Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended:
June 30, 2008
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
For
the
transition period from _____ to _____
Commission
file number:
333-86347
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
(Name
of
small business issuer in its charter)
Florida
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65-1130026
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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|
Middle
Section, Longmao Street, Area A, Laiyang Waixiangxing Industrial
Park
Laiyang
City, Yantai, Shandong Province, People’s Republic of China
265200
(Address
of principle executive offices)
(0086)
535-7282997
(Issuer's
telephone number)
Securities
registered under Section 12(b) of the Exchange Act:
None
Securities
registered under Section 12(g) of the Exchange Act:
Common
Stock, $0.001 Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such report(s)), and (2) has been subject to such filing requirements
for the past 90 days. Yes
x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer,” “accelerated filer,” and smaller
reporting companies in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
Accelerated filer
|
Non-accelerated filer (Do not check if a smaller reporting company)
|
Smaller reporting company 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
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the closing sale price of the
registrant’s common stock on December 31, 2007 as reported on the OTC Bulletin
Board was approximately $50.4 million (5,454,384 shares at $9.24). Approximately
4,887,000 shares of common stock held by each officer and director and by each
person who owns 10% or more of the outstanding common stock have been excluded
because such persons may be deemed to be affiliates.
The
number of outstanding shares of the registrant’s common stock on September 29,
2008 was 10,330,344.
TABLE
OF CONTENTS
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Item
1.
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Description
of Business
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4
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Item
1A
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Risk
Factors
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10
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Item
1B
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Unresolved
Staff Comments
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24
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Item
2.
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Description
of Property
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24
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Item
3.
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Legal
Proceedings
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25
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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PART
II
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Item
5.
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Market
for Common Equity , Related Stockholder Matters and Issuer Purchases
of
Equity Securities
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25
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Item
6.
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Selected
Financial Data
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26
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Item
7.
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Management's
Discussion and Analysis or Plan of Operation
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26
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Item
7A.
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Quantitative
and Qualitative Disclosures and Market Risk
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37
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Item
8.
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Financial
Statement and Supplementary Data
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37
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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37
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Item
9A.
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Controls
and Procedures
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38
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Item
9B
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Other
Information
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38
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PART
III
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Item
10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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39
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Item
11. Executive Compensation
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42
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Item
12. Security Ownership of Certain Beneficial Owners and Management
and
Related Shareholder Matters
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47
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Item
13. Certain Relationships and Related Transactions, and Director
Independence
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49
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Item
14. Principal Accountant Fees and Services
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52
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PART
IV
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Item
15. Exhibits and Financial Statement Schedules
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53
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SIGNATURES
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55
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EXHIBIT
INDEX
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain
statements in this annual report on Form 10K contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance
or
achievements to be materially different from any future results, performance
or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements.
These
factors include, but are not limited to, economic, political and market
conditions and fluctuations, government and industry regulation, interest rate
risk, global competition, and other factors as relate to our doing business
within the People's Republic of China. Most of these factors are difficult
to
predict accurately and are generally beyond our control. You should consider
the
areas of risk described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
Readers should carefully review this annual report in its entirety, including
but not limited to our financial statements and the notes thereto and the risks
described in "Item 1. Description of Business—Risk Factors." Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions
to
any forward-looking statements, to report events or to report the occurrence
of
unanticipated events.
When
used
in this annual report, the terms the "Company," "Genesis," "GNPH," "we," "us,"
"our," and similar terms refer to Genesis Pharmaceuticals Enterprises, Inc.,
a
Florida corporation, and our subsidiaries. The information which appears on
our
website www.genesis-china.net is not part of this report.
ITEM
1. DESCRIPTION OF BUSINESS
We
operate, control and beneficially own the pharmaceutical business of Laiyang
Jiangbo. Laiyang Jiangbo researches, develops, manufactures, markets and sells
pharmaceutical products and health supplements in the PRC. From our inception
in
2001 until our acquisition of Karmoya International Ltd. (“Karmoya”) in October
2007, we were a business development and marketing firm specializing in advising
and providing turn-key solutions for Chinese small and mid-sized companies
entering Western markets.
On
June
3, 2008, our board of directors and the majority holders of our capital stock
approved amendments to our Articles of Incorporation to increase our authorized
common stock from 600,000,000 shares to 900,000,000 shares (the “July 2008
Authorized Share Amendment”). The Certificate of Amendment and Certificate of
Change to our Articles of Incorporation to effect the July 2008 Authorized
Share
Amendment was filed with Florida’s Secretary of State on July 29,
2008.
On
July
27, 2008, our board of directors and the majority holders of our capital stock
approved a one-for-forty reverse stock split of our common stock. On August
29,
2008, we received confirmation from the Department of the State of Florida
that
the Articles of Amendment to the Amended and Restated Articles of Incorporation
(“August 2008 Amended Articles of Incorporation”) to effect a reverse stock
split was duly filed and on September 3, 2008, the reverse stock split was
effectuated. Following the reverse stock split, the total number of shares
of
our common stock outstanding was reduced from 412,986,078 shares to
approximately 10,325,000 shares. Pursuant to the August 2008 Amended Articles
of
Incorporation, the maximum number of shares of common stock that the Company
is
authorized to issue was also reduced from 900,000,000 to 22,500,000. The
financial statements have been retroactively adjusted to reflect the reverse
split. Additionally, all share representations are on a post-split basis
hereinafter.
Corporate
Structure
The
following diagram illustrates our current corporate structure:
CONTRACTUAL
ARRANGEMENTS WITH LAIYANG JIANGBO AND ITS SHAREHOLDERS
Our
relationships with Laiyang Jiangbo and its shareholders are governed by a series
of contractual arrangements primarily between two entities associated with
our
wholly owned subsidiary Karmoya: (1) GJBT, Karmoya’s wholly foreign owned
enterprise in PRC, and (2) Laiyang Jiangbo, Karmoya’s operating company in PRC.
Under PRC laws, each of GJBT and Laiyang Jiangbo is an independent legal person
and neither of them is exposed to liabilities incurred by the other party.
The
contractual arrangements constitute valid and binding obligations of the parties
of such agreements. Each of the contractual arrangements, as amended and
restated, and the rights and obligations of the parties thereto are enforceable
and valid in accordance with the laws of the PRC. Other than pursuant to the
contractual arrangements described below, Laiyang Jiangbo does not transfer
any
other funds generated from its operations to any other member of the LJ Group.
On September 21, 2007, we entered into the following contractual arrangements
(collectively, the “
LJ
Agreements”):
Consulting
Services Agreement.
Pursuant to the exclusive consulting services agreement between GJBT and Laiyang
Jiangbo, GJBT has the exclusive right to provide to Laiyang Jiangbo general
consulting services related to pharmaceutical business operations, as well
as
consulting services related to human resources and technological research and
development of pharmaceutical products and health supplements (the “
Services”).
Under
this agreement, GJBT owns the intellectual property rights developed or
discovered through research and development while providing the Services for
Laiyang Jiangbo. Laiyang Jiangbo pays a quarterly consulting service fee in
Chinese Renminbi (“
RMB”)
to
GJBT that is equal to all of Laiyang Jiangbo's revenue for such
quarter.
Operating
Agreement.
Pursuant to the operating agreement among GJBT, Laiyang Jiangbo and the
shareholders of Laiyang Jiangbo who collectively hold 100% of the outstanding
shares of Laiyang Jiangbo (collectively, the “
Laiyang Shareholders”),
GJBT
provides guidance and instructions on Laiyang Jiangbo's daily operations,
financial management and employment issues. The Laiyang Shareholders must
appoint the candidates recommended by GJBT as members of Laiyang Jiangbo's
board
of directors. GJBT has the right to appoint senior executives of Laiyang
Jiangbo. In addition, GJBT agrees to guarantee Laiyang Jiangbo's performance
under any agreements or arrangements relating to Laiyang Jiangbo's business
arrangements with any third party. Laiyang Jiangbo, in return, agrees to pledge
its accounts receivable and all of its assets to GJBT. Moreover, Laiyang Jiangbo
agrees that without the prior consent of GJBT, Laiyang Jiangbo will not engage
in any transactions that could materially affect the assets, liabilities, rights
or operations of Laiyang Jiangbo, including, but not limited to, incurrence
or
assumption of any indebtedness, sale or purchase of any assets or rights,
incurrence of any encumbrance on any of its assets or intellectual property
rights in favor of a third party, or transfer of any agreements relating to
its
business operation to any third party. The term of this agreement is ten (10)
years from September 21, 2007 unless early termination occurs in accordance
with
the provisions of the agreement and may be extended only upon GJBT's written
confirmation prior to the expiration of the this agreement, with the extended
term to be mutually agreed upon by the parties.
Equity
Pledge Agreement.
Pursuant to the equity pledge agreement among GJBT, Laiyang Jiangbo and the
Laiyang Shareholders, the Laiyang Shareholders pledged all of their equity
interests in Laiyang Jiangbo to GJBT to guarantee Laiyang Jiangbo's performance
of its obligations under the consulting services agreement. If either Laiyang
Jiangbo or any of the Laiyang Shareholders breaches its respective contractual
obligations, GJBT, as pledgee, will be entitled to certain rights, including
the
right to sell the pledged equity interests. The Laiyang Shareholders also
granted GJBT an exclusive, irrevocable power of attorney to take actions in
the
place and stead of the Laiyang Shareholders to carry out the security provisions
of the equity pledge agreement and take any action and execute any instrument
that GJBT may deem necessary or advisable to accomplish the purposes of the
equity pledge agreement. The Laiyang Shareholders agreed, among other things,
not to dispose of the pledged equity interests or take any actions that would
prejudice GJBT's interest. The equity pledge agreement will expire two (2)
years
after Laiyang Jiangbo obligations under the exclusive consulting services
agreement have been fulfilled.
Option
Agreement.
Pursuant to the option agreement among GJBT, Laiyang Jiangbo and the Laiyang
Shareholders, the Laiyang Shareholders irrevocably granted GJBT or its
designated person an exclusive option to purchase, to the extent permitted
under
PRC law, all or part of the equity interests in Laiyang Jiangbo for the cost
of
the initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. GJBT or its designated person
has
sole discretion to decide when to exercise the option, whether in part or in
full. The term of this agreement is ten (10) years from September 21, 2007
unless early termination occurs in accordance with the provisions of the
agreement and may be extended only upon GJBT's written confirmation prior to
the
expiration of the this agreement, with the extended term to be mutually agreed
upon by the parties.
Proxy
Agreement.
Pursuant to the proxy agreement among GJBT and the Laiyang Shareholders, the
Laiyang Shareholders agreed to irrevocably grant and entrust all the rights
to
exercise their voting power to the person(s) appointed by GJBT. GJBT may from
time to time establish and amend rules to govern how GJBT shall exercise the
powers granted to it by the Laiyang Shareholders, and GJBT shall take action
only in accordance with such rules. The Laiyang Shareholders shall not transfer
their equity interests in Laiyang Jiangbo to any individual or company (other
than GJBT or the individuals or entities designated by GJBT). The Laiyang
Shareholders acknowledged that they will continue to perform this agreement
even
if one or more than one of them no longer hold the equity interests of Laiyang
Jiangbo. This agreement may not be terminated without the unanimous consent
of
all of the parties, except that GJBT may terminate this agreement by giving
thirty (30) days prior written notice to the Laiyang
Shareholders.
Recent
Financings
May
2008 Financing
On
May
30, 2008, we entered into a Securities Purchase Agreement (the "May 2008
Securities Purchase Agreement"), pursuant to which, on May 30, 2008, we sold
to
investors $30,000,000 principal amount of our 6% Notes and Class A Warrants
to
purchase 1,875,000 shares of our common stock, in transactions exempt from
registration under the Securities Act. Pursuant to the terms of the May 2008
Securities Purchase Agreement, we will use the net proceeds for working capital
purposes.
The
Notes
are due May 30, 2011 and are convertible into shares of our common stock at
a
conversion price of $8.00 per share, subject to adjustment pursuant to customary
anti-dilution provisions and automatic downward adjustments in the event of
certain sales or issuances by us of common stock at a price per share less
than
$8.00 on a post-split basis. Interest on the outstanding principal balance
of
the notes is payable at the rate of 6% per annum, in semi-annual installments
payable on November 30th and May 30th of each year, with the first interest
payment due on November 30, 2008. The Class A Warrants are exercisable for
a
five-year period beginning on May 30, 2008 at an initial exercise price of
$10.00 per share.
In
connection with May 2008 financing, Mr. Wubo Cao, our chief executive officer
and chairman of the board, placed 3,750,000 shares of our common stock owned
by
him into an escrow account pursuant to a Make Good Escrow Agreement, dated
as of
May 30, 2008. In the event that either (i) our adjusted 2008 earnings before
taxes is less than $26,700,000 ("2008 Guaranteed EBT") or (ii) our 2008 adjusted
fully diluted earnings before taxes per share is less than $1.60 per share
("2008 Guaranteed Diluted EBT"), 1,500,000 of such shares (the "2008 Make Good
Shares") are to be released pro rata to the investors. In the event that either
(i) our adjusted 2009 earnings before taxes is less than US $38,400,000 ("2009
Guaranteed EBT") or (ii) our adjusted fully diluted earnings before taxes per
share is less than $2.32 (or US $2.24, if the 500,000 shares of common
stock held in escrow, in connection with the November 2007 financing have been
released from escrow)("2009 Guaranteed Diluted EBT"), 2,250,000 of such shares,
(the "2009 Make Good Shares") are to be released pro rata to the Investors.
Should we successfully satisfy these respective financial milestones, the 2008
Make Good Shares and 2009 Make Good Shares will be returned to Mr. Cao. In
addition, Mr. Cao is required to deliver shares of common stock owned by him
to
the investors on a pro rata basis equal to the number of shares (the "Settlement
Shares") required to satisfy all costs and expenses associated with the
settlement of all legal and other matters pertaining to the Company prior to
or
in connection with the completion of the our October 2007 share exchange in
accordance with formulas set forth in the Securities Purchase
Agreement.
In
connection with the May 2008 financing, we entered into a Registration Rights
Agreement dated as of May 30, 2008 with the investors. Pursuant to the
Registration Rights Agreement, we agreed to file a registration statement
covering the resale of (i) the shares of common stock underlying the Notes
and
Class A Warrants that are being registered in this offering, (ii) the 2008
Make
Good Shares, (iii) the 2009 Make Good Shares, and (iv) the Settlement Shares.
We
were required to file an initial registration statement covering the shares
of
common stock underlying the notes and warrants no later than 45 days from the
closing of the May 2008 financing and to have such registration statement
declared effective no later than 180 days from the closing of May 2008
financing. If we do not timely file such registration statement or cause it
to
be declared effective by the required dates, then we will be required to pay
liquidated damages to the investors equal to 1.0% of the aggregate purchase
price paid by such investors for each month that we do not file the registration
statement or cause it to be declared effective. Notwithstanding the foregoing,
in no event shall liquidated damages exceed 10% of the aggregate amount of
the
purchase price. We filed an initial registration statement on July 14, 2008
to
satisfy our obligations under the registration rights agreement. In connection
with the May 2008 financing, we and the purchaser of our Debentures and November
Warrants, agreed that such securities shall be included in this registration
statement. See "November 2007 Financing" below.
In
connection with the May 2008 financing, Mr. Cao entered into a Lock-Up Agreement
dated May 30, 2008 with us, pursuant to which he agreed not to transfer any
shares of our common stock owned by him until 18 months after the effective
date
of the registration statement discussed above.
November
2007 Financing
On
November 6, 2007, we entered into a Securities Purchase Agreement (the "November
Securities Purchase Agreement") with Pope Investments, LLC, pursuant to which,
on November 7, 2007, we issued and sold to Pope Investments (i) $5,000,000
principal amount of our debentures and (ii) warrants to purchase 250,000 shares
of common stock at an exercise price of 512.80 per share, subject to adjustment
as provided therein. The exercise price and number of shares for which the
warrants are exercisable were adjusted to 400,000 post-split shares at $8.00
per
share, in connection with the May 2008 financing.
The
debentures bear interest at the rate of 6% per annum, payable in semi-annual
installments on May 31 and November 30 of each year, with the first interest
payment being due on May 31, 2008. The initial conversion price of the
debentures was $10.00 per share. If we issue common stock at a price that
is less than the effective conversion price, or common stock equivalents with
an
exercise or conversion price less than the then effective conversion price,
the
conversion price of the debenture and the exercise price of the warrant will
be
reduced to such price. The exercise price of the debentures was reduced to
$8.00
per share in connection with the May 2008 financing. The debentures may not
be
prepaid without the prior written consent of the holder.
Pursuant
to the November Securities Purchase Agreement, the we entered into a
Registration Rights Agreement (the "November Registration Rights Agreement"),
pursuant to which we must file on each Filing Date (as defined therein) a
registration statement to register the portion of the Registrable Securities
(as
defined therein) as permitted by the SEC's guidance.
Pursuant
to the November Registration Rights Agreement, the initial registration
statement with respect to the shares of common stock issuable upon conversion
of
the Debentures and exercise of the November Warrants was required to be filed
within 90 days of the November 7, 2007 closing date and declared effective
within 180 days following such closing date. Any subsequent registration
statements that are required to be filed on the earliest practical date on
which
we are permitted by the SEC's guidance to file such additional registration
statement. Such additional registration statements must he effective 90 days
following the date on which it is required to be filed. In the event that the
registration statement was not timely filed or declared effective, we were
required, pursuant to the November registration rights agreement to pay
liquidated damages. Such liquidated damages shall be, at the investor's option,
either $81,643.83 or 165 shares of our common stock per day that the
registration statement is not timely filed or declared effective as required
pursuant to the November registration rights agreement, subject to an amount
of
liquidated damages not exceeding either $600,000, 60,000 shares of common stock,
or a combination thereof based upon 12% liquidated damages in the aggregate.
In
connection with the May 2008 financing, Pope Investments waived the initial
filing and effectiveness deadlines set forth in the November registration rights
agreement and agreed that we would be required to include the Registrable
Securities covered by the November Registration Rights Agreement in the
Registration Rights Agreement executed in connection with the May 2008
financing.
LAIYANG
JIANGBO PHARMACEUTICAL CO., LTD.
As
discussed above, our operations are conducted through Laiyang Jiangbo
Pharmaceutical Co., Ltd., (“Laiyang
Jiangbo”)
a limited liability company headquartered in the PRC and organized under
the laws of PRC (“
Laiyang Jiangbo”).
Laiyang Jiangbo was organized on August 18, 2003, and its fiscal year end
is June 30.
PRINCIPAL
PRODUCTS OR SERVICES
Laiyang
Jiangbo is engaged in research, development, production, marketing and sales
of
pharmaceutical products. It is located in Northeast China in an Economic
Development Zone in Laiyang City, Shandong province, and is one of the major
pharmaceutical companies in China producing tablets, capsules, and granules
for
both Western medical drugs and Chinese herbal-based medical drugs. Laiyang
Jiangbo is also a major manufacturer of liquid chemical supply for medical
use
in China. Approximately 20% of its current products are Chinese herbal-based
drugs and 80% are Western medical drugs. Laiyang Jiangbo has several
Certificates of Good Manufacturing Practices for Pharmaceutical Products (GMP
Certificates) issued by the Shandong State Drug Administration (SDA) and
currently produces six types of drugs.
Laiyang
Jiangbo’s top four products in fiscal 2008 include Clarithromycin
sustained-release tablets, Itopride Hydrochloride granules, Ciprofloxacin
Hydrochloride tablets, and Baobaole Chewable tablets.
Drug
Development and Production
Development
and production of pharmaceutical products is Laiyang Jiangbo’s largest and most
profitable business. Its principal pharmaceutical products include:
Clarithromycin
sustained-release tablets
Clarithromycin
sustained-release tablets, Chinese Drug Approval Number H20052746, are
semi-synthetic antibiotics for curing Clarithromycin sensitive microorganism
infections. Laiyang Jiangbo is one of only two domestic Chinese pharmaceutical
companies that has the technology to manufacture and actively produce
and sell this drug. The Company’s sales of this drug were approximately RMB
337.2 million (US $46.4 million) with gross margin over 75% in fiscal 2008,
which is approximately 50% of the market share in China for this type of
drug.
Clarithromycin
is the second generation of macrolide antibiotic and replaces the older
generation of Erythromycin. Clarithromycin first entered the pharmaceutical
market in Ireland in 1989, and as of 2007, it is one of thirty medicines which
generate the greatest sales revenue all over the world. Chemically,
Clarithromycin has a wider antimicrobial spectrum and longer duration of acid
resistance. Its activity is 2 to 4 times better than Erythromycin, but the
toxicity is 2-12 times lower.
Clarithromycin
sustained-release tablets utilize sustained-release technology, which requires
a
high degree of production technology. Because of the high degree of technology
required to produce this product, PRC production requirements are very strict
and there are very few manufacturers who gain permission to produce this
product. Therefore, there is a significant barrier to entry in the PRC market.
Currently, our Clarithromycin sustained-release tablets are the leading product
in the PRC domestic antibiotic sustained-release tablets market. Our goal is
to
maintain our current market share for this product.
Itopride
Hydrochloride granules
Itopride
Hydrochloride granules, Chinese Drug Approval Number H20050932, are a stomach
and intestinal drug for curing digestive system-related diseases. The Company’s
sales for this drug reached RMB 258.1 million (US $35.5 million) with gross
margin over 85% in fiscal 2008, and the Company has approximately 10-12% of
the
market share in China for this type of drug. This product is widely regarded
for
its pharmacological properties, i.e., rapid absorption, positive clinical
effects, and few side effects. Based on clinical observation, it has been shown
that Itopride Hydrochloride granules can improve 95.1% of gastrointestinal
indigestion symptoms.
Itopride
Hydrochloride granules are the fourth generation of gastrointestinal double
dynamic medicines, which are used for curing most symptoms due to functional
indigestion. The older generations are Metoclopramide Paspertin, Domperidone
and
Cisapride.
Itopride
Hydrochloride granules are SDA-approved and entered the PRC pharmaceutical
market in June 2005. Since 2005, Laiyang Jiangbo has seized the opportunity
presented by this product by rapidly establishing a domestic sales network
and
developing the market for this product. Currently, this product has competition
from two other famous stomach medicines, namely Dompendone Tablets and Vitamin
U
Belladonna and Aluminum Capsules II. Itopride Hydrochloride granules are a
new
product for Laiyang Jiangbo, but it already has a nationwide sales network
in
China. The Company’s goal is to maintain the current market share and profit
margin for this product.
Ciprofloxacin
Hydrochloride tablets
Ciprofloxacin
Hydrochloride tablets, Chinese Drug Approval Number H37022737, are an antibiotic
drug used to cure infection caused by bacteria. The Company’s sales for this
drug was approximately RMB 18.1 million (US $2.5 million) in fiscal 2008.
Due
to a
stoppage in production of raw material manufacturing in PRC in 2004, the price
of certain raw materials which are used to produce Ciprofloxacin Hydrochloride
tablets rose rapidly and Laiyang Jiangbo seized this opportunity by using its
stored raw materials to produce a significant amount of Ciprofloxacin
Hydrochloride tablets. As a result, Laiyang Jiangbo’s sales of this product won
a large percentage of the market in PRC from 2004 to 2006. However, other
companies resumed production in 2007, which has lead to stronger competition
and
a decrease in Laiyang Jiangbo’s profits for this product. As both the sales
volume and profit decreased for this product, the Company is not actively
promoting this product and only continues to produce Ciprofloxacin Hydrochloride
tablets to support the Company’s product variety and brand name.
Paracetamol
tablets
Paracetamol
tablets, Chinese Drug Approval Number H37022733, are a nonprescription analgesic
drug, mainly used for curing fever due to common flu or influenza. It is also
used for relief of aches and pains. The Company’s sales for this drug was
approximately RMB 3.6 million ($500,000) in fiscal 2008. Laiyang Jiangbo is
authorized by the PRC Ministry of Health to be an appointed producer of common
antibiotics in Jiangsu Province, Guangdong Province, Zhejiang Province, Fujian
Province, Shandong Province and Guangxi Province. Paracetamol tablets are one
of
PRC’s national A-level Medicare medicines. This product entered the Chinese
market in July 2004. As the sales volume and profit both significantly decreased
in recent years, the Company plans to gradually exit the market for this product
in fiscal 2009.
Baobaole
Chewable tablets
Baobaole
Chewable tablets, Chinese Drug Approval Number Z20060294, are a new product
of
Laiyang Jiangbo and formally entered the market in November 2007. Baobaole
Chewable tablets are nonprescription over-the counter drugs for gastric cavity
aches. This drug stimulates the appetite and promotes digestion. Baobaole is
used to cure deficiencies in the spleen and stomach, abdomen aches, loss of
appetite, and loose bowels. Its effects are mild and lasting. The drug has
quickly gained its popularity in the market and the sales for this drug has
grown at a fast pace since its initial introduction.
The
Company’s sales for Baobaole Chewable tablets was approximately RMB 95.1 million
(US $13.1 million) with gross margin over 80% in fiscal 2008. The Company plans
to continue expanding the distribution network for this product and actively
promote the drugs to sustain the product’s sales growth.
Radix
Isatidis Disperable Tablet
Radix
Isatidis Disperable Tablets, Chinese Drug Approval Number Z20080142,
nonprescription Traditional Chinese Medicine, is used to cure virus influenza
and sour throat. Laiyang Jiangbo recently obtained the approval for this drug
and is the only company that owns this manufacturing technology in China. It
clears away heat, detoxifies and promote pharynx. The research study indicates
Radix Isatidisthe’s ingredients included Indole, hapoxanthineuraci,
quina-alkaloids, amino acid, etc., have anti-inflammation and anti-virus
effects.
Compared
with similar existing Radix Isatidis products, Radix Isatidis Disperable Tablet
utilizes the new disperable tablet formula, which is convenient to take and
fast
to dissolve. It is also easy to absorb and has high stability. The product
was
first introduced to the market in September 2008. The Company plans to formally
sell this product in early October 2008 and will heavily promote this drug
through advertising and various promotional activities.
RESEARCH
AND DEVELOPMENT
For
the
fiscal year ended June 30, 2008, Laiyang Jiangbo spent approximately US $3.2
million or approximately 3.3% of its fiscal 2008 revenue on research and
development of products. For the fiscal year ended June 30, 2007, Laiyang
Jiangbo spent approximately US $11 million or approximately 14.6% of its fiscal
2007 revenue on research and development of various pharmaceutical products.
Laiyang
Jiangbo places great emphasis on product research and development and maintains
strategic relationships with many research institutions in PRC developing new
drugs, such as Pharmaceutical Institute of Shandong University, The Institute
of
Microbiology and Shandong Chinese Traditional Medicine Technical School. These
relationships help to ensure that Laiyang Jiangbo maintains a continuing
pipeline of high quality drugs with market potential into the future. Other
than
a number of potential R&D projects that are currently under evolution and
yet to be locked in, the Company currently has three products pending on PRC
SFDA approval in the pipeline for commercialization in China. Additionally,
the
Company also is negotiating to purchase a Class I drug that is currently being
developed. The products are-
Drug
Name
|
|
Target
Treatment/Drug Type
|
|
Status
|
Felodipine
Sustained Release Tablets
|
|
Treat
high blood pressure and arteriosclerosis/Western Drug
|
|
(A)
Expected approval date - second
quarter
of fiscal year 2009
|
Yuandu
Hanbi Capsules
|
|
Relieve
arthritis pain /Traditional Chinese Medicine
|
|
(A)
Expected approval date - second
quarter
of fiscal year 2009
|
Bezoar
Yijin Tablets
|
|
Cures
inflammations such as pharyngitis/Traditional Chinese Medicine
|
|
(A)
Expected approval date - second
quarter
of fiscal year 2009
|
|
(A)
|
Subject
to SFDA. Pending administrative protection and
approval.
|
Ligustrazine
Ferulic Acid Acetate (LFAA)
LFAA
is a
Cardiac Cerebral Vascular innovative medicine, researched by Pharmaceutical
Institute of Shandong University that is undergoing Phase III (final) clinical
studies and for which the Company is in the process of negotiating a drug
purchase contract. LFAA is protected by the patent of invention in China. Its
PRC invention patent application number is 02135989X, publication number is
CN1424313A and patent number is ZL02135989X filed in December 2005.
LFAA
is a
synthetic innovation medicine based on Liqustrazine. It is the successor of
Liqustrazine, which has independent intellectual property rights. LFAA helps
to
reduce blood clotting and prevent platelets in the blood from clumping together.
Based on clinical studies, LFAA’s artery endothelium cell proliferation
stimulating function is better than Liqustrazine in a number of measures.
Laiyang Jiangbo is currently in the process of finalizing the drug patent and
manufacturing right purchase agreement with Pharmaceutical Institute of Shandong
University. The Company anticipates being able to start producing LFAA in fiscal
2010.
DISTRIBUTION
METHODS OF THE PRODUCTS OR SERVICES AND OUR CUSTOMERS
Laiyang
Jiangbo has a well-established sales network across China. It has a distribution
network covering over 30 provinces and regions in the PRC. Currently, Laiyang
Jiangbo has approximately 1,100 distribution agents and salespeople throughout
the PRC. Laiyang Jiangbo will continue to establish more representative offices
and engage additional distribution agents in order to strengthen its
distribution network.
Laiyang
Jiangbo recognizes the importance of branding as well as packaging. All of
Laiyang Jiangbo’s products bear a uniform brand but have specialized designs to
differentiate the different categories of Laiyang Jiangbo's
products.
Laiyang
Jiangbo conducts promotional marketing activities to publicize and enhance
its
image as well as to reinforce the recognition of its brand name
including:
|
1.
|
publishing
advertisements and articles in national as well as specialized and
provincial newspapers, magazines, and in other media, including the
Internet;
|
|
|
|
|
2.
|
participating
in national meetings, seminars, symposiums, exhibitions for pharmaceutical
and other related industries;
|
|
|
|
|
3.
|
organizing
cooperative promotional activities with distributors;
and
|
|
|
|
|
4. |
sending
direct mail to major physician offices and
laboratories. |
CUSTOMERS
Currently,
Laiyang Jiangbo has approximately 1,200 terminal clients. Terminal clients
are
hospitals and medical institutions which purchase large supplies of
pharmaceutical drugs. Laiyang Jiangbo is also authorized by the PRC Ministry
of
Health as an appointed Medicare medication supplier in six provinces, namely
Jiangsu Province, Shandong Province, Zhejiang Province, Fujian Province,
Guangdong Province and Guangxi Province.
For
the fiscal years ended June 30, 2008, 2007 and 2006, five customers accounted
for approximately 18.1%, 33.3% and 30.5%, respectively, of Laiyang Jiangbo’s
sales. These five customers represented 11.8% and 24.6% of Laiyang Jiangbo’s
total accounts receivable as of June 30, 2008 and 2007,
respectively.
COMPETITION
As
a
pharmaceutical manufacturing and distribution company in PRC, overall, Laiyang
Jiangbo has two major competitors in the PRC: Zhuhai Lizhu and Beijing Nohua.
These companies have number of popular pharmaceutical products, strong financial
position and a large market share in the industry. Laiyang Jiangbo is able
to
compete with these competitors because of its favorable geographic position,
strong R&D capability, unique products, extensive sales network, and lower
prices.
Our
major
competitors in China on individual product basis are Jiangsu Hengrui
Pharmaceuticals (Clarithromycin sustained release tablets), Xi'an Yangsen (
Itopride Hydrochloride Granules) and Jiangzhong Pharmaceuticals (Baobaole
Chewable tablets), respectively. We are able to compete with Jiangsu Hengrui
Pharmaceuticals because of our extensive sales network as well as flexible
and favorable incentive policy. Compared with Motihium of Xi'an Yangsen, a
gastro dynamic only drug, our Itopride Hydrochloride Granules has
better efficacy due to its gastro-intestinal dynamic characteristic, higher
security and less side effects. Referring to Children Jiangwei Xiaoshi
Tablets of Jiangzhong Pharmaceutcials, our Baobaole Chewable tablet is able
to significantly stimulate appetite and fundamentally nurse children's
gastro-intestinal system. Also, it is very convenient for children to take.
As such, we believe we have competitive advantages for those
products.
SOURCES
AND AVAILABILITY OF RAW MATERIALS AND THE PRINCIPAL
SUPPLIERS
Laiyang
Jiangbo has strategic relationships with many research institutions in PRC
developing new drugs, such as Jiangsu Drug Research Institute, Pharmaceutical
Institute of Shandong University, Chinese Traditional Medicine Institute,
Shandong Chinese Traditional Medicine Technical School, and the Institute for
Drug Control Departments. These relationships help to ensure that Laiyang
Jiangbo maintains a continuing pipeline of high quality drugs into the future.
Laiyang Jiangbo’s own production facilities supply most of the raw materials
used to manufacture its products. Laiyang Jiangbo designs, creates prototypes
and manufactures its products at its manufacturing facilities located in Laiyang
City, Shandong province. Its principal raw materials include Ciprofloxacin
Hydrochloride tablets. The prices for these raw materials are subject to market
forces largely beyond our control, including energy costs, organic chemical
prices, market demand, and freight costs. The prices for these raw materials
have varied significantly in the past and may vary significantly in the
future.
INTELLECTUAL
PROPERTY
Laiyang
Jiangbo relies on a combination of trademarks copyright and trade secret
protection laws in the PRC and other jurisdictions, as well as confidentiality
procedures and contractual provisions to protect its intellectual property
and
brand. Laiyang Jiangbo has been issued design patents in the PRC for drug
packaging and drug containers, each valid for 10 years, and it intends to apply
for more patents to protect its core technologies. Laiyang Jiangbo is currently
in the process of acquiring the rights to a new Class I drug recently patented
and made available to Laiyang Jiangbo through its relationship with the
Pharmaceutical Institute of Shandong University. This is a Class I drug which
means that all PRC national hospitals and other major medical facilities must
carry this drug. Laiyang Jiangbo also enters into confidentiality, non-compete
and invention assignment agreements with its employees and consultants and
nondisclosure agreements with third parties. “Jiangbo” and a certain circular
design affiliated with our brand are our registered trademarks in the
PRC.
Pharmaceutical
companies are at times involved in litigation based on allegations of
infringement or other violations of intellectual property rights. Furthermore,
the application of laws governing intellectual property rights in the PRC and
abroad is uncertain and evolving and could involve substantial risks to
us.
GOVERNMENT
REGULATION
General
PRC Government Approval
The
Drug
Administration Law of the PRC governs Laiyang Jiangbo and its products. The
State Food & Drug Administration of the PRC regulates and implements PRC
drug laws. The State FDA has granted Laiyang Jiangbo government permits to
produce the following products: Clarithromycin sustained-released tablets,
Itopride Hydrochloride granules, Ciprofloxacin Hydrochloride tablets,
Paracetamol tablets, Baobaole Chewable tablets, Compound Sufamethoxazole
tablets, and Vitamin C tablets.
