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s Staff
Accounting Bulletin (“SAB”) No. 101, “
Revenue Recognition in Financial Statements
”
as
amended by SAB No. 104 (together, “SAB 104”), and Statement of
Financial Accounting Standards (“SFAS”) No. 48 “
Revenue Recognition When Right of Return Exists.
”
SAB 104 states that revenue should not be recognized until it is
realized or realizable and earned. In general, the Company records revenue
when
persuasive evidence of an arrangement exists, services have been rendered
or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured.
The
Company is generally not contractually obligated to accept returns. However,
on
a case by case negotiated basis, the Company permits customers to return
their
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when the Right of Return Exists", revenue
is recorded net of an allowance for estimated returns. Such reserves are
based
upon management's evaluation of historical experience and estimated costs.
The
amount of the reserves ultimately required could differ materially in the
near
term from amounts included in the accompanying consolidated financial
statements.
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs. Shipping and handling costs amounted to
$514,401, $153,881, and $38,979, respectively, for the years ended June 30,
2007, 2006 and 2005.
Use
of
estimates
The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates. Significant estimates include the allowance for doubtful accounts
and
sales returns, the allowance for obsolete inventory, the useful life of property
and equipment and intangible assets, and accruals for taxes due.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Financial
instruments
Statement
of Financial Accounting Standards No. 107 (“SFAS 107”), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value
of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, notes receivable,
other
receivables, prepayments, accounts payable, other payable, accrued liabilities,
customer deposits, tax payable, and loans to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of
interest.
Cash
and cash equivalents
Cash
includes cash on hand and demand deposits in accounts maintained with
state-owned banks within the People’s Republic of China. For purposes of the
statements of cash flows, the Company considers all highly liquid instruments
purchased with a maturity of three months or less and money market accounts
to
be cash equivalents. Balances at financial institutions or state owned banks
within the PRC are not covered by insurance. Total cash (including restricted
cash balances) in banks at June 30, 2007 and 2006 amounted to $26,278,194
and
$11,787,389, respectively. The Company has not experienced any losses in
such
accounts and believes it is not exposed to any risks on its cash in bank
accounts.
Restricted
cash
The
Company had restricted cash of $8,410,740 and $8,432,999 as of June 30, 2007
and
June 30, 2006, respectively. The restricted funds are kept as security deposits
for bank acceptance related to the Company’s notes payable.
Accounts
receivable
The
Company has a policy of reserving for uncollectible accounts based on its
best
estimate of the amount of probable credit losses in its existing accounts
receivable. The Company periodically reviews its accounts receivable to
determine whether an allowance is necessary based on an analysis of past
due
accounts and other factors that may indicate that the realization of an account
may be in doubt. Account balances deemed to be uncollectible are written
off
after all means of collection have been exhausted and the potential for recovery
is considered remote. Accounts receivable, net of allowance for doubtful
accounts outstanding at June 30, 2007 and 2006 amounted to $11,825,442 and
$9,758,715, respectively.
The
activity in the allowance for doubtful accounts for accounts receivable for
the
periods ended June 30, 2007 and 2006 is as follows:
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
158,710
|
|
|
-
|
|
Additions
charged to bad debt expense
|
|
|
-
|
|
|
158,710
|
|
Write-off
charged against the allowance
|
|
|
-
|
|
|
-
|
|
Foreighn
currency translation adjustments
|
|
|
7,986
|
|
|
-
|
|
Ending
allowance for doubtful accounts
|
|
$
|
166,696
|
|
|
158,710
|
|
Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average
method. As of June 30, 2007 and 2006, inventories consisted of the
following:
|
|
2007
|
|
2006
|
|
Raw
materials
|
|
$
|
2,955,915
|
|
$
|
4,905,832
|
|
Packing
materials
|
|
|
609
|
|
|
39,093
|
|
Finished
goods
|
|
|
2,174,410
|
|
|
1,628,437
|
|
Total
|
|
$
|
5,130,934
|
|
$
|
6,573,362
|
|
The
Company reviews its inventory periodically for possible obsolete goods or
to
determine if any reserves are necessary. As of June 30, 2007 and 2006, the
Company has determined that no reserves are necessary.
Advance
to suppliers
The
Company advances monies to certain vendors for purchase of its material.
The
advances to suppliers are interest free and unsecured.
Plant
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
|
|
Useful
Life
|
|
Building
and building improvements
|
|
|
20
- 40
|
|
|
Years
|
|
Manufacturing
equipment
|
|
|
10
- 15
|
|
|
Years
|
|
Office
equipment and furniture
|
|
|
5
- 8
|
|
|
Years
|
|
Vehicle
|
|
|
5
|
|
|
Years
|
|
The
cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the
cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Long-lived
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the
future
projected cash flows from related operations. The Company also re-evaluates
the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2007, the Company
expects these assets to be fully recoverable.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
As
of
June 30, 2007 and 2006, property and equipment consist of the
following:
|
|
2007
|
|
2006
|
|
Building
and building improvements
|
|
$
|
9,824,210
|
|
$
|
4,332,980
|
|
Manufacturing
equipment
|
|
|
785,219
|
|
|
737,960
|
|
Office
equipment and furniture
|
|
|
217,813
|
|
|
195,752
|
|
Vehicle
|
|
|
233,385
|
|
|
76,936
|
|
Total
|
|
|
11,060,627
|
|
|
5,343,628
|
|
Less:
accumulated depreication
|
|
|
881,493
|
|
|
483,067
|
|
Total
|
|
$
|
10,179,134
|
|
$
|
4,860,561
|
|
For
the
year ended June 30, 2007, 2006 and 2005, depreciation expense amounted to
$364,417, $255,602 and $198,936, respectively.
