UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2008
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to _____________
Commission File Number 333-67884
GLOBAL PHARMATECH, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0976805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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509 Maoxiang Street, High-Technology Industrial Development Zone,
Changchun, Jilin, China 130012
(Address of principal executive offices)
+86 431 8554 1826
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of July 24, 2008: 23,614,085 shares of common stock, par value
$0.0001 per share.
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION ............................................ 3
Item 1. Financial Statements and Notes thereto ........................... 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 13
Item 4. Controls and Procedures .......................................... 13
PART II - OTHER INFORMATION .............................................. 14
Item 1. Legal Proceedings ................................................ 14
Item 1A. Risk Factors...................................................... 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 19
Item 3. Defaults Upon Senior Securities .................................. 19
Item 4. Submission of Matters To a Vote of Security Holders .............. 19
Item 5. Other Information ................................................ 19
Item 6. Exhibits ......................................................... 19
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Global Pharmatech Inc. and Subsidiaries
Consolidated Balance Sheets
June 30,2008 December 31, 2007
------------ -----------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,436,580 $ 5,419,167
Notes receivable -- 34,225
Accounts receivable, net 1,056,099 1,063,652
Related party receivable 64,570 46,527
Inventories 1,028,072 858,025
Other current assets 553,448 657,654
------------ ------------
Total Current Assets 8,138,769 8,079,250
------------ ------------
PROPERTY, PLANT & EQUIPMENT, net 4,883,626 4,671,304
LAND LEASE, net 437,684 415,816
CONSTRUCTION IN PROGRESS -- 37,385
INTANGIBLE ASSETS, net 103,125 129,237
------------ ------------
5,424,435 5,253,741
------------ ------------
Total Assets $ 13,563,204 $ 13,332,992
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long term debt $ 2,624,400 $ 2,464,200
Short-term borrowing -- 273,800
Accounts payable and accrued expenses 555,289 485,300
Related party payable 12,827 --
Advances from customers 249,999 207,203
Other payables and accruals 822,318 573,270
Taxes Payable 40,092 130,754
Other current liabilities 76,533 57,264
------------ ------------
Total Current Liabilities 4,381,458 4,191,791
------------ ------------
MINORITY INTEREST 1,211,257 1,104,145
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock par value $ 0.0001 per share, 5,000,000
shares authorized, no shares issued and outstanding
Common stock par value $ 0.0001 per share, 95,000,000
shares authorized, 23,247,935 shares issued and outstanding 2,325 2,325
Additional paid in capital 11,374,300 11,374,300
Appropriated retained earnings 259,781 259,331
Unappropriated retained earnings (4,587,941) (4,281,848)
Accumulated other comprehensive income 937,024 697,948
Subscription receivable (15,000) (15,000)
------------ ------------
Total Stockholders' Equity 7,970,489 8,037,056
------------ ------------
Total Liabilities and Stockholders' Equity $ 13,563,204 $ 13,332,992
============ ============
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The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
Global Pharmatech Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2008 and 2007
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
------------------------------- -------------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
REVENUE $ 1,430,617 $ 1,070,198 $ 728,195 $ 599,239
COST OF REVENUE 573,161 366,704 193,142 161,263
------------ ------------ ------------ ------------
GROSS PROFIT 857,456 703,494 535,053 437,976
------------ ------------ ------------ ------------
OPERATING EXPENSES
Advertising (22,684) (27,554) (21,756) (24,300)
Research and development (394,734) (385,387) (198,466) (265,853)
Selling expenses (36,784) (77,968) (15,034) (55,547)
General and administrative expenses (646,723) (641,276) (321,582) (347,489)
------------ ------------ ------------ ------------
(1,100,925) (1,132,185) (556,838) (693,189)
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (243,469) (428,691) (21,785) (255,213)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Miscellaneous income (expenses) 93,294 14,180 -- 18,419
Interest expense (129,751) (83,794) (66,181) (39,807)
------------ ------------ ------------ ------------
(36,457) (69,614) (66,181) (21,388)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (279,926) (498,305) (87,966) (276,601)
PROVISION FOR INCOME TAXES
Current -- -- -- --
Deferred -- -- -- --
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (279,926) (498,305) (87,966) (276,601)
MINORITY INTEREST (26,167) (12,959) (3,477) (8,621)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (306,093) (511,264) (91,443) (285,222)
------------ ------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS, -- (49,102) -- --
Loss on sale of JiLin Yi Cao Tang
Pharmacy CO., Ltd. "YCT" -- (804,600) -- (804,600)
------------ ------------ ------------ ------------
NET LOSS $ (306,093) $ (1,364,966) $ (91,443) $ (1,089,822)
============ ============ ============ ============
BASIC NET LOSS PER SHARE
CONTINUING OPERATIONS $ (0.01) $ (0.02) $ (0.00) $ (0.01)
DISCONTINUED OPERATIONS 0.00 0.04 0.00 (0.03)
------------ ------------ ------------ ------------
$ (0.01) $ (0.06) $ (0.00) $ (0.04)
============ ============ ============ ============
DILUTED NET LOSS PER SHARE
CONTINUING OPERATIONS $ (0.01) $ (0.02) $ (0.00) $ (0.01)
DISCONTINUED OPERATIONS 0.00 (0.04) 0.00 (0.03)
------------ ------------ ------------ ------------
$ (0.01) $ (0.06) $ (0.00) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,247,935 23,247,935 23,247,935 23,247,935
============ ============ ============ ============
Net Loss (306,093) (1,364,966) (92,443) (1,089,822)
Foreign Currency Translation Adjustment 239,076 164,755 89,565 169,497
------------ ------------ ------------ ------------
Comprehensive Income $ (67,017) $ (1,200,211) $ (2,878) $ 920,325
============ ============ ============ ============
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The accompanying notes are an integral part of these
unaudited consolidated financial statements.