The
drug
approval process takes about two years: including local SFDA approval, Local
SFDA test, State SFDA processing, state SFDA expert valuation, clinical trial,
and final approval.
No
enterprise may start production at its facilities until it receives approval
from the PRC Ministry of Agriculture to begin operations. Laiyang Jiangbo
currently has obtained the requisite approval and licenses from the Ministry
of
Agriculture in order to operate its production facilities.
Circular
106 Compliance and Approval
On
May
31, 2007, the PRC State Administration of Foreign Exchange (“SAFE”)
issued
an official notice known as "Circular 106," which requires the owners of any
Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure for foreign financing as well as subsequent
acquisition matters in China.
In
early
September 2007, the three owners of 100% of the equity in Laiyang Jiangbo,
Cao
Wubo, Xun Guihong and Zhang Yihua, submitted their application to SAFE. On
September 19, 2007, SAFE approved their application, permitting these Chinese
citizens to establish an offshore company, Karmoya International Ltd., as a
“special purpose vehicle” for any foreign ownership and capital raising
activities by Laiyang Jiangbo.
After
SAFE’s approval, Cao Wubo, Xun Guihong and Zhang Yihua became the majority
owners of Karmoya International Ltd. on September 20, 2007.
COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
In
compliance with PRC environmental regulations, Laiyang Jiangbo spent
approximately $2,750 in fiscal 2008, $2,000 in fiscal 2007, and approximately
$1,600 in fiscal 2006, mainly for the wastewater treatment in connection with
its production facilities.
EMPLOYEES
Laiyang
Jiangbo currently has more than 1,430 employees, including 320 production crew,
440 full-time salespersons and 620 part-time salespersons. Approximately 200
of
these employees are represented by Laiyang City Jiangbo Pharmaceuticals Union,
which is governed by the City of Laiyang. Laiyang Jiangbo has not experienced
a
work stoppage since inception and does not anticipate any work stoppage in
the
foreseeable future. Management believes that its relations with its employees
and the union are good.
CORPORATE
INFORMATION
Laiyang
Jiangbo’s principal executive offices are located at Middle Section, Longmao
Street, Area A, Laiyang Waixiangxing Industrial Park, Laiyang City, Yantai,
Shandong Province, PRC 265200.
ITEM
1A. RISK FACTORS
Investing
in our securities involves a great deal of risk. Careful consideration should
be
made of the following factors as well as other information included in this
prospectus before deciding to purchase our common stock. You should pay
particular attention to the fact that we conduct all of our operations in China
and are governed by a legal and regulatory environment that in some respects
differs significantly from the environment that may prevail in other countries.
Our business, financial condition or results of operations could be affected
materially and adversely by any or all of these risks.
THE
FOLLOWING MATTERS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR PROSPECTS, FINANCIAL OR
OTHERWISE. REFERENCE TO THIS CAUTIONARY STATEMENT IN THE CONTEXT OF A
FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE DEEMED TO BE A STATEMENT THAT
ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT OR
STATEMENTS.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
have a
limited operating history. Laiyang Jiangbo commenced operations in 2003 and
first achieved profitability in the fiscal year ended June 30, 2005.
Accordingly, you should consider our future prospects in light of the risks
and
uncertainties experienced by early stage companies in evolving industries such
as the pharmaceutical industry in China. Some of these risks and uncertainties
relate to our ability to:
.
|
maintain
our market position in the pharmaceuticals business in
China;
|
|
|
.
|
offer
new and innovative products to attract and retain a larger customer
base;
|
|
|
.
|
attract
additional customers and increase spending per
customer;
|
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.
|
increase
awareness of our brand and continue to develop user and customer
loyalty;
|
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|
.
|
respond
to competitive market conditions;
|
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|
.
|
respond
to changes in our regulatory environment;
|
|
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.
|
manage
risks associated with intellectual property rights;
|
|
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.
|
maintain
effective control of our costs and expenses;
|
|
|
.
|
raise
sufficient capital to sustain and expand our
business;
|
.
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attract,
retain and motivate qualified personnel; and
|
|
|
.
|
upgrade
our technology to support additional research and development of
new
products.
|
If
we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
may need additional financing to execute our business
plan.
The
revenues from the production and sale of pharmaceutical products and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We may need substantial additional
funds to build our new production facilities, pursue further research and
development, obtain regulatory approvals, market our products, and file,
prosecute, defend and enforce our intellectual property rights. We will seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources. We could enter into collaborative
arrangements for the development of particular products that would lead to
our
relinquishing some or all rights to the related technology or
products.
There
are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures,
to
the extent necessary. The failure to fund our capital requirements would have
a
material adverse effect on our business, financial condition and results of
operations.
Our
success depends on collaborative partners, licensees and other third parties
over whom we have limited control.
Due
to
the complexity of the process of developing pharmaceuticals, our core business
depends on arrangements with pharmaceutical institutes, corporate and academic
collaborators, licensors, licensees and others for the research, development,
clinical testing, technology rights, manufacturing, marketing and
commercialization of our products. We have several research collaborations.
Our
license agreements could obligate us to diligently bring potential products
to
market, make milestone payments and royalties that, in some instances, could
be
substantial, and incur the costs of filing and prosecuting patent applications.
There are no assurances that we will be able to establish or maintain
collaborations that are important to our business on favorable terms, or at
all.
A
number
of risks arise from our dependence on collaborative agreements with third
parties. Product development and commercialization efforts could be adversely
affected if any collaborative partner:
.
|
terminates
or suspends its agreement with us
|
|
|
.
|
causes
delays
|
|
|
.
|
fails
to timely develop or manufacture in adequate quantities a substance
needed
in order to conduct clinical trials
|
|
|
.
|
fails
to adequately perform clinical trials
|
|
|
.
|
determines
not to develop, manufacture or commercialize a product to which it
has
rights or
|
|
|
.
|
otherwise
fails to meet its contractual
obligations.
|
Our
collaborative partners could pursue other technologies or develop alternative
products that could compete with the products we are developing.
The
profitability of our products will depend in part on our ability to protect
proprietary rights and operate without infringing the proprietary rights of
others.
The
profitability of our products will depend in part on our ability to obtain
and
maintain patents and licenses and preserve trade secrets, and the period our
intellectual property remains exclusive. We must also operate without infringing
the proprietary rights of third parties and without third parties circumventing
our rights. The patent positions of pharmaceutical enterprises, including ours,
are uncertain and involve complex legal and factual questions for which
important legal principles are largely unresolved. The pharmaceutical patent
situation outside the US is uncertain, is currently undergoing review and
revision in many countries, and may not protect our intellectual property rights
to the same extent as the laws of the US. Because patent applications are
maintained in secrecy in some cases, we cannot be certain that we or our
licensors are the first creators of inventions described in our pending patent
applications or patents or the first to file patent applications for such
inventions.
Most
of
our drug products have been approved by the PRC's Food and Drug Administration
(SFDA) but have not received patent protection. For instance, Clarithromycin
sustained-release tablets, one of our most profitable products, are produced
by
other companies in China. If any other company were to obtain patent protection
for Clarithromycin sustained-release tablets in China, or for any of our other
drug products, it would have a material adverse effect on our
revenue.
Other
companies may independently develop similar products and design around any
patented products we develop. We cannot assure you that:
.
|
any
of our patent applications will result in the issuance of
patents;
|
|
|
.
|
we
will develop additional patentable products;
|
|
|
.
|
the
patents we have been issued will provide us with any competitive
advantages;
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|
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.
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the
patents of others will not impede our ability to do business;
or
|
|
|
.
|
third
parties will not be able to circumvent our
patents.
|
A
number
of pharmaceutical, research, and academic companies and institutions have
developed technologies, filed patent applications or received patents on
technologies that may relate to our business. If these technologies,
applications or patents conflict with ours, the scope of our current or future
patents could be limited or our patent applications could be denied. Our
business may be adversely affected if competitors independently develop
competing technologies, especially if we do not obtain, or obtain only narrow,
patent protection. If patents that cover our activities are issued to other
companies, we may not be able to obtain licenses at a reasonable cost, or at
all; develop our technology; or introduce, manufacture or sell the products
we
have planned.
Patent
litigation is becoming widespread in the pharmaceutical industry. Such
litigation may affect our efforts to form collaborations, to conduct research
or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would
be
held valid or enforceable by a court or that a competitor's technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse outcome
to
such litigation. Similarly, we may need to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or equivalent
international authorities to determine priority of invention. We could incur
substantial costs and devote significant management resources to defend our
patent position or to seek a declaration that another company's patents are
invalid.
Much
of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership
of
proprietary rights to our technology, for example by asserting that they
developed the technology independently.
We
may encounter difficulties in manufacturing our products.
Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including GMP, production and quality control regulations. If
we
cannot arrange for or maintain commercial-scale manufacturing on acceptable
terms, or if there are delays or difficulties in the manufacturing process,
we
may not be able to conduct clinical trials, obtain regulatory approval or meet
demand for our products. Production of our products could require raw materials
which are scarce or which can be obtained only from a limited number of sources.
If we are unable to obtain adequate supplies of such raw materials, the
development, regulatory approval and marketing of our products could be
delayed.
We
could need more clinical trials or take more time to complete our clinical
trials than we have planned.
Clinical
trials vary in design by factors including dosage, end points, length, and
controls. We may need to conduct a series of trials to demonstrate the safety
and efficacy of our products. The results of these trials may not demonstrate
safety or efficacy sufficiently for regulatory authorities to approve our
products. Further, the actual schedules for our clinical trials could vary
dramatically from the forecasted schedules due to factors including changes
in
trial design, conflicts with the schedules of participating clinicians and
clinical institutions, and changes affecting product supplies for clinical
trials.
We
rely
on collaborators, including academic institutions, governmental agencies and
clinical research organizations, to conduct, supervise, monitor and design
some
or all aspects of clinical trials involving our products. Since these trials
depend on governmental participation and funding, we have less control over
their timing and design than trials we sponsor. Delays in or failure to commence
or complete any planned clinical trials could delay the ultimate timelines
for
our product releases. Such delays could reduce investors' confidence in our
ability to develop products, likely causing our share price to
decrease.
We
may not be able to obtain the regulatory approvals or clearances that are
necessary to commercialize our products.
The
PRC
and other countries impose significant statutory and regulatory obligations
upon
the manufacture and sale of pharmaceutical products. Each regulatory authority
typically has a lengthy approval process in which it examines pre-clinical
and
clinical data and the facilities in which the product is manufactured.
Regulatory submissions must meet complex criteria to demonstrate the safety
and
efficacy of the ultimate products. Addressing these criteria requires
considerable data collection, verification and analysis. We may spend time
and
money preparing regulatory submissions or applications without assurances as
to
whether they will be approved on a timely basis or at all.
Our
product candidates, some of which are currently in the early stages of
development, will require significant additional development and pre-clinical
and clinical testing prior to their commercialization. These steps and the
process of obtaining required approvals and clearances can be costly and
time-consuming. If our potential products are not successfully developed, cannot
be proven to be safe and effective through clinical trials, or do not receive
applicable regulatory approvals and clearances, or if there are delays in the
process:
.
|
the
commercialization of our products could be adversely
affected;
|
.
|
any
competitive advantages of the products could be diminished;
and
|
.
|
revenues
or collaborative milestones from the products could be reduced or
delayed.
|
Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product
receives regulatory approval and clearance, it may later exhibit adverse side
effects that limit or prevent its widespread use or that would force us to
withdraw the product from the market.
Any
marketed product and its manufacturer will continue to be subject to strict
regulation after approval. Results of post-marketing programs may limit or
expand the further marketing of products. Unforeseen problems with an approved
product or any violation of regulations could result in restrictions on the
product, including its withdrawal from the market and possible civil
actions.
In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records
and
documentation. If we cannot comply with regulatory requirements, including
applicable good manufacturing practice requirements, we may not be allowed
to
develop or market the product candidates. If we or our manufacturers fail to
comply with applicable regulatory requirements at any stage during the
regulatory process, we may be subject to sanctions, including fines, product
recalls or seizures, injunctions, refusal of regulatory agencies to review
pending market approval applications or supplements to approve applications,
total or partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal
prosecution.
Competitors
may develop and market pharmaceutical products that are less expensive, more
effective or safer, making our products obsolete or
uncompetitive.
Some
of
our competitors and potential competitors have greater product development
capabilities and financial, scientific, marketing and human resources than
we
do. Technological competition from pharmaceutical companies is intense and
is
expected to increase. Other companies have developed technologies that could
be
the basis for competitive products. Some of these products have an entirely
different approach or means of accomplishing the desired curative effect than
products we are developing. Alternative products may be developed that are
more
effective, work faster and are less costly than our products. Competitors may
succeed in developing products earlier than us, obtaining approvals and
clearances for such products more rapidly than us, or developing products that
are more effective than ours. In addition, other forms of treatment may be
competitive with our products. Over time, our technology or products may become
obsolete or uncompetitive.
Our
products may not gain market acceptance.
Our
products may not gain market acceptance in the pharmaceutical community. The
degree of market acceptance of any product depends on a number of factors,
including establishment and demonstration of clinical efficacy and safety,
cost-effectiveness, clinical advantages over alternative products, and marketing
and distribution support for the products. Limited information regarding these
factors is available in connection with our products or products that may
compete with ours.
To
directly market and distribute our pharmaceutical products, we or our
collaborators require a marketing and sales force with appropriate technical
expertise and supporting distribution capabilities. We may not be able to
further establish sales, marketing and distribution capabilities or enter into
arrangements with third parties on acceptable terms. If we or our partners
cannot successfully market and sell our products, our ability to generate
revenue will be limited.
Our
operations and the use of our products could subject us to damages relating
to
injuries or accidental contamination.
Our
research and development processes involve the controlled use of hazardous
materials. We are subject to PRC national, provincial and local laws and
regulations governing the use, manufacture, storage, handling and disposal
of
such materials and waste products. The risk of accidental contamination or
injury from handling and disposing of such materials cannot be completely
eliminated. In the event of an accident involving hazardous materials, we could
be held liable for resulting damages. We are not insured with respect to this
liability. Such liability could exceed our resources. In the future we could
incur significant costs to comply with environmental laws and
regulations.
If
we were successfully sued for product liability, we could face substantial
liabilities that may exceed our resources.
We
may be
held liable if any product we develop, or any product which is made using our
technologies, causes injury or is found unsuitable during product testing,
manufacturing, marketing, sale or use. These risks are inherent in the
development of agricultural and pharmaceutical products. We currently do not
have product liability insurance. We are not insured with respect to this
liability. If we choose to obtain product liability insurance but cannot obtain
sufficient insurance coverage at an acceptable cost or otherwise protect against
potential product liability claims, the commercialization of products that
we
develop may be prevented or inhibited. If we are sued for any injury caused
by
our products, our liability could exceed our total assets.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have
any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources.
Our
business depends substantially on the continuing efforts of our executive
officers and our ability to maintain a skilled labor force, and our business
may
be severely disrupted if we lose their services.
Our
future success depends substantially on the continued services of our executive
officers, especially Wubo Cao our chief executive officer and the chairman
of
our board. We do not maintain key man life insurance on any of our executive
officers. If one or more of our executive officers are unable or unwilling
to
continue in their present positions, we may not be able to replace them readily,
if at all. Therefore, our business may be severely disrupted, and we may incur
additional expenses to recruit and retain new officers. In addition, if any
of
our executives joins a competitor or forms a competing company, we may lose
some
of our customers.
Our
success depends on attracting and retaining qualified
personnel.
We
depend
on a core management and scientific team. The loss of any of these individuals
could prevent us from achieving our business objective of commercializing our
product candidates. Our future success will depend in large part on our
continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in
clinical testing and government regulation. We face competition for personnel
from other companies, universities, public and private research institutions,
government entities and other organizations. If our recruitment and retention
efforts are unsuccessful, our business operations could suffer.
We
may not be able to manage the expansion of our operations effectively, which
may
have an adverse effect on our business and results of
operations.
The
revenues from the production and sale of our current product offerings and
the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We will need substantial additional
funds to expand our production facilities, pursue research and development,
obtain regulatory approvals; file, prosecute, defend and enforce our
intellectual property rights and market our products. We will seek additional
funds through public or private equity or debt financing, strategic transactions
and/or from other sources. We could enter into collaborative arrangements for
the development of particular products that would lead to our relinquishing
some
or all rights to the related technology or products. There are no assurances
that future funding will be available on favorable terms or at all. If
additional funding is not obtained, we will need to reduce, defer or cancel
development programs, planned initiatives or overhead expenditures, to the
extent necessary. The failure to fund our capital requirements would have a
material adverse effect on our business, financial condition and results of
operations.
Risks
Related to Our Corporate Structure
PRC
laws and regulations governing our businesses and the validity of certain of
our
contractual arrangements are uncertain. If we are found to be in violation,
we
could be subject to sanctions. In addition, changes in such PRC laws and
regulations may materially and adversely affect our
business.
There
are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our contractual
arrangements with our affiliated Chinese entity, Laiyang Jiangbo, and its
shareholders. We are considered a foreign person or foreign invested enterprise
under PRC law. As a result, we are subject to PRC law limitations on foreign
ownership of Chinese companies. These laws and regulations are relatively new
and may be subject to change, and their official interpretation and enforcement
may involve substantial uncertainty. The effectiveness of newly enacted laws,
regulations or amendments may be delayed, resulting in detrimental reliance
by
foreign investors. New laws and regulations that affect existing and proposed
future businesses may also be applied retroactively.
The
PRC
government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses
and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new PRC laws or regulations on our businesses.
We
cannot assure you that our current ownership and operating structure would
not
be found in violation of any current or future PRC laws or regulations. As
a
result, we may be subject to sanctions, including fines, and could be required
to restructure our operations or cease to provide certain services. Any of
these
or similar actions could significantly disrupt our business operations or
restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
The
PRC
government restricts foreign investment in pharmaceutical businesses in China.
Accordingly, we operate our business in China through Laiyang Jiangbo. Laiyang
Jiangbo holds the licenses and approvals necessary to operate our pharmaceutical
business in China. We have contractual arrangements with Laiyang Jiangbo and
its
shareholders that allow us to substantially control Laiyang Jiangbo. We cannot
assure you, however, that we will be able to enforce these
contracts.
Although
we believe we comply with current PRC regulations, we cannot assure you that
the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If the
PRC
government determines that we do not comply with applicable law, it could revoke
our business and operating licenses, require us to discontinue or restrict
our
operations, restrict our right to collect revenues, require us to restructure
our operations, impose additional conditions or requirements with which we
may
not be able to comply, impose restrictions on our business operations or on
our
customers, or take other regulatory or enforcement actions against us that
could
be harmful to our business.
We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of pharmaceutical business and companies, including limitations
on
our ability to own key assets.
The
PRC
government regulates the pharmaceutical industry including foreign ownership
of,
and the licensing and permit requirements pertaining to, companies in the
pharmaceutical industry. These laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to
PRC
government regulation of the pharmaceutical industry include the
following:
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we
only have contractual control over Laiyang Jiangbo. We do not own
it due
to the restriction of foreign investment in Chinese businesses;
and
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uncertainties
relating to the regulation of the pharmaceutical business in China,
including evolving licensing practices, means that permits, licenses
or
operations at our company may be subject to challenge. This may disrupt
our business, or subject us to sanctions, requirements to increase
capital
or other conditions or enforcement, or compromise enforceability
of
related contractual arrangements, or have other harmful effects on
us.
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The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, pharmaceutical businesses in China,
including our business.
Our
contractual arrangements with Laiyang Jiangbo and its shareholders may not
be as
effective in providing control over these entities as direct
ownership.
Since the law
of the PRC limits foreign equity ownership in pharmaceutical companies in China,
we operate our business through Laiyang Jiangbo. We have no equity ownership
interest in Laiyang Jiangbo and rely on contractual arrangements to control
and
operate such business. These contractual arrangements may not be effective
in providing control over Laiyang Jiangbo as direct ownership. For example,
Laiyang Jiangbo could fail to take actions required for our business despite
its
contractual obligation to do so. If Laiyang Jiangbo fails to perform under
its
agreements with us, we may have to incur substantial costs and resources to
enforce such arrangements and may have to rely on legal remedies under the
law of the PRC, which may not be effective. In addition, we cannot assure you
that Laiyang Jiangbo's shareholders would always act in our best
interests.
The
chairman of the board of directors of Laiyang Jiangbo has potential conflicts
of
interest with us, which may adversely affect our business.
Mr.
Cao
Wubo, our Chairman and Chief Executive Officer, is also the Chairman of the
Board of Directors and General Manager of Laiyang Jiangbo. Conflicts of
interests between his duties to our company and Laiyang Jiangbo may arise.
As
Mr. Cao is a director and executive officer of our company, he has a duty of
loyalty and care to us under Florida law when there are any potential conflicts
of interests between our company and Laiyang Jiangbo. We cannot assure you,
however, that when conflicts of interest arise, Mr. Cao will act completely
in
our interests or that conflicts of interests will be resolved in our favor.
In
addition, Mr. Cao could violate his legal duties by diverting business
opportunities from us to others. If we cannot resolve any conflicts of interest
between us and Mr. Cao, we would have to rely on legal proceedings, which could
result in the disruption of our business.
Risks
Related to Doing Business in China
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may subject our PRC resident shareholders
to
personal liability, limit our ability to acquire PRC companies or to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us or otherwise materially adversely affect
us.
In
October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued
the Notice on Relevant Issues in the Foreign Exchange Control over Financing
and
Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register
with the competent local SAFE branch before establishing or acquiring control
over an offshore special purpose company, or SPV, for the purpose of engaging
in
an equity financing outside of China on the strength of domestic PRC assets
originally held by those residents. Internal implementing guidelines issued
by
SAFE, which became public in June 2007 (known as Notice 106), expanded the
reach
of Circular 75 by (i) purporting to cover the establishment or acquisition
of
control by PRC residents of offshore entities which merely acquire “control”
over domestic companies or assets, even in the absence of legal ownership;
(ii)
adding requirements relating to the source of the PRC resident’s funds used to
establish or acquire the offshore entity; (iii) covering the use of existing
offshore entities for offshore financings; (iv) purporting to cover situations
in which an offshore SPV establishes a new subsidiary in China or acquires
an
unrelated company or unrelated assets in China; and (v) making the domestic
affiliate of the SPV responsible for the accuracy of certain documents which
must be filed in connection with any such registration, notably, the business
plan which describes the overseas financing and the use of proceeds. Amendments
to registrations made under Circular 75 are required in connection with any
increase or decrease of capital, transfer of shares, mergers and acquisitions,
equity investment or creation of any security interest in any assets located
in
China to guarantee offshore obligations, and Notice 106 makes the offshore
SPV
jointly responsible for these filings. In the case of an SPV which was
established, and which acquired a related domestic company or assets, before
the
implementation date of Circular 75, a retroactive SAFE registration was required
to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant
establish that all foreign exchange transactions undertaken by the SPV and
its
affiliates were in compliance with applicable laws and regulations. Failure
to
comply with the requirements of Circular 75, as applied by SAFE in accordance
with Notice 106, may result in fines and other penalties under PRC laws for
evasion of applicable foreign exchange restrictions. Any such failure could
also
result in the SPV’s affiliates being impeded or prevented from distributing
their profits and the proceeds from any reduction in capital, share transfer
or
liquidation to the SPV, or from engaging in other transfers of funds into or
out
of China.
We
believe our shareholders who are PRC residents, as defined in Circular 75,
have
registered with the relevant branch of SAFE, as currently required, in
connection with their equity interests in us and our acquisitions of equity
interests in our PRC subsidiaries. However, we cannot provide any assurances
that their existing registrations have fully complied with, or that they have
made all necessary amendments to their registration to fully comply with, all
applicable registrations or approvals required by Circular 75. Moreover, because
of uncertainty over how Circular 75 will be interpreted and implemented, and
how
or whether SAFE will apply it to us, we cannot predict how it will affect our
business operations or future strategies. For example, our present and
prospective PRC subsidiaries’ ability to conduct foreign exchange activities,
such as the remittance of dividends and foreign currency-denominated borrowings,
may be subject to compliance with Circular 75 by our PRC resident beneficial
holders. In addition, such PRC residents may not always be able to complete
the
necessary registration procedures required by Circular 75. We also have little
control over either our present or prospective direct or indirect shareholders
or the outcome of such registration procedures. A failure by our PRC resident
beneficial holders or future PRC resident shareholders to comply with Circular
75, if SAFE requires it, could subject these PRC resident beneficial holders
to
fines or legal sanctions, restrict our overseas or cross-border investment
activities, limit our subsidiaries’ ability to make distributions or pay
dividends or affect our ownership structure, which could adversely affect our
business and prospects.
If
the PRC enacts regulations which forbid or restrict foreign investment, our
ability to grow may be severely impaired.
We
intend
to expand our business in areas relating to our present business. We may also
expand by making acquisitions of companies in related industries. Many of the
rules and regulations that we would face are not explicitly communicated, and
we
may be subject to rules that would affect our ability to grow, either internally
or through acquisition of other Chinese or foreign companies. There are also
substantial uncertainties regarding the proper interpretation of current laws
and regulations of the PRC. New laws or regulations that forbid foreign
investment could severely impair our businesses and prospects. Additionally,
if
the relevant authorities find us in violation of PRC laws or regulations, they
would have broad discretion in dealing with such a violation, including, without
limitation:
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levying
fines;
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revoking
our business and other licenses; and
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requiring
that we restructure our ownership or
operations.
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Any
deterioration of political relations between the United States and the PRC
could
impair our operations and your investment in us.
The
relationship between the United States and the PRC is subject to sudden
fluctuation and periodic tension. Changes in political conditions in the PRC
and
changes in the state of Sino-U.S. relations are difficult to predict and could
adversely affect our operations or cause potential acquisition candidates or
their goods and services to become less attractive. Such a change could lead
to
a decline in our profitability. Any weakening of relations between the United
States and the PRC could have a material adverse effect on our operations and
your investment in us, particularly in our efforts to raise capital to expand
our other business activities.
Adverse
changes in economic and political policies of the PRC government could have
a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China's economy
differs from the economies of most developed countries in many respects,
including with respect to:
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the
amount of government involvement;
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level
of development;
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growth
rate;
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control
of foreign exchange; and
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allocation
of resources.
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While
the
PRC economy has experienced significant growth in the past 20 years, growth
has
been uneven across different regions and among various economic sectors of
China. The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us.
For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Since early 2004, the PRC government
has
implemented certain measures to control the pace of economic growth. Such
measures may cause a decrease in the level of economic activity in China, which
in turn could adversely affect our results of operations and financial
condition.
Price
controls may affect both our revenues and net income.
The
laws
of the PRC provide for the government to fix and adjust prices. Although we
are
not presently subject to price controls in connection with the sale of our
products, it is possible that price controls may be imposed in the future.
To
the extent that we are subject to price control, our revenue, gross profit,
gross margin and net income will be affected since the revenue we derive from
our sales will be limited and, unless there is also price control on the
products that we purchase from our suppliers, we may face no limitation on
our
costs. Further, if price controls affect both our revenue and our costs, our
ability to be profitable and the extent of our profitability will be effectively
subject to determination by the applicable regulatory authorities in the
PRC.
Our
operations may not develop in the same way or at the same rate as might be
expected if the PRC economy were similar to the market-oriented economies of
OECD member countries.
The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it functions and produces according to governmental plans and pre-set
targets or quotas. In certain aspects, the PRC’s economy has been making a
transition to a more market-oriented economy, although the government imposes
price controls on certain products and in certain industries. However, we cannot
predict the future direction of these economic reforms or the effects these
measures may have. The economy of the PRC also differs from the economies of
most countries belonging to the Organization for Economic Cooperation and
Development (the “OECD”), an international group of member countries sharing a
commitment to democratic government and market economy. For
instance:
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the
level of state-owned enterprises in the PRC, as well as the level
of
governmental control over the allocation of resources is greater
than in
most of the countries belonging to the OECD;
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the
level of capital reinvestment is lower in the PRC than in other
countries
that are members of the OECD;
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the
government of the PRC has a greater involvement in general in the
economy
and the economic structure of industries within the PRC than other
countries belonging to the OECD;
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the
government of the PRC imposes price controls on certain products
and our
products may become subject to additional price controls;
and
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the
PRC has various impediments in place that make it difficult for foreign
firms to obtain local currency, as opposed to other countries belonging
to
the OECD where exchange of currencies is generally free from
restriction.
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As
a
result of these differences, our business may not develop in the same way or
at
the same rate as might be expected if the economy of the PRC were similar to
those of the OECD member countries.
Because
some of our officers and directors reside outside of the United States, it
may
be difficult for you to enforce your rights against them or enforce United
States court judgments against them in the PRC.
Most
of
our executive officers and directors reside in the PRC and a substantial portion
of our assets are located in the PRC. It may therefore be difficult for United
States investors to enforce their legal rights, to effect service of process
upon our directors or officers or to enforce judgments of United States courts
predicated upon civil liabilities and criminal penalties of our directors and
officers under federal securities laws. Further, it is unclear if extradition
treaties now in effect between the United States and the PRC would permit
effective enforcement of criminal penalties of the federal securities
laws.
We
may have limited legal recourse under Chinese law if disputes arise under
contracts with third parties.
Almost
all of our agreements with our employees and third parties, including our
supplier and customers, are governed by the laws of the PRC. The legal system
in
the PRC is a civil law system based on written statutes. Unlike common law
systems, such as we have in the United States, it is a system in which decided
legal cases have little precedential value. The government of the PRC has
enacted some laws and regulations dealing with matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
However, their experience in implementing, interpreting and enforcing these
laws
and regulations is limited, and our ability to enforce commercial claims or
to
resolve commercial disputes is unpredictable. The resolution of these matters
may be subject to the exercise of considerable discretion by agencies of the
PRC, and forces unrelated to the legal merits of a particular matter or dispute
may influence their determination. Any rights we may have to specific
performance or to seek an injunction under Chinese law are severely limited,
and
without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any such
events could have a material adverse effect on our business, financial condition
and results of operations.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer
a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject
us
to penalties and other adverse consequences.
We
are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. Foreign companies, including some that may compete with us, are not
subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft
and other fraudulent practices occur from time-to-time in the PRC. We can make
no assurance, however, that our employees or other agents will not engage in
such conduct for which we might be held responsible. If our employees or other
agents are found to have engaged in such practices, we could suffer severe
penalties and other consequences that may have a material adverse effect on
our
business, financial condition and results of operations.
A
downturn in the economy of the PRC may slow our growth and
profitability.
The
growth of the Chinese economy has been uneven across geographic regions and
economic sectors. There can be no assurance that growth of the Chinese economy
will be steady or that any downturn will not have a negative effect on our
business especially if it results in either a decreased use of products such
as
ours or in pressure on us to lower our prices. The Chinese economy has been
transitioning from a planned economy to a more market-oriented economy. Although
in recent years the Chinese government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state
ownership of productive assets and the establishment of sound corporate
governance in business enterprises, a substantial portion of the productive
assets in China is still owned by the Chinese government. The continued control
of these assets and other aspects of the national economy by the
Chinese government could materially and adversely affect our business. The
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by the
Chinese government to slow the pace of growth of the Chinese economy could
result in reduced demand for our products.
Any
adverse change in the economic conditions or government policies in China could
have a material adverse effect on the overall economic growth and the level
of pharmaceutical investments and expenditures in China, which in turn
could lead to a reduction in demand for our products and consequently have
a
material adverse effect on our businesses.
Downturns
in the economies of the U.S. and Europe may affect the PRC economy which could
reduce the demand for our products.
The
rapid
growth of the PRC economy in recent years has been partially related to the
U.S.
and European countries’ demand for goods made in and exported from the PRC. The
downturns in the U.S. and European economies may reduce the demand for goods
exported by the PRC which could eventually affect the PRC economy as overseas
orders decrease. The downturn in the PRC economy may in turn negatively impact
the demand for our products.
If
certain tax exemptions within the PRC regarding withholding taxes are removed,
we may be required to deduct corporate withholding taxes from any dividends
we
may pay in the future.
Under
the
PRC’s current tax laws, regulations and rulings, companies are exempt from
paying withholding taxes with respect dividends paid to stockholders outside
of
the PRC. However, if the foregoing exemption is removed, we may be required
to
deduct certain amounts from any dividends we pay to our
stockholders.
Laiyang
Jiangbo is subject to restrictions on making payments to
us.
We
are a
holding company incorporated in the State of Florida and do not have any assets
or conduct any business operations other than our investments in our affiliated
entity in China, Laiyang Jiangbo. As a result of our holding company structure,
we rely entirely on payments from Laiyang Jiangbo under our contractual
arrangements. The PRC government also imposes controls on the conversion of
RMB
into foreign currencies and the remittance of currencies out of China. We may
experience difficulties in completing the administrative procedures necessary
to
obtain and remit foreign currency. See “Government control of currency
conversion may affect the value of your investment.” Furthermore, if our
affiliated entity in China incurs debt on its own in the future, the instruments
governing the debt may restrict its ability to make payments. If we are unable
to receive all of the revenues from our operations through these contractual
or
dividend arrangements, we may be unable to pay dividends on our ordinary
shares.
Uncertainties
with respect to the PRC legal system could adversely affect
us.
We
conduct our business primarily through our affiliated Chinese entity, Laiyang
Jiangbo. Our operations in China are governed by PRC laws and regulations.
We
are generally subject to laws and regulations applicable to foreign investments
in China and, in particular, laws applicable to wholly foreign-owned
enterprises. The PRC legal system is based on written statutes. Prior court
decisions may be cited for reference but have limited precedential
value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based
in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result,
we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted
and
result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in the
prospectus.
We
conduct substantially all of our operations in China and substantially all
of
our assets are located in China. In addition, most of our senior executive
officers reside within China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon
our
senior executive officers, including with respect to matters arising under
U.S.
federal securities laws or applicable state securities laws. Moreover, our
PRC
counsel has advised us that the PRC does not have treaties with the United
States or many other countries providing for the reciprocal recognition and
enforcement of judgment of courts.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Laiyang Jiangbo. Shortages in
the
availability of foreign currency may restrict the ability of our PRC
subsidiaries and our affiliated entity to remit sufficient foreign currency
to
pay dividends or other payments to us, or otherwise satisfy their foreign
currency denominated obligations. Under existing PRC foreign exchange
regulations, payments of current account items, including profit distributions,
interest payments and expenditures from trade-related transactions, can be
made
in foreign currencies without prior approval from the PRC State Administration
of Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required where RMB is to
be
converted into foreign currency and remitted out of China to pay capital
expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government may also at its discretion restrict access in the future
to
foreign currencies for current account transactions. If the foreign exchange
control system prevents us from obtaining sufficient foreign currency to satisfy
our currency demands, we may not be able to pay dividends in foreign currencies
to our shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The
value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while a significant
portion of our financial assets are denominated in U.S. dollars. We rely
entirely on fees paid to us by our affiliated entity in China. Any significant
fluctuation in value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other
outbreaks.
Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks
Related to an Investment in Our Securities
We
do not anticipate paying any cash dividends.