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. The Company has recorded the costs paid to
acquire
a long-term interest to utilize the land underlying the Company's facility
as
land use rights. This type of arrangement is common for the use of land in
the
PRC. The land use rights are amortized on the straight-line method over the
term
of the land use rights of 50 years. The Company purchased land use rights
on
August 2004 for an original price of approximately $878,702.
Purchased
technological know-how includes secret formulas, manufacturing processes,
technical, procedural manuals and the certificate of drugs production and
is
amortized using the straight-line method over the expected useful economic
life
of 5 years, which reflects the period over which those formulas, manufacturing
processes, technical and procedural manuals are kept secret to the Company
as
agreed between the Company and the selling parties.
Intangible
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the
future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2007, the Company
expects these assets to be fully recoverable.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
At
June
30, 2007 and 2006, intangible assets consist of the following:
|
|
Useful
Life
|
|
2007
|
|
2006
|
|
Land
Use Right
|
|
|
40
Years
|
|
$
|
954,954
|
|
$
|
909,202
|
|
Patent
|
|
|
5
Years
|
|
|
486,550
|
|
|
463,240
|
|
License
|
|
|
5
Years
|
|
|
20,974
|
|
|
19,969
|
|
Total
|
|
|
|
|
|
1,462,478
|
|
|
1,392,411
|
|
Less:
accumulated Amortization
|
|
|
|
|
|
343,391
|
|
|
207,568
|
|
Total
|
|
|
|
|
$
|
1,119,087
|
|
$
|
1,184,843
|
|
As
of
June 30, 2007 and 2006, accumulated amortization amounted to $343,391 and
$207,568, respectively. Total amortization expense for the years ended June
30,
2007, 2006 and 2005 amounted to $122,126, $111,786 and $91,541,
respectively.
Income
taxes
The
Company is governed by the Income Tax Law of the People’s Republic of China.
Income taxes are accounted for under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. There are no deferred tax
amounts
at June 30, 2007 and 2006. The charge for taxation is based on the results
for
the year as adjusted for items, which are non-assessable or disallowed. It
is
calculated using tax rates that have been enacted or substantively enacted
by
the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
A
tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination.
For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no affect on the Company’s financial
statements.
Deferred
tax is calculated using tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it is related to items credited
or
charged directly to equity, in which case the deferred tax is also dealt
with in
equity. Deferred tax assets and liabilities are offset when they related
to
income taxes levied by the same taxation authority and the Company intends
to
settle its current ax assets and liabilities on a net basis.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Value
added tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import
and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales
price.
A credit is available whereby VAT paid on the purchases of semi-finished
products, raw materials used in the production of the Company’s finished
products, and payment of freight expenses can be used to offset the VAT due
on
sales of the finished product.
VAT
on
sales and VAT on purchases amounted to $5,523,840 and $262,013 for the year
ended June 30, 2007, $8,410,050 and $151,889 for the year ended June 30,
2006,
and $2,167,733 and $249,678 for the year ended June 30, 2005, respectively.
Sales and purchases are recorded net of VAT collected and paid as the Company
acts as an agent for the government. VAT taxes are not impacted by the income
tax holiday. The Chinese local government has exempted the Company’s VAT tax
payable from January 1, 2007 to June 30, 2007.
Advertising
Advertising
is expensed as incurred. Advertising expenses amounted to $8,064,137, $1,213,733
and $120,722 for the years ended June 30, 2007, 2006 and 2005,
respectively.
Research
and development
Research
and development costs are expensed as incurred. These costs primarily consist
of
cost of material used and salaries paid for the development of the Company’s
products and fees paid to third parties. Research and development costs for
the
years ended June 30, 2007, 2006 and 2005 were approximately $11,143,830,
$13,642,200 and $1,240,252, respectively, and are included in operating
expenses.
Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157,
“Fair
Value Measurements”
(SFAS 157), which provides guidance for how companies should measure fair
value when required to use a fair value measurement for recognition or
disclosure purposes under generally accepted accounting principle (GAAP).
SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently assessing the impact, if any, the adoption
of
SFAS 157 will have on its financial statements.
In
December 2006, FASB Staff Position No. EITF 00-19-2,
“Accounting
for Registration Payment Arrangements,”
was
issued. The FSP specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured
in
accordance with SFAS No. 5,
“Accounting
for Contingencies.”
The
Company believes that its current accounting is consistent with the FSP.
Accordingly, adoption of the FSP had no effect on its financial
statements.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial Liabilities, Including
an
Amendment of FASB Statement No. 115”
, under
which entities will now be permitted to measure many financial instruments
and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This Statement is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on
or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if
any, the adoption of SFAS 159 will have on its financial
statements.
In
June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in
Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered
for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been performed.
The
Company is currently evaluating the effect of this pronouncement on financial
statements.
Note
3 - Supplemental disclosure of cash flow information
Income
taxes paid for the years ended June 30, 2007, 2006 and 2005 amounted to
$447,911, $2,554,136, and $4,058,169, respectively.
Interest
paid for the years ended June 30, 2007, 2006 and 2005 amounted to $280,628,
$231,520, and $0, respectively.
