ITEM 1. FINANCIAL STATEMENTS.
GLOBAL PHARMATECH, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2007
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,175,169
Notes receivable 33,285
Accounts receivable, net 461,607
Related party receivable 42,911
Inventories 1,152,145
Other receivables and prepayments, net 1,598,486
------------
Total Current Assets 8,463,603
------------
PROPERTY, PLANT & EQUIPMENT, net 4,569,465
LAND LEASE, net 406,756
CONSTRUCTION IN PROGRESS 35,959
INTANGIBLE ASSETS, net 130,119
OTHER LONG-TERM ASSETS 743,562
------------
5,885,861
------------
Total Assets $ 14,349,464
============
|
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings 266,282
Accounts payable and accrued expenses 352,512
Advances from customers 176,163
Other payables and accruals 390,436
Taxes payable 49,806
Other current liabilities 41,026
------------
Total Current Liabilities 1,276,225
LONG-TERM LOAN 2,396,538
MINORITY INTEREST 1,141,050
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 issued and outstanding 2,325
Additional paid in capital 11,374,300
Appropriated retained earnings 237,052
Accumulated loss (2,755,906)
Accumulated other comprehensive income 692,880
Subscription receivable (15,000)
------------
Total Stockholders' Equity 9,535,651
------------
Total Liabilities and Stockholders' Equity $ 14,349,464
============
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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
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2007 2006 2007 2006
----------- ----------- ----------- -----------
REVENUE $ 1,591,142 $ 1,490,169 $ 520,942 $ 334,982
COST OF REVENUE 657,445 409,938 290,741 196,385
----------- ----------- ----------- -----------
GROSS PROFIT 933,697 1,080,231 230,201 138,597
----------- ----------- ----------- -----------
OPERATING EXPENSES
Advertising 74,291 35,386 46,736 564
Research and development 555,388 98,979 170,001 (135,174)
Selling expenses 102,225 33,470 24,257 12,158
General and administrative expenses 963,193 1,230,353 321,916 556,336
Bad debt expense -- 22,634 -- (14,838)
----------- ----------- ----------- -----------
1,695,097 1,420,822 562,910 419,046
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (761,400) (340,591) (332,709) (280,449)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Miscellaneous income (expense) (21,823) 544,447 (36,003) 75,392
Interest expense (135,382) (135,269) (51,588) (49,100)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
DISCONTIUED OPERATIONS (918,605) 68,587 (420,300) (254,157)
----------- ----------- ----------- -----------
MINORITY INTEREST 22,937 (2,338) 9,978 (4,118)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS (941,542) 70,925 (430,278) (250,039)
----------- ----------- ----------- -----------
Loss from discontinued operations (49,102) (110,674) -- (23,833)
Loss on sale of Jilin Yi Cao Tang Pharmacy
Co., Ltd. ("YCT") (804,600) -- -- --
----------- ----------- ----------- -----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (853,702) (110,674) -- (23,833)
NET LOSS $(1,795,244) $ (39,749) $ (430,278) $ (273,872)
FOREIGN EXCHANGE TRANSLATION 235,051 336,094 70,296 336,094
----------- ----------- ----------- -----------
TOTAL COMPREHNSIVE INCOME (LOSS) (1,560,193) 296,345 (359,982) 62,222
=========== =========== =========== ===========
BASIC AND DILUTED NET INCOME (LOSS) PER
COMMON SHARE:
Continuing operations $ (0.04) $ 0.00 $ (0.02) $ (0.01)
Discontinued operations $ (0.04) $ (0.01) $ 0.00 $ (0.00)
----------- ----------- ----------- -----------
$ (0.08) $ 0.01 $ (0.02) $ (0.01)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 23,247,935 21,044,602 23,247,935 23,291,268
=========== =========== =========== ===========
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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 NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2007 2006
----------- -----------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES
Net Loss $(1,795,244) $ (39,749)
Adjustments to reconcile income from operations
to net cash used by operating activities:
Minority interest 22,937 (2,338)
Depreciation 258,221 248,062
Bad debt expense -- 22,634