4
Global Pharmatech Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
2008 2007
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (306,093) $(1,364,966)
Adjustments to reconcile net income to net cash
used by operating activities:
Minority interest 26,167 12,959
Depreciation 205,457 162,309
Amortization of land lease and intangible assets 38,552 4,589
Loss from discontinued operations -- 853,702
Changes in operating assets and liabilities
Decrease (Increase) in operating assets:
Accounts receivable 74,529 (25,761)
Related party receivable (14,593) 23,772
Notes receivable 35,416 42,560
Inventories (111,025) (96,427)
Prepaid expenses 12,682 15,159
Other current assets 264,934 19,975
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 38,781 114,335
Related party payable 12,463 --
Advance from customers 28,493 27,307
Other payables and accruals (191,624) (213,440)
Taxes payable (96,350) --
Other current liabilities 18,311 (49,989
----------- -----------
Net Cash Provided (Used) by Continuing Operating Activities 36,100 (473,916)
Net Cash Provided (Used) by Discontinued Operating Activities -- (44,769)
----------- -----------
Net Cash Provided (Used) by Operating Activities 36,100 (518,685)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (77,999) (114,457)
Purchase of intangible -- (10,164)
Construction in progress -- (26,050)
----------- -----------
Net Cash Used by Continuing Investing Activities (77,999) (150,671)
Net Cash Used by Discontinued Investing Activities
Including Proceeds from Sale of Subsidiary -- 50,504
----------- -----------
Net Cash Used by Investing Activities (77,999) (100,167)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term borrowings (283,330) (259,115)
Contributions from minority interest -- 124,553
----------- -----------
Net Cash Provided (Used) by Financing Activities 283,330 (134,562)
Net Cash Provided (Used) by Discontinued Financing Activities -- 59,990
----------- -----------
Net Cash Used by Financing Activities (283,330) (74,572)
----------- -----------
Effect of exchange rate changes on cash 342,642 135,805
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,413 (557,619)
CASH AND CASH EQUIVALENTS, beginning of period 5,419,167 5,553,778
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,436,580 $ 4,996,159
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 129,751 $ 83,794
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
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The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2008
1. The Company
Global Pharmatech, Inc. ("Global" or the "Company") was incorporated in Delaware
on June 26, 2001 under the name Autocarbon.com, Inc. After engaging, under prior
management, in several businesses unrelated to its current one, on February 9,
2005, Global acquired Jilin Tian Yao Science and Technology Limited Company
("JTY"), by acquiring JTY's parent, Natural Pharmatech, Inc. ("Natural"),
through the issuance to Natural's shareholders of 13,703,125 of its common
shares for all of the outstanding common shares of Natural. Located in
Changchun, China, JTY is a Chinese limited liability company, organized on
February 7, 2001, which, together with its subsidiaries, is principally engaged
in the research and development of modernized traditional Chinese medicine and
bio-pharmacy, the sale of this technology, and the manufacture and sale of
Chinese medicine and vitamins throughout China. Natural was incorporated in the
British Virgin Islands on February 2, 2004, and acquired JTY on June 15, 2004 by
issuing 43,800,000 of its common shares for all of the outstanding common shares
of JTY.
Under generally accepted accounting principles, these acquisitions are
considered in substance to be capital transactions rather than business
combinations. In each case, for accounting purposes, the acquired company is
deemed to have issued its stock for the net monetary assets of the acquiring
company. Each transaction is accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition, except
that no goodwill is recorded.
During the first quarter of 2007, JTY and Natural purchased 50% and 25%,
respectively, of the equity interest in Jilin Biotech Co., Ltd ("BIO"), a
Chinese company, for 3,000,000 Hong Kong dollars (approximately $385,000). The
25% owner of BIO invested 1,000,000 Hong Kong dollars. The US$ equivalent of
approximately $125,000 is included with contributions from minority interest in
financing activities in the June 30, 2007 statement of cash flows.
On May 11, 2007, the Company entered into an Equity and Liability Transfer
Agreement to sell JTY's 95% equity interest in one of its Chinese subsidiaries,
Jilin Yi Cao Tang Pharmacy Co., Ltd ("YCT"), to Mr. Daojun Wang for a price of
RMB9,000,000 (approximately $1,197,000) The following table details the payment
schedule for the sale:
Due Date Amount Due (in RMB)
-------- -------------------
3 days after signing this agreement 500,000 (approximately $66,500)
May 30, 2007 500,000 (approximately $66,500)
November 30, 2007 1,000,000 (approximately $133,000)
May 30, 2008 1,000,000 (approximately $133,000)
November 30, 2008 1,000,000 (approximately $133,000)
May 30, 2009 1,000,000 (approximately $133,000)
November 30, 2009 1,000,000 (approximately $133,000)
May 30, 2010 1,000,000 (approximately $133,000)
November 30, 2010 1,000,000 (approximately $133,000)
May 30, 2011 1,000,000 (approximately $133,000)
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The Company has converted the receivable to present value using a 5% discount
rate. The total discounted amount is $60,778, and this will be amortized over
the life of payment schedule. As of June 30, 2008, the Company has established a
reserve for bad debt for the full amount of this receivable because the amounts
due are not being collected on time.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation and Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and include the
accounts of Global and its majority owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements as of June 30, 2008
and for the six and three months periods ended June 30, 2008 and 2007 have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Regulation S-X
applicable to small business issuers. In the opinion of management, these
unaudited consolidated interim financial statements include all adjustments
considered necessary to make the financial statements not misleading. The
results of operations for the six months ended June 30, 2008 are not necessarily
indicative of the results for the full fiscal year ending December 31, 2008. The
unaudited consolidated interim financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2007 as reported in Form 10-KSB.
6
b. Inventory
Inventories are stated at the lower of cost or market. Substantially all
inventory costs are determined using the first-in, first-out (FIFO) method.
Certain inventory goods purchased are subject to spoilage within a short period
of time while in possession of the Company. Inventory costs do not exceed net
realizable value.
c. Revenue Recognition
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues are $306,922 and $252,584 for the
six months ended June 30, 2008 and 2007, respectively. The contract revenues are
$266,438 and $106,551 for the three months ended June 30, 2008 and 2007,
respectively.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $8,510 and
$33,341 for the six months ended June 30, 2008 and 2007, respectively. Such
revenues are $126 and $33,341 for the three months ended June 30, 2008 and 2007,
respectively.
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. The revenues earned are $1,115,185
and $784,273 for the six months ended June 30, 2008 and 2007, respectively. The
revenues earned are $461,631 and $459,347 for the three months ended June 30,
2008 and 2007, respectively.
Government grants are recognized as other income upon receipt. These revenues
are $ 85,020 and $25,906 for the six months ended June 30, 2008 and 2007,
respectively. These revenues are $0 and $25,906 for the three months ended June
30, 2008 and 2007, respectively. This revenue is included in Miscellaneous
income (expense) on the statement of operations.
d. Foreign Currency Translation
The functional currency of Natural Pharmatech China and its subsidiaries is the
Chinese Yuan (RMB) and their reporting currency is the US dollar. Natural
Pharmatech China's consolidated balance sheet accounts are translated into U.S.
dollars at the year-end exchange rates and all revenue and expenses are
translated into U.S. dollars at the average exchange rates prevailing during the
periods in which these items arise. Translation gains and losses are deferred
and accumulated as a component of other comprehensive income in stockholders'
equity. Transaction gains and losses that arise from exchange rate fluctuations
from transactions denominated in a currency other than the functional currency
are included in the statement of operations as incurred. The transaction gains
and losses were immaterial for the periods ended June 30, 2008 and 2007.
The Chinese government imposes significant exchange restrictions on fund
transfers out of China that are not related to business operations. These
restrictions have not had a material impact on the Company because it has not
engaged in any significant transactions that are subject to the restrictions.
e. Appropriated retained earnings
In accordance with Chinese regulations, the Company's Chinese subsidiaries must
appropriate ten percent of their annual profits as computed under Chinese
generally accepted accounting principles, which is reflected in the consolidated
balance sheet as appropriated retained earnings and which, at June 30, 2008, had
a balance of $259,781.
3. Inventory
Inventory is comprised of the following:
June 30, 2008 December 31,2007
------------- ----------------
Raw materials $ 199,429 $ 298,403
Work in progress $ 612,576 $ 401,145
Finished goods $ 216,067 $ 158,477
---------- ----------
Total $1,028,072 $ 858,025
========== ==========
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4. Other Current Assets
Other Current Assets is comprised of the following:
June 30, 2008 December 31,2007
------------- ----------------
Other Receivables
and Prepayments, net $ 553,448 $ 645,399
Prepaid Expenses $ 0 $ 12,255
---------- ----------
Total $ 553,448 $ 657,654
========== ==========
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5. Property and Equipment
Property and equipment is comprised of the following:
June 30, 2008 December 31,2007
------------- ----------------
Office equipment $ 168,277 $ 157,622
Machinery and equipment 2,626,734 2,451,611
Furniture and fixtures 5,803 5,216
Computer equipment 66,001 58,612
Vehicles 187,945 151,830
Buildings and improvements 1,761,050 1,579,340
Buildings pledged as security to creditor 2,173,140 2,040,486
---------- ----------
TOTAL AT COST 6,988,950 6,444,717
---------- ----------
ACCUMULATED DEPRECIATION AND AMORTIZATION 2,105,324 1,773,414
---------- ----------
NET $4,883,626 $4,671,303
========== ==========
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Depreciation and amortization expense for each of the six months ended June 30,
2008 and 2007 was approximately $210,000 and $162,000, respectively.