Capital
contribution for the amount of $5,128,000 was contributed by buildings on
December 22, 2006.
Note
4 - Debt
Short
Term Bank Loans
Short
term loans represent amounts due to various banks which are due within one
year,
and these loans can be renewed with the banks. The Company’s short term bank
loans consisted of the following:
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Loan
from Communication Bank, due various dates from September 2006 to
September 2007. Interest rate at 5.022% to 7.344% per
annum, monthly interest payment. Guaranteed by related party,
Jiangbo Chinese-Western Pharmacy.
|
|
$
|
2,630,000
|
|
$
|
3,756,000
|
|
|
|
|
|
|
|
|
|
Loan
from Commercial Bank, due September 2006. Interest rate at 7.254% per
annum. Monthly interest payment. Guaranteed by the Company's
buildings and land use rights.
|
|
|
-
|
|
|
1,878,000
|
|
|
|
|
|
|
|
|
|
Loan
from Hua Xia Bank, due April 2008. Interest rate at 6.39% per annum.
Guaranteed by the Company's buildings and land use
rights.
|
|
|
1,972,500
|
|
|
-
|
|
Total:
|
|
$
|
4,602,500
|
|
$
|
5,634,000
|
|
The
loans
are secured by buildings and land use rights with carrying values as
follows:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Buildings
|
|
$
|
4,143,723
|
|
$
|
4,085,154
|
|
Land
use rights
|
|
|
885,918
|
|
|
866,205
|
|
Total
|
|
$
|
5,029,641
|
|
$
|
4,951,359
|
|
Total
interest expenses amounted to $280,628, $231,520 and $0 for the years ended
June
30, 2007, 2006 and 2005, respectively.
Notes
Payable
Notes
payable represent amounts due to various banks which are normally secured
and
are typically renewed. The Company’s notes payables consisted of the
following:
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
Commercial
Bank, various amounts, due from July 2007
|
|
$
|
8,279,240
|
|
|
8,215,777
|
|
to
December 2007. 100% of restricted cash deposited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication
Bank, due from July 2007 to December
|
|
|
|
|
|
|
|
2007.
100% of restricted cash deposited
|
|
|
131,500
|
|
|
217,222
|
|
Total
|
|
$
|
8,410,740
|
|
$
|
8,432,999
|
|
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Note
5 - Related party transactions
Accounts
receivable - related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd and Yantai Jiangbo
Pharmaceuticals Co., Ltd. At June 30, 2007 and 2006, accounts receivable
from
product sales due from the three companies owned by the Company's Chief
Executive Officer and major shareholders amounted to $498,940 and $413,850,
respectively. For the years ended June 30, 2007, 2006, and 2005, the Company
recorded net revenues of $3,018,502, $2,471,143 and $1,248,691 to Jiangbo
Chinese-Western Pharmacy, $436,909, $231,722, and $441,265 to Laiyang Jiangbo
Medicals, Co., Ltd and $478,470, $1,210,587, and $209,310 to Yantai Jiangbo
Pharmaceuticals Co., Ltd., respectively. In general, accounts receivable
due from related parties are payable in cash and are due within 3 to 6
months.
Other
payable - related parties
Prior
to
fiscal year 2007, the Company receives advances from its director, shareholders
and related parties for its operating activities. At June 30, 2007, the Company
had payable balances due to its shareholders and related parties amounting
$757,531 and $175,601 respectively. At June 30, 2006, the Company had payable
balances due to its director, shareholders and related parties totaling
$2,456,852, $1,397,602 and $795,237, respectively. These advances are short-term
in nature and bears interest rate at 5.84%, and 6.03%, for 2007 and 2006,
respectively. The interest rate for 2007 was calculated by using the Company’s
2007 average outstanding bank loan interest rate; and the interest rate for
2006
was calculated by using the 2006 Bank of China 6 months to 1 year basic bank
loan interest rate. The amount is expected to be repaid in the form of
cash.
At
June
30, 2007 and 2006, other payable-related parties consisted of the
following:
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
|
|
2007
|
|
2006
|
|
Payable
to Cao Wubo, Chief Executive Officer and
Chairman
of the Board, with annual interest at
5.84%
and 6.03%, for 2007 and 2006 respectively,
and
unsecured.
|
|
$
|
447,531
|
|
$
|
2,456,852
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guihong, shareholder and sister of
CEO’s
spouse, with annual interest at 5.84% and
6.03%,
for 2007 and 2006 respectively, and
unsecured.
|
|
|
280,334
|
|
|
1,369,358
|
|
|
|
|
|
|
|
|
|
Payable
to Zhang Yihua, shareholder of the
Company
and Yantai Jiangbo Pharmaceuticals,
and
nephew of CEO, with annual interest at 5.84%
and
6.03%, for 2007 and 2006 respectively, and
unsecured.
|
|
|
29,665
|
|
|
28,244
|
|
|
|
|
|
|
|
|
|
Payable
to Yantai Jiangbo Pharmaceuticals, an
affiliated
company, with annual interest at 5.84%
and
6.03%, for 2007 and 2006 respectively, and
unsecured.
|
|
|
106,910
|
|
|
727,788
|
|
|
|
|
|
|
|
|
|
Payable
to Laiyang Jiangbo Medicals, an affiliated
company,
with annual interest at 5.84% and
6.03%,
for 2007 and 2006 respectively, and
unsecured.
|
|
|
68,249
|
|
|
67,029
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guifang, who is the direct relative of
|
|
|
|
|
|
|
|
one
of the Company's shareholder
|
|
|
443
|
|
|
420
|
|
Total
other payable-related parties
|
|
$
|
933,132
|
|
$
|
4,649,691
|
|
Note
6 - Dividend payable
Dividends
declared are split pro rata between the shareholders according to their
ownership interest. The payment of the dividends may occur at different times
to
the shareholders. As of June 30, 2007, the Company had a dividend payable
balance amounting to $10,520,000.