We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends is within the
discretion of our Board of Directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.
Because
the OTC Bulletin Board is a quotation system, not an issuer listing service,
market or exchange, it may be difficult for you to sell your common stock or
you
may not be able to sell your common stock for an optimum trading
price.
The
OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter securities. Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order
at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.
The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a
bid
price for securities bought and sold through the OTC Bulletin Board. Due to
the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
In
the
event the trading price of our common shares reaches below $5 per
share, the open-market trading of our common shares will be subject to the
“penny stock” rules. The “penny stock” rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities
and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for
the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We
cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq National Market or other exchanges.
Our
common shares have historically been sporadically or "thinly-traded" on the
OTC
Bulletin Board, meaning that the number of persons interested in purchasing
our
common shares at or near bid prices at any given time may be relatively small
or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came
to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As
a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could,
for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact
on
its share price. Secondly, we are a speculative or "risky" investment due to
our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors
may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes;
the
termination of our contractual agreements with Laiyang Jiangbo; and additions
or
departures of our key personnel, as well as other items discussed under this
"Risk Factors" section, as well as elsewhere in this report. Many of these
factors are beyond our control and may decrease the market price of our common
shares, regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our common shares
will
be at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect that the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price. However, we do not rule out the possibility of applying for
listing on the Nasdaq National Market or other exchanges.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
The
market price for our stock may be volatile and the volatility in our common
share price may subject us to securities litigation.
The
market price for our stock may be volatile and subject to wide fluctuations
in
response to factors including the following:
|
·
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
|
|
|
|
·
|
changes
in financial estimates by securities research analysts;
|
|
|
|
|
·
|
conditions
in pharmaceutical and agricultural markets;
|
|
|
|
|
·
|
changes
in the economic performance or market valuations of other pharmaceutical
companies;
|
|
|
|
|
·
|
announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments;
|
|
|
|
|
·
|
addition
or departure of key personnel;
|
|
|
|
|
·
|
fluctuations
of exchange rates between RMB and the U.S. dollar;
|
|
|
|
|
·
|
intellectual
property litigation; and
|
|
|
|
|
·
|
general
economic or political conditions in
China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
Our
corporate actions are substantially controlled by our principal shareholders
and
affiliated entities.
Our
principal shareholders and their affiliated entities own approximately 53%
of
our outstanding common shares, representing approximately 53% of our voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of
the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of our
company.
The
elimination of monetary liability against our directors, officers and employees
under Florida law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and
employees.
Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Florida law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing
a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and
shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements
may
impact our future financial position and results of
operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results
of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes are likely
to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These
and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
Past
activities of Genesis and its affiliates may lead to future
liability.
Prior
to
the Exchange Agreement among Genesis, Karmoya and the Karmoya Shareholders
executed on October 1, 2007, we engaged in businesses unrelated to our current
operations. Neither Genesis’s prior management nor any of its shareholders prior
to the Exchange Transaction are providing indemnifications against any loss,
liability, claim, damage or expense arising out of or based on any breach of
or
inaccuracy in any of their representations and warranties made regarding such
acquisition, and any liabilities relating to such prior business against which
we are not completely indemnified may have a material adverse effect on our
company. For example, we are aware of three lawsuits arising from past
activities of Genesis, alleging breach of contract. Please see “Legal
Proceedings” for more information.
We
believe that our current cash and cash equivalents, anticipated cash flows
from
operations and the net proceeds from a proposed offering will be sufficient
to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may
seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to
our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
Existing
stockholders may experience some dilution as a result of the exercise of
warrants.
In
the
May 2008 financing, we issued notes and, in conjunction with the notes,
Class A warrants to purchase, collectively, up to 1,875,,000 shares of our
common stock, subject to adjustment. In the November 2007 financing, we issued
debentures and, in connection with the debentures, warrants to purchase,
collectively, up to 400,000 shares of our common stock. Any issuances of shares
upon any exercise of these warrants will cause dilution in the interests of
our
shareholders.
If
we fail to maintain an effective system of internal controls, we may not be
able
to accurately report our financial results or prevent
fraud.
We
will
be subject to reporting obligations under the U.S. securities laws. The SEC,
as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company's
internal controls over financial reporting in its annual report, which contains
management's assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to and report on management's assessment of the effectiveness
of our internal controls over financial reporting. Our management may conclude
that our internal controls over our financial reporting are not effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management's assessment or may issue
a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if
it
interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and
are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result
in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price
of
our stock. Furthermore, we anticipate that we will incur considerable costs
and
use significant management time and other resources in an effort to comply
with
Section 404 and other requirements of the Sarbanes-Oxley Act.
We
will incur increased costs as a result of being a public
company.
As
a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley
Act
and other new rules subsequently implemented by SEC have required changes in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance
costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount
of
additional costs we may incur or the timing of such costs.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. DESCRIPTION OF PROPERTY
Our
principal executive offices are located at Middle Section, Longmao Street,
Area
A, Laiyang Waixiangxing Industrial Park, Laiyang City, Yantai, Shandong
Province, PRC 265200, where we have developed approximately 45,356 square meters
of production, office, and garage space. Our total building area is 7,172 square
meters and our production workshop area is more than 3,132 square meters. This
property is owned by us.
On
August
13, 2003, the Laiyang Development Planning Agency approved Laiyang Jiangbo’s
plan to construct garage and office space. On August 18, 2003, the Laiyang
Industrial Park Administration certified Laiyang Jiangbo’s investment of RMB 10
million ($1.3 million) in Section A of the Industrial Park to build on a 13,000
square meters lot.
In
October 2007, the Laiyang Bureau of Land and Resources sold us a 50 years land
use right for a 266,664 square meters lot located in Laiyang City to Laiyang
Jiangbo. The Company paid approximately RMB 60.8 million ($8.9 million) for
the
land use right.
ITEM
3. LEGAL PROCEEDINGS
Except
as
discussed below, we are not a party to any pending legal proceeding, nor are
we
aware of any legal proceedings being contemplated against us by any governmental
authority:
Elizabeth
Hiromoto et al v. Telecom Communications, Inc. et al. - Case No.
2:07-cv-07858-PSG-E, United States District Court, Central District of
California (Western Division - Los Angeles)
On
December 3, 2007, two individuals filed a lawsuit against the Company, its
former Chief Executive Officer James Wang, and certain others, alleging breach
of contract relating to damages arising from the sale of Telecom Communications,
Inc.(“TCOM”) to Arran Services Limited, in which Mr. Wang acted as the Company’s
President and Chairman to provide consulting services to TCOM and certain
misrepresentations made on behalf of and in conjunction with TCOM’s majority
shareholder . On July 2, 2008, the Company and the plaintiffs settled the
lawsuit with prejudice and claims and plaintiffs have agreed to file a Request
for Dismissal with Prejudice of the lawsuit.
Fernando
Praca, Plaintiff v.s. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises,
Inc.- Case No. 50 2005 CA 005317, Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, filed an action in Dade County, Florida against
Extrema, LLC and the Company in June 2005 relating to damages arising from
the
sale of Extrema LLC to Genesis Technology Group, Inc. Praca had filed a Motion
of Temporary Injunction but had not proceeded to move this case forward. The
plaintiff has decided to reinitiate the legal action in March 2008. In July
2008, the Company and Praca entered into a Settlement Agreement whereby Praca
agreed to dismiss this action against the Company and to surrender to the
Company for cancellation, 100,000 shares of common stock in the Company held
by
him and the Company agreed to provide Praca with a legal opinion of its counsel
removing the restrictive legend on the 1,269,607 shares of common stock held
by
Praca.
Kenneth
Clinton vs. Genesis Pharmaceuticals Enterprises, Inc., GNPH Holdings, Capital
Growth Financial, Inc., Gary L. Wolfson and Pacific Rim Consultants, Inc. -
Case
No. 50 2007 CA 023923, Circuit Court of the 15th
Judicial Circuit in and for Palm Beach County, Florida
On
December 21, 2007, Kenneth Clinton, a former director and former President
of
the Company, filed a lawsuit against the Company and certain entities and
persons related to our predecessor Genesis Technology Group, Inc. The complaint
alleged, among other things, breach of contract against the Company for an
agreement to pay the plaintiff certain shares of other public companies
(collectively, the “Reverse Merger Shares”) in connection with reverse merger
transactions arranged by our predecessor, and breach of contract against the
Company for failure to allow the plaintiff to exercise certain stock options
for
shares in the Company or exchange such options for new shares in the Company.
The plaintiff sought relief in the form of (1) delivery of the Reverse Merger
Shares, or in the alternative damages in the amount of those shares, (2) a
judgment against the Company to allow the plaintiff to exchange and exercise
his
stock options for shares in the Company, or in the alternative damages in the
amount of those shares, and (3) a declaratory judgment regarding a pledge and
escrow agreement with defendant Capital Growth Financial.
In
February 2008, the Company entered into a settlement agreement and general
release with Mr. Clinton whereby the Company agreed to allow Mr. Clinton to
exercise 1.5 million stock options issued under the Company’s 2007 stock option
plan for shares in the Company and released and discharged Mr. Clinton from
any
and all claims, demands or obligations. Mr. Clinton agreed to waive and release
the Company from any and all claims, demands or obligations.
CRG
Partners, Inc. and Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals
Enterprises, Inc. (ARBITRATION) - Case No. 32 145 Y 00976 07, American
Arbitration Association, Southeast Case Management Center
On
December 4, 2007, CRG Partners, Inc. (“CRG”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach
of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by
the
claimant is equal to the dollar value of 29,978,900 shares of the Company’s
common stock (Pre 40 to 1 reverse split) on November 2, 2007 which the claimant
alleges are due and owing to CRG. On December 5, 2007, we gave notice of
termination of our relationship with CRG under the consulting agreement. The
arbitration is scheduled to be conducted in Miami Dade County, Florida. We
plan
to vigorously defend our position.
China
West II, LLC and Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals
Enterprises, Inc. (ARBITRATION)
In
June
2008, China West II, LLC (“CW II”) filed a Demand For Arbitration with the
American Arbitration Association the case of CW
II
and Genesis Technology Group, Inc. n/k/a Genesis Pharmaceuticals Enterprises,
Inc. and Joshua Tan. In
that
matter, CW II seeks breach of contract damages in connection with the Company’s
October 2007 reverse merger from the Company and Joshua Tan, jointly and
severally for approximately $6.7 million estimated by CW II. As of the date
of
this report, the Company is unable to estimate a loss, if any, the Company
may
incur related expenses to this lawsuit. The Company believes CW II’s demand was
without merit and plans to vigorously defend its position.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
June
13, 2008, the holders of 52.4% of the Company’s issued and outstanding common
stock (216,677,951) approved an increase in the Company’s number of authorized
shares of the Company’s Common Stock to 900,000,000. The share increase became
effective on July 29, 2008.
PART
II
Item
5. MARKET
FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
Our
common stock is not listed on any stock exchange. Our common stock is traded
over-the-counter on the Over-the-Counter Electronic Bulletin Board under the
symbol “GNPH”. The following table sets forth the high and low bid information
for our common stock for each quarter within our last two fiscal years, as
reported by the Over-the-Counter Electronic Bulletin Board. The bid prices
reflect inter-dealer quotations, do not include retail markups, markdowns or
commissions and do not necessarily reflect actual transactions.
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LOW
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HIGH
|
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2008
|
|
|
|
|
|
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Quarter
ended June 30, 2008
|
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$
|
7.50
|
|
$
|
14.40
|
|
Quarter
ended March 31, 2008
|
|
$
|
7.04
|
|
$
|
14.72
|
|
Quarter
ended December 31, 2007
|
|
$
|
8.80
|
|
$
|
14.40
|
|
Quarter
ended September 30, 2007
|
|
$
|
3.40
|
|
$
|
6.00
|
|
2007
|
|
|
|
|
|
|
|
Quarter
ended June 30, 2007
|
|
$
|
4.04
|
|
$
|
7.40
|
|
Quarter
ended March 31, 2007
|
|
$
|
4.80
|
|
$
|
7.40
|
|
Quarter
ended December 31, 2006
|
|
$
|
3.20
|
|
$
|
7.16
|
|
Quarter
ended September 30, 2006
|
|
$
|
3.60
|
|
$
|
7.40
|
|
As
of
September 26, 2008, the closing sales price for shares of our common stock
was
$8.70 per share on the Over-The-Counter Bulletin Board.
Holders
As
of
September 25, 2008, there were approximately 955 shareholders of record of
our
common stock based upon the shareholders’ listing provided by our transfer
agent. Our transfer agent is Computershare Trust Company, 350 Indiana St.,
#800,
Golden, Colorado 80401, and its telephone number is (303) 262-0600.
Dividend
Policy
We
have
not paid cash dividends on our common stock since the Company became public
through reverse merger. We intend to keep future earnings to finance the
expansion of our business, and we do not anticipate that any cash dividends
will
be paid in the foreseeable future. We rely on dividends from Laiyang Jiangbo
for
our funds and PRC regulations may limit the amount of funds distributed to
us
from Laiyang Jiangbo, which will affect our ability to declare any dividends.
See "Risk Factors - Risks Related to Doing Business in the PRC – Laiyang Jiangbo
and GJBT are subject to restrictions on paying dividends and making other
payments to us" and " Governmental control of currency conversion may affect
the
value of your investment."
Our
future payment of dividends will depend on our earnings, capital requirements,
expansion plans, financial condition and relevant factors that our board of
directors may deem relevant. Our retained earnings limits our ability to pay
dividends.
Recent
Sales of Unregistered Securities
The
following private placements of the Company’s securities were made in reliance
upon the exemption from registration under Section 4(2) of the Securities Act
of
1933, as amended, and/or, Rule 506 of Regulation D promulgated under the
Securities Act. The Company did not use underwriters in any of the following
private placements.
In
July
2008, the Company issued 2,500 shares of restricted common stock to its officers
and directors for services rendered. The Company valued these common stock
at
the fair market valueon the date of grant of $8 per share or, $20,000, in total
base on the trading price of common stock. Accordingly, the Company recorded
stock-based compensation expense of $20,000.
In
June
2008, the Company issued 5,875 shares of restricted common stock to its officers
and directors for services rendered. The Company valued these common stock
at
the fair market on the date of grant of $8 per share, or $47,000, in total
base
on the trading price of common stock. Accordingly, the Company recorded
stock-based compensation expense of $47,000. In June 2008, we issued 235,000
shares of restricted common stock
In
February 2008, in conjunction with a settlement between the Company and the
Company’s former officer, Mr. Kenneth Clinton, Mr. Clinton exercised 1,500,000
options and the remaining 941,406 options held by the former officer were
cancelled. The Company received $157,500 in cash and the proceed was used for
working capital purposes.
Issuer
Purchases of Equity Securities.
None.
As
a
smaller reporting company, we are not required to provide the information called
for by Item 6 of Form 10-K.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The
following analysis of our consolidated financial condition and results of
operations for the years ended June 30, 2008, 2007 and 2006, should be read
in
conjunction with our audited consolidated financial statements, including
footnotes, and other information presented elsewhere in this annual report
on
Form 10-K. This discussion contains forward-looking statements that involve
significant risks and uncertainties. As a result of many factors, such as those
set forth under “Forward Looking Statements” and “Item 1A. Risk Factors” and
elsewhere in this Form 10-K, our actual results may differ materially from
those
anticipated in these forward-looking statements. When used in this section,
"fiscal 2008" means our fiscal year ended June 30, 2008 and "fiscal 2007" means
our fiscal year ended June 30, 2007.
OVERVIEW
We
were
originally incorporated on August 15, 2001 in the State of Florida under the
name Genesis Technology Group, Inc. On October 12, 2001, we consummated a merger
with NewAgeCities.com, an Idaho public corporation originally formed in 1969.
We
were the surviving entity after the merger with the Idaho public
corporation.
On
October 1, 2007, we completed a share exchange transaction by and among us,
Karmoya International Ltd., a British Virgin Islands company (“Karmoya”), and
Karmoya’s shareholders. As a result of the share exchange transaction, Karmoya,
a company which was established as a “special purpose vehicle” for the foreign
capital raising activities of its Chinese subsidiaries, became our wholly owned
subsidiary and our new operating business. Karmoya was incorporated under the
laws of the British Virgin Islands on July 17, 2007 and owns 100% of the capital
stock of Union Well International Limited, a Cayman Islands company (“Union
Well”). Karmoya conducts its business operations through Union Well’s wholly
owned subsidiary, Genesis Jiangbo (Laiyang) Biotech Technology Co., Ltd.
(“GJBT”). GJBT was incorporated under the laws of the People’s Republic of China
("PRC") on September 16, 2007 and registered as a wholly foreign owned
enterprise (WOFE) on September 19, 2007. GJBT has entered into consulting
service agreements and equity-related agreements with Laiyang Jiangbo
Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a PRC limited liability company
incorporated on August 18, 2003.
As
a
result of the share exchange transaction, our primary operations consist of
the
business and operations of Karmoya and its subsidiaries, which are conducted
by
Laiyang Jiangbo in the PRC. Laiyang Jiangbo produces and sells western
pharmaceutical products in China and focuses on developing innovative medicines
to address various medical needs for patients worldwide.
FINANCIAL
PERFORMANCE HIGHLIGHTS:
Net
Revenues
|
|
2008
|
|
2007
|
|
2006
|
|
Net
Revenues (in '000)
|
|
$
|
99,547
|
|
$
|
76,194
|
|
$
|
49,156
|
|
%
change year over year
|
|
|
30.65
|
%
|
|
55
|
%
|
|
285.50
|
%
|
Net
revenues for fiscal 2008 of $99.5 million reflected an increase of 30.65%
over fiscal 2007 net revenues of $76.2 million. Our net revenues experienced
55%
growth from fiscal 2006, $ 49.2 million, to fiscal 2007, $ 76.2
million.
Gross
margin
|
|
2008
|
|
2007
|
|
2006
|
|
Cost
of Goods Sold (in '000)
|
|
$
|
22,507
|
|
$
|
21,162
|
|
$
|
15,686
|
|
Gross
Margin
|
|
|
77.39
|
%
|
|
72.23
|
%
|
|
68.09
|
%
|
Gross
margin increased to 77.39% in 2008 compared with 72.23% in 2007 and 68.09%
in
2006. This was primarily driven by increased sales of high profit
margin products.
SG&A
|
|
2008
|
|
2007
|
|
2006
|
|
SG&A
(in ‘000)
|
|
$
|
41,593
|
|
$
|
25,579
|
|
$
|
7,895
|
|
Percentage
of Sales
|
|
|
41.78
|
%
|
|
33.57
|
%
|
|
16.06
|
%
|
SG&A
as a percentage of sales increased to 41.78 % in 2008 from 33.57% in 2007 and
16.06% in 2006, principally driven by higher commission expenses paid to our
sales personnel, higher advertisement, marketing and promotion spending and
salaries, wages and related benefits expenses and expenses related to being
a
public company.
Net
income
|
|
2008
|
|
2007
|
|
2006
|
|
Net
income (in '000)
|
|
$
|
22,451
|
|
$
|
22,053
|
|
$
|
7,736
|
|
net
margin
|
|
|
22.55
|
%
|
|
28.94
|
%
|
|
15.74
|
%
|
Net
margin decreased to 22.55% in 2008 from 28.94% in 2007, primarily due to higher
SG&A as a percentage of sales and the smaller amounts of tax
exemption received in 2008 as compared to 2007. Net margin increased to
28.94% in 2007 from 15.74% in 2006, primarily due to higher gross
margin.
RESULTS
OF OPERATIONS
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales: ($ in thousands)
|
|
Year Ended
June 30,
|
|
% of
|
|
Year Ended
June 30,
|
|
% of
|
|
Year Ended
June 30,
|
|
% of
|
|
|
|
2008
|
|
Revenue
|
|
2007
|
|
Revenue
|
|
2006
|
|
Revenue
|
|
REVENUES
|
|
$
|
93,983
|
|
|
94.41
|
%
|
$
|
72,260
|
|
|
94.84
|
%
|
$
|
45,243
|
|
|
92.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES
- RELATED PARTY
|
|
|
5,564
|
|
|
5.59
|
%
|
|
3,934
|
|
|
5.16
|
%
|
|
3,913
|
|
|
7.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
21,073
|
|
|
21.17
|
%
|
|
19,961
|
|
|
26.20
|
%
|
|
13,628
|
|
|
27.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES-RELATED PARTIES
|
|
|
1,434
|
|
|
1.44
|
%
|
|
1,200
|
|
|
1.58
|
%
|
|
2,058
|
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
77,040
|
|
|
77.39
|
%
|
|
55,032
|
|
|
72.23
|
%
|
|
33,470
|
|
|
68.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
41,593
|
|
|
41.78
|
%
|
|
25,579
|
|
|
33.57
|
%
|
|
7,895
|
|
|
16.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
3,236
|
|
|
3.25
|
%
|
|
11,144
|
|
|
14.63
|
%
|
|
13,642
|
|
|
27.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
32,211
|
|
|
32.36
|
%
|
|
18,309
|
|
|
24.03
|
%
|
|
11,933
|
|
|
24.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES(INCOME)
|
|
|
2,789
|
|
|
2.80
|
%
|
|
(6,375
|
)
|
|
(8.37
|
)%
|
|
387
|
|
|
0.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
29,422
|
|
|
29.56
|
%
|
|
24,684
|
|
|
32.40
|
%
|
|
11,546
|
|
|
23.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
6,971
|
|
|
7.00
|
%
|
|
2,631
|
|
|
3.45
|
%
|
|
3,810
|
|
|
7.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
22,451
|
|
|
22.55
|
%
|
|
22,053
|
|
|
28.94
|
%
|
|
7,736
|
|
|
15.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
|
|
|
6,554
|
|
|
6.58
|
%
|
|
1,018
|
|
|
1.34
|
%
|
|
128
|
|
|
0.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
29,005
|
|
|
29.14
|
%
|
$ |
23,071
|
|
|
30.28
|
%
|
$ |
7,864
|
|
|
16.00
|
%
|
Comparison
of Years Ended June 30, 2008 and 2007
REVENUES.
Our
revenues include revenues from sales and revenues from sales to related party
of
$94.0 million and $5.6 million, respectively, for the year ended June 30, 2008.
During the year ended June 30, 2008, we had revenues from sales of $94.0 million
as compared to revenues from sales of $72.3 million for the year ended June
30,
2007, an increase of approximately 30.06%. During the year ended June 30, 2008,
we had revenues from sales to related parties of $5.6 million as compared to
revenues from sales to related parties of $4.0 million for the year ended June
30, 2007, an increase of approximately 41.44%. The overall increase in total
revenue was primarily attributable to the increase of sales volume of our best
selling products: Clarithromycin sustained-release tablets and Itopride
Hydrochloride Granules. Additionally, we released a new product, Baobaole
chewable tablets in the second quarter of fiscal year 2008 and the product
has
been very popular in the market since. We believe our sales will continue to
grow because we are strengthening our sales force, improving the quality of
our
products and continuing developing new products that we expect to be well
accepted in the market.
COST
OF REVENUES.
Our cost
of revenues includes cost of sales and cost of sales to related party of $21.1
million and $1.4 million, respectively, for the year ended June 30, 2008. For
the year ended June 30, 2007, cost of sales and to related parties amounted
to
$20.0 million and $1.2 million, respectively. Total cost of sales for 2008
increased $1.3 million or 6.36%, from $21.1 million for the year ended June
30,
2007 to $22.5 million for the year ended June 30, 2008. Cost of sales as a
percentage of net revenue for the year ended June 30, 2008 is approximately
22.61%, compared to the year ended June 30, 2007 at approximately 27.77%. The
decrease was attributable to more sales being generated from producing of
high-profit-margins products, the highly profitable new product Baobaole
chewable tables, more efficient producing process, our ability to better manage
raw material purchase prices and the government exemption on sales taxes and
mis. fees received in fiscal 2008.
GROSS
PROFIT.
Gross
profit was $77.0 million for the year ended June 30, 2008 as compared to $55.0
million for the year ended June 30, 2007, representing gross margins of
approximately 77.39% and 72.23%, respectively. The increase in our gross profits
was mainly due to decrease in cost of sales as a percentage of net revenue
as we
better managed raw material purchase prices and our product sales mixture to
generate more sales from products with higher profit margins.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES.
Selling,
general and administrative expenses totaled $41.6 million for the year ended
June 30, 2008, as compared to $25.6 million for the year ended June 30, 2007,
an
increase of approximately 62.56% as summarized below ($ in
thousands):
|
|
Years
Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Shipping
and handling
|
|
$
|
365
|
|
$
|
280
|
|
Advertisement,
marketing and promotion spending
|
|
|
28,119
|
|
|
18,097
|
|
Travel
and entertainment- sales related
|
|
|
982
|
|
|
564
|
|
Depreciation
and amortization
|
|
|
458
|
|
|
280
|
|
Salaries,
commissions, wages and related benefits
|
|
|
10,190
|
|
|
5,789
|
|
Travel
and entertainment- non sales related
|
|
|
325
|
|
|
36
|
|
Other
|
|
|
1,154
|
|
|
533
|
|
Total
|
|
$
|
41,593
|
|
$
|
25,579
|
|
The
changes in these expenses during the year ended June 30, 2008, as compared
to
the corresponding period in 2007 included the following:
|
·
|
An
increase of $10.0 million or approximately 55.39% in advertising,
marketing and promotional spending for the year ended June
30, 2008 was
primarily due to TV commercials and magazine advertisements
expenses to
promote our new product- Baobaole Chewable tablets, as well
as our brand
name. Additionally, we also increased our marketing and promotional
activities to promote our two best selling
products.
|
|
·
|
Travel
and entertainment -sales related expenses increased by $0.4
million or
approximately 74.14% for the year ended June 30, 2008 as compared
to the
corresponding period in fiscal 2007 was
primarily due to our
marketing and sales travel related activities related to promoting
our
Baobole Chewable tablets and establishing the distribution
network for the
product as well as promoting our two other best selling products.
|
|
·
|
Shipping
and handling expenses increased by $0.1 million or approximately
30.43%
for the year ended June 30, 2008 as compared to the corresponding
period
of fiscal 2007, primarily
because there was an increase in sales volume in fiscal year
2008.
|
|
·
|
Depreciation
and amortization increased by $0.2 million or 63.45% for the
year ended
June 30, 2008 as compared to the corresponding period of fiscal
2007,
primarily due
to additional fixed assets being depreciated.
|
|
·
|
Salaries,
wages, commissions and related benefits increased by $4.4 million
or
76.00% for the year ended June 30, 2008 as compared to the
corresponding
period of fiscal 2007. The increase was primarily due
to increase in commission payments as a percentage of sales
to sales
representatives as well as an increase in number of employees
and sales
representatives as a result of expanding our distribution network
from 26
provinces and regions to 30 provinces and regions in fiscal
2008.
|
|
·
|
An
increase of $0.3 million or approximately 806.12% in travel and
entertainment -non sales related expenses for the year ended
June 30, 2008
as compared to the corresponding period of fiscal 2007. The increase
was
primarily
due to increase in corporate executives’ and managers’ entertainment and
travel related to public company related activities.
|
|
·
|
Other
selling, general and administrative expenses, which includes
professional
fees, utilities, office supplies and expenses increased by $0.6
million or
116.37% for the year ended June 30, 2008 as compared to the corresponding
period in fiscal 2008 primarily due
to more professional fees, and other expenses related to being
a publicly
traded company in fiscal 2008.
|
RESEARCH
AND DEVELOPMENT COSTS.
Research
and development costs, which consist fees paid to third parties for research
and
development related activities conducted for the Company and cost of material
used and salaries paid for the development of the Company’s products, totaled $3
million for the year ended June 30, 2008, as compared to $11 million for the
year ended June 30, 2007, an decrease of approximately 70.96%. The significant
decrease in research and development expenses in fiscal 2008 was mainly due
to
major spending on a research and development project conducted and paid for
new
drug clinical trials and project were expensed in the second quarter of fiscal
2007. The Company completed several research and development projects prior
to
the end of fiscal 2007 and those drugs are currently in the final process of
being approved by the Chinese SFDA.
OTHER
INCOME (EXPENSES).
Our
other expenses consisted of valued added tax and various other tax exemptions
from the government, financial expenses and non-operating expenses. We had
net
other expense of $2.8 million for the year ended June 30, 2008 as compared
to
net other income of $6.3 million for the year ended June 30, 2007. The increase
in net other expenses was due the decrease of $3.5 million tax exemption
received by the Company in fiscal 2008, the increase in interest expense as
a
result of our financings in November 2007 and May 2008, realized and unrealized
losses on our marketable securities, and our loss from
discontinued operations in fiscal 2008 which we did not occurr in
fiscal 2007.
NET
INCOME.
Our net
income for the year ended June 30, 2008 was $22.5 million as compared to $22.1
million for the year ended June 30, 2007, an increase of $0.4 million or 1.80%.
The increase in net income is primarily attributable to increase in sales volume
of our best selling products, as well as improved profit margin and partially
offset by higher operating expense and significantly $4.7 million less tax
exemptions received in fiscal 2008 and the interest expenses related to our
financings in November 2007 and May 2008 . Our management believes that net
income will continue to improve as we will continue to offer better and more
products to gain market shares, improve our manufacturing efficiency and control
our spending.
Comparison
of Years Ended June 30, 2007 and 2006
REVENUES.
Our
revenues include revenues from sales and revenues from sales to related parties
of $72 million and $4 million, respectively for the year ended June 30, 2007.
During the year ended June 30, 2007, we had revenues from sales of $72 million
as compared to revenues from sales of $45 million for the year ended June 30,
2006, an increase of approximately 59.71%. During the year ended June 30, 2007,
we had revenues from sales to related parties of $3.93 million as compared
to
revenues from sales to related parties of $3.91 million for the year ended
June
30, 2006, an increase of approximately 0.52%. These increases are attributable
to continued strong sales of our best selling products, Ciprloxacin
Hydrochloride tablets, and Paracetamol tablets. We believe that our sales will
continue to grow because we are strengthening our sales force, improving the
quality of our products and continuing developing new products that will be
well
accepted in the market.
COST
OF REVENUES.
Our cost
of revenues includes cost of sales and cost of sales to related party of $20.0
million and $1.2 million, respectively, for the year ended June 30, 2007. For
the year ended June 30, 2006, cost of sales and to related parties amounted
to
$13.6 million and $2.1 million, respectively. Total cost of revenues for 2007
increased $5.5 million or 34.91%, from $15.7 million for the year ended June
30,
2006 to $21.2 million for the year ended June 30, 2007. The decrease in cost
of
revenue as a percentage of net revenues for the year ended June 30, 2006,
approximately 27.77% as compared to the year ended June 30, 2006, approximately
31.91%, was attributable to better and more efficient manufacturing
production.
GROSS
PROFIT.
Gross
profit was $55.0 million for the year ended June 30, 2007 as compared to $33.5
million for the year ended June 30, 2006, representing gross margins of
approximately 72.23% and 68.09%, respectively. The increase in our gross profits
was mainly due to strong product sale and decrease in cost of revenue as a
percentage of net revenue.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES.
Selling,
general and administrative expenses totaled $25.6 million for the year ended
June 30, 2007, as compared to $7.9 million for the year ended June 30, 2006,
an
increase of approximately 224.01% as summarized below ($ in
thousands):
|
|
Years
Ended June 30,
|
|
|
|
2007
|
|
2006
|
|
Shipping
and handling
|
|
$
|
280
|
|
$
|
188
|
|
Advertisement,
marketing and promotion spending
|
|
|
18,097
|
|
|
5,455
|
|
Travel
and entertainment- sales related
|
|
|
564
|
|
|
397
|
|
Depreciation
and amortization
|
|
|
280
|
|
|
182
|
|
Salaries,
commissions, wages and related benefits
|
|
|
5,789
|
|
|
1,114
|
|
Travel
and entertainment- non sales related
|
|
|
36
|
|
|
45
|
|
Other
|
|
|
533
|
|
|
514
|
|
Total
|
|
$
|
25,579
|
|
$
|
7,895
|
|
The
changes in these expenses during the year ended June 30, 2007, as compared
to
the corresponding period in 2006 included the following:
|
· |
An
increase of $12.6 million or approximately 231.72% in advertising,
marketing and promotional spending for the year ended June 30,
2007 was
primarily due
to increase in marketing and promotional activities to promote
our
products and brand name.
|
|
· |
Travel
and entertainment sales related expenses increased by $0.2 million,
or
approximately 41.94%, for the year ended June 30, 2007 as compared
to the
corresponding period in fiscal 2006 was
primarily due to the increase in our sales entertainment and sales
travel
related activities.
|
|
· |
Shipping
and handling expenses increased by $0.1 million, or approximately
48.87%,
for the year ended June 30, 2007 as compared to the corresponding
period
of fiscal 2006, primarily
because increase in sales volume in fiscal year 2007.
|
|
· |
Depreciation
and amortization increased by $0.1 million, or 53.76%, for the
year ended
June 30, 2007 as compared to the corresponding period of fiscal
2006,
primarily due
to additional amortization expenses on the new patent obtained
in late
fiscal 2007.
|
|
· |
Salaries,
wages, commissions and related benefits increased by $4.7 million,
or
419.83%, for the year ended June 30, 2007 as compared to the
corresponding
period of fiscal 2006. The increase was primarily due
to increase in commission payments to sales representatives
as well as an
increase in number of employees and sales representatives.
|
|
· |
Travel
and entertainment non sales related expenses were materially consistent
for the year ended June 30, 2007 as compared to the corresponding
period
of fiscal 2006.
|
|
· |
Other
selling, general and administrative expenses, which includes professional
fees, utilities, office supplies and expenses were materially consistent
for the year ended June 30, 2007 as compared to the corresponding
period
in fiscal 2006.
|
RESEARCH
AND DEVELOPMENT COSTS.
Research
and development costs, which consist of cost of material used and salaries
paid
for the development of the Company’s products and fees paid to third parties,
totaled $11 million for the year ended June 30, 2007, as compared to $14 million
for the year ended June 30, 2006, an decrease of approximately 18.31%. The
decrease was mainly because we had less new product development projects in
2007.
OTHER
(INCOME) EXPENSES.
Our
other (income) expenses consisted of corporate income tax and valued added
tax
exemption from the government, financial expenses and non-operating expenses.
We
had other income of $6.4 million for the year ended June 30, 2007 as compared
to
other expense $ 0.4 million for the year ended June 30, 2006. The decrease
in
other expenses is mainly due to receiving of corporate income tax and value
added tax exemption from the government.
NET
INCOME.
Our net
income for the year ended June 30, 2007 was $22 million as compared to $8
million for the year ended June 30, 2006. The increase in net income is
attributable to increased sales volume, lower average costs as well as
government income tax and value added tax exemption. Our management believes
that net income will continue to increase because we will continue to offer
better and more products and improve our manufacturing
efficiency.