Depreciation and amortization expense for each of the three months ended June
30, 2008 and 2007 was approximately $110,000 and $72,000, respectively.
6. Income Taxes
The Company and each of its subsidiaries file separate income tax returns. JTY
qualifies as a "high-technology foreign joint venture" which entitles it to an
exemption from PRC income tax for two years beginning with its first profitable
year. Since its first profitable year was 2005, JTY was entitled to an exemption
from PRC tax for the years 2005 and 2006. Because JTY qualifies as a
"high-technology joint venture" and is located in an economic development zone,
it is entitled to a reduced tax rate of 10% for the three years beginning in
2007 through 2009. Thereafter, it will be taxed at the standard income tax rate
of 15%.
Jilin BCT Pharmacy Company, Ltd ("BCT") is a "wholly-owned foreign venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. After these two years, it is entitled to a
reduced income tax rate of 10% for three additional years. After these three
years, it will be taxed at the standard income tax rate for a "wholly-owned
foreign venture" of 15%.
Jilin Tian Yao Drug Safety Evaluation Co., Ltd ("JDE") is a "high technology
joint venture" and is exempt from income taxes for two years beginning with its
first profitable year. It is thereafter taxed at a standard income tax rate of
15%.
Changchun Xiandi Technology Inc. ("XD") is considered a "high technology joint
venture" and so is entitled to full exemptions from income tax for two years,
beginning with its first profitable year. Thereafter, it is assessed at the
standard income tax rate for joint ventures of 15%.
BIO is a "foreign joint venture" which entitles it to an exemption from PRC
income tax for two years beginning with its first profitable year. After these
two years, it is entitled to a tax rate of 15% for three additional years.
The Company is also subject to value added tax (VAT), business tax and surtax
totaling 5.5 percent of gross sales.
The Company is still in the full-tax-exemption period for the Chinese
subsidiaries which reported positive net income for the year ended December 31,
2007, and therefore no tax was due for the period. Pursuant to the new
Enterprise Income Tax Law of PRC, the Company will enjoy a five-year transition
period starting from January 1, 2008. In these 5 years, the Company will be
taxed in the rate prescribed in the previous law, after the five-year transition
period, the enterprise tax of 25% shall be applied to any enterprise.
8
7. Concentrations and Credit Risk
The Company operates principally in China and grants credit to its customers in
this geographic region. Although China is considered economically stable, it is
always possible that unanticipated events in foreign countries could disrupt the
Company's operations.
At June 30, 2008, the Company has a credit risk exposure of uninsured cash in
banks of $5,436,580. The Company does not require collateral or other securities
to support financial instruments that are subject to credit risk.
For the six months ended June 30, 2008, one customer accounted for $145,800
(10.19%) of total sales.
For the six months ended June 30, 2007, two customers accounted for $191,347
(41%) of total sales as follows: Customer A at $126,755 (27%), and Customer B at
$64,592 (14%).
8. Debt
The Company has one long-term loan from one financial institutions totaling
approximately $2,624,400 at June 30, 2008 (2007: $2,464,200). The weighted
average interest rate of this loan at June 30, 2008 was approximately 9.83%
(2007: 9.13%). The loan is secured by Natural Pharmatech China's office
building, and matures in one lump sum payment on November 15, 2008. As of June
30, 2008, the Company has no short-term borrowing.
Amounts Due
2008 $2,624,400
----------
Total $2,624,400
==========
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As of December 31, 2007, the Company has one short-term borrowing of $273,800
with an APR of 8.54%. The term of the borrowing is from June 2, 2007 to June 3,
2008, and the lender is Bank of Jilin, Tongguang Branch. As of June 30, 2008,
the loan has been paid off.
Interest expense and related service charges were approximately $130,000 and
$84,000 for the six months ended June 30, 2008 and 2007, respectively Interest
expense and related service charges were approximately $66,000 and $40,000 for
the three months ended June 30, 2008 and 2007, respectively.
9. Related Party Transactions
As of June 30, 2008, the Company has the following amounts due from and to
related parties:
Advances Due From Related Parties
June 30, 2008 December 31,2007
------------- ----------------
Stockholders
Yun Peng Min $ 7,332 $ 5,460
Ben Ji Wang $ 422 $ --
Dong Hai Zhang $ 4,374 $ 4,107
Yu Ming Li $ 27,698 $ 36,960
Quan Cheng Zhao $ 16,312 $ --
Yu Qi Li $ 8,432 $ --
-------- --------
Total $ 64,570 $ 46,527
======== ========
Payable Due To Related Parties:
June 30, 2008 December 31,2007
------------- ----------------
Stockholders
Lian Zhen Xia $ 12,827 $ --
-------- --------
Total $ 12,827 $ --
======== ========
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9
Dong Hai Zhang is employed by Natural Pharmatech China, and owns more than 5% of
the Company's issued shares.
Yu Ming Li, Ben Ji Wang and Quan Cheng Zhao are the Company's senior managers;
Lian Zhen Xia, Yun Peng Min and Yu Qi Li are shareholders of the Company.
These balances have no stated terms for repayment and are not interest bearing.
10. Other Current Liabilities
The account principally comprises salaries and benefits payable to employees.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and Notes thereto set forth in Item 1of this
Form 10-Q. The information in this discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties, including
statements regarding our capital needs, business strategy and expectations,
including but not limited to the following:
* our ability to raise funds in the future through public or private
financings;
* our ability to develop marketable products through our research and
development efforts;
* our ability to protect our patents and technologies and related
intellectual properties;
* customers' acceptance of our products;
* our ability to compete against new companies entering the Chinese
pharmaceutical market and larger, more established companies which
have more resources than our company;
* our business expenses being greater than anticipated due to
competitive factors or unanticipated developments;
* changes in political and economic conditions in China;
* changes in Chinese laws and regulations applicable to our business,
including the Administration of Pharmaceuticals, the rules and
regulations of the State Food and Drug Administration, the Good Supply
Practice standards, and the inclusion of our products in the insurance
catalogue of the Ministry of Industry and Social Security;
* our ability to retain management and key personnel;
* our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including our good faith assumptions being
incorrect, our business expenses being greater than anticipated due to
competitive factors or unanticipated development or sales costs; revenues not
resulting in the manner anticipated due to a continued slow down in technology
spending, particularly in the telecommunications market; our failure to generate
investor interest or to sell certain of our assets or business segments. The
forward-looking statements may also be impacted by the additional risks faced by
us as described in this Report and in our filings with the Securities and
Exchange Commission (the "SEC"). All forward-looking statements included in this
Report are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.