Note
7 - Taxes payable
Income
Taxes
The
PRC
local government has provided various incentives to companies in order to
encourage economic development. Such incentives include reduced tax rates
and
other measures. Laiyang Jiangbo was originally subject to 33% income tax
rate.
For the period from January 1, 2007 to June 30, 2007, the Chinese local
government exempted all of the Company's taxes due as of June 30, 2007. The
Company received $9,931,919 tax exemption as of June 30, 2007, $3,338,774
was
reflected as reduction of the provision of income taxes and $6,593,145 was
recorded as non-operating income. Total tax exemption for the year ended
June
30, 2007 is summarized as follows:
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
|
|
June
30, 2007
|
|
VAT
tax exemption
|
|
$
|
6,126,464
|
|
Income
tax exemption
|
|
|
2,986,806
|
|
City
construction tax exemption
|
|
|
510,362
|
|
Others
|
|
|
308,287
|
|
Total
|
|
$
|
9,931,919
|
|
The
table
below summarizes the differences between the U.S. statutory federal rate
and the
Company’s effective tax rate and as follows for years ended June 30, 2007, 2006
and 2005:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
U.S.
Statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
Foreign
income not recognized in the U.S.
|
|
|
(34.0
|
%)
|
|
(34.0
|
%)
|
|
(34.0
|
%)
|
China
income taxes
|
|
|
33.0
|
%
|
|
33.0
|
%
|
|
33.0
|
%
|
China
income tax exemption
|
|
|
(18.6
|
%)
|
|
0.0
|
%
|
|
0.0
|
%
|
Total
provision for income taxes
|
|
|
14.4
|
%
|
|
33.0
|
%
|
|
33.0
|
%
|
Value
added tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT tax rate is 17% for
products sold in the PRC. The amount of VAT liability is determined by applying
the applicable tax rate to the invoiced amount of goods sold (output VAT)
less
VAT paid on purchases made with the relevant supporting invoices (input VAT).
Under the commercial practice of the PRC, the Company paid
value
added taxes (“VAT”) based on tax invoices issued. The tax invoices may be issued
subsequent to the date on which revenue is recognized, and there may be a
considerable delay between the date on which the revenue is recognized and
the
date on which the tax invoice is issued. In the event that the PRC tax
authorities dispute the date of which revenue is recognized for tax purposes,
the PRC tax office has the right to assess a penalty, which can range from
zero
to five times the amount of the taxes which are determined to be late or
deficient. According to the PRC tax laws, any potential tax penalty payable
on
late or deficient payments of this tax could be between zero and five times
the
amount of the late or deficient tax payable, and will be expensed as a period
expense if and when a determination has been made by the taxing authorities
that
a penalty is due.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
Taxes
payable as of June 30 are as follows:
|
|
2007
|
|
2006
|
|
Value
added taxes
|
|
$
|
-
|
|
$
|
962,033
|
|
Income
taxes
|
|
|
-
|
|
|
1,076,799
|
|
Other
taxes
|
|
|
(12,153
|
)
|
|
108,055
|
|
Total
|
|
$
|
(12,153
|
)
|
$
|
2,146,887
|
|
Note
8 - Shareholder's equity
Common
Stock
At
inception, Karmoya issued 1,000 shares of common stock to its founder. The
shares were value at par value. On September 20, 2007, the Company issued
9,000
shares of common stock to nine individuals at par value. The balance of $10,000
is shown in Subscriptions Receivable on the accompanying consolidated financial
statements. As part of its agreements with shareholders, the Company will
receive the entire $10,000 in October 2007.
On
September 20, 2007, Karmoya acquired 100% of Union Well. Union Well was
established on May 9, 2007 with a registered capital of $1,000. The amount
is
shown in Subscriptions Receivable on the accompanying consolidated financial
statements. The $1,000 is due in October 2007.
Registered
Capital Contribution Receivable
On
September 17, 2007, Union Well established GJBT in PRC as a 100% wholly owned
foreign limited liability subsidiary (“WFOE”) with registered capital of $12
million. PRC laws require the owner of the WFOE to contribute at least 15%
of
the registered capital within 90 days of its business license issuance date
and
the remaining balance is required to be contributed within two years of the
business license issuance date. The Company will fund the $3,000,000 by December
17, 2007 and the remaining balance of $9,000,000 by September 17, 2009 required
under the PRC law. These amounts are shown in Registered capital contribution
receivable in the accompanying consolidated financial statements.
Note
9 - Statutory reserves
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of People's Republic of China ("PRC GAAP"). Appropriation to the
statutory surplus reserve is required to be at least 10% of the after tax
net
income determined in accordance with PRC GAAP until the reserve is equal
to 50%
of the entities' registered capital. Appropriations to the discretionary
surplus
reserve are made at the discretion of the Board of Directors.