Common stock issued for services 59,376
Amortization of land lease and intangible assets 6,930 23,625
Loss from discontinued operations 853,702 110,674
Changes in operating assets and liabilities Decrease
(Increase) in operating assets:
Accounts receivable, net 91,766 1,012,646
Notes receivable 10,240
Related party receivable 64,769 547,228
Inventories (116,827) (617,315)
Other receivables and prepaid expenses (22,164) (1,251,644)
Increase (Decrease) in operating liabilities:
Accounts payable and accrued expenses 167,326 (141,275)
Related party payable -- (69,884)
Advances from customers 81,798 29,735
Other payables and accruals (184,385) (119,858)
Taxes payable (19,847) (22,297)
Other current liabilities (31,432) (5,578)
----------- -----------
Net Cash Used by Continuing Operating Activities (612,210) (215,958)
Net Cash Used by Discontinued Operating Activities (44,465) (11,548)
----------- -----------
Net Cash Used by Operating Activities (656,675) (227,506)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (122,460) (118,625)
Purchase of intangible assets (7,005) --
Construction in progress (35,231) (8,727)
----------- -----------
Net Cash Used by Continuing Investing Activities (164,696) (127,352)
Net Cash Provided by Discontinued Investing Activities,
Including Proceeds from Sale of Subsidiary 59,034 22,186
----------- -----------
Net Cash Used by Investing Activities (105,662) (105,166)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short term borrowings -- 247,825
Common shares issued -- 4,601,621
Proceeds from/(payment of)long-term borrowing -- (24,783)
Capital contributions from minority interests 125,880 --
----------- -----------
Net Cash Provided by Continuing Financing Activities 125,880 4,824,663
Net Cash Provided by Discontinued Financing Activities 49,779 --
----------- -----------
Net Cash Provided by Financing Activities 175,656 4,824,663
----------- -----------
Effect of exchange rate changes on cash 206,692 112,321
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (379,986) 4,604,312
CASH AND CASH EQUIVALENTS, beginning of period 5,555,155 690,835
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 5,175,169 $ 5,295,147
=========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 162,425 $ 152,191
=========== ===========
Income taxes paid $ 0 $ 0
=========== ===========
|
See Note 1 for Non-Cash Investing and Financing Activities for Sale of
Subsidiary.
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
5
NOTE TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2007
1. The Company
Global Pharmatech, Inc. ("Global" or the "Company") was incorporated in Delaware
on June 26, 2001 under the name Autocarbon.com, Inc. After engaging, under prior
management, in several businesses unrelated to its current one, on February 9,
2005, Global acquired Jilin Tian Yao Science and Technology Limited Company
("Natural Pharmatech China"), by acquiring Natural Pharmatech China's parent,
Natural Pharmatech, Inc. ("Natural"), through the issuance to Natural's
shareholders of 13,703,125 of its common shares for all of the outstanding
common shares of Natural. Located in Changchun, China, Natural Pharmatech China
is a Chinese limited liability company, organized on February 7, 2001, which,
together with its subsidiaries, is principally engaged in the research and
development of modernized traditional Chinese medicine and bio-pharmacy, the
sale of this technology, and the manufacture and sale of Chinese medicine and
vitamins throughout China. Natural was incorporated in the British Virgin
Islands on February 2, 2004, and acquired Natural Pharmatech China on June 15,
2004 by issuing 43,800,000 of its common shares for all of the outstanding
common shares of Natural Pharmatech China.
Under generally accepted accounting principles, these acquisitions are
considered in substance to be capital transactions rather than business
combinations. In each case, for accounting purposes, the acquired company is
deemed to have issued its stock for the net monetary assets of the acquiring
company. Each transaction is accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition, except
that no goodwill is recorded.