BACKGROUND
Global Pharmatech, Inc. ("Global Pharmatech," the "Company", "we", "us" or
"ours") was incorporated under the laws of the State of Delaware in 2001 under
the name Autocarbon.com, Inc. On November 1, 2002, we filed a Certificate of
Ownership with the Secretary of State of the State of Delaware whereby we merged
with our wholly-owned subsidiary and amended our Certificate of Incorporation,
changing our name to Autocarbon, Inc.
On January 24, 2005, our company entered into a Share Purchase Agreement with
Natural, a British Virgin Islands corporation, and the shareholders of Natural.
Under the terms of the Share Purchase Agreement, we agreed to acquire 100% of
Natural's shares in exchange for 80% of our common stock, to be issued to the
Natural shareholders. Our acquisition of Natural was completed on February 9,
2005. In connection with this transaction, we amended our Certificate of
Incorporation on January 31, 2005, changing our name to Global Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market proprietary drugs
and nutritional supplements that are based on traditional Chinese medicine. We
also offer a full range of "start to finish" biotechnology services, including
research and development, testing, manufacturing drugs in liquid and solid dose
forms, sales and marketing. We utilize unique extraction methods and innovative
techniques that have been developed by our research and development team. Our
core business is to leverage our patents and scientific expertise for
botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China and
other areas in South East Asia. Sales outside China are made either directly to
foreign distributors by our subsidiary, Jilin Bencaotang Pharmaceuticals Co.,
Ltd. ("BCT"), or through China BCT Global Development Ltd. ("BCT HK"), which
sells on to those areas indicated above.
Natural was formed on February 2, 2004 under the laws of the British Virgin
Islands. Natural was formed as a holding company to own the five subsidiaries
that made up Natural's business operations. JTY is a wholly owned subsidiary of
Natural located in Changchun in Jilin Province of China. JTY originated as a
research department within the Affiliated Hospital of Changchun Traditional
Chinese Medicine College. It was organized as a separate private for-profit
entity in February 2001.
JTY has four subsidiaries: BCT, Jilin Tian Yao Drug Safety Evaluation Co., Ltd.
("JDE"), Jilin Biotech Co., Ltd. ("BIO") and Changchun Xiandi Technology Inc.
(`XD"). JTY owns 75% of the shares of BCT, which was established in September
2002 as a Sino-foreign joint venture with BCT HK, a Hong Kong distributor of
natural drugs. BCT is principally engaged in the manufacture and sale of Chinese
11
medicine of the solid dose type, and is capable of manufacturing 20 drugs in
three forms. Our solid dose and capsule manufacturing, pre-manufacturing and
extraction plants received a national GMP (Good Manufacturing Practice)
certificate in April 2004.
JTY owns 99.5% of the shares of JDE, which was established in April 2003. It is
engaged in pharmacology, safety pharmacology, and short- and long-term
toxicology studies. JDE obtained a national GLP (Good Laboratory Practice)
certificate in December 2004.
During the first quarter of 2007, JTY and Natural purchased 50% and 25%,
respectively, of the equity interest in BIO, a Chinese company, for 3,000,000
Hong Kong dollars (approximately $385,000). The 25% owner of BIO invested
1,000,000 Hong Kong dollars. The US$ equivalent of approximately $125,000 is
included with contributions from minority interest in financing activities in
the March 31, 2007 statement of cash flows.
JTY owns 80% of the interest of XD. XD's main business is drug development,
transfer of technology and providing drug technology related services.
Since inception, most of our revenues historically have been derived from
transfer of technology, however, more and more revenues are derived from product
sales in recent years; this is consistent with our current strategy. We plan to
shift more percentage of revenue to product sales by increasing our product
sales in the future years.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND JUNE 30,
2007.
REVENUE
Revenues for the six months ended June 30, 2008 were $1,430,617, an increase of
34% from $1,070,198 for the same period of 2007. The main reason for the
increase is due to BCT's marketing development, which generated increased sales
compared to the same period last year.
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues are $306,922 and $252,584 in 2008
and 2007, respectively. The increase was due to the transfer of Naotongning
technology, which generated revenue of $145,800, whereas there were no such
transfer in the same period in 2007.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $8,510 and
$33,341 in 2008 and 2007, respectively. The decrease was due to the services
accepted by the customers in the current period were less than that of the same
period in 2007.
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. The revenues earned are $1,115,185
and $784,273 in 2008 and 2007, respectively. The main reason for the increase is
that BCT put more effort into its marketing during 2008, which resulted in an
increase in sales.
GOVERNMENT GRANTS
Government Grants were $85,020 and $25,906 for the six months ended June 30 in
2008 and 2007. Government grants are opportunistically granted and therefore
will fluctuate widely from quarter to quarter.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES
R&D expenses were $394,734 for 2008, an increase of 2.5% from the $385,387 for
last year. This increase was due to the general inflation in China, which
resulted in an increase in the costs of our research equipment and materials.
GROSS PROFIT
Gross profit for 2008 was $857,456, an increase of 22% from the $703,494
reported in the same period last year. The main reason for the increase is that
the Company's sales increased 34% compared to the same quarter last year.
GROSS PROFIT PERCENTAGE
Gross profit percentage decreased from 66% in the first half of 2007 to 60% in
the first half of 2008. The main reason is that we had less income from transfer
of technology in the first half of 2008 compared to the same period last year.
Although we realized an increase in the sale of goods compared to the same
period last year, the gross profit percentage for the sale of goods is much
smaller than it is from the transfer of technology. This brings down the overall
gross profit percentage.
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OPERATING EXPENSES
Operating expenses decreased to $1,100,925 for 2008 compared to $1,132,185 in
the same period last year. The main reasons for the decrease are:1) selling
expense decreased $41,184 as a result of a change in selling strategy by BIO and
2) advertising decreased $4,870 .
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, we have cash of $5,436,580. For the six months then ended,
we provided cash of $36,099 in our operating activities. The significant reasons
for the provision of cash are:
1) net loss of $306,093, including no use of cash for the depreciation
allowance of $205,457;
2) a decrease in notes receivable of $35,416;
3) a decrease in other current assets (other receivables and prepayment,
net) of $264,934;
4) a decrease in other payables and accruals of $191,624.
We anticipate steady revenue growth over time, as drugs currently under
development come to market. Additionally, we are also instituting procedures to
create a more effective credit policy, and reduce our accounts receivable and
shorten the aging of them. Additionally, the Company anticipates it will engage
in certain merger and/or acquisition later in 2008 that may require substantial
liquidity.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
While our reporting currency is the U.S. dollar, 100% of our consolidated
revenues and majority of consolidated costs and expenses are denominated in
Renminbi ("RMB"), with the balance denominated in U.S. dollars. Substantially
all of our assets are denominated in RMB. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB
depreciates against the U.S. dollar, the value of our RMB revenues, earnings and
assets as expressed in our U.S. dollar financial statements will decline. We
have not entered into any hedging transactions in an effort to reduce our
exposure to foreign exchange risk.
ITEM 4. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is defined under
Exchange Act Rule 13a-15(e), that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. We have carried out an
evaluation under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2008. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of June 30, 2008 our disclosure controls and procedures were effective
at the reasonable assurance level in ensuring that material information relating
to us, is made known to the Chief Executive Officer and Chief Financial Officer
by others within our company during the period in which this report was being
prepared.
There were no changes in our internal controls or in other factors during the
most recent quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any pending material legal proceeding.