The
statutory surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may
be
utilized for business expansion or converted into share capital by issuing
new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that
the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
KARMOYA
INTERNATIONAL LIMITED AND SUBSIDARIES
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
The
discretionary surplus fund may be used to acquire fixed assets or to increase
the working capital to expend on production and operation of the business.
The
Company's Board of Directors decided not to make an appropriation to this
reserve for 2007 and 2006.
According
to the Company's articles, the Company should appropriate 10% of the net
profit
as statutory surplus reserve. For the year ended June 30, 2007 and 2006,
the
Company appropriated to the statutory surplus reserve in the amount of
$2,157,637 and $648,667, respectively.
Note
10 - Major customers and suppliers
For
the
years ended June 30, 2007, 2006 and 2005, five customers accounted for
approximately 33.3%, 30.5% and 47.4%, respectively, of the Company's sales.
These five customers represent 28.9% and 26.5% of the Company's total accounts
receivable as of June 30, 2007 and 2006, respectively.
For
the
years ended June 30, 2007, 2006 and 2005, five suppliers accounted for
approximately 87.2%, 75.9% and 84.6% respectively, of the Company's purchases.
These five suppliers represent 55.6% and 66.9% of the Company's total accounts
payable as of June 30, 2007 and 2006, respectively.
Note
11 - Current vulnerability due to certain concentrations
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the
political, economic and legal environments in the PRC, and by the general
state
of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
other
things.
Note
12 - Subsequent event
On
September 10, 2007, the Company renewed its short term bank loan agreement
with
Communication Bank. The loan bears interest rate at 5.87% per annum and is
due
on September 10, 2008.
On
October 1, 2007, Genesis executed a Share Acquisition and Exchange Agreement
by
and among Genesis and the Company, and the shareholders of 100% of the Company's
capital stock. At Closing, Genesis issued 5,995,780 shares of its Series
B
Voting Convertible Preferred Stock and 597 shares of its common stock to
the
Company's shareholders in exchange for 100% of the Company's capital stock.
The
shares of Series B Preferred Stock issued are convertible, in the aggregate,
into 299,789,000 shares of Genesis's common stock that, when combined with
the
597 common shares issued to the Company’s shareholders, would equal 75% of
the issued and outstanding shares of Genesis's common stock on a fully-diluted
basis if the preferred shares were to be converted on the closing date of
the
Exchange Agreement.
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus or any prospectus supplement. This prospectus is not an
offer
of these securities in any jurisdiction where an offer and sale is not
permitted. The information contained in this prospectus is accurate only as
of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
266,000,000
Shares
Common
Stock
GENESIS
PHARMACEUTICALS
ENTERPRISES,
INC.
Preliminary
Prospectus
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with
the
issuance and distribution of the common stock being registered. All amounts
other than the SEC registration fee are estimates.
SEC
Registration Fee
|
|
$
|
2,250
|
|
|
|
|
|
|
Printing
and Engraving Expenses
|
|
$
|
20,000
|
|
|
|
|
|
|
Legal
Fees and Expenses
|
|
$
|
100,000
|
|
|
|
|
|
|
Accounting
Fees and Expenses
|
|
$
|
40,000
|
|
|
|
|
|
|
Miscellaneous
|
|
|
-0-
|
|
|
|
|
|
|
Total
|
|
$
|
162,250
|
|
Item
14. Indemnification of Directors and Officers
Florida
Law
Florida
Statutes Section 607.0850 generally permits us to indemnify our directors,
officers, employees or other agents who are subject to any third-party actions
because of their service to the company if such persons acted in good faith
and
in a manner they reasonably believed to be in, or not opposed to, the best
interests of the company. If the proceeding is a criminal one, such person
must
also have had no reasonable cause to believe his conduct was unlawful. In
addition, we may indemnify our directors, officers, employees or other agents
who are subject to derivative actions against expenses and amounts paid in
settlement which do not exceed, in the judgment of our board of directors,
the
estimated expense of litigating the proceeding to conclusion, including any
appeal thereof, actually and reasonably incurred in connection with the defense
or settlement of such proceeding, if such person acted in good faith and in
a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the company. To the extent that a director, officer, employee
or
other agent is successful on the merits or otherwise in defense of a third
party
or derivative action, such person will be indemnified against expenses actually
and reasonably incurred in connection therewith.
Florida
Statutes Section 607.0850 also permits us to further indemnify such persons
by
other means unless a judgment or other final adjudication establishes that
such
person's actions or omissions which were material to the cause of action
constitute (1) a crime (unless such person had reasonable cause to believe
his
conduct was lawful or had no reasonable cause to believe it unlawful), (2)
a
transaction from which he derived an improper personal benefit, (3) an action
in
violation of Florida Statutes Section 607.0834 (unlawful distributions to
shareholders), or (4) willful misconduct or a conscious disregard for the best
interests of the company in a proceeding by or in the right of the corporation
to procure a judgment in its favor or in a proceeding by or in the right of
a
shareholder.
Furthermore,
Section 607.0831 of the FBCA provides, in general, that no director shall be
personally liable for monetary damages to Industrial Services or any other
person for any statement, vote, decision, or failure to act, regarding corporate
management or policy, unless: (a) the director breached or failed to perform
his
duties as a director; and (b) the director's breach of, or failure to perform,
those duties constitutes (i) a violation of criminal law, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (ii) a transaction from which the
director derived an improper personal benefit, either directly or indirectly,
(iii) a circumstance under which the liability provisions of Florida Statutes
Section 607.0834 are applicable, (iv) in a proceeding by or in the right of
the
company to procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the company, or
willful misconduct, or (v) in a proceeding by or in the right of someone other
than the company or a shareholder, recklessness or an act or omission which
was
committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property.