During the first quarter of 2007, Natural Pharmatech China and Natural purchased
50% and 25%, respectively, of the equity interest in Jilin Biotech Co., Ltd
("BIO"), a Chinese company, for $3,000,000 Hong Kong dollars (approximately
$385,000). The 25% owner invested 1,000,000 Hong Kong dollars. The US$
equivalent of approximately $125,880 is included with contributions from
minority interest in financing activities in the September 30, 2007 statement of
cash flows.
On March 29, 2007, Natural Pharmatech China invested RMB 100,000 (approximately
$13,145) to set up Changchun Jutai Dietary Supplements Sales Co., Ltd. ("Jutai
Sales"), Natural Pharmatech China holds 100% of the ownership of Jutai Sales.
Jutai Sales' main business is the sale, of Jutai and other dietary supplements.
In the current quarter, Jutai Sales has opened one retail store in Changchun.
On May 11, 2007, the Company entered into an Equity and Liability Transfer
Agreement to sell Natural Pharmatech China's 95% equity interest in one of its
Chinese subsidiaries, Jilin Yi Cao Tang Pharmacy Co., Ltd ("YCT") to Mr. Daojun
Wang at for a price of RMB9,000,000 (approximately $1,197,000) 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)
|
6
The Company has converted the receivable to present value using a 5% discount
rate. The total discounted amount is $60,778, and this will be amortized over
the life of the payment schedule.
2. Summary of Significant Accounting Policies
a. Principles of Consolidation and Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and include the
accounts of Global and its majority owned subsidiaries. All significant
inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements as of September 30,
2007 and for the nine and three month periods ended September 30, 2007 and 2006
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. In the opinion of management, these unaudited
consolidated interim financial statements include all adjustments considered
necessary to make the financial statements not misleading. The results of
operations for the nine and three months ended September 30, 2007 are not
necessarily indicative of the results for the full fiscal year ending December
31, 2007. The unaudited consolidated interim financial statements should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2006 as reported in Form 10-KSB.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
7
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 $271,493 and $1,002,794 for
the nine months ended September 30, 2007 and 2006, respectively. The contract
revenues are $18,909 and $225,712 for the three months ended September 30, 2007
and 2006, respectively.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $41,780 and
$39,772 for the nine months ended September 30, 2007 and 2006, respectively.
Such revenues are $8,439 and $15,574 for the three months ended September 30,
2007 and 2006, respectively.
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. The revenues earned are $1,277,869
and $447,603 for the nine months ended September 30, 2007 and 2006,
respectively. The revenues earned are $493,594 and $93,696 for the three months
ended September 30, 2007 and 2006, respectively.
Government grants are recognized as other income upon receipt. These revenues
are $26,080 and $115,000 for the nine months ended September 30, 2007 and 2006,
respectively. This revenue is included in miscellaneous income (expense) on the
statement of operations.
d. Foreign Currency Translation
The functional currency of Natural Pharmatech China and its subsidiaries is the
Chinese Yuan [RMB] and its reporting currency is the U.S. dollar. Natural
Pharmatech China's consolidated balance sheet accounts are translated into U.S.
dollars at the period-end exchange rates and all revenue and expenses are
translated into U.S. dollars at the average exchange rates prevailing during the
periods in which these items arise. Translation gains and losses are deferred
and accumulated as a component of other comprehensive income in stockholders'
equity. Translation gains and losses that arise from exchange rate fluctuations
from transactions denominated in a currency other than the functional currency
are included in the statement of operations as incurred. The transaction gains
and losses were immaterial for the periods ended September 30, 2007 and 2006.
The Chinese government imposes significant exchange restrictions on fund
transfers out of China that are not related to business operations. These
restrictions have not had a material impact on the Company because it has not
engaged in any significant transactions that are subject to the restrictions.
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 September 30,
2007, had a balance of $237,052.