ITEM 1A. RISK FACTORS
Our business, financial condition, operating results and prospects are subject
to the following risks. Additional risks and uncertainties not presently
foreseeable to us may also impair our business operations. If any of the
following risks actually occurs, our business, financial condition or operating
results could be materially adversely affected. In such case, the trading price
of our common stock could decline, and our stockholders may lose all or part of
their investment in the shares of our common stock.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY. We were founded and commenced operations in
2001. Our operating history may be insufficient for you to evaluate our business
and future prospects. We have sustained losses in the past and cannot assure you
that we will become profitable or that we will not incur more losses in the
future. We expect that our operating expenses will increase as we expand. We
will have significant operating losses if we fail to realize anticipated revenue
growth. We will continue to encounter risks and difficulties frequently
experienced by companies at a similar stage of development, including that we
may fail to implement successfully our business model and strategy, or prudently
adapt and modify them as needed; increase awareness of our brands, protect our
reputation and develop customer loyalty; competently manage our expanding
operations and service offerings, including integration of any future
acquisitions; maintain adequate control of our expenses; and anticipate and
adapt to changing conditions in our markets, government regulation, our
competition and relevant technology.
If we are not successful in addressing any or all of these risks, our business
may be materially and adversely affected.
WE HAVE HAD LOSSES IN THE PAST AND MAY HAVE FUTURE LOSSES. WE MAKE NO ASSURANCES
THAT WE WILL BE ABLE TO ACHIEVE SUSTAINABLE PROFITABILITY. We have had operating
losses since completing our reverse merger in 2005. We will not be profitable
unless we materially increase our sales. The burden of our debt and current
interest liabilities makes it prudent to attract equity investment rather than
further debt to help us grow. Our new product development and management's
ability to successfully manage the business will be essential to achieving
consistent profitability. Although our revenues have grown in recent quarters,
this growth may not be sustained and we may never become consistently
profitable. As sales of goods grow and become a larger part of our total
revenues, we may experience smaller overall margins, as sales of our products
have higher costs of sales than our other revenue streams.
WE HAVE NEVER PAID CASH DIVIDENDS AND ARE NOT LIKELY TO DO SO IN THE FORESEEABLE
FUTURE. We currently intend to retain any future earnings for use in the
operation and expansion of our business. We do not expect to pay any cash
dividends in the foreseeable future but will review this policy as circumstances
dictate.
THE MARKET IN WHICH WE COMPETE IS HIGHLY COMPETITIVE, FAST-PACED AND FRAGMENTED,
AND WE MAY NOT BE ABLE TO MAINTAIN MARKET SHARE. We expect competition to
persist and intensify in the future. Our principal competitors are Tongrentang
and Guangzhou Pharmaceutical, and we also compete with a number of other,
smaller firms. Both Tongrentang and Guangzhou Pharmaceutical are publicly-traded
companies that are substantially larger and have greater resources than Global.
We face the risk that new competitors with greater resources than ours will
enter our market, and that increasing competition will result in lower prices.
If we must significantly reduce our prices, the decrease in revenues could
adversely affect our profitability.
Our products must keep pace with developments in our industry or they may be
displaced by competitors' products. Our industry is characterized by rapid
product development, with significant competitive advantages gained by companies
that introduce products that are first to market, deliver constant innovation in
products and techniques, offer frequent new product introductions and have
competitive prices. Our future growth partially depends on our ability to
develop products that are more effective in meeting consumer needs. In addition,
we must be able to manufacture and effectively market those products. The sales
of our existing products may decline if a competing product is introduced by
other companies.
The success of our new product offerings depends upon a number of factors,
including our ability to accurately anticipate consumer needs, innovate and
develop new products, successfully commercialize new products in a timely
manner, price our products competitively, manufacture and deliver our products
in sufficient volumes and in a timely manner and differentiate our product
offerings from those of our competitors. If we fail to make sufficient
investments in research and pay close attention to consumer needs or we focus on
technologies that do not lead to more effective products, our current and future
products could be surpassed by more effective or advanced products of others.
We have limited control over the activities of our distributors, which generally
are not employed or otherwise controlled by us, are free to conduct their
business at their own discretion and may be dedicated more to establishing their
own reputations and business relationships than to promoting our products. By
the same token, the simultaneous loss of a number of our distributors could have
a material adverse effect on our business, financial condition and results of
operations.
KEY EMPLOYEES ARE ESSENTIAL TO OUR BUSINESS. Our senior management is essential
to executing our strategy. We will need to retain these people and attract
others to succeed. We require specialized professionals in a variety of areas,
some of which are addressed by relatively few companies. As a result, depending
14
upon how our business grows, we may experience difficulty in hiring and
retaining highly skilled employees.
We compete for qualified professionals with a number of Chinese research
institutions, some of which are more established than we are and have the
ability to pay more cash and other compensation than we do. Competition for
qualified individuals is intense, and we cannot be certain that our search for
them will be successful. If we are unable to hire and retain skilled
professionals, our business, financial condition, operating results and future
prospects could be materially adversely affected. We do not have key-person
insurance for any of our senior managers or employees.
ESTABLISHING AND EXPANDING INTERNATIONAL OPERATIONS REQUIRES SIGNIFICANT
MANAGEMENT ATTENTION. Substantially all of our current revenues are derived from
China. We intend to expand our international operations in Southeast Asia and
the United States, which, if not planned and managed properly, could materially
adversely affect our business, financial condition and operating results.
Expanding internationally exposes us to legal uncertainties, new regulatory
requirements, liability, export and import restrictions, tariffs and other trade
barriers, difficulties in managing operations across disparate geographic areas,
foreign currency fluctuations, dependence on local distributors and potential
disruptions in sales or manufacturing due to military or terrorist acts, as well
as longer customer payment cycles and greater difficulties in collecting
accounts receivable. We may also face challenges in protecting our intellectual
property or avoiding infringement of others' rights, and in complying with
potentially uncertain or adverse tax laws.
We do not currently enter into forward exchange rate contracts to hedge some of
the financial risks of international operations, but expect to do so in the
future.
FLUCTUATIONS IN THE VALUE OF THE RMB RELATIVE TO FOREIGN CURRENCIES COULD AFFECT
OUR OPERATING RESULTS. Most of our operations are conducted in Hong Kong dollars
and Chinese Renminbi. To the extent future revenue is denominated in foreign
currencies, such as the U.S. dollar, we would be subject to increased risks of
foreign currency exchange rate fluctuations that could have a material adverse
affect on our business, financial condition and operating results. The value of
Hong Kong dollars and Chinese Renminbi against the U.S. dollar and other
currencies may fluctuate and is affected by, among other things, changes in the
PRC's political and economic conditions. As our operations are primarily in
Asia, any significant revaluation of Hong Kong dollars or the Chinese Renminbi
may materially and adversely affect our cash flows, revenues and financial
condition. For example, to the extent that we need to convert U.S. dollars into
Hong Kong dollars or Chinese Renminbi for our operations, appreciation of either
currency against the U.S. dollar could have a material adverse effect on our
business, financial condition and results of operations. Conversely, if we
decide to convert our Hong Kong dollars or Chinese Renminbi into U.S. dollars
for other business purposes and the U.S. dollar appreciates against either
currency, the U.S. dollar equivalent of the currency we convert would be
reduced. To date, we have not engaged in any hedging transactions in connection
with our international operations.