Charter
Provisions and Other Arrangements of the Registrant
Article
VIII of our articles of incorporation provides for the indemnification of any
and all persons who serve as our director, officer, employee or agent to the
fullest extent permitted under Florida law. In addition, we carry insurance
permitted by the laws of Florida on behalf of directors, officers, employees
or
agents which may cover, among other things, liabilities under the Securities
Act
of 1933, as amended (the “
Securities
Act
”).
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the company pursuant
to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Item
1
5.
Recent Sales of Unregistered Securities
The
following private placements of the Company’s securities were made in reliance
upon the exemption from registration under Section 4(2) of the Securities Act
of
1933, as amended, and/or, Rule 506 of Regulation D promulgated under the
Securities Act. The Company did not use underwriters in any of the following
private placements.
On
May
30, 2008, we entered into a Securities Purchase Agreement (the “Securities
Purchase Agreement”), with Karmoya International Ltd., a British Virgin Islands
company, Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., a wholly
owned foreign enterprise in the People’s Republic of China, Wubo Cao (“Mr. Cao”)
and certain investors (the “Investors”), pursuant to which, on May 30, 2008, we
sold to the Investors 6% convertible notes (the “Notes”) and warrants to
purchase shares of the Company’s common stock (“Warrants”) for the aggregate
amount of $30,000,000, in transactions exempt from registration under Regulation
D and Section 4(2) of the Securities Act of 1933, as amended. Each of the
Investors were accredited investors.
In
February 2008, in conjunction with a settlement between the Company and the
Company’s former officer, the former officer exercised 1,500,000 options and
remaining 941,406 options held by the former officer were cancelled. The Company
received $157,500 in cash and the proceed is used for working capital purposes.
On
November 6, 2007, we entered into a Securities Purchase Agreement (the “November
Securities Purchase Agreement”) with Pope Investments, LLC (the “Purchaser”)
pursuant to which the Company, on November 7, 2007 (the “Closing Date”) issued
and sold to the Purchaser, for $5,000,000 (a) 6% convertible subordinated
debentures due November 30, 2010 (the “Debenture”) and (b) a three-year warrant
(the “Warrant”) to purchase 10,000,000 shares of the Company’s common stock, par
value $0.001 per share, at an exercise price of $0.32 per share, subject to
adjustment as provided therein in transactions exempt from registration under
Regulation D and Section 4(2) of the Securities Act of 1933, as
amended.
In
October 2007, we issued 5,995,780 shares of our Series B Preferred Stock and
597
shares of our common stock to the Karmoya Shareholders in exchange for 100%
of
the capital stock of Karmoya. The shares of Series B Preferred Stock issued
are
convertible, in the aggregate, into a number of shares of our common stock
that,
when combined with the 597 shares of our common stock, would equal 75% of the
outstanding shares of our common stock (on a fully-diluted basis) if the shares
were to be converted on the Closing Date. The issuance of the Series B Preferred
Stock to the Karmoya Shareholders pursuant to the Exchange Agreement was exempt
from registration under the Securities Act pursuant to Section 4(2) and/or
Regulation D thereof.
On
May
17, 2007, we issued 357,143 shares of our common stock to a Beijing-based third
party consultant for business development services rendered in connection with
its operations for its partner company Genesis Equity Partners LLC, a Florida
limited liability partnership (“GEP”). We valued these shares of common stock at
the fair market value on the date of grant of $0.15 per share or $53,571 based
on the trading price of shares of our common stock. The recipient was an
accredited or otherwise sophisticated investor and the transactions were exempt
from registration under the Securities Act in reliance on an exemption provided
by Section 4(2) of that Act.
On
May
15, 2007, in connection with a 90-day consulting agreement, we issued 265,000
shares of our common stock to Pentony Enterprises, Inc. for investor relations
services. We valued these shares of common stock at the fair market value on
the
date of grant of $0.155 per share or $41,075 based on the trading price of
shares of our common stock. The recipient was an accredited or otherwise
sophisticated investor and the transactions were exempt from registration under
the Securities Act in reliance on an exemption provided by Section 4(2) of
that
Act.
On
April
13, 2007, we issued 428,571 shares of common stock to a Beijing-based third
party consultant for business development services rendered in connection with
its GEP operations. We valued these shares of our common stock at the fair
market value on the date of grant of $0.14 per share or $60,000 based on the
trading price of shares of our common stock. . The recipient was an accredited
or otherwise sophisticated investor and the transactions were exempt from
registration under the Securities Act in reliance on an exemption provided
by
Section 4(2) of that Act.
On
March
29, 2007, we cancelled 343,706 shares of common stock previously issued to
officers of the Company.
On
January 1, 2007, in connection with the appointment of a new director, Robert
D.
Cain, we issued 500,000 shares of restricted common stock to the new director
member for services to be rendered for a one-year period. The company valued
these shares of common stock at the fair market value on the date of grant
of
$.14 per share or $70,000 based on the trading price of shares of our common
stock. The recipient was an accredited or otherwise sophisticated investor
and
the transactions were exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of that Act.