LIQUIDITY
AND CAPITAL RESOURCES
We
have
historically financed our operations and capital expenditures principally
through private placements of debt and equity offerings, bank loans, and cash
provided by operations. In fiscal year 2008, our primary financing activities
included the following:
-
|
In
November 2007, we raised $5,000,000 in gross proceeds through the
sale of
a convertible note.
We
received $4,645,592 in net proceeds after deducting placement agent
discounts and commissions and payment of professional and other related
expenses. Further detailed discussion regarding this financing is
provided
in the footnotes to financial statements.
|
-
|
In
May 2008, we raised $30,000,000 in gross proceeds through the sale
of a
convertible note.
We
received $28,313,500 in net proceeds after deducting placement agent
discounts and commissions and payment of professional and other related
expenses. Further detailed discussion regarding this financing is
provided
in the footnotes to financial statements.
|
As
is
customary in the industry, we provide payment terms to most of our customers
that exceed terms that we receive from our suppliers. Therefore, the Company’s
liquidity needs have generally consisted of working capital necessary to finance
receivables and raw material inventory. Capital expenditures have historically
been necessary to expand the production capacity of the Company’s manufacturing
operations.
Cash
Flows
Net
cash
flow provided by operating activities was $17.1 million in fiscal 2008, compared
with $15.3 million in fiscal 2007, an increase of $1.8 million. The 2008
increase in cash provided by operating activities included the followings:
1)
decrease in inventory of $1.7 million 2) an add-back of amortization on debt
discount of $2.5 million, 3) an add-back of unrealized loss on marketable
securities of $0.7 million, 4) increase in other payables of $2.0 million and
partially offset by the increase in accounts receivable and 5) increase in
advances to suppliers. We also have cash payment for liabilities from
discontinued operations of $ 1.2 million in 2008 while we do not have
corresponding payment in fiscal 2007.
Net
cash
flow used in investing activities was $7.6 million in fiscal 2008 and $0.2
million in fiscal 2007, a $7.4 million increased. Uses of cash flow for
investing activities included equipment purchases and payments for
intangible assets. The increase of net cash flow used in investing activities
in
fiscal 2008 was mainly due to increase in property and equipments payments
of $0.3 million and purchase of intangible assets of $8.9 million offset by
proceeds from sale of marketable securities of $1.0 million and cash received
from reverse acquisition of $0.5 million.
Net
cash
flow provided by financing activities was $18.5 million in fiscal 2008 and
while
net cash flow used in financing activities was $1.2 million in fiscal 2007.
The
increase of net cash flow provided by financing activities was mainly due to
increase in proceeds from convertible debt of $33 million, decrease in
payments for short term loans of $ 0.9 million offset by payment for
dividend of $10.6 million, payment to escrow account of $2.0 million and
decrease in proceeds from short term loan of $ 1.9 million.
Our
working capital position increased $57.2 million, to $73.2 million at June
30,
2008, from $16.0 million at June 30, 2007. This increase in working capital
is
primarily attributable to the increase in cash in bank of $30.5 million,
accounts receivable of $12.5 million, marketable equity securities of $2.1
million, advances to suppliers of $1.4 million and decrease of dividend payable
of $10.5 million, notes payable of $2.6 million, short term bank loans of
$1.8
million, and offset by decrease of inventories of $1.2 million, and increase
of
other payables of $2.3 million and the liability assumed from discontinued
operations of $1.1 million.
We
anticipate that our working capital requirements may increase as a result of
our
anticipated expanded business expansion plan, continued increases in sales,
potential increases in the price of our raw material, competition and our
relationship with suppliers or customers. We believe that our existing cash,
cash equivalents and cash flows from operations will be sufficient to meet
our
presently anticipated future cash needs for at least the next 12 months. We
may,
however, require additional cash resources due to changed business conditions
or
other future developments, including any investments or acquisitions we may
decide to pursue.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of June 30, 2008,
and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
Payments Due by Period
|
|
|
|
Total
|
|
Less than 1
year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years +
|
|
|
|
In Thousands
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Indebtedness
|
|
$
|
8,615,395
|
|
$
|
8,615,395
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Research
and Development Contract Obligations
|
|
$
|
11,562,575
|
|
$
|
4,377,000
|
|
$
|
5,252,400
|
|
$
|
1,933,175
|
|
$
|
-
|
|
Total
Contractual Obligations:
|
|
$
|
20,177,970
|
|
$
|
12,992,395
|
|
$
|
5,252,400
|
|
$
|
1,933,175
|
|
$
|
-
|
|
Bank
Indebtedness amounts include the short-term bank loans amount and notes payable
amount.
Off-balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered
into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest
in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest
in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Basis
of Presentation
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). These
accounting principles require us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and assumptions upon
which
we rely are reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These estimates, judgments
and assumptions can affect the reported amounts of assets and liabilities as
of
the date of the financial statements as well as the reported amounts of revenues
and expenses during the periods presented. Our financial statements would be
affected to the extent there are material differences between these estimates
and actual results. In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment
in selecting any available alternative would not produce a materially different
result.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
A
summary
of significant accounting policies is included in Note 2 to the audited
consolidated financial statements included in this Form 10-K. Management
believes that the application of these policies on a consistent basis enables
us
to provide useful and reliable financial information about the company's
operating results and financial condition.
Use
of Estimates
The
preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates
and
assumptions. We base our estimates on historical experience and on various
other
factors that we believe are reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying value of assets
and
liabilities that are not readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or conditions.
Significant estimates in 2008, 2007 and 2006 include the allowance for doubtful
accounts, the allowance for obsolete inventory, the useful life of property
and
equipment and intangible assets, and accruals for taxes due.
Inventories
Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average
method.
Property
and equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using straight-line method over the estimated useful lives of the
assets. The estimated useful lives of the assets are as follows:
|
Useful
Life
|
Building
and building improvements
|
5
-
40
|
|
Years
|
Manufacturing
equipment
|
5
–
20
|
|
Years
|
Office
equipment and furniture
|
5
–
10
|
|
Years
|
Vehicle
|
5
|
|
Years
|
The
cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may
not
be recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount of
the
asset. The amount of impairment is measured as the difference between the
asset’s estimated fair value and its book value.
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. The Company has recorded the costs paid to acquire
a long-term interest to utilize the land underlying the Company's facility
as
land use rights. This type of arrangement is common for the use of land in
the
PRC. The land use rights are amortized on the straight-line method over the
term
of the land use rights of 50 years.
Purchased
technological know-how includes secret formulas, manufacturing processes,
technical, procedural manuals and the certificate of drugs production and is
amortized using the straight-line method over the expected useful economic
life
of 5 years, which reflects the period over which those formulas, manufacturing
processes, technical and procedural manuals are kept secret to the Company
as
agreed between the Company and the selling parties.
Intangible
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.
Investments
and restricted investments
Investments
are comprised primarily of equity securities and are stated fair value. Certain
of these investments are classified as trading securities based on the Company’s
intent to sell and dispose of them within the year. Further, certain of these
securities are classified as available-for-sale and are reflected as restricted,
noncurrent investments based on the Company’s intent to hold them beyond one
year. For trading securities, realized and unrealized gains and losses are
included in the accompanying consolidated statements of income. For
available-for-sale securities, realized gains and losses are included in the
consolidated statements of income. Unrealized gains and losses for these
available-for-sale securities are reported in other comprehensive income, net
of
tax, in the consolidated statements of shareholders’ equity. The Company has no
investments that are considered to be held-to-maturity securities.
Accounting
for Stock Based Compensation
Effective
October 1, 2005, we adopted Statement of Financial Accounting Standards No.
123
(revised 2004), Share Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes
the financial accounting and reporting standards for stock-based compensation
plans. As required by SFAS No. 123R, we recognize the cost resulting from all
stock-based payment transactions including shares issued under our stock option
plans in the financial statements. The adoption of SFAS No. 123R will have
a
negative impact on our future results of operations.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (SEC) Staff
Accounting Bulletin (SAB) No. 101, “
Revenue Recognition in Financial Statements”
as
amended by SAB No. 104 (together, “SAB 104”), and Statement of
Financial Accounting Standards (SFAS) No. 48 “
Revenue Recognition When Right of Return Exists.”
SAB 104 states that revenue should not be recognized until it is
realized or realizable and earned. In general, the Company records revenue
when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectibility is reasonably assured.
The
Company is generally not contractually obligated to accept returns. However,
on
a case-by-case negotiated basis, the Company permits customers to return their
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when the Right of Return Exists", revenue
is recorded net of an allowance for estimated returns. Such reserves are based
upon management's evaluation of historical experience and estimated costs.
The
amount of the reserves ultimately required could differ materially in the near
term from amounts included in the consolidated financial
statements.
Income
taxes
The
Company is governed by the Income Tax Law of the People’s Republic of China.
Income taxes are accounted for under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. The charge for taxation is based
on the results for the year as adjusted for items, which are non-assessable
or
disallowed. It is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it is related to items credited
or
charged directly to equity, in which case the deferred tax is also dealt with
in
equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current
ax
assets and liabilities on a net basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater
than
50% likely of being realized on examination. For tax positions not meeting
the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.
Variable
Interest Entities
Pursuant
to Financial Accounting Standards Board Interpretation No. 46 (Revised),
“Consolidation of Variable Interest Entities - an Interpretation of ARB No.
51”
(“FIN 46R”) we are required to include in our consolidated financial statements
the financial statements of variable interest entities. FIN 46R requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss for the variable interest entity
or is
entitled to receive a majority of the variable interest entity’s residual
returns. Variable interest entities are those entities in which we, through
contractual arrangements, bear the risk of, and enjoy the rewards normally
associated with ownership of the entity, and therefore we are the primary
beneficiary of the entity.
The
accounts of Laiyang Jiangbo are consolidated in the accompanying financial
statements pursuant to FIN 46R. As a VIE, Laiyang Jiangbo sales are included
in
our total sales, its income from operations is consolidated with our, and our
net income includes all of Laiyang Jiangbo's net income. We do not have any
non-controlling interest and accordingly, did not subtract any net income in
calculating the net income attributable to us. Because of the contractual
arrangements, we have pecuniary interest in Laiyang Jiangbo that require
consolidation of our financial statements and Laiyang Jiangbo financial
statements.
Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
Measurements.” SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of this statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. The Company will adopt SFAS 157 in fiscal year 2009. The Company
is currently evaluating the impact, if any, that the adoption of SFAS 157 will
have on its consolidated results of operations and consolidated financial
position.
In
February 2008, the FASB issued FASB Staff Position No. 157-1 ("FSP 157-1"),
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes
of
Lease Classification or Measurement under Statement 13." FSP 157-1 indicates
that it does not apply under FASB Statement No. 13 (“SFAS 13”), "Accounting for
Leases," and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS
13.
This scope exception does not apply to assets acquired and liabilities assumed
in a business combination that are required to be measured at fair value under
SFAS No. 141 or SFAS No. 141R, regardless of whether those assets and
liabilities are related to leases.
Also
in
February 2008, the FASB issued FASB Staff Position No. 157-2 ("FSP 157-2"),
"Effective Date of FASB Statement No. 157." With the issuance of FSP 157-2,
the
FASB agreed to: (a) defer the effective date in SFAS No. 157 for one year for
certain nonfinancial assets and nonfinancial liabilities, except those that
are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), and (b) remove certain leasing transactions from
the
scope of SFAS No. 157. The deferral is intended to provide the FASB time to
consider the effect of certain implementation issues that have arisen from
the
application of SFAS No. 157 to these assets and liabilities.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option
for Financial Assets and Financials Liabilities — Including an Amendment of FASB
Statement No. 115.” This standard permits measurement of certain financial
assets and financial liabilities at fair value. If the fair value option is
elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument
in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. SFAS
159 is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the impact, if any,
that
the adoption of SFAS 159 will have on its consolidated results of operations
or
consolidated financial position.
In
December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141R”), “Business
Combinations,” which replaces SFAS No. 141. SFAS 141R retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting as well as requiring the expensing of acquisition-related
costs as incurred. Furthermore, SFAS 141R provides guidance for recognizing
and
measuring the goodwill acquired in the business combination and determines
what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Company is evaluating the impact, if any, that
the
adoption of this statement will have on its consolidated results of operations
or consolidated financial position.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Noncontrolling
Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.”
SFAS 160 amends ARB No. 51 to establish accounting and reporting standards
for
the noncontrolling interest in a subsidiary and for the deconsolidation of
a
subsidiary. It is intended to eliminate the diversity in practice regarding
the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation, requires that
a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is to be applied prospectively as of the beginning
of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements, which must be applied retrospectively for all
periods presented. The Company has not yet evaluated the impact that SFAS 160
will have on its consolidated financial position or consolidated results of
operations.
In
March
2008, the FASB issued SFAS No. 161 ("SFAS 161"), "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company does not anticipate that the adoption of SFAS 161 will
have a material impact on its consolidated results of operations or consolidated
financial position.
In
May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (“PCAOB”) amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles." The Company
does not expect the adoption of SFAS 162 will have a material impact on its
consolidated results of operations or consolidated financial position.
On
May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components
in
a manner that will reflect the entity's nonconvertible debt borrowing rate
when
interest cost is recognized in subsequent periods. FSP APB14-1 is effective
for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The Company has not yet evaluated
the impact that FSP APB 14-1 will have on its consolidated results of operations
or consolidated financial position.
On
June
16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 (“FSP No. EITF
03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities,” to address the question of whether
instruments granted in share-based payment transactions are participating
securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based
payment awards that contain rights to dividend payments should be included
in
earnings per share calculations. The guidance will be effective for fiscal
years
beginning after December 15, 2008. The Company is currently evaluating the
requirements of FSP No. EITF 03-6-1 and the impact that its adoption will have
on the consolidated results of operations or consolidated financial
position.
In
June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. Paragraph 11(a) of
SFAS
No. 133 “Accounting for Derivatives and Hedging Activities,” specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to
be
applied in determining whether a financial instrument or an embedded feature
is
indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception. This standard triggers liability accounting
on
all options and warrants exercisable at strike prices denominated in any
currency other than the functional currency of the operating entity in the
PRC
(Renminbi). The Company is currently evaluating the impact of the adoption
of
EITF 07-5 on the accounting for related warrants transactions.
Item
7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES AND MARKET RISK
As
a
smaller reporting company, we are not required to provide the information called
for by Item 7A of Form 10-K.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See
"Index to Financial Statements" beginning on page F-1 below for our financial
statements included in this annual report on Form 10-K.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective
February 25, 2008, Sherb & Co., LLP (“Sherb & Co.”) was dismissed as the
Company’s principal accountant engaged to audit its financial statements. Sherb
& Co. had been engaged as the Company’s auditors since May 11, 2002 and
audited the Company’s financial statements for the years ended September 30,
2007 and September 30, 2006.
Sherb
& Co.’s report on the Company’s financial statements for the two years ended
September 30, 2007 and September 30, 2006 did not contain any adverse opinions
or disclaimers of opinion, and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, except that Sherb & Co.’s reports for
each of the years ended September 30, 2007 and September 30, 2006 were modified
with respect to the uncertainty of the Company’s ability to continue as a going
concern.
Prior
to their dismissal, there were no disagreements with Sherb & Co. on any
matter of accounting principles or practices, financial statement disclosure
or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Sherb & Co. would have caused them to make reference to this
subject matter of the disagreements in connection with their report, nor were
there any “reportable events” as such term is described in Item 304(a)(1)(iv) of
Regulation S-B.
Sherb
& Co.’s dismissal was approved by the Company’s board of
directors.
On
February 25, 2008, the Company’s board of directors engaged Moore Stephens Wurth
Frazer & Torbet, LLP ("Moore Stephens") to serve as the Company’s principal
accountant to audit the Company’s financial statements. There have been no
disagreements with our independent auditors. Prior to the engagement
of Moore Stephens as the independent auditor, there were no consulting or
other services provided to the Company by Moore Stephens.
ITEM
9A. CONTROLS AND PROCEDURES
Our
management does not expect that our disclosure controls or our internal
controls
over financial reporting will prevent all error and fraud. A control system,
no
matter how well conceived and operated, can provide only reasonable, but
no
absolute, assurance that the objectives of a control system are met. Further,
any control system reflects limitations on resources, and the benefits
of a
control system must be considered relative to its costs. These limitations
also
include the realities that judgments in decision-making can be faulty and
that
breakdowns can occur because of simple error or mistake. Additionally,
controls
can be circumvented by the individual acts of some persons, by collusion
of two
or more people or by management override of a control. A design of a control
system is also based upon certain assumptions about potential future conditions;
over time, controls may become inadequate because of changes in conditions,
or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure
that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934,
as
amended, is recorded, processed, summarized and reported within the time
periods
specified in the Securities and Exchange Commission's rules and forms,
and that
such information is accumulated and communicated to our management, including
our principal executive officer (our president) and our principal accounting
and
financial officer (our chief financial officer) to allow for timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
As
of
June 30, 2008, the year end period covered by this report, we carried out
an
evaluation, under the supervision and with the participation of our management,
including our principal executive officer and our principal accounting
officer,
of the effectiveness of the design and operation of our disclosure controls
and
procedures. Based on the foregoing, our chief executive officer and our
chief
financial officer concluded that our disclosure controls and procedures
were not
effective as of the end of the period covered by this annual report due
to the
significant deficiencies described below in "Management’s Report on
Internal Control over Financial Reporting.
Management's
Report on Internal Control over Financial Reporting
Our
management, under the supervision of our chief executive officer and chief
financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f)
and
15d-15(f) under the Securities Exchange Act. Our management is also
required to assess and report on the effectiveness of our internal control
over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act of
2002 (“Section 404”). Management assessed the effectiveness of our
internal control over financial reporting as of June 30, 2008. In
making this assessment, management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework. During our assessment of the
effectiveness of internal control over financial reporting as of June 30,
2008,
management identified significant deficiencies and determined that our
internal
controls over financial reporting were not effective as of that date. The
significant deficiencies related to the following:
1. Accounting
and Finance Personnel Weaknesses - US
GAAP expertise - The current staff in the accounting department does not
have
extensive experience with U.S. GAAP, and needs substantial training so
as to
meet with the higher demands of being a U.S. public company. The accounting
skills and understanding necessary to fulfill the requirements of U.S.
GAAP-based reporting, including the skills of subsidiary financial statements
consolidation, are inadequate and were inadequately supervised. The lack
of
sufficient and adequately trained accounting and finance personnel resulted
in
an ineffective segregation of duties relative to key financial reporting
functions.
2. Lack
of internal audit function–
The
Company lacks qualified resources to perform the internal audit functions
properly, which was ineffective in preventing and detecting control lapses
and
errors in the accounting of certain key areas like revenue recognition,
inter-company transactions, cash receipt and cash disbursement authorizations,
inventory safeguard and proper accumulation for cost of products, in accordance
with the appropriate costing method used by the company. In addition, the
scope
and effectiveness of the internal audit function are yet to be
developed.
3. Absence
of an Audit Committee –
As
of
June 30, 2008, the Company did not have an Audit Committee in place.
During
majority of fiscal year ended June 30, 2008, our internal accounting staff
was
primarily engaged in ensuring compliance with PRC accounting and reporting
requirements for our operating subsidiaries and was not required to meet
or
apply U.S. GAAP requirements. As a result, our current accounting
department responsible for financial reporting of the Company, on a consolidated
basis, is relatively new to U.S. GAAP and the related internal control
procedures required of U.S. public companies. Although our accounting
staff is professional and experienced in accounting requirements and procedures
generally accepted in the PRC, management has determined that they require
additional training and assistance in U.S. GAAP matters. Management
has determined that our internal audit function is also significantly deficient
due to insufficient qualified resources to perform internal audit
functions. Finally, management determined that the lack of an Audit
Committee of the board of directors of the Company also contributes to
insufficient oversight of our accounting and audit functions.
In
order
to correct the foregoing deficiencies, we have taken the following remediation
measures:
|
1.
|
On
June 10, 2008, we engaged a full time Chief Financial officer,
Ms. Elsa
Sung, from the U.S. to serve as our Chief Financial Officer. Ms.
Sung has extensive experience in internal control and U.S. GAAP
reporting
compliance to review complex, non-routine transactions and to evaluate
and
approve the accounting treatment for such transactions. Additionally,
we
also plan on involving both internal accounting and operations
personnel
and outside contractors with technical accounting expertise, as
needed,
early in the evaluation of a complex, non-routine transaction to
obtain
additional guidance as to the application of generally accepted
accounting
principles to such a proposed
transaction.
|
|
2.
|
In
July 2008, the Board of Directors authorized and approved creation
of an
Audit Committee that will oversee matters relating to the Company's
financial reporting. We appointed an independent director who is
qualified
an "audit committee financial expert" in compliance with applicable
SEC
and current stock exchange rules and regulations to the committee.
Each
member of the Audit Committee is "independent" as defined in Section
10A
of the Securities Exchange Act of
1934.
|
|
3.
|
We
have and will continue to evaluate the internal audit function
in relation
to the Company’s financial resources and requirements. To the extent
possible, we will implement procedures to assure that the initiation
of
transactions, the custody of assets and the recording of transactions
will
be performed by separate
individuals
|
We
believe that the foregoing steps will remediate the significant deficiencies
identified above, and we will continue to monitor the effectiveness of these
steps and make any changes that our management deems appropriate to insure
that
the foregoing do not become material weaknesses.
A
material weakness (within the meaning of PCAOB Auditing Standard No. 5) is
a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough
to
merit attention by those responsible for oversight of the company's financial
reporting.
Our
management is not aware of any material weaknesses in our internal control
over
financial reporting, and nothing has come to the attention of management
that
causes them to believe that any material inaccuracies or errors exist in
our
financial statements as of June 30, 2008. The reportable conditions
and other areas of our internal control over financial reporting identified
by
us as needing improvement have not resulted in a material restatement of
our
financial statements. Nor are we aware of any instance where such
reportable conditions or other identified areas of weakness have resulted
in a
material misstatement or omission in any report we have filed with or submitted
to the Commission.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Auditor
Attestation
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.
Changes
in Internal Controls over Financial Reporting
Except
as
described above, there were no changes in our internal controls over financial
reporting during fiscal year 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT
Current
Management
The
following table sets forth the name, age and position of each of our directors,
executive officers and significant employees:
Name
|
|
Age
|
|
Position
|
Cao
Wubo
|
|
43
|
|
Chief
Executive Officer and Chairman of the Board
|
Elsa
Sung
|
|
34
|
|
Chief
Financial Officer
|
Xu
Haibo
|
|
36
|
|
Chief
Operating Officer and Director
|
Dong
Lining
|
|
49
|
|
Vice
President, Director of Technology
|
Yang
Weidong
|
|
37
|
|
Vice
President, Director of Sales
|
Xin
Jingsheng
|
|
53
|
|
Director
of Equipment
|
Xue
Hong
|
|
40
|
|
Controller
|
Feng
Xiaowei
|
|
40
|
|
Director
|
Huang
Lei
|
|
26
|
|
Director
|
Ge
Jian
|
|
36
|
|
Director
|
Michael
Marks
|
|
37
|
|
Director
|
John
(Yang) Wang
|
|
38
|
|
Director
|
Cao
Wubo,
age 43,
has served as our chief executive officer and chairman of the board since
October 2007. He has served as the chairman and general manager of Laiyang
Jiangbo since 2003. From 1981 to 1988, Mr. Cao completed his military service
in
the Chinese Army, during which he was sales section director in Laiyang Yongkang
Pharmaceutical Factory. From 1988 to 1998, he continued working in Laiyang
Yongkang Pharmaceutical Factory as Marketing Manager. From 1998 to 2003, he
was
general manager of Laiyang Jiangbo Pharmacy Co. Ltd. and Laiyang Jiangbo Chinese
and Western Pharmacy Co. Ltd. He is the founder of Laiyang Jiangbo Pharmacy
Co.
Ltd., Laiyang Jiangbo Chinese and Western Pharmacy Co. Ltd., and Laiyang Jiangbo
Pharmaceutical Co. Ltd.
Elsa
Sung,
age 34,
has served as our chief financial officer since October 2007. Prior to June
2008, she was also Vice President of CFO Oncall, Inc. Prior to joining CFO
Oncall, Inc., Ms. Sung was an Audit Manager from January 2006 to July 2007
at
Sherb & Co., Boca Raton, Florida, responsible for managing, monitoring, as
well as performing audits for domestic and international clients. From June
2005
to December 2005, Ms. Sung was a Senior Internal Auditor at Applica Consumer
Products, Inc., an U.S. publicly traded company. From 2002 to 2005, Ms. Sung
was
with Ernst & Young, LLP in West Palm Beach, Florida as a Senior Auditor in
the Assurance and Advisory Business Service Group. Ms. Sung is a licensed CPA
in
the State of Georgia and a member of the American Institute of Certified Public
Accountants. She received her Master of Business Administration and Bachelor’s
Degree, graduated “Cum Laude,” in Accounting from Florida Atlantic University.
She also holds a Bachelor’s Degree in Sociology from National Chengchi
University in Taipei, Taiwan.
Xu
Haibo,
age 37,
has served as our chief operating officer and director since October 2007.
He
has served as a deputy general manager of Laiyang Jiangbo since August 2006.
He
graduated from Shanghai Financial and Economic University in 1993 and has
engaged in a banking career for more than ten years. From July 1993 to July
2004, he worked in the Bank of China Yantai Branch as Credit Clerk in the Credit
Department, Section Chief in the Operation Department, Governor of the Bank
of
China Yantai Fushan Branch, and Director of the Risk Control Department in
the
Bank of China Yantai Branch. From August 2004 to July 2006, he was general
manager of Shandong Province Licheng Investment Co. Ltd.
Dong
Lining,
age 49,
has served as our vice president and director of technology since October 2007.
He has served as deputy manager of Laiyang Jiangbo since July 2003. He graduated
from Shandong Pharmacy University in 1995. From July 1986 to July 2003, he
worked in Laiyang Biochemistry Pharmaceutical Factory, where he was a checker,
technologist, workshop director, product technology section chief, technology
deputy factory director, and factory director. He has published several
pharmaceutical thesis articles in magazines such as, Chinese Biochemical Medical
Magazine, Food and Drug, and China New Clinical Medicine.
Yang
Weidong,
age 37,
has served as our vice president and director of sales since October 2007.
He
has served as a deputy general manager for Laiyang Jiangbo since August 2004.
He
graduated from Nanjing University with a masters degree. From February 1995
to
March 2000, he worked at Jiangsu Yangtze Pharmaceutical Co. Ltd as a sales
clerk. From April 2000 to July 2004, he was area director in Jiangsu Jizhou
Pharmaceutical Co. Ltd.
Xin
Jingsheng,
age 53,
has served as our director of equipment since October 2007. He has served as
a
deputy general manager of Laiyang Jiangbo since October 2003. He graduated
from
the Chinese People’s Liberation Army Shengqing Engineering Institute in August
1978. Mr. Xin has experience as a member of a group of trained personnel at
54685 Army Pharmacy from April 1983 to August 2001 and at China Laiyang
Construction Bureau from August 2001 to September 2003. He has been engaged
in
the pharmaceutical industry for more than 20 years, and his varied experience
includes positions as a technician, engineer assistant, engineer, deputy factory
director, factory director and deputy general manager. He has participated
in
industry training held by the Chinese National Drug Supervising Department
and
Shandong Drug Supervising Department and is very familiar with laws and statutes
in the Chinese pharmaceutical industry.
Xue
Hong,
age 40,
has served as our controller since October 2007. She has served as finance
controller of Laiyang Jiangbo since April 2003. From July 1988 to March 1990,
she worked in Qingzhou Iron and Steel Works as quality control inspector and
auditor. From March 1990 to March 1999, She was a quality examiner at Laiyang
City Power Facility. From March 1999 to March 2000, she worked as an accountant
at Laiyang Yongkang Company. From March 2000 to September 2003, she was the
chief accountant of Laiyang Jiangbo Pharmacy.
Feng
Xiaowei,
age 40,
has served as our director since October 2007. Mr. Feng graduated from Dalian
Jiaotong University Railway Locomotive & Car Department with a bachelors
degree and Jilin University Postgraduate Research Institute Foreign Economic
Law
Department with a masters degree. Over the course of his career, he has been
procurator in Shenyang Railroad Transportation Procuratorate, associate
professor in Jilin University, counsel in China Jilin International Trust and
Investment Corporation, expert commissary of China Strategy and Administration
Association, and deputy secretary-general of the “China Strengthening
Self-Innovative Capacity and Building Innovative Nation Forum.” He has
participated in the Research on National Economic Development Strategy and
in
the subject investigation of Beijing Olympic Games, Guangzhou Development Zone
and Tianjin Development Zone. He has been commissioner of Yunnan Province Policy
and Economic Development Task Team, commissioner of the Xinjiang Uygur
Autonomous Region Policy and Economic Development Task Team and commissioner
of
the China Shi Hezi National Economic Development Zone Task Team. He is the
founder of the Chinese Young People Network Home Co. Ltd., and has presided
over
the China Young People Card Project. From January 2003 to June 2005, he was
Vice
President of the Chinese Young People Network Home Co. Ltd. Mr. Feng has been
the general manager of Anqiao International Investment Co., Ltd. since June
2005
through present.
Huang
Lei,
age 26,
has served as our director since October 2007. Ms. Huang graduated from Kwantlen
University College in Canada. She also earned her MBA degree from the University
of British Columbia in October 2006. From November 2006 to 2007, she was a
marketing manager in CúC Top Enterprises Ltd. Ms. Huang has published articles
on business administration at Canada Weekly and school magazines, and earned
the
Best International Student Scholarship and a full scholarship. Ms. Huang speaks
English, French, Mandarin and Cantonese, and has a working knowledge of
accountancy and business administration.
Ge
Jian,
age 36,
has served as our director since October 2007. Mr. Ge Jian graduated from
Shandong University Management Sciences Department with a Bachelor of Business
Administration in 1992. From 1992 to the end of 2000, he worked for the
Development and Reform Commission of Yantai. From 2001 to 2006, he was the
minister of the Capital Operation Department and the minister of the Development
Department in Zhenghai Group Co. Ltd., and a director of Yantai Hualian
Development Group Co. Ltd. Since 2006, he has been the general manager of Yantai
Zhenghai Pawn Co. Ltd.
Michael
Marks,
age 37,
has served as our director since July 18, 2008. Since 2007, he has served as
an
independent director of China Housing & Land Development, Inc., a property
developer in China. In 2006, Mr. Marks became the President of Middle Kingdom
Alliance Corp., a publicly traded Special Purpose Acquisition Corporation active
in China. In January of 2003, Mr. Marks founded the China practice of
Sonnenblick Goldman, a real estate investment bank, and served as its Managing
Director in China until December 2007. In 2001, he founded B2Globe, providing
technology solutions to international internet businesses in Asia. In 1999,
he
co-founded Metro Corporate Training in Shanghai to offer training and management
development, and was its Chief Executive Officer until 2001. From 1998 to 1999,
Mr. Marks worked as a management consultant with Horwath Asia Pacific in
Australia and China. From 1995 to 1998, Mr. Marks worked in the audit, corporate
finance and advisory divisions of PricewaterhouseCoopers in South Africa. Mr.
Marks received a Bachelor of Commerce (Honors) in 1994 and Masters of Commerce
in 1997 from the University of the Witwatersrand in Johannesburg, South Africa.
In 1998, he graduated with a Bachelor of Arts (Psychology) degree from the
University of South Africa. In 1997, Mr. Marks became a Chartered Accountant
in
South Africa, and a Fellow of the Association of International Accountants
in
the United Kingdom in 1999. He speaks fluent Mandarin, French and
English.
John
(Yang) Wang,
age 38,
has served as our director since September 8, 2008. Since November 2004, Mr.
Wang has been the President of Marbella Capital Partners. Since September 2007,
he also serves as the CEO of Hambrecht Asia Acquisition Corp., and is on the
Board of Directors of Hong Kong Stock Exchange listed Wuyi International
Pharmaceuticals Company Limited. From 2000 to 2004, he was Executive Vice
President of SBI E2-Capital (HK) Limited. From 1997 to 1999, he managed
Accenture Consulting’s (formerly known as Andersen Consulting) Greater China
communication, media and high tech strategy practice. Prior to that, he was
the
lead telecom analyst covering Greater China and Southeast Asia for Pyramid
Research, an emerging market telecom research firm based in Cambridge,
Massachusetts. Mr. Wang holds a Bachelor of Arts in International Relations
from
Tufts University and an M.A.L.D. degree in international law and business from
The Fletcher School of Law and Diplomacy. He has over 15 years of experience
in
investment banking and consulting and speaks fluent Mandarin and
English.
Family
Relationships
There
are
no family relationships between or among any of the current directors, executive
officers or persons nominated or charged by the Company to become directors
or
executive officers.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a)
of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors, executive officers and persons who own more than 10% of the Company’s
Common Stock to file reports of ownership and changes in ownership on Forms
3, 4
and 5 with the Securities and Exchange Commission (the “SEC”). Directors,
executive officers and greater than 10% stockholders are required by SEC rules
to furnish the Company with copies of Section 16(a) forms they
file.
The
Company believes that all of its directors, executive officers and greater
than
10% beneficial owners complied with all filing requirements applicable to them
in fiscal year 2008.
Codes
of Ethics.
In
January 2006, we adopted a Code of Ethics and Business Conduct to provide
guiding principles to our officers, directors and employees. Our Code of Ethics
and Business Conduct also strongly recommends that all directors and employees
of our company comply with the code in the performance of their duties.
Generally, our Code of Ethics and Business Conduct provides guidelines
regarding:
|
.
|
compliance
with laws, rules and regulations
|
|
.
|
conflicts
of interest,
|
|
.
|
insider
trading,
|
|
.
|
corporate
opportunities
|
|
.
|
competition
and fair dealing,
|
|
.
|
discrimination
and harassment,
|
|
.
|
health
and safety,
|
|
.
|
record-keeping,
|
|
.
|
confidentiality,
|
|
.
|
protection
and proper use of company assets, and
|
|
.
|
payments
to government personnel.
|
A
copy of
the Code of Ethics and Business Conduct is included as Exhibit 14 to our 2007
annual report on Form 10-K filed with the SEC.
Meetings
and Committees of the Board of Directors
The
Board
of Directors held board meetings at least four times during the fiscal year.
In
addition to meetings of the full Board, directors attended meetings of Board
committees on which they served. The Board’s standing committees are the Audit
and Compensation Committees.
Committee
Membership
The
following table shows the current membership on the standing
committees:
Committee
|
|
Chair
|
|
Member
|
|
Member
|
Audit
|
|
Michael
Marks
|
|
John
(Yang) Wang
|
|
Feng
Xiaowei
|
Compensation
|
|
Feng
Xiaowei
|
|
John
(Yang) Wang
|
|
Ge
Jian
|
Audit
Committee.
The
Board
of Directors has an Audit Committee established in accordance with section
3(a)(58) of Securities Exchange Act of 1934 (the “Exchange Act”). The Board of
Directors has determined that each of the members of the Audit Committee is
“independent,” as defined in the corporate governance listing standards of
NASDAQ and Rule 10A-3 under the Exchange Act relating to audit committees.