8
3. Inventory
Inventory is comprised of the following:
September 30, 2007
------------------
Raw materials $ 196,376
Work in progress 86,130
Finished goods 869,639
----------
Total $1,152,145
==========
|
4. Other receivables and prepayments
Other receivables and prepayments are comprised of the following:
September 30, 2007
------------------
Receivable from Mr. Daojun Wang
for YCT (Note 1) $ 326,160
Prepayments 182,250
Others 1,090,076
----------
Total $1,598,486
==========
|
5. Other Current Liabilities
The account consists principally of approximately $29,800 of salaries and
benefits payable to employees.
6. Property and Equipment
Property and equipment is comprised of the following:
September 30, 2007
------------------
Office equipment $ 149,848
Machinery and equipment 2,136,272
Vehicles 114,418
Computer equipment 78,556
Furniture fixtures 25,981
Building and improvement 505,562
Building pledged as security 2,869,791
----------
Total $5,880,428
----------
Accumulated Depreciation 1,310,963
----------
Net $4,569,465
==========
|
Depreciation and amortization expense for each of the nine months ended
September 30, 2007 and 2006 was approximately $258,000 and $248,000,
respectively.
Depreciation and amortization expense for each of the three months ended
September 30, 2007 and 2006 was approximately $96,000 and $83,000, respectively.
7. Income Taxes
The deferred tax liability as of September30, 2007 is immaterial and is included
with other liabilities.
The Company and each of its subsidiaries file separate income tax returns.
Natural Pharmatech China qualifies as a "high-technology foreign joint venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. Since its first profitable year was 2005,
9
Natural Pharmatech China is entitled to an exemption from PRC tax for the years
2005 and 2006. Because Natural Pharmatech China qualifies as a "high-technology
joint venture" and is located in an economic development zone, it is entitled to
a reduced tax rate of 10% for the three years beginning in 2007 through 2009.
Thereafter, it will be taxed at the standard income tax rate of 15%.
Jilin BCT Pharmacy Company, Ltd ("BCT") is a "wholly-owned foreign venture"
which entitles it to an exemption from PRC income tax for two years beginning
with its first profitable year. After these two years, it is entitled to a
reduced income tax rate of 10% for three additional years. After these three
years, it will be taxed at the standard income tax rate for a "wholly-owned
foreign venture" of 15%.
Jilin Tian Yao Drug Safety Evaluation Co., Ltd ("JDE") is a "high technology
joint venture" and is exempt from income taxes for two years beginning with its
first profitable year. It is thereafter taxed at a standard income tax rate of
15%.
XD is considered a "high technology joint venture" and so is entitled to full
exemptions from income tax for two years, beginning with its first profitable
year. Thereafter, it is assessed at the standard income tax rate for joint
ventures of 15%.
BIO is a foreign joint venture, so the income tax rate is 15%.
Jutai Sales' income tax rate is 33%.
The Company is also subject to value added tax (VAT), business tax and surtax
totaling 5.5 percent of gross sales.
8. 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 September30, 2007, the Company has a credit risk exposure of uninsured cash
in banks of $5,175,169. The Company does not require collateral or other
securities to support financial instruments that are subject to credit risk.
For the nine months ended September 30, 2007, two customers accounted for
$613,096 (39%) of total sales as follows: Customer D at $481,955 (30%) and
Customer E at $131,141 (9%).
For the nine months ended September30, 2006, three customers accounted for
$582,000(39%) of total sales as follows: Customer A at $250,000(17%), Customer B
at $169,000 (11%) and Customer C at $163,000(11%).
9. Debt
The Company has one long-term loan from one financial institution totaling
approximately $2,396,538 at September 30, 2007. The weighted interest rate of
the loan at September 30, 2007 was approximately 9.13 percent. The loan is
secured by Natural Pharmatech China's office building and matures in one lump
sum payment on November 15, 2008.
The Company has a short term loan from Changchun Commercial Bank Tongguang Road
Branch of approximately $266,000 at September 30, 2007. The annual interest rate
is 8.54% and the total balance is due June 2008.
Interest expense and related service charges were approximately $162,000 and
$152,000 for the nine months ended September 30, 2007 and 2006, respectively.
Interest expense and related service charges were approximately $78,000 and
$66,000 for the three months ended September 30, 2007 and 2006, respectively.