On
December 11, 2006, we issued 500,000 shares to a Beijing-based consultant for
business development services rendered in connection with its GEP operations.
We
valued these shares of common stock at the fair market value on the date of
grant of $0.12 per share or $60,000 based on the trading price of our shares
of
common stock. The recipient was an accredited or otherwise sophisticated
investor and the transactions were exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that Act.
On
November 30, 2006, in connection with the appointment of a new director, Rodrigo
Arboleda, we issued 500,000 shares of restricted common stock to the new
director for services to be rendered for a one-year period. We valued these
shares of common stock at the fair market value on the date of grant of $0.135
per share or $67,500 based on the trading price of shares of our common stock.
The recipient was an accredited or otherwise sophisticated investor and the
transactions were exempt from registration under the Securities Act in reliance
on an exemption provided by Section 4(2) of that Act.
On
November 20, 2006, we issued 600,000 shares to a Beijing-based consultant for
business development services rendered in connection with its GEP operations.
We
valued these shares of common stock at the fair market value on the date of
grant of $0.10 per share or $60,000 based on the trading price of shares of
our
common stock. The recipient was an accredited or otherwise sophisticated
investor and the transactions were exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that
Act.
On
May 5,
2006, we issued 1,000,000 shares of common stock for services. We valued these
shares of common stock at the fair market value on the date of grant at per
share price of $.23. The recipient was an accredited or otherwise sophisticated
investor and the transaction was exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that Act.
.
Item
16. Exhibits and Financial Statement Schedules
EXHIBITS
The
following exhibits are filed as part of this registration statement:
Exhibit
Number
|
|
Description
|
2.1
|
|
Share
Acquisition and Exchange Agreement by and among Genesis, Karmoya
and
Karmoya Shareholders dated October 1, 2007 (1)
|
3.1
|
|
Articles
of Incorporation (2)
|
3.2
|
|
Bylaws
(2)
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
3.4
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
3.5
|
|
Articles
of Amendment to Articles of Incorporation (3)
|
4.1
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series A Preferred Stock (4)
|
4.2
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series B Voting Convertible Preferred Stock (5)
|
4.3
|
|
6%
Convertible Subordinated Debenture, dated November 7, 2007
(6)
|
4.4
|
|
Common
Stock Purchase Warrant, dated November 7, 2007 (6)
|
4.5
|
|
Form
of 6% Convertible Note (7)
|
4.6
|
|
Form
of Class A Common Stock Purchase Warrant (7)
|
5.1
|
|
Opinion
of
Schneider
Weinberger & Beilly LLP
,
regarding legality of securities.*
|
10.1
|
|
Securities
Purchase Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(6)
|
10.2
|
|
Registration
Rights Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(6)
|
10.3
|
|
Closing
Escrow Agreement, dated as of November 6, 2007, by and among
Genesis
Pharmaceuticals Enterprises, Inc., Pope Investments, LLC and
Sichenzia
Ross Friedman Ference LLP (6)
|
10.4
|
|
Securities
Purchase Agreement, dated May 30, 2008, by and among the Company,
Karmoya
International Ltd., Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., Wubo Cao and the investors party thereto (7)
|
10.5
|
|
Make
Good Escrow Agreement, dated May 30, 2008, by and among the Company,
the
investors party thereto, Pope Investments LLC, Wubo Cao and Loeb
&
Loeb LLP (7)
|
10.6
|
|
Holdback
Escrow Agreement, dated May 30, 2008, by and among the Company,
the
investors party thereto and Loeb & Loeb LLP (7)
|
10.7
|
|
Registration
Rights Agreement, dated May 30, 2008, by and among the Company
and the
investors party thereto (7)
|
10.8
|
|
Lock-up
Agreement, dated May 30, 2008, between the Company and Wubo Cao
(7)
|
10.9
|
|
Employment
Agreement between Elsa Sung and the Company, dated June 10, 2008
(8)
|
14.1
|
|
Code
of Business
Conduct and Ethics (9)
|
23.1
|
|
Consent
of Moore Stephens Wurth Frazer and Torbet, LLP+
|
23.2
|
|
Consent
of
Schneider
Weinberger & Beilly LLP
(included in the opinion filed as Exhibit 5.1)*
|
99.1
|
|
Consulting
Services Agreement between Genesis Jiangbo (Laiyang) Biotech
Technologies
Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated
September
21, 2007 (English Translation) (1)
|
99.2
|
|
Equity
Pledge Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated
September
21, 2007 (English Translation) (1)
|
99.3
|
|
Operating
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.4
|
|
Proxy
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.5
|
|
Option
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.6
|
|
Audit
Committee
Charter+
|
99.7
|
|
Compensation
Committee
Charter+
|
*
To be
filed by amendment.
+
Filed
herewith.
(1)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 1,
2007.
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K filed on September 1,
1999.
|
(3)
|
Incorporated
by reference to the Company’s Form 8-K filed on August 21,
2008.
|
(4)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on January 22,
2004.
|
(5)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 9,
2007.
|
(6)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 9,
2007.
|
(7)
|
Incorporated
by reference to the Company’s Form 8-K filed on June 3,
2008.
|
(8)
|
Incorporated
by reference to the Company’s Form 8-K filed on June 12,
2008.
|
(9)
|
Incorporated by reference to the Company's
Form 10-KSB
filed on January 13,
2006.
|
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made pursuant to
this
Registration Statement, a post-effective amendment to this registration
statement:
(i)
to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933.