In addition, the Board has determined that all members of the Audit Committee
are financially literate and that Mr. Marks qualifies as an “audit committee
financial expert” as defined by the Securities and Exchange
Commission.
The
committee assists the Board in fulfilling its oversight responsibilities
relating to:
· our
auditing, accounting and reporting practices;
· the
adequacy of our systems of internal controls;
· and
the quality and integrity of publicly reported financial
disclosures.
In
this
role, the committee appoints the independent auditors and reviews and approves
the scope of the audit, the financial statements and the independent auditors’
fees. The Audit Committee met one time since its first inception in July 2008,
and the Chairman met with management and the external auditors prior to the
release of our financial results.
The
Audit
Committee exercises the powers of the Board of Directors in connection with
our
accounting and financial reporting practices, and provides a channel of
communication between the Board of Directors and independent registered public
accountants.
Compensation
Committee.
The
Compensation Committee is comprised of three directors who meet the independence
requirements of NASDAQ, are “non-employee directors” for purposes of Rule 16b-3
under the Securities Exchange Act of 1934 and are “outside directors” for
purposes of Section 162(m) of the Internal Revenue Code. The purpose of our
compensation committee is to discharge the responsibilities of our board of
directors relating to compensation of our executive officers. Specific
responsibilities of our compensation committee include:
·
reviewing and recommending approval of compensation of our executive
officers;
·
administering our stock incentive plan;
·
and
reviewing and making recommendations to our board with respect to incentive
compensation and equity plans.
The
Compensation Committee has yet to hold a meeting since its first inception
in
July 2008.
Stockholder
Nominees
There
have been no material changes to the procedures by which security holders may
recommend nominees to the registrant’s Board of directors since our last annual
report on form 10-KSB.
Involvement
in Certain Legal Proceedings
There
are
no orders, judgments, or decrees of any governmental agency or administrator,
or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or
in
the sale of a particular security or temporarily or permanently restraining
any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities,
or
convicting such person of any felony or misdemeanor involving a security, or
any
aspect of the securities business or of theft or of any felony. Nor are any
of
the officers or directors of any corporation or entity affiliated with us so
enjoined.
ITEM
11. EXECUTIVE COMPENSATION
Introductions
We
endeavor to provide our “named executive officers” (as defined in Item 402 of
Regulation S-K) with a competitive base salary that is in-line with their roles
and responsibilities when compared to peer companies of comparable size in
the
same or similar locality. It is not uncommon for PRC private corporations in
that locality to have base salaries as the sole and only form of compensation.
The base salary level is established and reviewed based on the level of
responsibilities, the experience and tenure of the individual and the current
and potential contributions of the individual. The base salary is compared
to
similar positions within comparable peer companies and with consideration of
the
executive’s relative experience in his or her position. Base salaries are
reviewed periodically and at the time of promotion or other changes in
responsibilities.
Under
the
governance of our newly established compensation committee, we plan to implement
a more comprehensive compensation program, which takes into account other
elements of compensation, including, without limitation, short and long term
compensation, cash and non-cash compensation, and other equity-based
compensation such as stock options. This compensation program shall be
comparative to our peers in the industry and aimed to retain and attract
talented individuals.
Director
Compensation
The
following table sets forth information concerning the compensation of each
person who served as a non-employee director during our fiscal year ended June
30, 2008. The compensation for each of our executive officers who also served
as
a director during fiscal year ended June 30, 2008 is fully reflected under
our
“Summary Compensation of Named Executive Officers” disclosure
below.
Director
Compensation of Non-Employee Directors
for
Fiscal Year Ended June, 2008
Name
|
|
Fees
Earned
or Paid in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Feng
Xiaowei (1)
|
|
$
|
2,891
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Huang
Lei (1)
|
|
$
|
2,891
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Ge
Jian (1)
|
|
$
|
2,891
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Michael
Marks (4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
John
(Yang) Wang (4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Zhang
Yihua (1) (2)
(Former
Director)
|
|
$
|
28,91
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Rodrigo
Arboleda
(Former
Director)(2)
|
|
$
|
23,333
|
|
$
|
10,000
|
(5)
|
|
|
|
|
—
|
|
|
—
|
|
$
|
12,250
|
(6)
|
$
|
45,583
|
|
Robert
D. Cain
(Former
Director )(3)
|
|
$
|
20,417
|
|
$
|
10,000
|
(7)
|
|
|
|
|
—
|
|
|
—
|
|
$
|
29,524
|
(8)
|
$
|
59,941
|
|
(1)
|
This
individual was appointed as a director in connection with the Exchange
Transaction on October 1, 2007, and therefore did not receive any
compensation from the Company for the first quarter of fiscal year
2008.
|
(2) |
Effective
July 18, 2008, Ms. Zhang Yihua and Mr. Rodrigo Arboleda resigned
as a
member of our board of directors.
|
(3) |
Effective
September 9, 2008, Mr. Robert Cain resigned as a member of our
board of
directors.
|
(4) |
The
director was appointed subsequent to the June 30, 2008 fiscal
year end,
and therefore did not receive any compensation from the Company
in fiscal
year 2008.
|
(5)
|
The
director was granted 1,250 shares of our restricted common stock
in fiscal
year 2008 valued at $10,000 in June 2008.
|
(6) |
The
$12,250 was for the amortization of deferred compensation related
to the
unamortized portion of the value of the stock awards issued
in fiscal year
2007.
|
(7) |
The
director was granted 1,250 shares of our restricted common stock
in fiscal
year 2008 valued at $10,000 in June 2008.
|
(8) |
In
connection with certain business consulting services Mr. Robert
Cain
provided to the Company, the Company paid a cash payment of
$12,024 in
fiscal year 2008 to Mr. Cain. The additional $17,500 related
to the
amortization of deferred compensation related to the unamortized
portion
of the value of the stock awards issued in fiscal year 2007.
|
The
non-executive directors would also be reimbursed for all of their out-of-pocket
expenses in traveling to and attending meetings of the Board of Directors
and
committees on which they would serve.
Executive
Compensation
The
following is a summary of the compensation we paid for each of the three
years
ended June 30, 2008, 2007 and 2006, respectively
(unless otherwise provided) (i) to the persons who acted as our principal
executive officers during the three years, (ii)
to
the person who acted as our principal financial officer or acted in a similar
capacity during the three years and (iii) our other executive officers received
compensation in excess of $100,000 in these three year.
We refer
to these individuals in this 10-K as “named executive officers.”
Summary
Compensation of Named Executive Officers
The
following table reflects all compensation awarded to, earned by or paid to
our
named executive officers for our fiscal years ended June 30
Name
and
Principal
Position
|
|
Fiscal
Year
Ended
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
|
|
Option
Awards
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
Cao
Wubo,
Chairman
of the Board, Chief Executive Officer, and President
|
|
|
2008
2007
2006
|
|
$
$
$
|
117,000
2,460
2,269
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
$
$
$
|
117,000
2,460
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elsa
Sung,
Chief
Financial Officer (1)
|
|
|
2008
2007
2006
|
(2) |
$
|
67,500
—
—
|
|
|
—
—
—
|
|
$
|
27,000
—
—
|
|
$
|
10,847
—
—
|
|
|
—
—
—
|
|
$
|
26,295
—
—
|
|
|
—
—
—
|
|
$
|
131,642
—
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xu
Haibo,
Director,
Chief Operating Officer
|
|
|
2008
2007
2006
|
|
$
$
$
|
50,400
1,845
908
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
$
$
$
|
50,400
1,845
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Wolfson,
Former
Director and Former Chief Executive Officer (3)
|
|
|
2008
2007
2006
|
(4)
(5)
(6)
|
$
$
$
|
45,375
178,062
167,750
|
|
|
—
415,970
—
|
|
|
—
—
—
|
|
$
$
$
|
311,348
302,733
512,675
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
-
|
|
$
$
$
|
356,723
896,765
680,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adam
Wasserman,
Former
Chief Financial Officer (3)
|
|
|
2008
2007
2006
|
|
$
$
|
26,803
80,407
—
|
|
$
|
—
36,500
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
|
—
—
—
|
|
$
$
|
26,803
116,907
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
Clinton,
Former
Director and Former President (3)
|
|
|
2008
2007
2006
|
(7)
(8)
(9)
|
$
$
$
|
45,375
178,062
167,750
|
|
|
—
350,112
—
|
|
|
—
—
—
|
|
$
$
$
|
311,348
302,733
512,675
|
|
$
|
311,348
—
—
|
|
|
—
—
—
|
|
|
—
$603,000
—
|
|
$
$
$
|
356,723
1,433,907
680,425
|
|
(1) Ms.
Sung
was appointed as our Chief Financial Officer in connection with the Exchange
Transaction on October 1, 2007, and therefore did not receive any compensation
from the Company for the most recent fiscal year ended September 30,
2007.
(2)
Ms.
Sung’s compensation for fiscal 2008 included $94,500 salary payable under the
terms of his employment agreement, of which $67,500 was paid by cash, issuance
of 3375 shares of our restricted common stock valued at of $27,000 in June
2008
and options to purchase 2,000 shares of our common stock at an exercise price
of
$12 per share representing other annual compensation which were valued at
$10,847 pursuant to the terms of her employment agreement. Options to purchase
5,500 shares of our common stock at an average exercise price of $20.09 per
share representing nonqualified deferred compensation earnings other annual
compensation which were valued at $26,250 pursuant to the terms of her
employment agreement. During our fiscal year ended June 30, 2008, we granted
Ms.
Sung options for 2,000 shares exercisable at a price of $12 per share, 1,750
shares exercisable at a price of $16 per share, 1,875 shares exercisable
at a
price of $20 per share and 1,875 shares exercisable at $24 per share with
vesting period, 500 shares exercisable at a price of $0.105 per share, which
was
the lowest closing price of our common stock on the OTC Bulletin Board in
the 5
trading days immediately preceding the grant date. These options were granted
to
Ms. Sung in June, 2008. The options expire on June 10, 2013. The value of
the
option award was calculated using the Black-Scholes option pricing model
based
on the following assumptions: weighted average life of 5 years; risk-free
interest rate of 3.57 %; volatility rate of 95%; and weighted average fair
market value of $0.1238 per share at date of grant. The aggregate number
of
stock awards and option awards issued to Ms. Sung and outstanding as of June
30,
2008 is 3,375 and 7,500, respectively. A description of her employment agreement
can be found below in the section titled “Employment Agreements”.
(3)
Effective October 1, 2007, Mr. Gary Wolfson resigned from his positions as
Chief
Executive Officer and a director of the Company, Mr. Adam Wasserman resigned
as
Chief Financial Officer of the Company and Mr. Kenneth Clinton resigned from
his
positions as President and a director of the Company.
(4)
Mr.
Wolfson’s compensation for fiscal 2008 included $45,250 salary payable under the
term of his employment agreement and options to purchase 61,036 shares of
our
common stock at an exercise price of $4.20 per share representing other annual
compensation which were valued at $311,348 pursuant to the terms of his
employment
(5)
Mr.
Wolfson's compensation for fiscal 2007 included $178,062 salary payable under
the terms of his employment agreement, $415,970 bonus payment, of which $326,845
was paid through the distribution of LTUS shares that were held in our
investment securities account and Options to purchase 48,379 shares of our
common stock at an exercise price of $3.72 per share representing other annual
compensation which were valued at $302,733 pursuant to the terms of his
employment agreement,
(6)
Mr.
Wolfson's compensation for fiscal 2006 included $167,750 salary payable under
the terms of his employment agreement, of which $80,078 was paid through
the
issuance of 48,829 shares of our common stock upon the exercise of stock
options
and 42,448 shares of our common stock valued at $84,896 issued to him in
September 2005, options to purchase 92,500 shares of our common stock at
an
exercise price of $5.8 per share representing other annual compensation which
were valued at $512,675 pursuant to the terms of his employment agreement.
(7)
Mr.
Clinton’s compensation for fiscal 2008 inlcuded $45,250a salary payable under
the term of his employment agreement and options to purchase 61,036 shares
of
our common stock at an exercise price of $4.20 per share representing other
annual compensation which were valued at $311,348 pursuant to the terms of
his
employment
(8)
Mr.
Clinton's compensation for fiscal 2007 included $178,062salary payable under
the
terms of his employment agreement, $350,112 bonus payment, of which $326,845
was
paid through the distribution of LTUS shares that were held in our investment
securities account, an one time distribution of 3,350,000 shares of SPEH
common
stock valued at $603,000, and options to purchase 61,035 shares of our common
stock at an exercise price of $4.2 per share representing other annual
compensation which were valued at $311,348 pursuant to the terms of his
employment.
(9)
Mr.
Clinton's compensation for fiscal 2006 included $167,750 salary payable under
the terms of his employment agreement, of which $80,078 was paid through
the
issuance of 48,379 shares of our common stock upon the exercise of stock
options
and 42,448 shares of our common stock valued at $84,896 issued to him in
September 2005, options to purchase 92,500 shares of our common stock at
an
exercise price of $5.8 per share representing other annual compensation which
were valued at $512,675 pursuant to the terms of his employment agreement.
Outstanding
Equity Awards
The
following table sets forth certain information concerning unexercised options,
stock that has not vested, and equity incentive plan awards outstanding as
of
June 30, 2008 for the named executive officers below:
Outstanding
Equity Awards at Fiscal Year Ended
June
30, 2008
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested
|
|
Market Value
of Shares or
Units of Stock
That Have Not
Vested
($)
|
|
Equity Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
|
|
Equity Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
|
|
Elsa
Sung
|
|
|
-
|
|
|
2,000
1,750
1,875
1,875
|
|
|
0
|
|
$
$
$
$
|
12
16
20
24
|
|
|
6/10/2013
6/10/2013
6/10/2013
6/10/2013
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Wolfson (1)
|
|
|
61,036
|
|
|
0
|
|
|
0
|
|
$
|
4.2
|
|
|
12/31/2010
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1)
|
These
options were fully vested as of July 1,
2007.
|
We
currently have no plans that provide for payments or other benefits at,
following, or in connection with retirement of our named executive
officers.
Nonqualified
defined contribution and other nonqualified deferred compensation
plans.
We
currently have no defined contribution or other plans that provide for the
deferral of compensation to our named executive officers on a basis that
is not
tax-qualified.
Employment
Agreements.
Effective
June 10, 2008, the Company entered into an employment agreement (the “Employment
Agreement”) with Ms. Sung, our Chief Financial Officer. In accordance with the
terms of the Employment Agreement, Ms. Sung will receive an annual base salary
of $120,000 and will be entitled to receive performance bonuses of (i) $18,000
if the Company is successfully listed or quoted on the New York Stock Exchange,
the American Stock Exchange, the NASDAQ Select Market, the NASDAQ Global
Market
or the NASDAQ Capital Market; (ii) $8,000 if the Company meets its 2008
Guaranteed EBT ( the Company’s adjusted 2008 earnings before taxes is more than
$26,700,000 USD or, the Company’s 2008 adjusted fully diluted earnings before
taxes per share is less than $1.6 USD); and (iii) $20,000 if the Company
meets
its 2009 Guaranteed EBT ( the Company’s adjusted 2009 earnings before taxes is
less than $38,400,000 USD or, the Company’s adjusted fully diluted earnings
before taxes per share is less than $2.32 USD). In addition, In connection
with
Ms. Sung’s employment, the Board of Directors has approved a non-qualified stock
option grant to Ms. Sung in the amount of 7,500 shares of common stock of
the
Company vesting over an eighteen months period. All shares pursuant to the
option must be exercised within five years after the grant date. If the Company
terminates Ms. Sung, without cause or if Ms. Sung terminates her employment
for
Good Reason (as defined therein), Ms. Sung is entitled to receive (i) a lump
sum
cash payment equal to any accrued and unpaid salary and bonus; (ii) an amount
equal to the sum of (a) 80% of her then current base salary and (b) 50% of
the
average annual cash bonus payments during the preceding 2 fiscal years, with
such sum payable in 6 substantially equal monthly installments; and (iii)
6
months of medical and life insurance costs. If the Company terminates Ms.
Sung’s
employment with Cause, she is entitled to his accrued and unpaid salary and
accrued and unpaid bonus through the effective date of termination as well
as
the reimbursement of any expenses.
Potential
payments upon termination or change-in-control.
The
employment contract with Ms. Sung provided the terms of potential payments
upon
termination. A description of her employment agreement can be found above
in the
section titled “Employment Agreements”.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth, as of June 30, 2008, certain information concerning
the beneficial ownership of our Common Stock by (i) each shareholder known
by us
to own beneficially five percent or more of our outstanding Common Stock;
(ii)
each director; (iii) each executive officer; and (iv) all of our executive
officers and directors as a group, and their percentage ownership and voting
power.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Unless otherwise indicated in the table, the persons
and
entities named in the table have sole voting and sole investment power with
respect to the shares set forth opposite the shareholder’s name. Unless
otherwise indicated, the address of each beneficial owner listed below is
c/o
Laiyang Jiangbo Pharmaceuticals Enterprises, Inc., Middle Section, Longmao
Street, Area A, Laiyang Waixiangxing Industrial Park, Laiyang City, Yantai,
Shandong Province, PRC 265200. The percentage of class beneficially owned
set
forth below is based on 10,327,844 shares of common stock outstanding on
June
30, 2008. The issued and outstanding shares do not include 2,489,983 shares
of
our common stock issuable upon the exercise of our outstanding warrants and
options.
Named
Executive Officers and Directors
|
|
Number
of Shares of
Common
Stock
Beneficially
Owned
(1) (2)
|
|
Percentage
of
Outstanding
Common
Stock
|
|
Cao
Wubo, Chief Executive Officer and Chairman of the Board†
|
|
|
4,856,592
|
(3)
|
|
47.02
|
%
|
Elsa
Sung, Chief Financial Officer†
|
|
|
3,875
|
|
|
*
|
|
Xu
Haibo, Vice President, Chief Operating Officer and
Director†
|
|
|
0
|
|
|
-0
-
|
|
Dong
Lining, Vice President, Director of Technology†
|
|
|
0
|
|
|
-0
-
|
|
Yang
Weidong, Vice President, Director of Sales†
|
|
|
0
|
|
|
-0
-
|
|
Xin
Jingsheng, Director of Equipment†
|
|
|
0
|
|
|
-0
-
|
|
Xue
Hong, Controller†
|
|
|
0
|
|
|
-0
-
|
|
Feng
Xiaowei, Director†
|
|
|
0
|
|
|
-0
-
|
|
Huang
Lei, Director†
|
|
|
0
|
|
|
-0
-
|
|
Ge
Jian, Director†
|
|
|
9,993
|
|
|
*
|
|
Michael
Marks†
|
|
|
0
|
|
|
-0
-
|
|
John
(Yang) Wang†
|
|
|
0
|
|
|
-0
-
|
|
Total
Held by Directors and Executive Officers (twelve
individuals)
|
|
|
4,870,460
|
|
|
47.16
|
%
|
|
|
|
|
|
|
|
|
5%
Shareholders
|
|
|
|
|
|
|
|
Verda
International Limited (4)
A-1
Building Dasi Street
Laiyan
City, Shandong Province, PRC
|
|
|
4,856,592
|
|
|
47.02
|
%
|
Wang
Renhui
No.
57-2-14-1 Chaoyang Street
Dalin,
PRC
|
|
|
559,608
|
|
|
5.42
|
%
|
Pope
Investments LLC(5)(6)
5100
Poplar Avenue, Suite 805
Memphis,
Tennessee 38137
|
|
|
1,146,250
|
|
|
9.99
|
%
|
Ardsley
Advisory Partners(7)
262
Harbor Drive
Stamford,
Connecticut 06902
|
|
|
693,750
|
|
|
6.72
|
%
|
Ardsley
Partners I(7)
262
Harbor Drive
Stamford,
Connecticut 06902
|
|
|
686,250
|
|
|
6.64
|
%
|
* Represents
less than one percent (1%).
(1) |
Based
on 10,327,844 outstanding shares of Common Stock as of June 30,2008.
Of
the 10,327,844 shares, 560,000 shares are not considered issued
and
outstanding for our earnings per share calculation at June 30,
2008 as the
issuance is contingent on the occurrence of certain future events.
|
(2) |
Unless
otherwise noted, the Company believes that all persons named in
the table
have sole voting and investment power with respect to all shares
of the
Common Stock beneficially owned by them. A person is deemed to
be the
beneficial owner of securities which may be acquired by such person
within
sixty (60) days from the date indicated above upon the exercise
of
options, warrants or convertible securities. Each beneficial owner’s
percentage of ownership is determined by assuming that options,
warrants
or convertible securities that are held by such person (not those
held by
any other person) and which are exercisable within sixty (60) days
of the
date indicated above, have been
exercised.
|
(3) |
Includes
4,856,592 shares of common stock owned by Verda International
Limited, a
company of which Mr. Cao is the Executive Director and owner
of 100% of
the equity interest. The address for Verda International Limited
is A-1
Building Dasi Street,Laiyang City, Shandong province,
China.
|
(4) |
The
natural person with voting power and investment power on behalf
of Verda
International Limited is Mr. Cao
Wubo.
|
(5) |
Includes
(i) 625,000 shares of Common Stock issuable to Pope Investments
LLC,, upon
conversion of $5,000,000 aggregate principal amount of the Company’s
Debentures and 400,000 shares of Common Stock issuable upon exercise
of
the November Warrants and (ii) up to an additional 4,850,000 shares
of
Common Stock of the 2,125,000 shares of Common Stock issuable to
Pope
Investments upon conversion of $17,000,000 aggregate principal
amount of
the Company’s Notes and 1,062,500 shares of Common Stock issuable upon
exercise of 1,062,500 Class A Warrants. Pope Asset Management LLC,
a
Tennessee limited liability company (“Pope Asset”) serves as an investment
adviser and/or manager to Pope Investments. Pope Asset is the sole
manager
for Pope Investments and has sole voting control and investment
and
disposition power and discretion with respect to all securities
held by
Pope Investments. Pope Asset may be deemed to beneficially own
shares
owned or held by, or held for the account or benefit of, Pope Investments.
Mr. William P. Wells is the sole manager of Pope Asset. Mr. Wells
may be
deemed to own shares owned or held by, or held for the account
or benefit
of, Pope Investments. Pope Asset and Mr. Wells do not directly
own any
shares of Common Stock
|
(6) |
The
percentage of shares of Common Stock that may be beneficially owned
by
Pope Investments is limited to 9.99% and no shares of Common Stock in
excess of this beneficial ownership limitation may be issued by
the
Company to Pope Investments. This limitation may be waived by Pope
Investments at any time upon 61 days’ notice to the
Company.
|
(7) |
Beneficial
ownership information derived from a Schedule G filed with the
SEC on June
10, 2008 by Ardsley Partners Fund II, L.P., Ardsley Partners Institutional
Fund, L.P., Ardsley Offshore Fund Ltd., Ardsley Advisory Partners,
Ardsley
Partners I and Philip J. Hempleman.
|
Securities
Authorized for Issuance Under Equity Compensation Plans or Individual
Compensation Arrangements
The
following table sets forth information as of June 30, 2008 regarding securities
authorized for issuance under equity compensation plans, including individual
compensation arrangements, by us under our 2002 Stock Option Plan and our
2003
Stock Option, our 2004 Stock Plan as amended and any compensation plans not
previously approved by our shareholders as of June 30, 2008.
Equity
Compensation as of June 30, 2008
Plan Category
|
|
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
|
|
Weighted average exercise price
of outstanding options, warrants
and rights
|
|
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column 2)
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plans or
Individual
Compensation
Arrangements
Not Approved by
Security
Holders (1)
|
|
|
133,400
2,000
1,750
1,875
1,875
|
|
$
$
$
$
$
|
4.20
12.00
16.00
20.00
24.00
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
140,900
|
|
$
|
5.18
|
|
|
0
|
|
(1)
|
Equity
compensation plan not approved by shareholders is comprised of options
granted and/or restricted stock to be issued to employees and
non-employees, including directors, consultants, advisers, suppliers,
vendors, customers and lenders for purposes including to provide
continued
incentives, as compensation for services and/or to satisfy outstanding
indebtedness to them.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Agreement
and Plan of Share Exchange
On
October 1, 2007, we executed a Share Exchange Agreement (“Exchange Agreement”)
by and among Karmoya International Limited, a British Virgin Islands company
(“Karmoya”), and the shareholders of 100% of Karmoya’s capital stock (the
“Karmoya Shareholders”) on the one hand, and us and the majority shareholders of
our capital stock (the “Genesis Shareholders”) on the other hand. Separately,
Karmoya owns 100% of the capital stock of Union Well International Limited,
a
Cayman Islands company (“Union Well”), which has established and owns 100% of
the equity in Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd., a wholly
foreign owned enterprise in the People’s Republic of China (“GJBT”). GJBT has
entered into consulting service agreements and equity-related agreements with
Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a limited
liability company headquartered in, and organized under the laws of,
China.
Under
the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock, which were converted into
299,789,000 shares of our common stock on October 26, 2007. As a result of
this
transaction, the Karmoya Shareholders became our controlling shareholders and
Karmoya became our wholly owned subsidiary. In connection with Karmoya becoming
our wholly owned subsidiary, we acquired the business and operations of the
LJ
Group, and our principal business activities continued to be conducted through
the LJ Group’s operating company in China, Laiyang Jiangbo.
Our
Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders
PRC
law
currently limits foreign equity ownership of Chinese companies. To comply with
these foreign ownership restrictions, we operate our business in China through
a
series of contractual arrangements with Laiyang Jiangbo and its shareholders
that were executed on September 21, 2007. For a description of these contractual
arrangements, see “Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders” under the “Business” section above.
As
a
result of the Exchange Transaction, we have contractual arrangements with
Laiyang Jiangbo which give us the ability to substantially influence Laiyang
Jiangbo's daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.
Related
Parties Transactions of Laiyang Jiangbo
Set
forth
below are the related parties transactions since June 30, 2007 between Laiyang
Jiangbo’s shareholders, officers and/or directors, and Laiyang Jiangbo. As a
result of the Exchange Transaction, we have contractual arrangements with
Laiyang Jiangbo which give us the ability to substantially influence Laiyang
Jiangbo's daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.
Accounts
receivable - related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
majority shareholders have 100% ownership of these entities. At June 30, 2008
and 2007, accounts receivable from the Company’s product sales to these related
entities were $673,808
and
$498,940, respectively. Accounts receivable due drom related parties are
receivable in cash and due within 3 to 6 monhts. For the years ended June 30,
2008, 2007, and 2006, the Company recorded sales to related parties as follows:
Name of Related Party
|
|
Relationship
|
|
Net Revenues
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Jiangbo
Chinese-Western Pharmacy
|
|
90%
owned by Chief Executive Officer |
|
$
|
1,622,935
|
|
$
|
3,018,502
|
|
$
|
2,471,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laiyang
Jiangbo Medicals, Co. Ltd
|
|
60%
owned by Chief Executive Officer |
|
|
1,185,183
|
|
|
436,909
|
|
|
231,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yantai
Jiangbo Pharmaceuticals Co., Ltd.
|
|
Owned
by Other Related Party |
|
|
2,755,980
|
|
|
478,470
|
|
|
1,210,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
5,564,098
|
|
$
|
3,933,881
|
|
$
|
3,913,452
|
|
Other income
from related parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy. For
the
years ended June 30, 2008, 2007, and 2006, the Company recorded other income
of
$110,152, $102,472, and $59,775 from leasing the two buildings.
Other
payables - related parties
Prior
to
fiscal year 2008, the Company received advances from its director, shareholders
and related parties for its operating activities. At June 30, 2008 and 2007,
the
Company had payable balances due to its shareholders and related parties
amounting
to $164,137 and $933,132,
respectively. These advances are short-term in nature and bears interest
rate
at
0%,
and
5.84% per annum, for 2008 and 2007, respectively. The interest rate for 2007
was
calculated by using the Company’s 2007 average outstanding bank loan interest
rate. The amount is expected to be repaid in the form of cash.
At
June
30, 2008 and 2007, other payables - related parties consisted of the
following:
|
|
2008
|
|
2007
|
|
Payable
to Cao Wubo, Chief Executive Officer and
Chairman
of the Board, with annual interest at
0%
and 5.84%, for 2008 and 2007 respectively,
and
unsecured.
|
|
$
|
164,137
|
|
$
|
447,531
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guihong, shareholder and sister of
CEO’s
spouse, with annual interest at 5.84% for
2007
respectively, and unsecured.
|
|
|
-
|
|
|
280,334
|
|
|
|
|
|
|
|
|
|
Payable
to Zhang Yihua, shareholder of the
Company
and Yantai Jiangbo Pharmaceuticals,
and
nephew of CEO, with annual interest at
5.84%
for 2007, and unsecured.
|
|
|
-
|
|
|
29,665
|
|
|
|
|
|
|
|
|
|
Payable
to Yantai Jiangbo Pharmaceuticals, an
affiliated
company, with annual interest at
5.84%
for 2007, and unsecured.
|
|
|
-
|
|
|
106,910
|
|
|
|
|
|
|
|
|
|
Payable
to Laiyang Jiangbo Medicals, an affiliated
company,
with annual interest at 5.84% for 2007,
and
unsecured.
|
|
|
-
|
|
|
68,249
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guifang, who is the direct relative of
a
Company's shareholder.
|
|
|
-
|
|
|
443
|
|
Total
other payable-related parties
|
|
$
|
164,137
|
|
$
|
933,132
|
|
Related
Party Transactions of Genesis Technology Group, Inc.
Set
forth
below are the related party transactions since June 30, 2007 between the
shareholders, officers and/or directors of Genesis Technology Group, Inc
(“Genesis”), our predecessor, and Genesis.
On
July
31, 2007, Genesis’s then 51% owned subsidiary, Genesis Equity Partners LLC, II
(“GEP II”), issued a promissory note to a member of GEP II in the amount of
$190,000 for working capital purposes. The note bears interest at 10% per annum
and is due on July 31, 2008 GEP II was subsequently dissolved and we assumed
this obligation. Upon receipt by us of shares or other equity distribution
in
connection with the reverse merger transaction with a certain GEP II client
and
distribution of 24.5% of the reverse merger distribution to the note holder
in
accordance with the terms of GEP II’s operating agreement, our obligation under
this note shall terminate. The note is secured by 2,000,000 shares of our common
stock which may be adjusted from time to time.
On
July
23, 2007, Genesis entered into a one-year consulting agreement for business
advisory and investor relations services with a company related to a member
of
its then-subsidiary, GEP. In connection with this agreement, it transferred
100,000 shares of LTUS
to
this consultant with a fair market value of $100,000. The consulting agreement
has been terminated.
May
2008 Escrow Agreement
In
connection with the May 2008 Financing, Mr. Cao, the Company’s Chief Executive
Officer and Chairman of the Board, placed 3,750,000 shares of common stock
of
the Company owned by him into an escrow account pursuant to a make good escrow
agreement, dated May 30, 2008 (the “Make Good Escrow Agreement”). In the event
that either (i) the Company’s adjusted 2008 earnings before taxes is less than
$26,700,000 USD (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted
fully diluted earnings before taxes per share is less than $1.6 USD (“2008
Guaranteed Diluted EBT”), 1,500,000 of such shares (the “2008 Make Good Shares”)
are to be released pro rata to the May 2008 Investors. In the event that either
(i) the Company’s adjusted 2009 earnings before taxes is less than $38,400,000
USD (“2009 Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted
earnings before taxes per share is less than $2.32 USD (or $2.24 USD if the
500,000 shares of common stock held in escrow in connection with the November
2007 private placement have been released from escrow) (“2009 Guaranteed Diluted
EBT”), 2,250,000 of such shares (the “2009 Make Good Shares”) are to be released
pro rata to the May 2008 Investors. Should the Company successfully satisfy
these respective financial milestones, the 2008 Make Good Shares and 2009 Make
Good Shares will be returned to Mr. Cao. In addition, Mr. Cao is required to
deliver shares of common stock owned by him to the Investors on a pro rata
basis
equal to the number of shares (the “Settlement Shares”) required to satisfy all
costs and expenses associated with the settlement of all legal and other matters
pertaining to the Company prior to or in connection with the completion of
the
Company’s October 2007 share exchange in accordance with formulas set forth in
the May 2008 Securities Purchase Agreement (post 40-to-1 reverse
split).
Director
Independence
For
our
description of director independence, see “Board Committees and Director
Independence” under the section entitled “Directors, Executive Officers,
Promoters, Control Persons and Corporate Governance; Compliance with Section
16(a) of the Exchange Act” above.
ITEM
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate
fees billed by our current principal accountants, Moore Stephens Wurth Frazer
and Torbet, LLP for audit services
related
to the most recent fiscal year, and for other professional services billed
in
the most recent fiscal year, were as follows:
|
|
Fiscal 2008
|
|
Audit
Fees
|
|
$
|
185,000
|
|
Audit-Related
Fees
|
|
|
-
|
|
Tax
Fees
|
|
|
-
|
|
All
Other Fees
|
|
|
-
|
|
Total
|
|
$
|
185,000
|
|
Aggregate
fees billed by our previous principal accountants, Sherb & Co., for audit
services related to the most recent two fiscal years, and for other professional
services billed in the most recent two fiscal years, were as
follows:
|
|
Fiscal 2007
|
|
Fiscal 2006
|
|
Audit
Fees
|
|
$
|
82,500
|
|
$
|
66,000
|
|
Audit-Related
Fees
|
|
|
0
|
|
|
-
|
|
Tax
Fees
|
|
|
12,500
|
|
|
-
|
|
All
Other Fees
|
|
|
0
|
|
|
-
|
|
Total
|
|
$
|
95,000
|
|
$
|
66,000
|
|
Audit
Fees—
This
category includes the audit of our annual financial statements, review of
financial statements included in our Form 10-QSB Quarterly Reports and services
that are normally provided by the independent auditors in connection with
engagements for those fiscal years. This category also includes advice on audit
and accounting matters that arose during, or as a result of, the audit or the
review of interim financial statements.
Audit-Related
Fees—
This
category consists of assurance and related services by the independent auditors
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported above under "Audit Fees." The services
for the fees disclosed under this category include consultation regarding our
correspondence with the SEC and other accounting consulting.
Tax
Fees—
This
category consists of professional services rendered by our independent auditors
for tax compliance and tax advice. The services for the fees disclosed under
this category include tax return preparation and technical tax
advice.
All
Other Fees—
This
category consists of fees for other miscellaneous items.
Pre-Approval
Policies and Procedures—
Prior
to engaging its accountants to perform particular services, our board of
directors obtains an estimate for the service to be performed. All of the
services described above were approved by the board of directors in accordance
with its procedure.