CHINESE FOREIGN EXCHANGE CONTROLS MAY LIMIT OUR ABILITY TO UTILIZE REVENUES
EFFECTIVELY AND RECEIVE DIVIDENDS AND OTHER PAYMENTS FROM OUR CHINESE
SUBSIDIARIES. Our Chinese subsidiaries are subject to Chinese rules and
regulations on currency conversion. The Chinese government regulates the
conversion of the Chinese RMB into foreign currencies. Currently, foreign
investment enterprises are required to apply for authority (renewed annually) to
open foreign currency accounts governing conversion for payment of dividends,
limited capital items such as direct investments, loans, and issuances of
securities, some of which may be effected with governmental approval, while
others require authorization.
Our subsidiaries' ability to remit funds to us may be limited by these
restrictions. There can be no assurance that the relevant regulations in China
will not be amended so as to adversely affect our ability to obtain funds from
our subsidiaries.
OUR OPERATIONS COULD BE CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED ADDITIONAL
FINANCING. ADDITIONAL FINANCING COULD ALSO RESULT IN DILUTION TO OUR EXISTING
STOCKHOLDERS OR RESTRICTIONS ON OUR FINANCIAL DISCRETION. Since inception our
investments and operations primarily have been financed through sales of our
common stock and proceeds from our current sales. In the future we may need to
raise additional funds through public or private financing, which may include
the sale of equity securities or equity or debt securities convertible into or
exchangeable for our common stock. The issuance of these securities could result
in dilution to our stockholders. To the extent that we raise additional capital
by issuing debt securities, we would incur substantial interest obligations, may
be required to pledge assets as security for the debt and may be constrained by
restrictive financial and/or operational covenants. Debt financing would also be
superior to your interest in bankruptcy or liquidation. To the extent we raise
additional funds through licensing or other arrangements, it may be necessary to
relinquish some rights to our technologies or products, or grant licenses on
unfavorable terms.
If we are unable to raise capital when needed, our business growth strategy may
slow, which could severely limit our ability to increase revenue, and we may be
unable to take advantage of business opportunities or respond to competition.
OUR COMPLIANCE WITH THE SARBANES-OXLEY ACT AND SECURITIES AND EXCHANGE
COMMISSION ("SEC") RULES CONCERNING INTERNAL CONTROLS MAY BE TIME CONSUMING,
DIFFICULT AND COSTLY. Although individual members of our management team have
experience as officers of publicly-traded companies, much of that experience
came prior to the adoption of the Sarbanes-Oxley Act of 2002. We have only
recently become a publicly-traded company. It may be time consuming, difficult
and costly for us to develop and implement the internal controls and reporting
procedures required by Sarbanes-Oxley. We may need to hire additional financial
reporting, internal controls and other finance staff in order to develop and
implement appropriate internal controls and reporting procedures. If we are
15
unable to comply with Sarbanes-Oxley's internal controls requirements, we may
not be able to obtain the independent accountant certifications that
Sarbanes-Oxley Act requires publicly-traded companies to obtain.
RISKS OF DOING BUSINESS IN CHINA
OUR OPERATIONS AND ASSETS ARE SUBJECT TO SIGNIFICANT POLITICAL AND ECONOMIC
UNCERTAINTIES. Changes in laws and regulations, or their interpretation, or the
imposition of confiscatory taxation, restrictions on currency conversion,
imports and sources of supply, devaluations of currency or the nationalization
or other expropriation of private enterprises could have a material adverse
effect on our business, results of operations and financial condition. Under its
current leadership, the Chinese government has been pursuing economic reform
policies that encourage private economic activity and greater economic
decentralization. There is no assurance, however, that the Chinese government
will continue to pursue these policies, or that it will not significantly alter
these policies from time to time without notice.
As China changes its economy from planned to more market-oriented, uncertainties
arise regarding governmental policies and measures. Although, in recent years,
the Chinese government has implemented measures emphasizing the use of market
forces for economic reform, reduction of state ownership of productive assets,
and establishment of sound corporate governance practices, a substantial portion
of productive assets in China are still owned by the Chinese government. For
example, all lands are state owned and leased to business entities or
individuals through governmental grants of state-owned land use rights. The
grant process is typically based on government policies at the time of grant,
which can be lengthy and complex and may adversely affect any expansion of our
operations. The Chinese government also exercises significant control over
China's economic growth through allocation of resources, foreign currency
control and providing preferential treatment to particular industries or
companies.
Products distributed outside China are subject to government regulations of
different jurisdictions, which could be stricter than in China. In some
developed countries, the government regulations for product approval could be
stricter than in China, while in developing countries, government regulation
could be uncertain.
WE ARE REQUIRED TO OBTAIN LICENSES TO EXPAND OUR BUSINESS IN MAINLAND CHINA. Our
activities must be reviewed and approved by various national and local agencies
of the Chinese government before they will issue business licenses to us. There
can be no assurance that Chinese authorities will continue to approve and renew
our licenses. If we are unable to obtain licenses or renewals we will not be
able to continue our business operations in China, which would have a material
adverse effect on our business, financial condition and results of operations.
WEAKENED POLITICAL RELATIONS BETWEEN THE U.S. AND CHINA COULD MAKE US LESS
ATTRACTIVE. Sino-U.S. relations are subject to sudden fluctuation and periodic
tension. Changes in political conditions in China and the U.S. are difficult to
predict and could adversely affect our operations, and its future business plans
and profitability.
OUR OPERATIONS MAY NOT DEVELOP IN THE SAME WAY OR AT THE SAME RATE AS MIGHT BE
EXPECTED IF THE PRC ECONOMY WERE SIMILAR TO THE MARKET-ORIENTED ECONOMIES OF
OECD MEMBER COUNTRIES. The economy of the PRC has historically been a
nationalistic, "planned economy," meaning it functions and produces according to
governmental plans and pre-set targets or quotas. In certain aspects, the PRC's
economy has been transitioning to a more market-oriented economy. However, there
can be no assurance of the future direction of these economic reforms or the
effects these measures may have. The PRC economy also differs from the economies
of most countries belonging to the Organization for Economic Cooperation and
Development, an international group of member countries sharing a commitment to
democratic government and market economy. For instance:
* the number and importance of state-owned enterprises in the PRC is
greater than in most OECD countries;
* the level of capital reinvestment is lower in the PRC than in most
OECD countries; and
* Chinese policies make it more difficult for foreign firms to obtain
local currency in China than in OECD jurisdictions.
As a result of these differences, the combined company's operations may not
develop in the same way or at the same rate as might be expected if the PRC
economy were similar to those of OECD member countries.
THE ECONOMY OF CHINA HAS BEEN EXPERIENCING UNPRECEDENTED GROWTH, WHICH COULD BE
CURTAILED IF THE GOVERNMENT TRIES TO CONTROL INFLATION BY TRADITIONAL MEANS OF
MONETARY POLICY OR ITS RETURN TO PLANNED-ECONOMY POLICIES, ANY OF WHICH WOULD
HAVE AN ADVERSE EFFECT ON US. The Chinese economy's rapid growth has led to
higher levels of inflation. Government attempts to control inflation may
adversely affect the business climate and growth of private enterprise in China,
and may create a more challenging revenue and expense environment for our
business, which could have an adverse effect on our profitability.