(ii)
to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth 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% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement.
(iii)
to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(2)
That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4)
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the
Registrant’s annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall
be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be
the initial bona fide offering thereof.
(5)
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of
the Registrant pursuant to the foregoing provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission 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 the Registrant of expenses incurred or paid by a director, officer
or
controlling person of the Registrant 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 Registrant 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.
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 for filing this Amendment No. 1 to Form S-1 and has authorized
this Form S-1 to be signed on its behalf by the undersigned in Laiyang City,
Yantai, Shandong Province, People’s Republic of China, on August 25,
2008.
|
|
|
|
|
|
|
By:
|
/s/ Cao Wubo
|
|
Name:
Cao Wubo
|
|
Title:
Chief Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
Signature
|
|
Title
|
|
Date
|
/s/
Cao Wubo
|
|
Chief
Executive Officer and Chairman of the Board
|
|
August
25, 2008
|
Cao
Wubo
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
August
25, 2008
|
Elsa
Sung
|
|
|
|
|
/s/ Xue Hong
|
|
Controller
|
|
August
25, 2008
|
Xue
Hong
|
|
|
|
|
|
|
Vice
President, Chief Operating Officer and Director
|
|
August
25, 2008
|
Xu
Haibo
|
|
|
|
|
|
|
Director
|
|
August
25, 2008
|
Feng
Xiaowei
|
|
|
|
|
|
|
Director
|
|
August
25, 2008
|
Huang
Lei
|
|
|
|
|
|
|
Director
|
|
August
25, 2008
|
Ge
Jian
|
|
|
|
|
|
|
Director
|
|
August
25, 2008
|
Michael
Marks
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
|
2.1
|
|
Share
Acquisition and Exchange Agreement by and among Genesis, Karmoya
and
Karmoya Shareholders dated October 1, 2007 (1)
|
3.1
|
|
Articles
of Incorporation (2)
|
3.2
|
|
Bylaws
(2)
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
3.4
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
3.5
|
|
Articles
of Amendment to Articles of Incorporation (3)
|
4.1
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series A Preferred Stock (4)
|
4.2
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series B Voting Convertible Preferred Stock (5)
|
4.3
|
|
6%
Convertible Subordinated Debenture, dated November 7, 2007
(6)
|
4.4
|
|
Common
Stock Purchase Warrant, dated November 7, 2007 (6)
|
4.5
|
|
Form
of 6% Convertible Note (7)
|
4.6
|
|
Form
of Class A Common Stock Purchase Warrant (7)
|
5.1
|
|
Opinion
of
Schneider
Weinberger & Beilly LLP
,
regarding legality of securities.*
|
10.1
|
|
Securities
Purchase Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(6)
|
10.2
|
|
Registration
Rights Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(6)
|
10.3
|
|
Closing
Escrow Agreement, dated as of November 6, 2007, by and among
Genesis
Pharmaceuticals Enterprises, Inc., Pope Investments, LLC and
Sichenzia
Ross Friedman Ference LLP (6)
|
10.4
|
|
Securities
Purchase Agreement, dated May 30, 2008, by and among the Company,
Karmoya
International Ltd., Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., Wubo Cao and the investors party thereto (7)
|
10.5
|
|
Make
Good Escrow Agreement, dated May 30, 2008, by and among the Company,
the
investors party thereto, Pope Investments LLC, Wubo Cao and Loeb
&
Loeb LLP (7)
|
10.6
|
|
Holdback
Escrow Agreement, dated May 30, 2008, by and among the Company,
the
investors party thereto and Loeb & Loeb LLP (7)
|
10.7
|
|
Registration
Rights Agreement, dated May 30, 2008, by and among the Company
and the
investors party thereto (7)
|
10.8
|
|
Lock-up
Agreement, dated May 30, 2008, between the Company and Wubo Cao
(7)
|
10.9
|
|
Employment
Agreement between Elsa Sung and the Company, dated June 10, 2008
(8)
|
14.1
|
|
Code
of Business
Conduct and Ethics (9)
|
23.1
|
|
Consent
of Moore Stephens Wurth Frazer and Torbet, LLP+
|
23.2
|
|
Consent
of
Schneider
Weinberger & Beilly LLP
(included in the opinion filed as Exhibit 5.1)*
|
99.1
|
|
Consulting
Services Agreement between Genesis Jiangbo (Laiyang) Biotech
Technologies
Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated
September
21, 2007 (English Translation) (1)
|
99.2
|
|
Equity
Pledge Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated
September
21, 2007 (English Translation) (1)
|
99.3
|
|
Operating
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.4
|
|
Proxy
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.5
|
|
Option
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.6
|
|
Audit
Committee
Charter+
|
99.7
|
|
Compensation
Committee
Charter+
|
*
To be
filed by amendment.
+
Filed
herewith.
(1)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 1,
2007.
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K filed on September 1,
1999.
|
(3)
|
Incorporated
by reference to the Company’s Form 8-K filed on August 21,
2008.
|
(4)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on January 22,
2004.
|
(5)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 9,
2007.
|
(6)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 9,
2007.
|
(7)
|
Incorporated
by reference to the Company’s Form 8-K filed on June 3,
2008.
|
(8)
|
Incorporated
by reference to the Company’s Form 8-K filed on June 12,
2008.
|
(9)
|
Incorporated by reference to the Company's
Form 10-KSB
filed on January 13,
2006.
|