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial
Statements and Financial Statements Schedules
The
following financial statements of Genesis Pharmaceuticals Enterprises, Inc.
and
Reports of Independent Registered Public Accounting Firms are presented in
the
“F” pages of this report:
Reports
of Independent Registered Public Accounting Firms
|
|
|
F-1
|
|
|
|
|
|
|
Consolidated
Balance Sheets - as of June 30, 2008 and 2007
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Statements of Income and Other Comprehensive Income - for the
Years ended June 30, 2008, 2007 and 2006
|
|
|
F-3
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity - for the Years ended June 30, 2008,
2007 and 2006
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows - for the Years ended June 30, 2008, 2007
and
2006
|
|
|
F-5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-6
- F-33
|
|
(b) Exhibits
*Filed
Herewith
Exhibit
Number
|
|
Description
|
2.1
|
|
Share
Acquisition and Exchange Agreement by and among Genesis, Karmoya
and
Karmoya Shareholders dated October 1, 2007 (1)
|
3.1
|
|
Articles
of Incorporation (2)
|
3.2
|
|
Bylaws
(2)
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
3.4
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
3.5
|
|
Articles
of Amendment to Articles of Incorporation (3)
|
3.6
|
|
Articles
of Amendment to Articles of Incorporation (4)
|
4.1
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series A Preferred Stock (5)
|
4.2
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series B Voting Convertible Preferred Stock (6)
|
4.3
|
|
6%
Convertible Subordinated Debenture, dated November 7, 2007
(7)
|
4.4
|
|
Common
Stock Purchase Warrant, dated November 7, 2007 (7)
|
4.5
|
|
Form
of 6% Convertible Note (8)
|
4.6
|
|
Form
of Class A Common Stock Purchase Warrant (8)
|
10.1
|
|
Securities
Purchase Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(7)
|
10.2
|
|
Registration
Rights Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(7)
|
10.3
|
|
Closing
Escrow Agreement, dated as of November 6, 2007, by and among Genesis
Pharmaceuticals Enterprises, Inc., Pope Investments, LLC and Sichenzia
Ross Friedman Ference LLP (7)
|
10.4
|
|
Securities
Purchase Agreement, dated May 30, 2008, by and among the Company,
Karmoya
International Ltd., Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., Wubo Cao and the investors party thereto (8)
|
10.5
|
|
Make
Good Escrow Agreement, dated May 30, 2008, by and among the Company,
the
investors party thereto, Pope Investments LLC, Wubo Cao and Loeb
&
Loeb LLP (8)
|
10.6
|
|
Holdback
Escrow Agreement, dated May 30, 2008, by and among the Company, the
investors party thereto and Loeb & Loeb LLP (8)
|
10.7
|
|
Registration
Rights Agreement, dated May 30, 2008, by and among the Company and
the
investors party thereto (8)
|
10.8
|
|
Lock-up
Agreement, dated May 30, 2008, between the Company and Wubo Cao
(8)
|
10.9
|
|
Employment
Agreement between Elsa Sung and the Company, dated June 10, 2008
(9)
|
10.10
|
|
Consulting
Agreement between the Company and
Robert Cain, dated September 10, 2008 (10)
|
14.1
|
|
Code
of Business Conduct and Ethics (11)
|
99.1
|
|
Consulting
Services Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21, 2007 (English Translation) (1)
|
99.2
|
|
Equity
Pledge Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co., Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21, 2007 (English Translation) (1)
|
99.3
|
|
Operating
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.4
|
|
Proxy
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.5
|
|
Option
Agreement between Genesis Jiangbo (Laiyang) Biotech Technologies
Co.,
Ltd., and Laiyang Jiangbo Pharmaceutical Co., Ltd. dated September
21,
2007 (English Translation) (1)
|
99.6
|
|
Audit
Committee Charter (12)
|
99.7
|
|
Compensation
Committee Charter (12)
|
(1)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 1,
2007.
|
(2)
|
Incorporated
by reference to the Company’s Form 8-K filed on September 1,
1999.
|
(3)
|
Incorporated
by reference to the Company’s Form 8-K filed on August 21,
2008.
|
(4)
|
Incorporated
by reference to the Company’s Form 8-K filed on September 5,
2008.
|
(5)
|
Incorporated
by reference to the Company’s Form 10-QSB filed on January 22,
2004.
|
(6)
|
Incorporated
by reference to the Company’s Form 8-K filed on October 9,
2007.
|
(7)
|
Incorporated
by reference to the Company’s Form 8-K filed on November 9,
2007.
|
(8)
|
Incorporated
by reference to the Company’s Form 8-K filed on June 3,
2008.
|
(9)
|
Incorporated
by reference to the Company’s Form 8-K filed on June 12,
2008.
|
(10)
|
Incorporated
by reference to the Company’s Form 8-K filed on September 12,
2008.
|
(11)
|
Incorporated
by reference to the Company's Form 10-KSB filed on January 13,
2006.
|
|
(12)
|
Incorporated
by reference to the Company's Form S-1/A filed on August 26,
2008.
|
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on September 29, 2008.
GENESIS
PHARMACEUTICALS ENTERPISES, INC.
/s/
Cao Wubo
|
Cao
Wubo, Chief Executive Officer and
President
|
In
accordance with the Securities Exchange of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
NAME
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Cao Wubo
|
|
Chairman
of the Board, Chief Executive Officer and President
|
|
September 29, 2008
|
Cao
Wubo
|
|
|
|
|
|
|
|
|
|
/s/
Xu Haibo
|
|
Vice
President, Chief Operating Officer and Director
|
|
September
29, 2008
|
Xu
Haibo
|
|
|
|
|
|
|
|
|
|
/s/
Elsa Sung
|
|
Chief
Financial Officer
|
|
September
29, 2008
|
Elsa
Sung
|
|
|
|
|
|
|
|
|
|
/s/
Xue Hong
|
|
Financial
Controller
|
|
September
29, 2008
|
Xue
Hong
|
|
|
|
|
|
|
|
|
|
/s/
Feng Xiaowei
|
|
Director
|
|
September
29, 2008
|
Feng
Xiaowei
|
|
|
|
|
|
|
|
|
|
/s/
Huang Lei
|
|
Director
|
|
September
29, 2008
|
Huang
Lei
|
|
|
|
|
|
|
|
|
|
/s/
Ge Jian
|
|
Director
|
|
September
29, 2008
|
Ge
Jian
|
|
|
|
|
|
|
|
|
|
/s/Michael
Marks
|
|
Director
|
|
September
29, 2008
|
Michael
Marks
|
|
|
|
|
|
|
|
|
|
/s/John
(Yang) Wang
|
|
Director
|
|
September
29, 2008
|
John
(Yang) Wang
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and
Shareholders
of Genesis Pharmaceuticals Enterprises, Inc. and Subsidiaries
We
have
audited the consolidated balance sheets of Genesis Pharmaceuticals Enterprises,
Inc. and Subsidiaries (the "Company") as of June 30, 2008 and 2007, and the
consolidated statements of income and other comprehensive income, shareholders’
equity, and cash flows for each of the years in the three-year period ended
June
30, 2008. Genesis Pharmaceuticals Enterprises, Inc. and Subsidiaries’ management
is responsible for these financial statements. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Genesis Pharmaceuticals
Enterprises, Inc and Subsidiaries as of June 30, 2008 and 2007, and the results
of its operations and its cash flows for each of the years in the three-year
period ended June 30, 2008 in conformity with accounting principles generally
accepted in the United States of America.
/S/
Moore
Stephens Wurth Frazer and Torbet, LLP
Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut,
California
September
26, 2008
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF
JUNE 30, 2008 AND 2007
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
|
|
$
|
48,195,798
|
|
$
|
17,737,208
|
|
Restricted
cash
|
|
|
7,839,785
|
|
|
8,410,740
|
|
Investments
|
|
|
2,055,241
|
|
|
-
|
|
Accounts
receivable, net of allowance for doubtful accounts of $155,662
and
$166,696 as of June 30, 2008 and 2007, respectively
|
|
|
24,312,077
|
|
|
11,825,442
|
|
Accounts
receivable - related parties
|
|
|
673,808
|
|
|
498,940
|
|
Notes
receivables
|
|
|
-
|
|
|
57,965
|
|
Inventories
|
|
|
3,906,174
|
|
|
5,130,934
|
|
Other
receivables
|
|
|
152,469
|
|
|
23,623
|
|
Advances
to suppliers
|
|
|
1,718,504
|
|
|
313,018
|
|
Financing
costs - current
|
|
|
680,303
|
|
|
-
|
|
Other
assets
|
|
|
- |
|
|
100,968
|
|
Total
current assets
|
|
|
89,534,159
|
|
|
44,098,838
|
|
|
|
|
|
|
|
|
|
PLANT
AND EQUIPMENT, net
|
|
|
11,225,844
|
|
|
10,179,134
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS:
|
|
|
|
|
|
|
|
Restricted
investments
|
|
|
2,481,413
|
|
|
-
|
|
Financing
costs, net
|
|
|
1,236,641
|
|
|
-
|
|
Intangible
assets, net
|
|
|
9,916,801
|
|
|
1,119,087
|
|
Total
other assets
|
|
|
13,634,855
|
|
|
1,119,087
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
114,394,858
|
|
$
|
55,397,059
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,341,812
|
|
$
|
2,051,506
|
|
Short
term bank loans
|
|
|
2,772,100
|
|
|
4,602,500
|
|
Notes
payable
|
|
|
5,843,295
|
|
|
8,410,740
|
|
Other
payables
|
|
|
3,671,703
|
|
|
1,367,052
|
|
Other
payables - related parties
|
|
|
164,137
|
|
|
933,132
|
|
Accrued
liabilities
|
|
|
334,439
|
|
|
216,468
|
|
Liabilities
assumed from reorganization
|
|
|
1,084,427
|
|
|
-
|
|
Dividends
payable
|
|
|
-
|
|
|
10,520,000
|
|
Taxes
payable
|
|
|
166,433
|
|
|
-
|
|
Total
current liabilities
|
|
|
16,378,346
|
|
|
28,101,398
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE
DEBT, net of discount $32,499,957 and $0 as of June 30, 2008 and
2007, respectively
|
|
|
2,500,043
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
18,878,389
|
|
|
28,101,398
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES AND SUBSEQUENT EVENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Convertible
preferred stock Series A ($0.001 par value; 0 and 218,000
shares
authorized; 0 shares issued and outstanding as of June 30,
2008 and
2007
|
|
|
-
|
|
|
-
|
|
Common
Stock ($0.001 par value,15,000,000 and 5,000,000 shares authorized,
9,767,844 and 7,494,740 shares issued and outstanding as
of June 30, 2008
and 2007)
|
|
|
9,770
|
|
|
7,495
|
|
Treasury
stock
|
|
|
|
|
|
(2,805
|
)
|
Paid-in-capital
|
|
|
45,554,513
|
|
|
18,344,309
|
|
Captial
contribution receivable
|
|
|
(11,000
|
)
|
|
(12,011,000
|
)
|
Retained
earnings
|
|
|
39,008,403
|
|
|
17,653,584
|
|
Statutory
reserves
|
|
|
3,253,878
|
|
|
2,157,637
|
|
Accumulated
other comprehensive income
|
|
|
7,700,905
|
|
|
1,146,441
|
|
Total
shareholders' equity
|
|
|
95,516,469
|
|
|
27,295,661
|
|
Total
liabilities and shareholders' equity
|
|
$
|
114,394,858
|
|
$
|
55,397,059
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these
consolidated financial statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006
|
|
2008
|
|
2007
|
|
2006
|
|
REVENUES:
|
|
|
|
|
|
|
|
Sales
|
|
$
|
93,982,407
|
|
$
|
72,259,812
|
|
$
|
45,242,987
|
|
Sales
- related parties
|
|
|
5,564,098
|
|
|
3,933,881
|
|
|
3,913,452
|
|
TOTAL
REVENUE
|
|
|
99,546,505
|
|
|
76,193,693
|
|
|
49,156,439
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
21,072,674
|
|
|
19,961,439
|
|
|
13,628,107
|
|
Cost
of sales - related parties
|
|
|
1,433,873
|
|
|
1,200,091
|
|
|
2,058,126
|
|
COST
OF SALES
|
|
|
22,506,547
|
|
|
21,161,530
|
|
|
15,686,233
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
77,039,958
|
|
|
55,032,163
|
|
|
33,470,206
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT EXPENSE
|
|
|
3,235,715
|
|
|
11,143,830
|
|
|
13,642,200
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
41,593,197
|
|
|
25,579,361
|
|
|
7,894,672
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
32,211,046
|
|
|
18,308,972
|
|
|
11,933,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(INCOME) EXPENSE, NET
|
|
|
|
|
|
|
|
|
|
|
Other
expense, net
|
|
|
708,338
|
|
|
-
|
|
|
7,176
|
|
Non-operating
(income) expense
|
|
|
(1,391,301
|
)
|
|
(6,586,956
|
)
|
|
1,230
|
|
Interest
expense, net
|
|
|
3,092,183
|
|
|
211,616
|
|
|
378,410
|
|
Loss
(Income) from discontinued business
|
|
|
380,027
|
|
|
-
|
|
|
-
|
|
OTHER
EXPENSE, NET
|
|
|
2,789,247
|
|
|
(6,375,340
|
)
|
|
386,816
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
29,421,799
|
|
|
24,684,312
|
|
|
11,546,518
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
6,970,739
|
|
|
2,631,256
|
|
|
3,810,351
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
22,451,060
|
|
|
22,053,056
|
|
|
7,736,167
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME:
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on marketable securities
|
|
|
1,347,852
|
|
|
-
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
5,206,612
|
|
|
1,018,130
|
|
|
128,311
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$
|
29,005,524
|
|
$
|
23,071,186
|
|
$
|
7,864,478
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGITED
AVERAGE NUMBER OF SHARES:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,164,127
|
|
|
7,494,740
|
|
|
7,494,740
|
|
Dilulted
|
|
|
9,737,832
|
|
|
7,494,740
|
|
|
7,494,740
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.45
|
|
$
|
2.94
|
|
$
|
1.03
|
|
Diluted
|
|
$
|
1.84
|
|
$
|
2.94
|
|
$
|
1.03
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these
consolidated financial statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
Par
Value $0.001
|
|
Par
Vaule $0.001
|
|
Par
Vaule $0.001
|
|
Treasury
Stock
|
|
Additional
|
|
Capital
|
|
Retained
Earnings
|
|
Accumulated
other
|
|
|
|
|
|
Number
|
|
Preferred
|
|
Number
|
|
Preferred
|
|
Number
|
|
Common
|
|
Number
|
|
Treasury
|
|
Paid-in
|
|
contribution
|
|
Statutory
|
|
Unrestricted
|
|
comprehensive
|
|
|
|
|
|
of
share
|
|
stock
|
|
of
share
|
|
stock
|
|
of
shares
|
|
stock
|
|
of
shares
|
|
stock
|
|
capital
|
|
receivable
|
|
reserves
|
|
earnings
|
|
income
|
|
Totals
|
|
BALANCE,
June 30, 2006 |
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
7,494,740
|
|
$
|
7,495
|
|
|
10,000
|
|
$
|
(2,805
|
)
|
$
|
13,216,309
|
|
$
|
(12,011,000
|
)
|
$
|
648,667
|
|
$
|
7,453,498
|
|
$
|
128,311
|
|
$
|
9,440,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Capital
contribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,128,000
|
|
Dividend
distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,344,000
|
)
|
|
|
|
|
(10,344,000
|
)
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,053,056
|
|
|
|
|
|
22,053,056
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,508,970
|
|
|
(1,508,970
|
)
|
|
|
|
|
-
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018,130
|
|
|
1,018,130
|
|
BALANCE,
June 30, 2007 |
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
7,494,740
|
|
$
|
7,495
|
|
|
10,000
|
|
$
|
(2,805
|
)
|
$
|
18,344,309
|
|
$
|
(12,011,000
|
)
|
$
|
2,157,637
|
|
$
|
17,653,584
|
|
$
|
1,146,441
|
|
$
|
27,295,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
of Company
|
|
|
15,400
|
|
|
15
|
|
|
|
|
|
|
|
|
2,131,603
|
|
|
2,132
|
|
|
|
|
|
|
|
|
3,815,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,817,959
|
|
Common
stock Issued for conversion of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,031
|
|
|
44
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Issuance
of common stock @ $4.80 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
|
38
|
|
|
|
|
|
|
|
|
179,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,001
|
|
Exercise
of stock options to common stock @ $4.20 per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,500
|
|
|
38
|
|
|
|
|
|
|
|
|
157,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,501
|
|
Conversion
of convertible preferred stock A to common
stock
|
|
|
(15,400
|
)
|
|
(15
|
)
|
|
|
|
|
|
|
|
16,595
|
|
|
17
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Capital
contribution registered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,000,000
|
)
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Sales
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
|
2,805
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,975
|
|
Grant
of warrants and beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
connection with convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000,000
|
|
Common
stock issued for service @ $8.00 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,875
|
|
|
6
|
|
|
|
|
|
|
|
|
46,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,000
|
|
Stock
option compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,847
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,451,060
|
|
|
|
|
|
22,451,060
|
|
Adjustment
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,096,241
|
|
|
(1,096,241
|
)
|
|
|
|
|
-
|
|
Change
in fair value on restricted marketable equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,347,852
|
|
|
1,347,852
|
|
Foreign
currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,206,612
|
|
|
5,206,612
|
|
BALANCE,
June 30, 2008 |
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
9,767,844
|
|
$
|
9,770
|
|
|
-
|
|
$
|
-
|
|
$
|
45,554,513
|
|
$
|
(11,000
|
)
|
$
|
3,253,878
|
|
$
|
39,008,403
|
|
$
|
7,700,905
|
|
$
|
95,516,469
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
YEARS ENDED JUNE 30, 2008, 2007 AND 2006
|
|
2008
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
22,451,060
|
|
$
|
22,053,056
|
|
$
|
7,736,167
|
|
Loss
from discontinued operations
|
|
|
380,027
|
|
|
-
|
|
|
-
|
|
Income
from continued operations
|
|
|
22,831,087
|
|
|
22,053,056
|
|
|
7,736,167
|
|
Adjustments
to reconcile net income to cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
517,863
|
|
|
364,417
|
|
|
255,602
|
|
Amortization
of intangible assets
|
|
|
184,465
|
|
|
122,126
|
|
|
111,786
|
|
Amortization
of debt issuance costs
|
|
|
123,964
|
|
|
-
|
|
|
-
|
|
Amortization
of debt discount
|
|
|
2,500,043
|
|
|
-
|
|
|
-
|
|
Bad
debt expense (recovery)
|
|
|
(27,641
|
)
|
|
-
|
|
|
157,214
|
|
Unrealized
loss on marketable securities
|
|
|
696,528
|
|
|
-
|
|
|
-
|
|
Common
stock issued for services
|
|
|
46,994
|
|
|
- |
|
|
- |
|
Amortization
of stock option compensation
|
|
|
10,847
|
|
|
-
|
|
|
-
|
|
Gain
on forgiveness of debt
|
|
|
(86,752
|
)
|
|
-
|
|
|
-
|
|
Change
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(10,534,270
|
)
|
|
(1,534,814
|
)
|
|
(6,945,531
|
)
|
Accounts
receivable - related parties
|
|
|
(113,465
|
)
|
|
(62,599
|
)
|
|
(12,538
|
)
|
Notes
receivables
|
|
|
60,694
|
|
|
(26,626
|
)
|
|
(28,888
|
)
|
Inventories
|
|
|
1,686,090
|
|
|
1,727,215
|
|
|
(3,680,020
|
)
|
Other
receivables
|
|
|
(111,571
|
)
|
|
(20,889
|
)
|
|
3,359
|
|
Advances
to suppliers
|
|
|
(1,259,254
|
)
|
|
(66,821
|
)
|
|
264,641
|
|
Other
assets
|
|
|
92,996
|
|
|
1,563,800
|
|
|
(1,445,205
|
)
|
Accounts
payable
|
|
|
55,085
|
|
|
(2,027,968
|
)
|
|
764,749
|
|
Accrued
liabilities
|
|
|
211,362
|
|
|
45,567
|
|
|
70,348
|
|
Other
payables
|
|
|
2,033,689
|
|
|
(827,498
|
)
|
|
(630,146
|
)
|
Other
payables - related parties
|
|
|
(822,155
|
)
|
|
(3,848,086
|
)
|
|
(1,470,501
|
)
|
Liabilities
from discontinued operations
|
|
|
(1,172,816
|
)
|
|
-
|
|
|
-
|
|
Taxes
payable
|
|
|
169,790
|
|
|
(2,168,912
|
)
|
|
1,905,120
|
|
Net
cash provided by (used in) operating activities
|
|
|
17,093,573
|
|
|
15,291,968
|
|
|
(2,943,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
1,034,028
|
|
|
-
|
|
|
-
|
|
Proceeds
from sale of restricted securities
|
|
|
155,000
|
|
|
-
|
|
|
-
|
|
Purchase
of equipment
|
|
|
(453,718
|
)
|
|
(183,237
|
)
|
|
(531,890
|
)
|
Purchase
of intangible assets
|
|
|
(8,870,631
|
)
|
|
-
|
|
|
(34,106
|
)
|
Cash
receipt from reverse acquisition
|
|
|
534,950
|
|
|
-
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(7,600,371
|
)
|
|
(183,237
|
)
|
|
(565,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
3,292,168
|
|
|
435,022
|
|
|
(4,544,212
|
)
|
Principal
payments on notes payable
|
|
|
(3,292,168
|
)
|
|
(435,022
|
)
|
|
4,544,294
|
|
Borrowings
on short term loan
|
|
|
2,616,110
|
|
|
4,471,600
|
|
|
5,568,750
|
|
Principal
payments on short term loan
|
|
|
(4,819,150
|
)
|
|
(5,688,450
|
)
|
|
-
|
|
Proceeds
from sale of common stock
|
|
|
337,500
|
|
|
-
|
|
|
-
|
|
Proceeds
from sale of treasury stock
|
|
|
1,975
|
|
|
-
|
|
|
-
|
|
Payment
to escrow acount
|
|
|
(1,996,490
|
)
|
|
-
|
|
|
-
|
|
Payments
for dividend
|
|
|
(10,608,000
|
)
|
|
-
|
|
|
-
|
|
Proceeds
from convertible debt
|
|
|
32,974,500
|
|
|
-
|
|
|
-
|
|
Payments
for debt issuance cost
|
|
|
(15,408
|
)
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
18,491,037
|
|
|
(1,216,850
|
)
|
|
5,568,832
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
|
|
2,474,351
|
|
|
473,729
|
|
|
74,821
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
30,458,590
|
|
|
14,365,610
|
|
|
2,133,814
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
beginning of the year
|
|
|
17,737,208
|
|
|
3,371,598
|
|
|
1,237,784
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH,
end of the year
|
|
$
|
48,195,798
|
|
$
|
17,737,208
|
|
$
|
3,371,598
|
|
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these
consolidated financial statements.
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
NOTES
TO
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2008
Note
1 – Organization and business
Genesis
Pharmaceuticals Enterprises, Inc. (the “Company” or “Genesis”) was originally
incorporated in the state of Florida on August 15, 2001, under the name Genesis
Technology Group, Inc. with the principal business objective of operating as
a
business development and marketing firm that specializes in advising and
providing a turnkey solution for small and mid-sized Chinese companies entering
Western markets. On October 1, 2007, Genesis executed a Share Acquisition and
Exchange Agreement (“Exchange Agreement”) by and among Genesis, Karmoya
International Ltd. (“Karmoya”), a British Virgin Islands company, and the
shareholders of 100% of Karmoya’s capital stock (the “Karmoya Shareholders”).
After the closing of the share exchange transaction, Karmoya became the
Company’s wholly-owned subsidiary, and the Company’s primary operations now
consist of the business and operations of Karmoya and its subsidiaries. The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed at the date of the acquisition:
Cash
|
|
$
|
534,950
|
|
Prepaid
expenses
|
|
|
40,620
|
|
Marketable
equity securities
|
|
|
370,330
|
|
Other
assets
|
|
|
7,083
|
|
Restricted
marketable securities
|
|
|
1,746,809
|
|
Restricted
marketable securities held for short term loans
|
|
|
3,250,000
|
|
Accounts
payable and accrued liabilities
|
|
|
(1,085,323
|
)
|
Loan
payable
|
|
|
(515,000
|
)
|
Other
liabilities assumed from acquisition
|
|
|
(452,001
|
)
|
Minority
interest
|
|
|
(121,063
|
)
|
Net
assets acquired
|
|
$
|
3,776,405
|
|
Contemporaneous
with the share exchange agreement in October 2007, the Company discontinued
the
business development and marketing segment of the Company, which had been the
Company’s principal business objective prior to the reverse merger as described
in Note 7. (The business development and marketing segment represented 100%
of
the Company’s sales prior to October 1, 2007.) Liabilities of the business
development and marketing segment are reclassified as liabilities assumed from
reorganization in the consolidated balance sheets. The results of operations
and
cash flows of the business development and marketing segment of the Company
have
been reflected as loss from discontinued operations in the consolidated
statements of income and consolidated statements of cash flows, respectively,
for the year ended June 30, 2008. Except for Genesis Pharmaceuticals
Enterprises, Inc., all other entities that were consolidated into the Company
prior to October 1, 2007, have been administratively dissolved.
Karmoya
was established on July 18, 2007, under the laws of British Virgin Islands.
Karmoya was established as a “special purpose vehicle” for the foreign capital
raising activities of Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang
Jiangbo”), a limited liability company formed under the laws of the People’s
Republic of China (the “PRC” or “China”). China’s State Administration of
Foreign Exchange (“SAFE”) requires the shareholders of any Chinese companies to
obtain SAFE’s approval before establishing any offshore holding company
structure for foreign financing as well as subsequent acquisition matters under
an official notice known as “Circular 106” in the PRC. On September 19, 2007,
Karmoya was approved by the local Chinese SAFE as a “special purpose vehicle”
offshore company.
On
September 20, 2007, Karmoya acquired 100% of Union Well International Limited
(“Union Well”), a Cayman Islands corporation established on May 9, 2007. On
September 17, 2007, Union Well established a wholly-owned subsidiary, Genesis
Jiangbo (“Laiyang”) Biotech Technology Co., Ltd. (“GJBT”), in the PRC as a
wholly-owned foreign limited liability company with an original registered
capital of $12 million. GJBT develops, manufactures, and sells health medicines.
The Company increased its registered capital in GJBT to $30,000,000 in June
2008.
Laiyang
Jiangbo was formed under laws of the PRC in August 2003, with registered capital
of $1,210,000 (RMB 10,000,000). On December 1, 2006, Laiyang Jiangbo’s
registered capital increased to $6,664,000 (RMB 50,000,000), and on December
22,
2006, the registered capital was funded by the contribution of certain buildings
to the Company. Laiyang Jiangbo produces and sells western pharmaceutical
products in China and focuses on developing innovative medicines to address
various medical needs for patients worldwide. Laiyang Jiangbo operates in 26
provinces in the PRC, and is headquartered in Laiyang City, Shandong province,
China.
On
September 21, 2007, GJBT entered into a series of contractual arrangements
(“Contractual Arrangements”) with Laiyang Jiangbo and its shareholders. Under
the terms of the Contractual Arrangements, GJBT took control over the management
of the business activities of Laiyang Jiangbo and holds a 100% variable interest
in Laiyang Jiangbo. The Contractual Arrangements are comprised of a series
of
agreements, including a Consulting Services Agreement and an Operating
Agreement, through which GJBT has the right to advise, consult, manage, and
operate Laiyang Jiangbo, and collect and own all of their respective net
profits. Additionally, Laiyang Jiangbo’s shareholders have granted their voting
rights over Laiyang Jiangbo to GJBT. In order to further reinforce GJBT’s rights
to control and operate Laiyang Jiangbo, Laiyang Jiangbo and its shareholders
have granted GJBT the exclusive right and option to acquire all of their equity
interests in Laiyang Jiangbo or, alternatively, all of the assets of Laiyang
Jiangbo. Further Laiyang Jiangbo’s shareholders have pledged all of their
rights, titles, and interests in Laiyang Jiangbo to GJBT. As both companies
are
under common control, this has been accounted for as a reorganization of
entities and the accompanying consolidated financial statements have been
prepared as if the reorganization occurred retroactively. The Company
consolidates Laiyang Jiangbo’s results, assets and liabilities in its financial
statements.
Karmoya
used the contractual arrangements to gain control of Laiyang Jiangbo, instead
of
using a complete acquisition of Laiyang Jiangbo’s assets or equity to make
Laiyang Jiangbo a wholly-owned subsidiary of Karmoya, due to the following:
(i)
PRC laws governing share exchanges with foreign entities, which became effective
on September 8, 2006, make the consequences of such acquisitions uncertain
and
(ii) other than by share exchange, PRC’s laws would require Karmoya to acquire
Laiyang Jiangbo in cash, and at the time of the acquisition, Karmoya was unable
to raise sufficient funds to pay the full appraised cash fair value for Laiyang
Jiangbo’s assets or shares as required under PRC laws.
Note
2 - Summary of significant accounting policies
Basis
of presentation
The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America ("US
GAAP"). In the opinion of management, the accompanying consolidated balance
sheets, and consolidated statements of income, shareholders’ equity, and cash
flows include all adjustments, consisting only of normal recurring items.
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of the
following entities, and all significant intercompany transactions and balanced
have been eliminated in consolidation:
Consolidated
entity name:
|
|
Percentage
of ownership
|
|
Karmoya
International Ltd.
|
|
|
100
|
%
|
Union
Well International Limited
|
|
|
100
|
%
|
Genesis
Jiangbo Biotech Technology Co., Ltd.
|
|
|
100
|
%
|
Laiyang
Jiangbo Pharmaceutical Co., Ltd
|
|
|
Variable
Interest Entity
|
|
Financial
Accounting Standards Board (“FASB”) Interpretation Number (“FIN”) 46 (revised
December 2003), Consolidation of Variable Interest Entities, an Interpretation
of ARB No.51 (“FIN 46R”), addresses whether certain types of entities, referred
to as variable interest entities (“VIEs”), should be consolidated in a company’s
consolidated financial statements. In accordance with the provisions of FIN
46R,
the Company has determined that Laiyang Jiangbo is a VIE and that the Company
is
the primary beneficiary, and accordingly, the financial statements of Laiyang
Jiangbo are consolidated into the financial statements of the Company.
Reverse
stock split
In
July 2008, the Company approved a 40-to-1 reverse stock split, effective on
September 4, 2008, and a new trading symbol “GNPH” also became effective on that
day. The accompanying consolidated financial statements have been retroactively
adjusted to reflect the reverse split. All share representations are on a
post-split basis.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency
of
the Company is the local currency, the Chinese Renminbi (“RMB”). In accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign
Currency Translation,” results of operations and cash flows are translated at
average exchange rates during the period, assets and liabilities are translated
at the unified exchange rates as quoted by the People’s Bank of China at the end
of the period, and equity is translated at historical exchange rates. As a
result, amounts related to assets and liabilities reported on the consolidated
statements of cash flows will not necessarily agree with changes in the
corresponding balances on the consolidated balance sheets. Transaction gains
and
losses that arise from exchange rate fluctuations on transactions denominated
in
a currency other than the functional currency are included in the results of
operations as incurred.
Translation
adjustments amounted to $6,353,053 and $1,146,441 as of June 30, 2008 and 2007,
respectively. Asset and liability accounts at June 30, 2008, were translated
at
6.85 RMB to $1.00 USD as compared to 7.60 RMB to $1.00 USD at June 30, 2007.
The
average translation rates applied to income statements for the years ended
June
30, 2008, 2007, and 2006 were 7.26 RMB, 7.81 RMB and 8.06 RMB to $1.00 USD,
respectively.
Use
of
estimates
The
preparation of financial statements in conformity with US GAAP 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 date of the financial statements, and the reported amounts of revenues
and
expenses during the reporting period. The significant estimates made in the
preparation of the Company’s consolidated financial statements relate to the
assessment of the carrying values of accounts receivable and related allowance
for doubtful accounts, allowance for obsolete inventory, sales returns, fair
value of warrants and beneficial conversion features related to the convertible
notes, and fair value of options granted to employees. Actual results could
be
materially different from these estimates upon which the carrying values were
based.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (“SEC”)
Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in
Financial Statements” as amended by SAB No. 104 (together,
“SAB 104”), and SFAS No. 48 (“SFAS 48”) “Revenue Recognition When
Right of Return Exists.” SAB 104 states that revenue should not be
recognized until it is realized or realizable and earned. In general, the
Company records revenue when persuasive evidence of an arrangement exists,
services have been rendered or product delivery has occurred, the sales price
to
the customer is fixed or determinable, and collectibility is reasonably
assured.
The
Company is generally not contractually obligated to accept returns. However,
on
a case by case negotiated basis, the Company permits customers to return their
products. In accordance with SFAS 48, revenue is recorded net of an allowance
for estimated returns. Such reserves are based upon management's evaluation
of
historical experience and estimated costs. The amount of the reserves ultimately
required could differ materially in the near term from amounts included in
the
accompanying consolidated statements of income.
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative expenses. Shipping and handling costs amounted to
$365,327, $280,099 and $188,151 for the years ended June 30, 2008, 2007, and
2006, respectively.
Financial
instruments
SFAS
No.
107 (“SFAS 107”), “Disclosures about Fair Value of Financial Instruments,”
requires disclosure of the fair value of financial instruments held by the
Company. SFAS 107 defines the fair value of financial instruments as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. The Company considers the carrying values of cash, accounts
receivable, notes receivable, other receivables,
prepayments, accounts payable, other payables, accrued liabilities, customer
deposits, taxes payable, and loans to approximate their fair values because
of
the short period of time between the origination of such instruments and their
expected realization and their current market rate of interest.
Stock-based
compensation
The
Company records stock-based compensation expense pursuant to SFAS
No.
123R (SFAS 123R”), "Share Based Payment.” SFAS 123R requires companies to
measure compensation cost for stock-based employee compensation plans at fair
value at the grant date and recognize the expense over the employee's requisite
service period. The Company estimates the fair value of the award using the
Black-Scholes Option Pricing Model. Under SFAS 123R, the Company’s expected
volatility assumption is based on the historical volatility of Company’s stock
or the expected volatility of similar entities. The expected life assumption
is
primarily based on historical exercise patterns and employee post-vesting
termination behavior. The risk-free interest rate for the expected term of
the
option is based on the U.S. Treasury yield curve in effect at the time of grant.
Stock-based
compensation expense is recognized based on awards expected to vest, and there
were no estimated forfeitures as the Company has a short history of issuing
options. SFAS 123R requires forfeitures to be estimated at the time of grant
and
revised in subsequent periods, if necessary, if actual forfeitures differ from
those estimates.
Comprehensive
income
SFAS
No.
130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for
reporting and display of comprehensive income and its components in financial
statements. It requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The accompanying consolidated financial statements include
the provisions of SFAS 130.
Cash
and cash equivalents
Cash
and
cash equivalents include cash on hand and demand deposits in accounts maintained
with state-owned banks within the PRC. The Company considers all highly liquid
instruments with original maturities of three months or less, and money market
accounts to be cash and cash equivalents.