CHINESE BUSINESS AND COMMERCIAL LAW IS RELATIVELY RECENT AND REMAINS IN FLUX,
AND WE MAY HAVE LIMITED LEGAL RECOURSE UNDER CHINESE LAW IF DISPUTES ARISE UNDER
OUR CONTRACTS WITH THIRD PARTIES. The Chinese government has enacted some laws
and regulations dealing with matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. Its experience in
implementing, interpreting and enforcing these laws and regulations, however, is
limited, and our ability to enforce commercial claims or to resolve commercial
disputes is unpredictable. If our business is unsuccessful, or other adverse
circumstances arise from our business transactions, we face the risk that our
counterparties may seek ways to terminate the transactions, or, may hinder or
prevent us from accessing important information regarding their financial and
business operations. The resolution of these matters may be subject to the
16
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under Chinese law, may be limited. Without a means of
recourse by virtue of the Chinese legal system, we may be unable to prevent
these situations from occurring. The occurrence of any such events could have a
material adverse effect on our business, financial condition and results of
operations.
YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING
FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN CHINA BASED ON UNITED STATES
JUDGMENTS AGAINST US, OUR SUBSIDIARIES, OFFICERS AND DIRECTORS AND OTHERS.
Substantially all of our assets are located in the PRC, and our management
principally reside and have their assets there. As a result, it may not be
possible for U.S. investors to effect service of process within the U.S. or
elsewhere outside the PRC on our directors or executive officers, including with
respect to matters arising under U.S. federal or state securities laws. The PRC
does not have treaties providing for reciprocal recognition and enforcement of
judgments of courts with the U.S. or many other countries. As a result,
recognition and enforcement in the PRC of such judgments in relation to any
matter, including U.S. securities laws, may be difficult or impossible. An
original action may be brought in the PRC against our subsidiaries' assets,
directors and executive officers only if the actions are not required to be
arbitrated by PRC law and the facts alleged in the complaint give rise to a
cause of action under PRC law. In connection with such an original action, a PRC
court may award civil liability, including monetary damages.
WE MUST COMPLY WITH U.S. LAWS PROHIBITING CORRUPT BUSINESS PRACTICES OUTSIDE THE
UNITED STATES, WHICH MAY PUT US AT A COMPETITIVE DISADVANTAGE. We are required
to comply with the U.S. Foreign Corrupt Practices Act, which prohibits U.S.
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some of our competitors, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
occur from time-to-time in mainland China. If our competitors engage in these
practices they may receive preferential treatment from personnel of some
companies, giving our competitors an advantage in securing business, or from
government officials who might give them priority in obtaining new licenses,
which would put us at a disadvantage. Although we inform our personnel that such
practices are illegal, we can not assure you that our employees or other agents
will not engage in such conduct for which we might be held responsible. If our
employees or other agents are found to have engaged in such practices, we could
suffer severe penalties.
WE MAY NOT BE GUARANTEED OF A CONTINUANCE TO RECEIVE THE PREFERENTIAL TAX
TREATMENT WE CURRENTLY ENJOY UNDER PRC LAW, AND DIVIDENDS PAID TO US FROM OUR
OPERATIONS IN CHINA MAY BECOME SUBJECT TO INCOME TAX UNDER PRC LAW. The PRC
government promulgated on March 16, 2007 the new Enterprise Income Tax Law that
was effective as of January 1, 2008. Pursuant to the new law, the enterprise
income tax of 25% shall be apply to any enterprise. Although we were approved by
the local tax authority to be exempted from the enterprise income tax for two
years beginning with the first profitable year and be entitled to a reduced
income tax rate, we do not know whether such new law may change the preferential
treatment that was granted to us. Any loss or substantial reduction of the tax
benefits enjoyed by us would reduce our net profit.
RISKS RELATED TO OUR PRODUCTS
WE MAY INCUR SUBSTANTIAL UNINSURED LIABILITIES AND BE REQUIRED TO LIMIT
COMMERCIALIZATION OF OUR PRODUCTS IN RESPONSE TO PRODUCT LIABILITY LAWSUITS. The
manufacture, marketing and sale of our products entail inherent risks of product
liability. As a manufacturer of products designed for human consumption, we are
subject to product liability claims that use of our products has resulted in
injury. Some of our products contain vitamins, minerals, herbs and other
ingredients that are not subject to pre-market regulatory approval. Our products
could contain contaminated substances, and some of our products contain
innovative ingredients that do not have long histories of human consumption.
Previously unknown adverse reactions resulting from human consumption of these
ingredients could occur.
We may be held liable if serious adverse reactions from the use of our products
occur. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities and damage to our commercial
reputation, or be required to limit commercialization of our products.
Our inability to obtain sufficient product liability insurance at acceptable
cost against claims could prevent or inhibit commercialization of our products.
We currently do not carry product liability insurance. We may not be able to
obtain insurance at reasonable cost, if at all. If we obtain insurance in the
future, it may not adequately compensate us for all losses that we may incur,
which could have a material adverse effect on our business.
CONSUMERS MAY NOT ACCEPT AND USE OUR PRODUCTS. Even if regulatory bodies approve
our products, consumers may not accept and use them. Acceptance and use will
depend upon a number of factors, including perceptions by the health and
nutrition community about their safety and effectiveness, changing consumer
preferences and trends, our products' cost-effectiveness relative to competing
products and the effectiveness of marketing and distribution efforts by us, our
licensees and distributors, if any. Reimbursement for our products from
government or other healthcare payors is generally minimal, and any such
reimbursement is problematic, in that payors routinely challenge prices charged,
limit coverage and provide inadequate reimbursement, which would diminish market
acceptance of our products.
Our success depends in part on our ability to anticipate and respond to changes
in consumer trends, and we may not respond in a timely or commercially
appropriate manner to them. Because markets for our products differentiate
geographically, we must accurately assess demand in each specific market into
which we wish to make sales. If we fail to invest in extensive market research
on consumer health needs in each market we target, we may face limited market
acceptance of our products, which could have a material adverse effect on our
17
sales and earnings. If we cannot compete successfully for market share against
other drug companies, we may not achieve sufficient product revenues, and our
business will suffer.
OBTAINING AND MAINTAINING NECESSARY REGULATORY APPROVALS FOR OUR PRODUCTS MAY BE
TIME CONSUMING, DIFFICULT AND COSTLY. IF WE FAIL TO DO SO, WE WILL BE UNABLE TO
SELL OUR PRODUCTS IN SOME AREAS. Our current products require and have obtained
regulatory review and approval for sale. We anticipate that future product
candidates we develop will also require such review and approval. Government
regulation includes inspection of and controls over testing, manufacturing,
safety and environmental standards, efficacy, labeling, advertising, promotion,
record keeping and sale and distribution generally. The required effort to
achieve approval may be time consuming, difficult and costly, and we cannot
predict whether such approvals would be obtained in particular cases. Regulators
have substantial discretion in approving products such as ours, and may either
decline to do so or require us to spend considerable effort to achieve a
different result. That process may also be delayed by changes in government
regulation, future legislation, administrative action or changes in policy that
occur prior to or during regulatory review. Delays in obtaining regulatory
approvals may delay commercialization of, and our ability to derive product
revenues from, the affected products, impose costly procedures on us, and
diminish any competitive advantages we may otherwise enjoy.