10
10. Related Party Transactions
As of September 30, 2007, the Company has the following amounts due from related
parties:
Advances Due From Related Parties
Stockholders
Ben Ji Wang $ 3,329
-------
$ 3,329
Yuming Li 39,582
-------
Total $42,911
=======
|
Yuming Li is the brother-in-law of the Company's chairwoman.
These balances have no stated terms for repayment and are not interest bearing.
11. Discontinued Operations
Due to consistent operating losses at its YCT subsidiary, in March 2007, the
Company's Board of Directors approved a plan to sell Natural Pharmatech China's
95% equity interest in YCT to Mr. Daojun Wang for a price of RMB9,000,000
(approximately $1,197,000). On May 11, 2007, the Company and Mr. Wang signed the
Equity and Liability Transfer Agreement. As of September 30, 2007, the above
transfer has been executed, and YCT's ownership has been transferred to Mr.
Wang. The Company has recorded a loss of $804,600 on the sale.
The following table represents the results of the discontinued operations and
net of minority interest:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
2007 2006 2007 2006
---------- ---------- ---------- ----------
Sales - YCT $ -- $ 39,283 $ 138,606 $ 195,031
========== ========== ========== ==========
Loss from operations -YCT $ -- $ (24,604) $ (51,960) $ (116,499)
========== ========== ========== ==========
Net loss from discontinued
Operations - YCT $ -- $ (23,833) $ (49,102) $ (110,674)
========== ========== ========== ==========
Loss on sale of YCT $ -- $ -- $ (804,600) $ --
========== ========== ========== ==========
|
As of September 30, 2007, the Company has received RMB 500,000 (approximately
$65,725) from Mr. Daojun Wang as payment for YCT. According to the contract, the
Company should have received RMB 1,000,000 (approximately $133,000) by that
date, however, the Company anticipates that the full amount of the agreement
will be collectible.
As of September 30, 2007, the Company's long term receivable is RMB6, 000,000
(approximately $743,562). This is the outstanding balance to be paid between
November 2008 and 2011 as stated in the YCT contract. This balance is classified
as other long term asset.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-QSB.
The information in this discussion contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business strategy and expectations, including but
not limited to the following:
* our ability to raise funds in the future through public or private
financings;
* our ability to develop marketable products through our research and
development efforts;
* our ability to protect our patents and technologies and related
intellectual properties;
* customers' acceptance of our products;
* our ability to compete against new companies entering the Chinese
pharmaceutical market and larger, more established companies which
have more resources than our company;
* our business expenses being greater than anticipated due to
competitive factors or unanticipated developments;
* changes in political and economic conditions in China;
* changes in Chinese laws and regulations applicable to our business,
including the Administration of Pharmaceuticals, the rules and
regulations of the State Food and Drug Administration, the Good Supply
Practice standards, and the inclusion of our products in the insurance
catalogue of the Ministry of Industry and Social Security
* our ability to retain management and key personnel;
* our ability to comply with the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002.
Any statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. For example, words such as "may,"
"will," "should," "estimates," "predicts," "potential," "continue," "strategy,"
"believes," "anticipates," "plans," "expects," "intends," and similar
expressions are intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements. Actual results could
differ materially from those anticipated in these forward-looking statements as
a result of a number of factors, including our good faith assumptions being
incorrect, our business expenses being greater than anticipated due to
competitive factors or unanticipated development or sales costs; revenues not
resulting in the manner anticipated due to a continued slow down in technology
spending, particularly in the telecommunications market; our failure to generate
investor interest or to sell certain of our assets or business segments. The
forward-looking statements may also be impacted by the additional risks faced by
us as described in this Report and in our filings with the Securities and
Exchange Commission (the "SEC"). All forward-looking statements included in this
Report are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements.