The
Company maintains cash deposits in financial institutions that exceed the
amounts insured by the U.S. government. Balances at financial institutions
or
state-owned banks within the PRC are not covered by insurance. Non-performance
by these institutions could expose the Company to losses for amounts in excess
of insured balances. At June 30, 2008 and 2007, the Company’s bank balances,
including restricted cash balances, exceeded government-insured limits by
approximately $55,576,446 and $26,278,194, respectively. The Company has not
experienced, nor does it anticipate, non-performance by these
institutions.
Restricted
cash
Restricted
cash represent amounts set aside by the Company in accordance with the Company’s
debt agreements with certain financial institutions. These cash amounts are
designated for the purpose of paying down the principal amounts owed to the
financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements. Due to the short-term
nature of the Company’s debt obligations to these banks, the corresponding
restricted cash balances have been classified as current in the consolidated
balance sheets.
As
of
June 30, 2008 and 2007, the Company had restricted cash of $7,839,785 and
$8,410,740, respectively, of which $5,843,295 and $8,410,740, respectively,
were
maintained as security deposits for bank acceptance related to the Company’s
notes payable. At June 30, 2008, $1,996,490 of the restricted cash amounts
were
maintained in the Company’s legal counsel’s hold-back escrow account related to
the May 2008 convertible note issuance (Note 13), contingent on the Company’s
satisfaction of certain financing terms. Subsequent to year end, these monies
were released to the Company in full.
Investments
and restricted investments
Investments
are comprised primarily of equity securities and are stated fair value. Certain
of these investments are classified as trading securities based on the Company’s
intent to sell them within the year. Further, certain of these securities are
classified as available-for-sale and are reflected as restricted, noncurrent
investments, based on the Company’s intent to hold them beyond one year.
Restricted investments are securities that were acquired through the reverse
acquisition which contained certain restrictions on the securities. For trading
securities, realized and unrealized gains and losses are included in the
accompanying consolidated statements of income. For available-for-sale
securities, realized gains and losses are included in the consolidated
statements of income. Unrealized gains and losses for these available-for-sale
securities are reported in other comprehensive income, net of tax, in the
consolidated statements of shareholders’ equity. The Company has no investments
that are considered to be held-to-maturity securities.
For
the
year ended June 30, 2008, realized loss on trading securities amounted to
$44,881. Unrealized loss on trading securities amounted to $651,464 for the
year
ended June 30, 2008.
For
the
year ended June 30, 2008, unrealized gain on available-for-sales securities
amounted to $1,347,852.
For
the
years ended June 30, 2007 and 2006, there were no realized and unrealized gain
or loss on trading securities or available-for-sale securities.
Accounts
receivable
In
the
normal course of business, the Company extends credit to its customers without
requiring collateral or other security interests. Management reviews its
accounts receivables at each reporting period to provide for an allowance
against accounts receivable for an amount that could become uncollectible.
This
review process may involve the identification of payment problems with specific
customers. The Company estimates this allowance based on the aging of the
accounts receivable, historical collection experience, and other relevant
factors, such as changes in the economy and the imposition of regulatory
requirements that can have an impact on the industry. These factors continuously
change, and can have an impact on collections and the Company’s estimation
process. These impacts may be material.
Certain
accounts receivable amounts are charged off against allowances after designated
period of collection efforts. Subsequent cash recoveries are recognized as
income in the period when they occur.
The
activities in the allowance for doubtful accounts are as follows for the years
ended June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Beginning
allowance for doubtful accounts
|
|
$
|
166,696
|
|
|
158,710
|
|
Bad
debt recovery
|
|
|
(27,641
|
)
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
16,607
|
|
|
7,986
|
|
Ending
allowance for doubtful accounts
|
|
$
|
155,662
|
|
|
166,696
|
|
Inventories,
consisting of raw materials and finished goods related to the Company’s
products, are stated at the lower of cost or market utilizing the weighted
average method. As of June 30, 2008 and 2007, inventories consisted of the
following:
|
|
2008
|
|
2007
|
|
Raw
materials
|
|
$
|
2,164,138
|
|
$
|
2,955,915
|
|
Packing
materials
|
|
|
531,076
|
|
|
609
|
|
Work–in-progress
|
|
|
204,763
|
|
|
-
|
|
Finished
goods
|
|
|
1,006,197
|
|
|
2,174,410
|
|
Total
|
|
$
|
3,906,174
|
|
$
|
5,130,934
|
|
The
Company reviews its inventory periodically for possible obsolescence or to
determine if any reserve is necessary. As of June 30, 2008 and 2007, the Company
determined that no inventory reserves were necessary.
Advances
to suppliers
Advances
to suppliers represent partial payments or deposits for inventory purchases.
These advances to suppliers are non-interest bearing and unsecured. As of June
30, 2008, and 2007, the Company’s advance to suppliers amounted to approximately
$1,718,504 and $313,018, respectively.
Plant
and equipment
Plant
and
equipment are stated at cost less accumulated depreciation. Additions and
improvements to plant and equipment accounts are recorded at cost. When assets
are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in the results
of operations in the year of disposition. Maintenance, repairs, and minor
renewals are charged directly to expense as incurred. Major additions and
betterments to plant and equipment accounts are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of
the
assets. The estimated useful lives of the assets are as follows:
|
|
Useful
Life
|
|
Buildings
and building improvements
|
|
|
5
–
40
|
|
|
Years
|
|
Manufacturing
equipment
|
|
|
5
–
20
|
|
|
Years
|
|
Office
equipment and furniture
|
|
|
5
–
10
|
|
|
Years
|
|
Vehicles
|
|
|
5
|
|
|
Years
|
|
Intangible
assets
All
land
in the PRC is owned by the PRC government and cannot be sold to any individual
or company. The Company has recorded the amounts paid to the PRC government
to
acquire long-term interests to utilize land underlying the Company’s facilities
as land use rights. This type of arrangement is common for the use of land
in
the PRC. The land use rights are amortized on the straight-line method over
the
terms of the land use rights, which range from 20 to 50 years. The Company
acquired land use rights in August 2004 and October 2007 in the amounts of
approximately $879,000 and $8,871,000, respectively, which are included in
intangible assets. (See Note 6.)
Intangible
assets also consist of purchased technological know-how (“patents”). This
includes secret formulas, manufacturing processes, technical and procedural
manuals, and the certificate of drugs production, and are amortized using the
straight-line method over the expected useful life of 5 years, which reflects
the period over which the patents are kept secret to the Company as agreed
between the Company and the selling parties. (See Note 6.)
Impairment
of long-lived assets
Long-lived
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying values have become impaired. The
Company considers assets to be impaired if the carrying values exceed the future
projected cash flows from related operations. The Company also re-evaluates
the
periods of depreciation to determine whether subsequent events and circumstances
warrant revised estimates of useful lives. As of June 30, 2008, the Company
expects these assets to be fully recoverable.
Beneficial
conversion feature of convertible notes
The
Company accounted for the $5,000,000 and $30,000,000 secured convertible notes
issued pursuant to the subscription agreements discussed in Note 14 under
Emerging Issues Task Force (“EITF”) 00-27, ‘‘Application of Issue 98-5 to
Certain Convertible Instruments.” In accordance with EITF 00-27, the Company has
determined that the convertible notes contained beneficial conversion feature
because on November 6, 2007, the effective conversion price of the $5,000,000
convertible note was $5.48 when the market value per share was $16.00, and
on
May 30, 2008, the effective conversion price of the $30,000,000 convertible
note
was $4.69 when the market value per share was $12.00. Total value of beneficial
conversion feature of $2,742,714 for the November 6, 2007 convertible
note and $17,572,910 for the May
30, 2008 convertible debt was discount to the convertible note. The beneficial
conversation feature was amortized according to the term of the note. As of
June
30, 2008, total of $1,444,136 remained unamortized for the beneficial conversion
feature.
Income
taxes
The
Company accounts for income taxes in accordance with SFAS
No.
109
(“SFAS 109”), “Accounting for Income Taxes.” Under the asset and liability
method as required by SFAS 109, deferred income taxes are recognized for the
tax
consequences of temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS 109, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recognized if it is more likely than not that some portion, or
all
of, a deferred tax asset will not be realized. As of June 30, 2008 and 2007,
the
Company did not have any deferred tax assets or liabilities, and as such, no
valuation allowances were recorded at June 30, 2008 and 2007.
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," which clarifies the accounting
and
disclosure for uncertain tax positions. This interpretation is effective for
fiscal years beginning after December 15, 2006, and the Company has implemented
this interpretation as of July 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attribute for recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
Under
FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals
or
litigation based on the technical merits of that position. The second step
is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements.
A
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. Tax positions
that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met.
The
adoption of FIN 48 at July 1, 2007, did not have a material effect on the
Company's consolidated financial statements.
The
Company’s operations are subject to income and transaction taxes in the United
States and in the PRC jurisdictions. Significant estimates and judgments are
required in determining the Company’s worldwide provision for income taxes. Some
of these estimates are based on interpretations of existing tax laws or
regulations, and as a result the ultimate amount of tax liability may be
uncertain. However, the Company does not anticipate any events that would lead
to changes to these uncertainties.
Value
added tax
The
Company is subject to value added tax (“VAT”) for manufacturing products and
business tax for services provided. The applicable VAT rate is 17% for products
sold in the PRC. The amount of VAT liability is determined by applying the
applicable tax rate to the invoiced amount of goods sold (output VAT) less
VAT
paid on purchases made with the relevant supporting invoices (input VAT). Under
the commercial practice of the PRC, the Company paid VAT
based
on tax invoices issued. The tax invoices may be issued subsequent to the date
on
which revenue is recognized, and there may be a considerable delay between
the
date on which the revenue is recognized and the date on which the tax invoice
is
issued. In the event that the PRC tax authorities dispute the date on which
revenue is recognized for tax purposes, the PRC tax office has the right to
assess a penalty, which can range from zero to five times the amount of the
taxes which are determined to be late or deficient, and will be expensed in
the
period if and when a determination is been made by the taxing authorities that
a
penalty is due.
VAT
on
sales and VAT on purchases amounted to $16,975,054 and $3,283,855, respectively,
for the year ended June 30, 2008. VAT on sales and VAT on purchases amounted
to
$5,523,840 and $262,013, respectively, for the year ended June 30, 2007. VAT
on
sales and VAT on purchases amounted to $8,410,050 and $151,889, respectively,
for the year ended June 30, 2006. Sales and purchases are recorded net of VAT
collected and paid as the Company acts as an agent for the government. VAT
taxes
are not impacted by the income tax holiday. The Chinese local government has
exempted $1,428,804 of the Company’s VAT tax liability at June 30, 2008, and
this exemption has been included in the consolidated statement of income for
the
year then ended.
Advertising
Expenses
incurred in the advertising of the Company and the Company’s products are
charged to operations currently. Advertising expenses amounted to $4,653,121,
$1,280,900 and $606,867 for the years ended June 30, 2008, 2007 and 2006,
respectively.
Research
and development
Research
and development costs are expensed as incurred. These costs primarily consist
of
cost of material used and salaries paid for the development of the Company’s
products and fees paid to third parties to assist in such efforts. Research
and
development costs for the years ended June 30, 2008, 2007, and 2006 were
approximately $3,236,000, $11,144,000, and $13,642,000,
respectively.
Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value
Measurements.” SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of this statement relate to the
definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. The Company will adopt SFAS 157 in fiscal year 2009. The Company
is currently evaluating the impact, if any, that the adoption of SFAS 157 will
have on its consolidated results of operations and consolidated financial
position.
In
February 2008, the FASB issued FASB Staff Position No. 157-1 ("FSP 157-1"),
"Application of FASB Statement No. 157 to FASB Statement No. 13 and Other
Accounting Pronouncements That Address Fair Value Measurements for Purposes
of
Lease Classification or Measurement under Statement 13." FSP 157-1 indicates
that it does not apply under FASB Statement No. 13 (“SFAS 13”), "Accounting for
Leases," and other accounting pronouncements that address fair value
measurements for purposes of lease classification or measurement under SFAS
13.
This scope exception does not apply to assets acquired and liabilities assumed
in a business combination that are required to be measured at fair value under
SFAS No. 141 or SFAS No. 141R, regardless of whether those assets and
liabilities are related to leases.
Also
in
February 2008, the FASB issued FASB Staff Position No. 157-2 ("FSP 157-2"),
"Effective Date of FASB Statement No. 157." With the issuance of FSP 157-2,
the
FASB agreed to: (a) defer the effective date in SFAS No. 157 for one year for
certain nonfinancial assets and nonfinancial liabilities, except those that
are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), and (b) remove certain leasing transactions from
the
scope of SFAS No. 157. The deferral is intended to provide the FASB time to
consider the effect of certain implementation issues that have arisen from
the
application of SFAS No. 157 to these assets and liabilities.
In
February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), “The Fair Value Option
for Financial Assets and Financials Liabilities — Including an Amendment of FASB
Statement No. 115.” This standard permits measurement of certain financial
assets and financial liabilities at fair value. If the fair value option is
elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an
instrument-by-instrument basis, as long as it is applied to the instrument
in
its entirety. The fair value option election is irrevocable, unless a new
election date occurs. SFAS 159 requires prospective application and also
establishes certain additional presentation and disclosure requirements. SFAS
159 is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the impact, if any,
that
the adoption of SFAS 159 will have on its consolidated results of operations
or
consolidated financial position.
In
December 2007, the FASB issued SFAS No. 141(R) (“SFAS 141R”), “Business
Combinations,” which replaces SFAS No. 141. SFAS 141R retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting as well as requiring the expensing of acquisition-related
costs as incurred. Furthermore, SFAS 141R provides guidance for recognizing
and
measuring the goodwill acquired in the business combination and determines
what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. The Company is evaluating the impact, if any, that
the
adoption of this statement will have on its consolidated results of operations
or consolidated financial position.
In
December 2007, the FASB issued SFAS No. 160 (“SFAS 160”), “Noncontrolling
Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.”
SFAS 160 amends ARB No. 51 to establish accounting and reporting standards
for
the noncontrolling interest in a subsidiary and for the deconsolidation of
a
subsidiary. It is intended to eliminate the diversity in practice regarding
the
accounting for transactions between equity and noncontrolling interests by
requiring that they be treated as equity transactions. Further, it requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. SFAS 160 also
establishes a single method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation, requires that
a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated, requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the
parent’s owners and the interests of the noncontrolling owners of a subsidiary,
among others. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008, with early adoption permitted, and it is to be applied
prospectively. SFAS 160 is to be applied prospectively as of the beginning
of
the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements, which must be applied retrospectively for all
periods presented. The Company has not yet evaluated the impact that SFAS 160
will have on its consolidated financial position or consolidated results of
operations.
In
March
2008, the FASB issued SFAS No. 161 ("SFAS 161"), "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008, with early adoption
encouraged. The Company does not anticipate that the adoption of SFAS 161 will
have a material impact on its consolidated results of operations or consolidated
financial position.
In
May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board (“PCAOB”) amendments to AU Section 411, "The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles." The Company
does not expect the adoption of SFAS 162 will have a material impact on its
consolidated results of operations or consolidated financial position.
On
May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1 ("FSP APB 14-1"),
"Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)." FSP APB 14-1 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such
instruments should separately account for the liability and equity components
in
a manner that will reflect the entity's nonconvertible debt borrowing rate
when
interest cost is recognized in subsequent periods. FSP APB14-1 is effective
for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. The Company has not yet evaluated
the impact that FSP APB 14-1 will have on its consolidated results of operations
or consolidated financial position.
On
June
16, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1 (“FSP No. EITF
03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities,” to address the question of whether
instruments granted in share-based payment transactions are participating
securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based
payment awards that contain rights to dividend payments should be included
in
earnings per share calculations. The guidance will be effective for fiscal
years
beginning after December 15, 2008. The Company is currently evaluating the
requirements of FSP No. EITF 03-6-1 and the impact that its adoption will have
on the consolidated results of operations or consolidated financial
position.
In
June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 (“EITF 07-5”),
“Determining whether an Instrument (or Embedded Feature) is indexed to an
Entity’s Own Stock.” EITF No. 07-5 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early application is not permitted. Paragraph 11(a) of
SFAS
No. 133 “Accounting for Derivatives and Hedging Activities,” specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be considered a
derivative financial instrument. EITF 07-5 provides a new two-step model to
be
applied in determining whether a financial instrument or an embedded feature
is
indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception. This standard triggers liability accounting
on
all options and warrants exercisable at strike prices denominated in any
currency other than the functional currency of the operating entity in the
PRC
(Renminbi). The Company is currently evaluating the impact of the adoption
of
EITF 07-5 on the accounting for related warrants transactions.
Company
reporting year end
For
financial statement reporting purposes in the United States of America, the
Company adopted June 30 as its fiscal year end, beginning in 2007.
Reclassifications
Certain
amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current period presentation with no impact on
the
previously reported net income or cash flows.
Note
3 - Earnings per share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128 (“SFAS 128”), “Earnings Per Share.” SFAS 128 requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
All
share
and per share amounts used in the Company’s financial statements and notes
thereto have been retroactively restated to reflect the 40-to-1 reverse stock
split, which occurred on September 4, 2008.
The
following is a reconciliation of the basic and diluted earnings per share
computations for the years ended June 30, 2008, 2007, and 2006:
|
|
2008
|
|
2007
|
|
2006
|
|
For
the years ended June 30, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$
|
22,451,060
|
|
$
|
22,053,056
|
|
$
|
7,736,167
|
|
Plus:
interest expense
|
|
|
195,833
|
|
|
-
|
|
|
-
|
|
Subtract:
financing cost
|
|
|
(277,292
|
)
|
|
-
|
|
|
-
|
|
Subtract:
debt discount
|
|
|
(4,454,641
|
)
|
|
-
|
|
|
-
|
|
Net
income for diluted earnings per share
|
|
|
17,914,960
|
|
|
22,053,056
|
|
|
7,736,167
|
|
Weighted
average shares used in basic computation
|
|
|
9,164,127
|
|
|
7,494,740
|
|
|
7,494,740
|
|
Diluted
effect of stock options
|
|
|
87,910
|
|
|
-
|
|
|
-
|
|
Diluted
effect of warrants
|
|
|
79,973
|
|
|
-
|
|
|
-
|
|
Diluted
effect of $5,000,000 convertible note
|
|
|
405,822
|
|
|
-
|
|
|
-
|
|
Weighted
average shares used in diluted computation
|
|
|
9,737,832
|
|
|
7,494,740
|
|
|
7,494,740
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.45
|
|
$
|
2.94
|
|
$
|
1.03
|
|
Diluted
|
|
$
|
1.84
|
|
$
|
2.94
|
|
$
|
1.03
|
|
For
the
year ended June 30, 2008, the $30,000,000 convertible debt was excluded from
the
diluted earnings per share due to the anti-diluted effect.
For
the
year ended June 30, 2008, 250,000 warrants at an average exercise price of
$12.80 were not included in the diluted earnings per share calculation because
of the anti-dilutive effect. For years ended June 30, 2007 and 2006, all options
and warrants were excluded in the diluted earnings per share calculation due
to
the anti-diluted effect.
Note
4 - Supplemental disclosure of cash flow information
Cash
paid
for income taxes amounted to $7,001,264, $447,911, and $2,554,136 for the years
ended June 30, 2008, 2007, and 2006, respectively.
Cash
paid
for interest amounted to $493,781, $280,628, and $231,520 for the years ended
June 30, 2008, 2007, and 2006, respectively.
Capital
contribution in the amount of $5,128,000 via contribution of buildings on
December 22, 2006.
Note
5 - Plant and equipment
Plant
and
equipment consist of the following at June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Buildings
and building improvements
|
|
$
|
10,926,369
|
|
$
|
9,824,210
|
|
Manufacturing
equipment
|
|
|
1,188,643
|
|
|
785,219
|
|
Office
equipment and furniture
|
|
|
298,137
|
|
|
217,813
|
|
Vehicle
|
|
|
380,485
|
|
|
233,385
|
|
Total
|
|
|
12,793,634
|
|
|
11,060,627
|
|
Less:
accumulated depreciation
|
|
|
1,567,790
|
|
|
881,493
|
|
Total
|
|
$
|
11,225,844
|
|
$
|
10,179,134
|
|
For
the
years ended June 30, 2008, 2007, and 2006, depreciation expense amounted to
$517,863, $364,417, and $255,602, respectively.
Note
6 - Intangible assets
At
June
30, 2008 and 2007, intangible assets consist of the following:
|
|
Useful
Life
|
|
2008
|
|
2007
|
|
Land
use rights
|
|
|
40
Years
|
|
$
|
9,930,157
|
|
$
|
954,954
|
|
Patents
|
|
|
5
Years
|
|
|
539,830
|
|
|
486,550
|
|
Licenses
|
|
|
5
Years
|
|
|
23,271
|
|
|
20,974
|
|
Total
|
|
|
|
|
|
10,493,258
|
|
|
1,462,478
|
|
Less:
accumulated amortization
|
|
|
|
|
|
576,457
|
|
|
343,391
|
|
Total
|
|
|
|
|
$
|
9,916,801
|
|
$
|
1,119,087
|
|
For
the
years ended June 30, 2008, 2007, and 2006, amortization expense relating to
the
above intangible assets amounted to $184,465, $122,126, and $111,786,
respectively. As of June 30, 2008 and 2007, the net carrying value of patents
approximated $156,000 and $222,000, respectively, net of accumulated
amortization.
Note
7 - Discontinued operations
In
connection with the reverse merger with Karmoya on October 1, 2007, the Company
determined to discontinue its operations of business development and marketing,
as it no longer supported its core business strategy. The discontinuance of
these operations did not involve any sale of assets of assumption of liabilities
by another party. In conjunction with the discontinuance of operations, the
Company determined that the assets related to the Company’s business development
and marketing operations were subject to the recognition of impairment. However,
since the related assets are continuing to be used by the Company’s Karmoya and
subsidiaries, the Company determined that there had been no impairment. The
remaining liabilities of the discontinued operations are reflected in the
consolidated balance sheets under the caption "liabilities assumed from
reorganization" which totaled $1,084,427 as of June 30, 2008.
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the results of operations of a component of entity that has
been disposed of or is classified as held for sale shall be reported in
discontinued operations. Accordingly, the results of operations of the business
development and marketing operation segment are reported as discontinued
operations in the accompanying consolidated statements of income for the year
ended June 30, 2008. As the accompanying consolidated statements of income
for
the years ended June 30, 2007 and 2006 reflect the results of operations for
Karmoya and its subsidiaries, the discontinued operations of Genesis did not
have any impact on the consolidated statements of income for those periods
presented.
The
following is a summary of the components of the loss from discontinued
operations for the year ended June 30, 2008:
|
|
2008
|
|
Revenues
|
|
$
|
-
|
|
Cost
of sales
|
|
|
-
|
|
Gross
profit
|
|
|
-
|
|
Operating
and other non-operating expenses
|
|
|
380,027
|
|
Loss
from discontinued operations before other expenses and income
taxes
|
|
|
380,027
|
|
Income
tax benefit
|
|
|
-
|
|
Loss
from discontinued operations
|
|
$
|
380,027
|
|
Note
8- Debt
Short
term bank loans
Short
term loans represent amounts due to various banks that are due within one year,
and these loans can be renewed with the banks upon maturity. The Company’s short
term bank loans consisted of the following:
|
|
|
|
|
|
Loan
from Communication Bank; due September 2008; interest rate of 8.64%
per
annum; monthly interest payment; guaranteed by related party, Jiangbo
Chinese-Western Pharmacy.
|
|
$
|
2,772,100
|
|
$
|
2,630,000
|
|
|
|
|
|
|
|
|
|
Loan
from Hua Xia Bank, due April 2008; interest rate of 6.39% per annum;
the Company’s buildings and land use rights as
collateral.
|
|
|
-
|
|
|
1,972,500
|
|
Total
|
|
$
|
2,772,100
|
|
$
|
4,602,500
|
|
The
loans
are guaranteed by a related party as of June 30, 2008, and secured by buildings
and land use rights as of June 30, 2007 with carrying values as
follows:
|
|
June 30,
|
|
|
|
2007
|
|
Buildings
|
|
$
|
4,143,723
|
|
Land
use rights
|
|
|
885,918
|
|
Total
|
|
$
|
5,029,641
|
|
Interest
expense related to the bank loans amounted to $436,818, $280,628, and $231,520
for the years ended June 30, 2008, 2007, and 2006, respectively.
Notes
Payable
Notes
payable represent amounts due to various banks which are normally secured and
are typically renewed. The Company’s notes payable consist of the following as
of June 30, 2008 and 2007:
|
|
2008
|
|
2007
|
|
Commercial
Bank; various amounts; due from July 2008
|
|
|
|
|
|
|
|
to
December 2008; 100% of restricted cash deposited.
|
|
$
|
5,843,295
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Commercial
Bank; various amounts; due from July 2007
|
|
|
|
|
|
|
|
to
December 2007; 100% of restricted cash deposited.
|
|
|
-
|
|
|
8,279,240
|
|
|
|
|
|
|
|
|
|
Communication
Bank; due from July 2007 to December
|
|
|
|
|
|
|
|
2007;
100% of restricted cash deposited.
|
|
|
-
|
|
|
131,500
|
|
Total
|
|
$
|
5,843,295
|
|
$
|
8,410,740
|
|
Note
9 - Related party transactions
Accounts
receivable - related parties
The
Company is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd, and Yantai Jiangbo
Pharmaceuticals Co., Ltd. The Company’s Chief Executive Officer and other
majority shareholders have 100% ownership of these entities. At June 30, 2008
and 2007, accounts receivable from the Company’s product sales to these related
entities were $673,808 and $498,940, respectively. Accounts receivable due
from
related parties are receivable in cash and due within 3 to 6 monhts. For the
years ended June 30, 2008, 2007, and 2006, the Company recorded sales to related
parties as follows:
Name
of Related Party
|
|
Relationship
|
|
Net Sales
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Jiangbo
Chinese-Western Pharmacy
|
|
|
90%
owned by Chief Executive Officer
|
|
$
|
1,622,935
|
|
$
|
3,018,502
|
|
$
|
2,471,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laiyang
Jiangbo Medicals, Co. Ltd
|
|
|
60%
owned by Chief
Executive
Officer
|
|
|
1,185,183
|
|
|
436,909
|
|
|
231,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yantai
Jiangbo Pharmaceuticals Co., Ltd.
|
|
|
Owned
by Other Related
Party
|
|
|
2,755,980
|
|
|
478,470
|
|
|
1,210,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
$
|
5,564,098
|
|
$
|
3,933,881
|
|
$
|
3,913,452
|
|
Other income
from related parties
The
Company leases two of its buildings to Jiangbo Chinese-Western Pharmacy. For
the
years ended June 30, 2008, 2007, and 2006, the Company recorded other income
of
$110,152, $102,472, and $59,775 from leasing the two buildings.
Other
payables - related parties
Prior
to
fiscal year 2008, the Company received advances from its director, shareholders
and related parties for its operating activities. At June 30, 2008 and 2007,
the
Company had payable balances due to its shareholders and related parties
amounting to $164,137 and $933,132, respectively. These advances are short-term
in nature and bears interest rate at 0%, and 5.84% per annum, for 2008 and
2007,
respectively. The interest rate for 2007 was calculated by using the Company’s
2007 average outstanding bank loan interest rate. The amount is expected to
be
repaid in the form of cash.
At
June
30, 2008 and 2007, other payables - related parties consisted of the
following:
|
|
2008
|
|
2007
|
|
Payable
to Cao Wubo, Chief Executive Officer and
Chairman
of the Board, with annual interest at
0%
and 5.84%, for 2008 and 2007 respectively,
and
unsecured.
|
|
$
|
164,137
|
|
$
|
447,531
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guihong, shareholder and sister of
CEO’s
spouse, with annual interest at 5.84% for
2007
respectively, and unsecured.
|
|
|
-
|
|
|
280,334
|
|
|
|
|
|
|
|
|
|
Payable
to Zhang Yihua, shareholder of the
Company
and Yantai Jiangbo Pharmaceuticals,
and
nephew of CEO, with annual interest at
5.84%
for 2007, and unsecured.
|
|
|
-
|
|
|
29,665
|
|
|
|
|
|
|
|
|
|
Payable
to Yantai Jiangbo Pharmaceuticals, an
affiliated
company, with annual interest at
5.84%
for 2007, and unsecured.
|
|
|
-
|
|
|
106,910
|
|
|
|
|
|
|
|
|
|
Payable
to Laiyang Jiangbo Medicals, an affiliated
company,
with annual interest at 5.84% for 2007,
and
unsecured.
|
|
|
-
|
|
|
68,249
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guifang, who is the direct relative of
|
|
|
|
|
|
|
|
a
Company's shareholder.
|
|
|
-
|
|
|
443
|
|
Total
other payables - related parties
|
|
$
|
164,137
|
|
$
|
933,132
|
|
Note
10 - Major customers and suppliers
For
the
years ended June 30, 2008, 2007, and 2006, five customers accounted for
approximately 18.1%, 33.3%, and 30.5%, respectively, of the Company's sales.
These five customers represented 11.8% and 24.6% of the Company’s total accounts
receivable as of June 30, 2008 and 2007, respectively.
For
the
years ended June 30, 2008, 2007 and 2006, five suppliers accounted for
approximately 67.7%, 87.2% and 75.9% respectively, of the Company’s purchases.
These five suppliers represented 63.8% and 55.6% of the Company’s total accounts
payable as of June 30, 2008 and 2007, respectively.
Note
11 - Dividends payable
Dividends
declared are split pro rata between the shareholders according to their
ownership interest. The payment of the dividends may occur at different times
to
the shareholders. As of June 30, 2007, the Company had a dividend payable
balance amounting to $10,520,000, and the dividends were paid in full in
September 2007.
Note
12 - Taxes payable
Income
Taxes
The
Company is subject to the United States federal income tax at a tax rate of
34%.
No provision for income taxes in the U.S. has been made as the company had
no
U.S. taxable income during the years ended June 30, 2008, 2007, and
2006.
The
Company’s wholly-owned subsidiaries, Karmoya International Ltd. and Union Well
International Ltd., were incorporated in the British Virgin Islands and Cayman
Islands. Under the current laws of the BVI and Cayman Islands, the two entities
are not subject to income taxes.
Before
January 1, 2008, companies established in the PRC were generally subject to
an
enterprise income tax ("EIT") rate of 33.0%, which included a 30.0% state income
tax and a 3.0% local income tax. The PRC local government has provided various
incentives to companies in order to encourage economic development. Such
incentives include reduced tax rates and other measures. On March 16, 2007,
the
National People's Congress of China passed the new Enterprise Income Tax Law
("EIT Law"), and on November 28, 2007, the State Council of China passed the
Implementing Rules for the EIT Law ("Implementing Rules") which took effect
on
January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of
25.0% on all domestic-invested enterprises and Foreign Investment Enterprises
(“FIEs”), unless they qualify under certain limited exceptions. Therefore,
nearly all FIEs are subject to the new tax rate alongside other domestic
businesses rather than benefiting from the foreign enterprise income tax, and
its associated preferential tax treatments, beginning January 1, 2008.
In
addition to the changes to the current tax structure, under the EIT Law, an
enterprise established outside of China with "de facto management bodies" within
China is considered a resident enterprise and will normally be subject to an
EIT
of 25.0% on its global income. The Implementing Rules define the term "de facto
management bodies" as "an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting,
etc., of a Chinese enterprise." If the PRC tax authorities subsequently
determine that the Company should be classified as a resident enterprise, then
the organization’s global income will be subject to PRC income tax of 25.0%.
Laiyang Jiangbo and GJBT were originally subject to 33% income tax rate and
starting January 1, 2008, Laiyang Jiangbo and GJBT are subject to an EIT rate
of
25%.
Liangyang
Jiangbo was subject to 33% income tax rate from January 1, 2007, to December
31,
2008, and 25% from January 1, 2008, to June 30, 2008. For the fiscal year ended
June 30, 2008, the Company received $5,256,634 in tax exemption. Of that amount,
$2,114,983 was reflected as reduction of the provision for income taxes;
$1,695,671 was reflected as reduction of sales tax and miscellaneous fees;
and
$1,445,980 was recorded as non-operating income. The Chinese local government
exempted all of the Company's taxes due for the period from January 1, 2007,
and
June 30, 2007. For that period, the Company received $9,931,919 tax exemption
as
of June 30, 2007, of which $3,338,774 was reflected as reduction of the
provision for income taxes, and $6,593,145 was recorded as non-operating income.
Total tax exemption for the year ended June 30, 2008 and 2007 is summarized
as
follows:
|
|
June 30, 2008
|
|
June 30, 2007
|
|
VAT
tax exemption
|
|
$
|
1,428,804
|
|
$
|
6,126,464
|
|
Income
tax exemption
|
|
|
2,114,983
|
|
|
2,986,806
|
|
City
construction tax exemption
|
|
|
1,079,063
|
|
|
510,362
|
|
Others
|
|
|
633,784
|
|
|
308,287
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,256,634
|
|
$
|
9,931,919
|
|
The
table
below summarizes the differences between the U.S. statutory federal rate and
the
Company’s effective tax rate and as follows for the fiscal year ended June 30,
2008 and 2007:
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
U.S.
statutory rates
|
|
|
34.0
|
%
|
|
34.0
|
%
|
|
34.0
|
%
|
Foreign
income not recognized in the U.S.
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
China
income taxes
|
|
|
25.0
|
%
|
|
33.0
|
%
|
|
33.0
|
%
|
China
income tax exemption
|
|
|
(5.6
|
)%
|
|
(18.6
|
)%
|
|
0.0
|
%
|
Total
provision for income taxes
|
|
|
19.4
|
%
|
|
14.4
|
%
|
|
33.0
|
%
|
Value
added tax
Taxes
payable as of June 30, 2008 and 2007 are as follows:
|
|
2008
|
|
2007
|
|
Value
added tax
|
|
$
|
83,775
|
|
$
|
-
|
|
Income
taxes
|
|
|
62,733
|
|
|
-
|
|
Other
taxes
|
|
|
19,924
|
|
|
(12,153
|
)
|
Total
|
|
$
|
166,432
|
|
$
|
(12,153
|
)
|
Note
13 - Convertible Debt
November
2007 Convertible Debentures
On
November 7, 2007, the Company entered into a Securities Purchase Agreement
(the
“November 2007 Purchase Agreement”) with Pope Investments, LLC (the “November
2007 Investor”). Pursuant to the November 2007 Purchase Agreement, the Company
issued and sold to the November 2007 Investor, $5,000,000 consisting of: (a)
6%
convertible subordinated debentures due November 30, 2010 (the “November 2007
Debenture”) and (b) a three-year warrant to purchase 250,000 shares of Genesis’
common stock, par value $0.001 per share, at an exercise price of $12.8 per
share, subject to adjustment as provided therein. The November 2007 Debenture
bears interest at the rate of 6% per annum and the initial conversion price
of
the debentures is $10 per share. In connection with the offering, the Company
placed in escrow 500,000 shares of its common stock. In connection with the
May
2008 financing, the November 2007 Debenture conversion price was subsequently
adjusted to $8 per share (Post 40-to-1 reverse split).