In addition, even after approval, regulated products are subject to continuing
review, reporting requirements and other compliance obligations. The discovery
of previously unknown problems with our products, our own manufacturing or
manufacturing by third parties, may result in restrictions on our products or in
their manufacture, including withdrawal of the product from the market.
Internationally, our products are subject to regulatory requirements that vary
by country. Obtaining approval to sell our products internationally involves
complexities of dealing with a variety of governmental regulations. We have
limited experience in dealing with the specific regulations that may be required
to sell our products in certain international markets, which could delay our
ability to obtain relevant regulatory approval for our products. In addition,
our product sales in other countries are subject to product regulatory regimes
of various degrees and direct marketing or distribution regulations. There can
be no assurance that our current operations will not be adversely affected by
compliance issues and changes in applicable laws and regulations in relevant
jurisdictions.
WE RELY ON A LIMITED NUMBER OF VENDORS TO SUPPLY RAW MATERIALS AND FINISHED
GOODS FOR OUR PRODUCTS. Regulatory authorities also periodically inspect
manufacturing facilities, including third parties who manufacture our products
or our active ingredients for us, and may challenge their qualifications or
competence. Pharmaceutical manufacturing facilities must comply with applicable
good manufacturing practice standards, and manufacturers usually must invest
substantial funds, time and effort to ensure full compliance with these
standards and make quality products. We do not have control over our contract
manufacturers' compliance with these requirements. Failure to comply with
regulatory requirements can result in sanctions, fines, delays, suspension of
approvals, seizures or recalls of products, operating restrictions,
manufacturing interruptions, costly corrective actions, injunctions, adverse
publicity against us and our products and criminal prosecutions.
If we are unable to obtain sufficient supplies of raw materials, if climatic or
environmental conditions adversely affect them or if they increase significantly
in price, our business would be seriously harmed. If any of our current or
future third-party suppliers cease to supply products in the quantity and
quality we need to manufacture our products, or if they are unable to comply
with applicable regulations, the qualification of other suppliers could be a
lengthy process, and there may not be adequate alternatives to meet our needs.
As a result, we may not be able to obtain the necessary ingredients used in our
products in the future on a timely basis, if at all. This would negatively
affect our business.
MANUFACTURING RISKS. There are risks associated with ingredients mixing and
production processes and techniques. Our manufacturing process requires a
significant degree of technical expertise. If we fail to manufacture our
products to specifications or inadvertently use defective materials in the
manufacturing process, the reliability and performance of our products will be
compromised.
Any significant disruption in our manufacturing operations for any reason, such
as regulatory requirements and loss of certifications, power interruptions,
fires, hurricanes, war or other force majeure, could adversely affect our sales
and customer relationships.
IF WE FAIL TO PROTECT ADEQUATELY OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OR
TO SECURE RIGHTS TO PATENTS OF OTHERS, THE VALUE OF OUR INTELLECTUAL PROPERTY
RIGHTS COULD DIMINISH. Our success, competitive position and revenues will
depend in part on our ability, and the ability of our licensors, to obtain and
maintain patent or other intellectual property protection for our products,
methods, processes and other technologies, to preserve our trade secrets, to
prevent third parties from infringing on our proprietary rights and to operate
without infringing the proprietary rights of third parties.
Our patents, trade secrets, trademarks, service marks and similar intellectual
property are critical to our success. We rely on patent, trademark and trade
secret law, as well as confidentiality and license agreements with our
employees, customers, partners and others, to protect our proprietary rights. We
have received patent protection for certain of our products in the People's
Republic of China. We have not applied for any patent or other protection in
countries other than China. We cannot predict the degree and range of protection
patents or other intellectual property rights will afford us against
competitors, including whether third parties will find ways to invalidate or
otherwise circumvent our patents, if and when patents will issue, whether or not
others will obtain patents claiming aspects similar to ours, or if we will need
to initiate litigation or administrative proceedings, which may be costly
whether we win or lose.
Our success also depends on the skills, knowledge and experience of our
employees, consultants, advisors, licensors and contractors. To help protect our
proprietary know-how and inventions for which patents may be unobtainable or
difficult to obtain, we rely on trade secret protection and confidentiality
agreements. To this end, we require all of our employees, consultants, advisors
18
and contractors to enter into confidentiality and, where applicable, grant-back
agreements. These agreements may not provide adequate protection in the event of
unauthorized use or disclosure or the lawful development by others of such
information. If any of our intellectual property is disclosed, its value would
be significantly impaired, and our business and competitive position would
suffer.
IF WE INFRINGE THE RIGHTS OF THIRD PARTIES, WE COULD BE PREVENTED FROM SELLING
PRODUCTS, FORCED TO PAY DAMAGES, AND COMPELLED TO DEFEND AGAINST LITIGATION. We
could also incur substantial costs, and have to obtain licenses, which may not
be available on commercially reasonable terms (if at all), redesign our products
or processes, stop using the subject matter claimed in the asserted patents, pay
damages or defend litigation or administrative proceedings. All these may be
costly, whether we win or lose, and could result in a substantial diversion of
valuable management resources.
We believe we do not infringe others' proprietary rights. However, we cannot
guarantee that no third party will claim infringement in the future. Resolving
such issues traditionally has resulted, and could in our case result, in lengthy
and costly legal proceedings, the outcome of which cannot be predicted
accurately.
RISK RELATED TO MANAGEMENT
THE CONCENTRATED OWNERSHIP OF OUR CAPITAL STOCK MAY BE AT ODDS WITH YOUR
INTERESTS, AND HAVE THE EFFECT OF DELAYING OR PREVENTING A CHANGE IN CONTROL OF
OUR COMPANY. Our directors, officers, key personnel and their affiliates as a
group beneficially own or control the vote of approximately 69% of our
outstanding capital stock, and control the Company. They will be able to
continue to exercise significant influence over all matters affecting the
Company, including the election of directors, formation and execution of
business strategy and approval of mergers, acquisitions and other significant
corporate transactions, which may have an adverse effect on the stock price.
They may have conflicts of interest and interests that are not aligned with
yours in all respects.
MANAGEMENT IS INEXPERIENCED IN RUNNING A U.S. PUBLIC COMPANY. We are managed by
a management team that is relatively unfamiliar with the capital market and the
processes by which a U.S. public company should be managed and operated.
Management is currently making efforts to familiarize itself with the relevant
laws, rules and regulations and market practice, but there can be no assurance
that it can master the relevant knowledge and skills and set up the required
systems in time to prevent mistakes and to meet shareholder and market
expectations.
WE MAY NOT SUCCESSFULLY MANAGE OUR GROWTH. Our success will depend upon the
expansion of our operations and the effective management of our growth, which
will place a significant strain on our management and administrative,
operational, and financial resources. To manage this growth, we must expand our
facilities, augment our operational, financial and management systems, and hire
and train additional qualified personnel. If we are unable to manage our growth
effectively, our business would be harmed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit
Number Description
------ -----------
31.1 Certification by the Chief Executive Officer pursuant to Rule
13a-14(a)or 15d-14(a). **
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a). **
32.1 Certification of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
----------
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** Filed herewith
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL PHARMATECH, INC.
Date: August 14, 2008 By: /s/ Lianqin Qu
-----------------------------------------
Name: Lianqin Qu
Title: President and Chief Executive Officer
Date: August 14, 2008 By: /s/ Zongsheng Zhang
-----------------------------------------
Name: Zongsheng Zhang
Title: Chief Financial Officer
|
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