12
BACKGROUND
Global Pharmatech, Inc. ("Global Pharmatech," the "Company", "we", "us" or
"ours") was incorporated under the laws of the State of Delaware in 2001 under
the name Autocarbon.com, Inc. On November 1, 2002, we filed a Certificate of
Ownership with the Secretary of State of the State of Delaware whereby we merged
with our wholly-owned subsidiary and amended our Certificate of Incorporation,
changing our name to Autocarbon, Inc.
On January 24, 2005, our company entered into a Share Purchase Agreement with
Natural Pharmatech, Inc., a British Virgin Islands corporation ("Natural
Pharmatech"), and the shareholders of Natural Pharmatech. Under the terms of the
Share Purchase Agreement, we agreed to acquire 100% of Natural Pharmatech's
shares in exchange for 80% of our common stock, to be issued to the Natural
Pharmatech shareholders. Our acquisition of Natural Pharmatech was completed on
February 9, 2005. In connection with this transaction, we amended our
Certificate of Incorporation on January 31, 2005, changing our name to Global
Pharmatech, Inc.
Through our subsidiaries, we develop, manufacture and market proprietary drugs
and nutritional supplements that are based on traditional Chinese medicine. We
also offer a full range of "start to finish" biotechnology services, including
research and development, testing, manufacturing drugs in liquid and solid dose
forms, sales and marketing. We utilize unique extraction methods and innovative
techniques that have been developed by our research and development team. Our
core business is to license our patents and technologies for
botanical/biological drug and nutritional supplements and to manufacture and
market the products to China and the globe. Our operations are currently
conducted in the People's Republic of China with sales distribution in China,
U.S, Hong Kong, Malaysia, Singapore, Indonesia and Vietnam. Sales outside China
are made either directly to foreign distributors by our subsidiary, Jilin Ben
Cao Tang Pharmacy Co., Ltd. ("BCT"), or through China Ben Cao Tang International
Development Ltd. ("BCT HK"), which sells on to those areas indicated above.
Natural Pharmatech was formed on February 2, 2004 under the laws of the British
Virgin Islands. Natural Pharmatech was formed as a holding company to own the
five subsidiaries that made up Natural Pharmatech's business operations. Natural
Pharmatech (Jilin China) Co., Ltd. ("Natural Pharmatech China" or "JTY") is a
wholly owned subsidiary of Natural Pharmatech located in Changchun in Jilin
Province of China. Natural Pharmatech China originated as a research department
within the Affiliated Hospital of Changchun Traditional Chinese Medicine
College. It was organized as a separate private for-profit entity in February
2001.
Natural Pharmatech China has five subsidiaries: BCT, Jilin Ben Cao Tang Pharmacy
Co., Ltd. Safety Evaluation Co., Ltd. ("JDE"). Jilin Biotech Co., Ltd ("BIO"),
Changchun Jutai Dietary Supplements Sales Co., Ltd. ("Jutai Sales") and
Changchun Xiandai Technology Inc. ("XD"). Natural Pharmatech China owns 75% of
the shares of BCT, which was established in September 2002 as a Sino-foreign
joint venture with BCT HK, a Hong Kong distributor of natural drugs. BCT is
principally engaged in the manufacture and sale of Chinese medicine of the solid
dose type, and is capable of manufacturing 15 drugs in three forms. Our solid
dose and capsule manufacturing, pre-manufacturing and extraction plants received
a national GMP (Good Manufacturing Practice) certificate in April 2004.
On March, 2007, Natural Pharmatech China, through direct investment, acquired a
50% equity interest in Jilin Biotech Co., Ltd ("BIO"). Natural purchased another
25% equity interest in BIO. The Company currently holds 75% of equity interest
of BIO. BIO's main business is to manufacture and sell dietary supplements.
On March 29, 2007, Natural Pharmatech China invested RMB 100,000 to set up
Changchun Jutai Dietary Supplements Sales Co., Ltd. ("Jutai Sales"), Natural
Pharmatech China holds 100% of the ownership of Jutai Sales. Jutai Sales' main
business is the sale, of Jutai and other dietary supplements. In the current
quarter, Jutai Sales has opened one retail store in Changchun.