The
Company evaluated the application of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27, “Application of Issue No. 98-5 to Certain
Convertible Instruments,” and concluded that the convertible debenture has a
beneficial conversion feature. The Company estimated the fair value
of the beneficial conversion feature of the November 2007 Debenture at
$2,904,093 as a discount to par value. The fair value of the warrants was
estimated at $2,095,907. The two amounts are recorded together as debt discount
and amortized using the effective interest method over the three-year term
of
debenture.
The
fair
value of the warrants granted with this private placement was computed using
the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends. The total estimated fair value of
the warrants granted and beneficial conversion feature of the November 2007
Debenture should not exceed the $5,000,000 Debenture, and the calculated warrant
value was used to determine the allocation between the fair value of the
beneficial conversion feature of the November 2007 Debenture and the fair value
of the warrants.
In
connection with the private placement, the Company paid the placement agents
a
fee of $250,000 and incurred other expenses of $104,408, which were capitalized
as deferred debt issuance costs and will be amortized to interest expense over
the life of the debenture. During the year ended June 30, 2008, amortization
of
debt issuance costs related to the November 2007 Purchase Agreement was $77,116.
The remaining balance of debt issuance costs of the November 2007 Purchase
Agreement at June 30, 2008 was $277,291. The amortization of debt discounts
was
$545,359 for the year ended June 30, 2008, which has been included in interest
expense on the accompanying consolidated statements of income. The balance
of
the debt discount was $4,454,641 at June 30, 2008.
The
Company evaluated whether or not the secured convertible debentures contain
embedded conversion options, which meet the definition of derivatives under
SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" and
related interpretations. The Company concluded that since the secured
convertible debentures had a fixed conversion rate of $10, the secured
convertible debt was not a derivative instrument.
The
November 2007 Debenture bears interest at the rate of 6% per annum, payable
in
semi-annual installments on May 31 and November 30 of each year, with the first
interest payment due on May 31, 2008. The initial conversion price (“November
2007 Conversion Price”) of the November 2007 Debentures is $10 per share. If the
Company issues common stock at a price that is less than the effective November
2007 Conversion Price, or common stock equivalents with an exercise or
conversion price less than the then effective November 2007 Conversion Price,
the November 2007 Conversion Price of the November 2007 Debenture and the
exercise price of the warrants will be reduced to such price. The November
2007
Debenture may not be prepaid without the prior written consent of the Holder,
as
defined. In connection with the Offering, the Company placed in escrow 500,000
shares of common stock issued by the Company in the name of the escrow agent.
In
the event the Company’s consolidated Net Income Per Share (as defined in the
Purchase Agreement), for the year ended June 30, 2008, is less than $1.52,
the
escrow agent shall deliver the 500,000 shares to the November 2007 Investor.
The
Company has concluded its fiscal 2008 Net Income Per Share has met the required
amount and no shares will delivered to the November 2007 Investor.
Pursuant
to the November 2007 Purchase Agreement, the Company entered into a Registration
Rights Agreement. In accordance with the Registration Rights Agreement, the
Company must file on each Filing Date (as defined in the Registration Rights
Agreement) a registration statement to register the portion of the Registrable
Securities (as defined therein) as permitted by the Securities and Exchange
Commission’s guidance. The initial registration statement must be filed within
90 days of the Closing Date and declared effective within 180 days following
the
Closing Date. Any subsequent registration statements that are required to be
filed on the earliest practical date on which the Company is permitted by the
Securities and Exchange Commission’s guidance to file such additional
registration statement, these statements must be effective 90 days following
the
date on which it is required to be filed. In the event that the registration
statement is not timely filed or declared effective, the Company will be
required to pay liquidated damages. Such liquidated damages shall be, at the
investor’s option, either $1,643.83 or 164 shares of common stock per day that
the registration statement is not timely filed or declared effective as required
pursuant to the Registration Rights Agreement, subject to an amount of
liquidated damages not exceeding either $600,000, and 60,000 shares of common
stock, or a combination thereof based upon 12% liquidated damages in the
aggregate. In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting
for
Registration Payments," which was effective immediately. This FSP amended EITF
00-19 to require potential registration payment arrangements be treated as
a
contingency pursuant to SFAS No. 5, “Accounting for Contingencies,” rather than
at fair value. The November 2007 Investor has subsequently agreed to allow
the
Company to file the November 2007 registration statement in conjunction with
the
Company’s financing in May 2008 and, as such, no liquidated damages were
incurred for the year ended June 30, 2008.
The
financing was completed through a private placement to accredited investors
and
is exempt from registration pursuant to Section 4(2) of the Securities Act
of
1933, as amended ("Securities Act"). The Company has not filed its registration
statement as of May 14, 2008, and the investor has agreed to extend the initial
registration filing date. For the year ended June 30, 2008, liquidated damage
penalty had no material impact to the Company’s consolidated financial
statements.
May
2008 Convertible Debentures
On
May
30, 2008, the “Company entered into a Securities Purchase Agreement (the “May
2008 Securities Purchase Agreement”) with certain investors (the “May 2008
Investors”), pursuant to which, on May 30, 2008, the Company sold to the May
2008 Investors 6% convertible debentures (the “May 2008 Notes”) and warrants to
purchase 1,875,000 shares of the Company’s common stock (“May 2008 Warrants”),
for an aggregate amount of $30,000,000 (the “May 2008 Purchase Price”), in
transactions exempt from registration under the Securities Act of 1933, as
amended (the “May 2008 Financing”). Pursuant to the terms of the May 2008
Securities Purchase Agreement, the Company will use the net proceeds from the
Financing for working capital purposes. Also pursuant to the terms of the May
2008 Securities Purchase Agreement, the Company must, among other things,
increase the number of its authorized shares of common stock to 22,500,000
by
August 31, 2008, and is prohibited from issuing any “Future Priced Securities”
as such term is described by NASD IM-4350-1 for one year following the closing
of the Financing. The Company has satisfied the increase in the number of its
authorized shares of common stock in August 2008 (post 40-to-1 reverse split).
The
May
2008 Notes are due May 30, 2011, and are convertible into shares of the
Company’s common stock at a conversion price equal to $8, subject to adjustment
pursuant to customary anti-dilution provisions and automatic downward
adjustments in the event of certain sales or issuances by the Company of common
stock at a price per share less than $8. Interest on the outstanding principal
balance of the May 2008 Notes is payable at a rate of 6% per annum, in
semi-annual installments payable on November 30 and May 30 of each year, with
the first interest payment due on November 30, 2008. At any time after the
issuance of the May 2008 Note, any May 2008 Investor may convert its May 2008
Note, in whole or in part, into shares of the Company’s common stock, provided
that such May 2008 Investor shall not effect any conversion if immediately
after
such conversion, such May 2008 Investor and its affiliates would, in the
aggregate, beneficially own more than 9.99% of the Company’s outstanding common
stock. The May 2008 Notes are convertible at the option of the Company if the
following four conditions are met: (i) effectiveness of a registration statement
with respect to the shares of the Company’s common stock underlying the Notes
and the Warrants; (ii) the Volume Weighted Average Price (“VWAP” of the common
stock has been equal to or greater than 250% of the conversion price, as
adjusted, for 20 consecutive trading days on its principal trading market;
(iii)
the average dollar trading volume of the common stock exceeds $500,000 on its
principal trading market for the same 20 days; and (iv) the Company achieves
2008 Guaranteed EBT (as hereinafter defined) and 2009 Guaranteed EBT (as
hereinafter defined). A holder of a May 2008 Note may require the Company to
redeem all or a portion of such May 2008 Note for cash at a redemption price
as
set forth in the May 2008 Notes, in the event of a change in control of the
Company, an event of default or if any governmental agency in the PRC challenges
or takes action that would adversely affect the transactions contemplated by
the
Securities Purchase Agreement. The May 2008 Warrants are exercisable for a
five-year period beginning on May 30, 2008, at an initial exercise price of
$10
per share.
The
Company evaluated the application of EITF 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,” and EITF 00-27,“Application of Issue No. 98-5 to Certain
Convertible Instruments” and concluded that the convertible debenture has a
beneficial conversion feature. The Company estimated the fair value
of the beneficial conversion feature of the May 2008 Note at $17,572,910 as
a
discount to par value. The fair value of the warrants was estimated at
$12,427,090. The two amounts are recorded together as debt discount and
amortized using the effective interest method over the three-year term of
Debenture.
The
fair
value of the warrants granted with this private placement was computed using
the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.2%),
(2) expected warrant life of 5 years, (3) expected volatility of
95%, and (4) zero expected dividends. The total estimated fair value of the
warrants granted and beneficial conversion feature of the May 2008 Note should
not exceed the $30,000,000 Debenture, and the calculated warrant value was
used
to determine the allocation between the fair value of the beneficial conversion
feature of the May 2008 Debenture and the fair value of the warrants.
In
connection with the private placement, the Company paid the placement agents
a
fee of $1,500,000 and incurred other expenses of $186,500, which were
capitalized as deferred debt issuance costs and will be amortized to interest
expense over the life of the debenture. During the year ended June 30, 2008,
amortization debt issuance costs related to the May 2008 Purchase Agreement
were
$46,847. The remaining balance of debt issuance costs of the May 2008 Purchase
Agreement at June 30, 2008 was $1,639,653. The amortization of debt discounts
was $1,954,684 for the year ended June 30, 2008, which has been included in
interest expense on the accompanying consolidated statement of income. The
balance of the debt discount is $28,045,316 at June 30, 2008.
The
Company evaluated whether or not the secured convertible debentures contain
embedded conversion options, which meets the definition of derivatives under
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
and
related interpretations. The Company concluded that since the secured
convertible debentures had a fixed conversion rate of $8.00, the secured
convertible debt was not a derivative instrument.
In
connection with the May 2008 Financing, the Company entered into a holdback
escrow agreement (the “Holdback Escrow Agreement”) dated May 30, 2008, with the
May 2008 Investors and Loeb & Loeb LLP, as Escrow Agent, pursuant to which
$4,000,000 of the Purchase Price was deposited into an escrow account with
the
Escrow Agent at the closing of the Financing. Pursuant to the terms of the
Holdback Escrow Agreement, (i) $2,000,000 of the escrowed funds will be released
to the Company upon the Company’s satisfaction no later than 120 days following
the closing of the Financing of an obligation that the board of directors be
comprised of at least five members (at least two of whom are to be fluent
English speakers who possess necessary experience to serve as a director of
a
public company), a majority of whom will be independent directors acceptable
to
Pope Investments LLC (“Pope”) and (ii) $2,000,000 of the escrowed funds will be
released to the Company upon the Company’s satisfaction no later than six months
following the closing of the Financing of an obligation to hire a qualified
full-time chief financial officer (as defined in the May 2008 Securities
Purchase Agreement). In the event that either or both of these obligations
is
not so satisfied, the applicable portion of the escrowed funds will be released
pro rata to the Investors. The Company has subsequently satisfied both
requirement and the holdback money was released to the Company in full.
In
connection with the May 2008 Financing, Mr. Cao, the Company’s Chief Executive
Officer and Chairman of the Board, placed 3,750,000 shares of common stock
of
the Company owned by him into an escrow account pursuant to a make good escrow
agreement, dated May 30, 2008 (the “Make Good Escrow Agreement”). In the event
that either (i) the Company’s adjusted 2008 earnings before taxes is less than
$26,700,000 USD (“2008 Guaranteed EBT”) or (ii) the Company’s 2008 adjusted
fully diluted earnings before taxes per share is less than $1.6 USD (“2008
Guaranteed Diluted EBT”), 1,500,000 of such shares (the “2008 Make Good Shares”)
are to be released pro rata to the May 2008 Investors. In the event that either
(i) the Company’s adjusted 2009 earnings before taxes is less than $38,400,000
USD (“2009 Guaranteed EBT”) or (ii) the Company’s adjusted fully diluted
earnings before taxes per share is less than $2.32 USD (or $2.24 USD if the
500,000 shares of common stock held in escrow in connection with the November
2007 private placement have been released from escrow) (“2009 Guaranteed Diluted
EBT”), 2,250,000 of such shares (the “2009 Make Good Shares”) are to be released
pro rata to the May 2008 Investors. Should the Company successfully satisfy
these respective financial milestones, the 2008 Make Good Shares and 2009 Make
Good Shares will be returned to Mr. Cao. In addition, Mr. Cao is required to
deliver shares of common stock owned by him to the Investors on a pro rata
basis
equal to the number of shares (the “Settlement Shares”) required to satisfy all
costs and expenses associated with the settlement of all legal and other matters
pertaining to the Company prior to or in connection with the completion of
the
Company’s October 2007 share exchange in accordance with formulas set forth in
the May 2008 Securities Purchase Agreement (post 40-to-1 reverse
split).
The
security purchase agreement set forth permitted indebtedness which the Company’s
lease obligations and purchase money indebtedness is limited up to $1,500,000
per year in connection with new acquisition of capital assets and lease
obligations. Permitted investment set forth with the security purchase agreement
limits capital expenditure of the Company not to exceed $5,000,000 in any
rolling 12 months.
Pursuant
to a Registration Rights Agreement, the Company agreed to file a registration
statement covering the resale of the shares of common stock underlying the
May
2008 Notes and Warrants, (ii) the 2008 Make Good Shares, (iii) the 2009 Make
Good Shares, and (iv) the Settlement Shares. The Company must file an initial
registration statement covering the shares of common stock underlying the Notes
and Warrants no later than 45 days from the closing of the Financing and to
have
such registration statement declared effective no later than 180 days from
the
closing of the Financing. If the Company does not timely file such registration
statement or cause it to be declared effective by the required dates, then
the
Company will be required to pay liquidated damages to the Investors equal to
1.0% of the aggregate Purchase Price paid by such Investors for each month
that
the Company does not file the registration statement or cause it to be declared
effective. Notwithstanding the foregoing, in no event shall liquidated damages
exceed 10% of the aggregate amount of the May 2008 Purchase Price.
The
above two convertible debenture liabilities are as follows at June
30,
2008:
|
|
|
|
|
|
|
|
|
|
November
2007 convertible debenture note payable
|
|
$
|
5,000,000
|
|
May
2008 convertible debenture note payable
|
|
|
30,
000, 000
|
|
Total
convertible debenture note payable
|
|
|
35,000,000
|
|
Less:unamortized
discount on November 2007 convertible debenture note
payable
|
|
|
(4,454,641
|
)
|
Less:unamortized
discount on May 2008 convertible debenture note payable
|
|
|
(28,045,316
|
)
|
Convertible
debentures, net
|
|
$
|
2,500,043
|
|
Note
14 - Shareholders’ equity
Common
Stock
At
inception, Karmoya issued 1,000 shares of common stock to its founder. The
shares were valued at par value. On September 20, 2007, the Company issued
9,000
shares of common stock to nine individuals at par value. The balance of $10,000
is shown in capital contribution receivable on the accompanying consolidated
financial statements.
On
September 20, 2007, Karmoya acquired 100% of Union Well. Union Well was
established on May 9, 2007, with a registered capital of $1,000. The amount
is
shown in capital contribution receivable on the accompanying consolidated
financial statements.
On
October 1, 2007, the Company executed a Share Acquisition and Exchange Agreement
by and among the Company, Karmoya, and the shareholders of 100% of the Karmoya’s
capital stock. At closing, the Company issued 5,995,780 shares of its Series
B
Voting Convertible Preferred Stock and 15 shares (post 40-for-1 reverse split)
of its common stock to Karmoya’s shareholders in exchange for 100% of Karmoya’s
capital stock.
On
October 1, 2007, holders of 220,156 options converted the options into 44,031
shares (post
40-for-1 reverse stock split) of
common
stock.
In
October 2007, the Company received $180,000 in funding from various investors
through the sale of its common stock and issued 37,500 shares (post 40-for-1
reverse stock split) of its common stock with a Rule 144 restrictive
legend.
On
October 8, 2007, a Series A preferred stockholder converted 15,400 shares of
Series A Preferred Stock into 16,595 shares (post 40-for-1 reverse stock split)
of common stock.
In
October 2007, the Company’s board of directors and the majority holders of its
capital stock approved amendments to its Articles of Incorporation by written
consent, including: (1) a change of the Company’s corporate name to Genesis
Pharmaceuticals Enterprises, Inc, (the “Name Change”), (2) a change of the
principal officers and mailing address to the current address in the PRC (the
“Address Change”), (3) a change in the registered agent and registered office in
Florida (the “Registered Agent Change”), and (4) an increase in the authorized
common stock from 5,000,000 (post 40-for-1 reverse stock split) to 15,000,000
shares (post 40-for-1 reverse stock split) (the “Authorized Share Amendment”).
The Certificate of Amendment and Certificate of Change to the Company’s Articles
of Incorporation to effect the Name Change, Address Change, Registered Agent
Change and the Authorized Share Amendment was filed with Florida’s Secretary of
State on October 16, 2007.
On
October 26, 2007, the shares of Series B Preferred Stock issued were converted,
in the aggregate, into 7,494,725 shares (post 40-for-1 reverse stock split)
of
the Company’s common stock.
In
February 2008, in conjunction with a settlement between the Company and one
of
the Company’s former officers, the former officer exercised 37,500 of stock
options for 37,500 shares (post 40-for-1 reverse stock split) of common stock
and the remaining 23,536 options held by the former officer were
cancelled.
In
June
2008, the Company issued 5,875 shares of common stock to its officer and
directors for services rendered. The Company valued the services based on the
common stock fair market value on the date of grant at $8 per share or $46,994
and included as part of the selling, general and administrative
expenses.
Registered
capital
On
September 17, 2007, Union Well established GJBT in PRC as a 100% wholly-owned
foreign limited liability subsidiary (“WOFE”) with registered capital of $12
million. PRC laws require the owner of the WOFE to contribute at least 15%
of
the registered capital within 90 days of its business license issuance date
and
the remaining balance is required to be contributed within two years of the
business license issuance date. In June 2008, the PRC government approved for
GJBT to increase its registered capital from $12 million to $30 million. As
of
June 30, 2008, the Company has funded GJBT the entire registered capital
required in accordance with PRC laws.
Note
15 - Warrants
In
connection with the May 2008 financing, the exercise price of outstanding
warrants issued in 2004 to purchase 74,085 shares of common stock was reduced
to
$8 per share. The 2004 warrants contain full ratchet anti-dilution provisions
to
the exercise price, which due to the Company’s May 2008 financing, resulted in
the 2004 warrants to be exercisable at $8 per share. The provisions of the
2004
Warrants which result in the reduction of the exercise price remain in place.
Of
the warrants, 16,455 shares are exercisable through January 15, 2009, and 57,630
are exercisable through March 29, 2009.
In
connection with the $5,000,000, 6% convertible subordinated debentures note,
the
Company issued a three-year warrant to purchase 250,000 shares of common stock,
at an exercise price of $12.8 per share. The calculated fair value of the
warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 3 years, (3) expected volatility of
197%, and (4) zero expected dividends. In connection with the May 2008
financing, the exercise price of outstanding warrants issued in November 2007
was reduced to $8 per share and the total number of warrants to purchase common
stock was increased to 400,000.
In
connection with the $30,000,000, 6% convertible subordinated debentures note,
the Company issued a five-year warrant to purchase 1,875,000 shares of common
stock, at an exercise price of $10 per share. The calculated fair value of
the
warrants granted with this private placement was computed using the
Black-Scholes option-pricing model. Variables used in the option-pricing model
include (1) risk-free interest rate at the date of grant (4.5%),
(2) expected warrant life of 5 years, (3) expected volatility of
95%, and (4) zero expected dividends.
The
Company has 2,349,085 warrants outstanding and exercisable at an average
exercise price of $9.60 per share as of June 30, 2008.
A
summary
of the warrants as of June 30, 2008, and changes during the period is presented
below:
|
|
|
Number
of warrants
|
|
Outstanding
as of July 1, 2007
|
|
|
74,085
|
|
Granted
|
|
|
2,275,000
|
|
Forfeited
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
Outstanding
as of June 30, 2008
|
|
|
2,349,085
|
|
Following
is a summary of the status of warrants outstanding at June 30,
2008:
|
|
Outstanding Warrants
|
|
Exercisable Warrants
|
|
|
|
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual Life
|
|
Average
Exercise Price
|
|
Number
|
|
Average
Remaining
Contractual Life
|
|
|
|
$
|
8.00
|
|
|
474,085
|
|
|
2.41
|
|
$
|
8.00
|
|
|
474,085
|
|
|
2.41
|
|
|
|
$
|
10.00
|
|
|
1,875,000
|
|
|
4.92
|
|
$
|
10.00
|
|
|
1,875,000
|
|
|
4.92
|
|
Total
|
|
|
2,349,085
|
|
|
|
|
|
|
|
|
2,349,085
|
|
|
|
|
Note 16 -
Stock options
The
Company uses the Black-Scholes option pricing model which was developed for
use
in estimating the fair value of options. Option pricing models require the
input
of highly complex and subjective variables including the expected life of
options granted and the Company’s expected stock price volatility over a period
equal to or greater than the expected life of the options. Because changes
in
the subjective assumptions can materially affect the estimated value of the
Company’s employee stock options, it is management’s opinion that the
Black-Scholes option pricing model may not provide an accurate measure of the
fair value of the Company’s employee stock options. Although the fair value of
employee stock options is determined in accordance with SFAS 123R using an
option pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction.
The
133,400 options were granted on July 1, 2007, and the fair value of this option
grant was estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
|
|
Expected
|
|
Expected
|
|
Dividend
|
|
Risk Free
|
|
Grant Date
|
|
|
|
Life
|
|
Volatility
|
|
Yield
|
|
Interest Rate
|
|
Fair Value
|
|
Former
officers
|
|
|
3.50
yrs
|
|
|
195
|
%
|
|
0
|
%
|
|
4.50
|
%
|
$
|
5.20
|
|
The
7,500
options were granted on June 10, 2008 and the fair value of this option grant
was estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
|
|
Expected
|
|
Expected
|
|
Dividend
|
|
Risk Free
|
|
|
|
|
|
Life
|
|
Volatility
|
|
Yield
|
|
Interest Rate
|
|
Value
|
|
Current
officer
|
|
|
5
yrs
|
|
|
95
|
%
|
|
0
|
%
|
|
2.51
|
%
|
$
|
8.00
|
|
In
accordance with SFAS 123R, the Company recorded $10,847, $0, and $0 of
compensation expense relating to stock options for the years ended June 30,
2008, 2007, and 2006.
The
following is a summary of the option activity during the year ended June 30,
2008:
|
|
|
Number
of options
|
|
Outstanding
as of July 1, 2007
|
|
|
194,436
|
|
Granted
|
|
|
7,500
|
|
Forfeited
|
|
|
(23,536
|
)
|
Exercised
|
|
|
(37,500
|
)
|
Outstanding
as of June 30, 2008
|
|
|
140,900
|
|
Following
is a summary of the status of option outstanding at June 30, 2008:
Outstanding options
|
|
Exercisable options
|
Average
Exercise price
|
|
Number
|
|
Average
remaining
contractual life
(years)
|
|
Average
exercise price
|
|
Number
|
|
Weighted
average
exercise price
|
$
|
4.20
|
|
|
133,400
|
|
|
2.50
|
|
$
|
4.20
|
|
|
133,400
|
|
$
|
2.50
|
$
|
12.00
|
|
|
2,000
|
|
|
5.00
|
|
|
-
|
|
|
-
|
|
|
-
|
$
|
16.00
|
|
|
1,750
|
|
|
5.00
|
|
|
-
|
|
|
-
|
|
|
-
|
$
|
20.00
|
|
|
1,875
|
|
|
5.00
|
|
|
-
|
|
|
-
|
|
|
-
|
$
|
24.00
|
|
|
1,875
|
|
|
5.00
|
|
|
-
|
|
|
-
|
|
|
-
|
$
|
4.93
|
|
|
140,900
|
|
|
2.64
|
|
$
|
4.20
|
|
|
133,400
|
|
$
|
2.50
|
As
of
June 30, 2008, there was $26,295 of total unrecognized compensation expense
related to nonvested share-based compensation arrangements granted under the
Stock Incentive Plan. That cost is expected to be recognized over a
weighted-average period of 3 years.
Note
17 - Statutory reserves
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve and discretionary surplus reserve, based on after-tax
net income determined in accordance with generally accepted accounting
principles of the PRC ("PRC GAAP"). Appropriation to the statutory surplus
reserve is required to be at least 10% of the after tax net income determined
in
accordance with PRC GAAP until the reserve is equal to 50% of the entities'
registered capital. Appropriations to the discretionary surplus reserve are
made
at the discretion of the Board of Directors.
The
statutory surplus reserve fund is non-distributable other than during
liquidation and can be used to fund previous years' losses, if any, and may
be
utilized for business expansion or converted into share capital by issuing
new
shares to existing shareholders in proportion to their shareholding or by
increasing the par value of the shares currently held by them, provided that
the
remaining reserve balance after such issue is not less than 25% of the
registered capital.
The
discretionary surplus fund may be used to acquire fixed assets or to increase
the working capital to expend on production and operations of the business.
The
Company’s Board of Directors decided not to make an appropriation to this
reserve for 2008 and 2007.
According
to the Company’s articles, the Company should appropriate 10% of the net profit
as statutory surplus reserve. For the years ended June 30, 2008 and 2007, the
Company appropriated to the statutory surplus reserve in the amount of
$1,096,241 and $1,508,970, respectively.
Note
18 - Employee pension
Employee
pension in the Company generally includes two parts: the first part to be paid
by the Company is 30.6% of $128 for each qualified employee each month. The
other part, paid by the employees, is 11% of $128 each month. For the years
ended June 30, 2008, 2007, and 2006, the Company made pension contributions
in
the amount of $35,273, $31,760, and $32,130, respectively.
Note
19 - Accumulated other comprehensive income
The
components of accumulated other comprehensive income for the year ended June
30,
2008 and 2007 are as follows:
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
Beginning
Balance
|
|
$
|
1,146,441
|
|
$
|
128,311
|
|
Foreign
currency translation gain
|
|
|
5,206,612
|
|
|
1,018,130
|
|
Unrealized
gain on marketable securities
|
|
|
1,347,852
|
|
|
-
|
|
Ending
Balance
|
|
$
|
7,700,905
|
|
$
|
1,146,441
|
|
Note
20 - Current vulnerability due to certain concentrations
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition, and results of operations may be influenced
by
the political, economic, and legal environments in the PRC, and by the general
state of the PRC's economy.
The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic, and legal environments, and foreign currency exchange.
The
Company's results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among
others.
Note
21 - Commitments and contingencies
In
September 2007, the Company entered into a three year Cooperative Research
and
Development Agreement (“CRADA”) with a provincial university (the “University”).
Pursuant to the CRADA, the University is responsible for designing, researching
and developing designated pharmaceutical projects for the Company. Additionally,
the University will also provide technical services and training to the
Company. As part of the CRADA, the Company will pay RMB 24,000,000
(approximately $3.5 million as of June 30, 2008) plus out–of-pocket expenses to
the University annually, and provide internship opportunities for students
of
the University. The Company will have the primary ownership of the
designated research and development project results.
In
November 2007, the Company entered into a five year CRADA with a research
institute (the “Institute”). Under the CRADA, the Institute is responsible for
designing, researching and developing designated pharmaceutical projects for
the
Company. Additionally, the Institute will also provide technical services and
trainings to the Company. As part of the CRADA, the Company will pay RMB
6,000,000 (approximately $875,000 as of June 30, 2008) to the Institute
annually. The Company will have the primary ownership of the designated
research and development project results.
Legal
proceedings
The
following summarizes the Company’s pending and settled legal proceedings as of
June 30, 2008:
Elizabeth
Hiromoto et al v. Telecom Communications, Inc. et al. - Case No.
2:07-cv-07858-PSG-E, United States District Court, Central District of
California (Western Division - Los Angeles)
On
December 3, 2007, two individuals filed a lawsuit against the Company, its
former Chief Executive Officer James Wang, and certain others, alleging breach
of contract relating to damages arising from the sale of Telecom Communications,
Inc.(“TCOM”) to Arran Services Limited, in which Mr. Wang acted as the Company’s
President and Chairman to provide consulting services to TCOM and certain
misrepresentations made on behalf of and in conjunction with TCOM’s majority
shareholder . On July 2, 2008, the Company and the plaintiffs settled the
lawsuit with prejudice and claims and plaintiffs have agreed to file a Request
for Dismissal with Prejudice of the lawsuit.
The
Company received letters dated August 22, 2008, August 25, 2008, and September
16, 2008, from Corrigan & Morris LLP, on behalf of James Wang, making a
claim for indemnification of fees incurred in connection with the defense
of two
lawsuits brought against Mr. Wang. These letters request that the Company
reimburse Mr. Wang a total of $153,243, representing attorneys’ fees, settlement
amounts, and legal costs. The Company does not believe it has the obligation
to
reimburse Mr. Wang and is currently reviewing the letters.
Fernando
Praca, Plaintiff v.s. EXTREMA, LLC and Genesis Pharmaceuticals Enterprises,
Inc.- Case No. 50 2005 CA 005317, Circuit Court of the 15th Judicial Circuit
in
and for Palm Beach County, Florida.
Fernando
Praca, former Director and former President of the Company’s discontinued
subsidiary, Extrema LLC, which is included as part of the discontinued entities,
filed an action in Dade County, Florida, against Extrema, LLC and the Company
in
June 2005, relating to damages arising from the sale of Extrema LLC to Genesis
Technology Group, Inc. Praca had filed a Motion of Temporary Injunction but
had
not proceeded to move this case forward. The plaintiff decided to reinitiate
the
legal action in March 2008. In May 2008, the plaintiff and the Company entered
into an agreement whereby the plaintiff agreed to return 100,000 shares of
restricted common shares of the Company and the Company agreed to remove the
restrictive legend on the 1,269,697 shares previously owned by the plaintiff.
The Company subsequently cancelled the 100,000 restricted common stock. The
plaintiff agreed to waive and release the Company from any and all further
claims, demands or obligations.
Kenneth
Clinton vs. Genesis Pharmaceuticals Enterprises, Inc., GTEC Holdings, Capital
Growth Financial, Inc., Gary L. Wolfson and Pacific Rim Consultants, Inc. -
Case
No. 50 2007 CA 023923, Circuit Court of the 15th Judicial Circuit in and for
Palm Beach County, Florida.
On
December 21, 2007, Kenneth Clinton, a former director and former President
of
the Company, filed a lawsuit against the Company and certain entities and
persons related to Genesis Technology Group, Inc. The complaint alleges, among
other things, breach of contract against the Company for an agreement to pay
the
plaintiff certain shares of other public companies (collectively, the “Reverse
Merger Shares”) in connection with reverse merger transactions arranged by
Genesis Technology Group, Inc , and breach of contract against the Company
for
failure to allow the plaintiff to exercise certain stock options for shares
in
the Company or exchange such options for new shares in the Company. The
plaintiff is seeking relief in the form of (1) delivery of the Reverse Merger
Shares, or in the alternative damages in the amount of those shares, (2) a
judgment against the Company to allow the plaintiff to exchange and exercise
his
stock options for shares in the Company, or in the alternative damages in the
amount of those shares, and (3) a declaratory judgment regarding a pledge and
escrow agreement with defendant Capital Growth Financial.
In
February 2008, the Company entered into a settlement agreement and general
release with Mr. Clinton whereby the Company agreed to allow Mr. Clinton
exercise 1.5 million stock options issued under the Company’s 2007 stock option
plan for shares in the Company and released and discharged Mr. Clinton from
any
and all claims, demands or obligations. Mr. Clinton agreed to waive and release
the Company from any and all claims, demands or obligations.
Other
litigation
The
Company currently has pending before the American Arbitration Association the
case of CRG Partners, Inc. (“CRGP”) and Genesis Technology Group, Inc. n/k/a
Genesis Pharmaceuticals Enterprises, Inc. In that matter, CRGP seeks breach
of
contract damages from the Company for 29,978,900 shares of the Company’s stock
(Pre 40 to 1 reverse split) or a dollar amount equal to the value of the
stock, estimated by CRGP at approximately $10 million. As of the date of these
consolidated financial statements, the Company is unable to estimate a loss,
if
any, the Company may incur related expenses to this lawsuit. The Company
believes CRGP’s claims were without merit and plans to vigorously defend its
position.
In
June
2008, China West II, LLC (“CW II”) filed a Demand for Arbitration with the
American Arbitration Association the case of CW II and Genesis Technology Group,
Inc. n/k/a Genesis Pharmaceuticals Enterprises, Inc. and Joshua Tan. In that
matter, CW II seeks breach of contract damages in connection with the Company’s
October 2007 reverse merger from the Company and Joshua Tan, who’s the former
director before the reverse merger, jointly and severally for approximately
$6.7
million. As of the date of these consolidated financial statements, the Company
is unable to estimate a loss, if any, the Company may incur related expenses
to
this lawsuit.
The
Company believes CW II’s demand was without merit and plans to vigorously defend
its position.
Note
22 - Subsequent events
In
July
2008, in connection with the settlement with Mr. Fernando Praca, the Company
cancelled 2,500 shares of its common stock (post 40-to-1 reverse split).
In
July
2008, the Company issued 2,500 share of common stock to two directors as part
of
their compensation for services. The Company valued these shares at the fair
market value on the date of grant of $8.00 per share, or $20,000 in total,
based
on the trading price of common stock (post 40-to-1 reverse split).
In
July
2008, the Board of Directors completed an evaluation of the trading market
for
the Company’s common stock, and due to the low stock price, the opinion of the
Board of Directors was that a significant reverse split of the Company’s Common
Stock is required to allow the Company to undertake acquisitions, raise capital,
and improve the image of the Company. Thus, the Board of Directors approved
a
40-to-1 reverse stock split. The matter was submitted to the vote of the
shareholders, and a majority of the shareholders had voted in favor of the
proposed reverse stock split. The stock split became effective on September
4,
2008, and a new trading symbol “GNPH” also became effective on that day. Those
holding fractional shares will be rounded up the next whole share. Subsequent
to
the stock split, the Company has approximately 9,768,000 shares issued and
outstanding. The total number of authorized shares became 22,500,000. These
consolidated financial statements have been retroactively adjusted to reflect
the reverse split. Additionally, all share representations are on a post-split
basis.
In
August
2008, the PRC government approved for CJBT to increase its registered capital
from $30 million to $58 million. The PRC laws require Union Well, the 100%
owner
of CJBT to contribute at least 20% of the registered capital within 30 days
of
the approval and the remaining balance is required to be contributed within
two
years of the approval date. In August 2008, CJBT received additional registered
capital in total of $1,996,001.
In
September 2008, the Company repaid the outstanding balance of the short term
loan in the amount of $2,772,100, in satisfaction of its obligation outstanding
as of June 30, 2008.The Company is in the process of renewing of this loan.