Until June 4, 2007, Natural Pharmatech China also owned 95% of the shares of
Jilin Yi Cao Tang Pharmacy Co., Ltd. (YCT), which was established in September
2003. YCT was engaged in the manufacturing and sale of Chinese and Western
medicine. On June 4, 2007, Natural Pharmatech China sold its 95% equity interest
in YCT to Mr. Daojun Wang.
Since inception, our revenues have been mainly generated from technical-related
services, including the sale of patents and research services. Sales from our
BCT and BIO subsidiaries have grown steadily since the beginning of 2007.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND
SEPTEMBER 30, 2006.
REVENUE
Contract revenues earned from the transfer of technology are recognized in
accordance with contract terms. Such revenues are $271,493 and $328,192 and in
2007 and 2006, respectively. The decrease was primarily attributable to the
effect of a major, disproportionately large contract in 2006. The Company did
not experience a similar contract during the first nine months of 2007.
Revenue derived from experiments, research and related ancillary services is
recognized when the customer accepts the service. Such revenues are $41,780 and
$7,916 in 2007 and 2006, respectively. This increase was due to the inclusion of
XD's revenue in 2007 where XD did not exist in the same period of 2006.
Revenue from goods sold is recognized when title has passed to the purchaser,
which generally is at the time of delivery. The revenues earned are $1,277,869
and $ 1,154,061in 2007 and 2006, respectively. This increase was due to the
increased sales efforts, Jutai and some other TCM products that had higher than
average sales growth.
13
GOVERNMENT GRANTS
Government Grants were $26,080 for the nine months ended September 30, 2007,
compared to $115,000 for the nine months ended September 30, 2006. Government
grants are opportunistically granted and therefore may fluctuate widely from
period to period.
RESEARCH AND DEVELOPMENT ("R&D") EXPENSES
R&D expenses were $555,388, as compared to $98,979 for the same period last
year. The increase was principally due to the Company's widening scope and
quantity of research and development projects, as the Company strives to develop
more drugs.
GROSS PROFIT
Gross profit in 2007 was $933,697, as compared to $1,080,231 as reported in the
same period last year. The main reason for the decrease is that we had less
income from technology transfer compared to the same period in 2006. The income
from transfer of technology is not steady, as we had a relatively large amount
of income from a single transfer of technology in the first three quarters of
2006, however, there was no such transfer in the first three quarters of 2007.
GROSS PROFIT PERCENTAGE
Gross profit percentage decreased from 72% in the first three quarters of 2006
to 59% in the first three quarters of 2007. The main reason is that we had less
income from transfer of technology in this period compared to the same period
last year. Although we realized an increase in the sale of goods compared to the
same period last year, the gross profit percentage for the sale of goods is much
smaller than it is from the transfer of technology. This brings down the overall
gross profit percentage.
OPERATING EXPENSES
Operating expenses increased to $1,695,097 compared to $1,420,822 in the same
period last year. The main reasons for the increase are:1) R&D expense increased
$456,409 compared to same period last year and 2) administrative expense
decreased $267,160 compared to the same period last year. This is achieved
through more efficient management.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2007, we had cash of $5,175,169. For the nine months then
ended, we used cash of $612,210 in our continuing operating activities. The
significant reasons for the use of cash are:
1) the loss from continuing operations for the nine months ended of
$941,542;
2) the increase in inventories of $116,827;
3) the increase in accounts payable and accrued expenses of $167,326
4) depreciation of property plant and equipment $258,221.
During the first three quarters of 2007, the Company used $122,460 towards
purchasing machinery. Contributions from minority interest were $125,880 during
the period. The Company received $65,725 for the sale of YCT in this quarter. We
had no other material investing or financing activities.
We anticipate steady revenue growth over time, as drugs currently under
development come to market. Additionally, we are also instituting procedures to
create a more effective credit policy, and reduce our accounts receivable and
shorten the aging of them. We do not anticipate any material cash needs in 2007.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance arrangements.