UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
x
ANNUAL
REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended: September
30, 2007
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
710075
(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: None
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been
subject to such filing requirement for the past 90 days. x
Yes o
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o Yes
x
No
State
issuer’s revenue for its most recent fiscal year: $3,035,000
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: The aggregate market value of the
issuer’s common stock held by non-affiliates, as of January 14, 2008, based upon
the average bid and asked price of such common stock as reported on the OTC
Bulletin Board, was $ 97.2 million (388,968,760 shares at $.253 per
share).
As
of
January 14, 2008, there were 388,968,760 shares of the issuer's common stock
outstanding.
Documents
incorporated by reference: None
Transitional
Small Business Disclosure Format (Check one): o Yes x
No
PART
I
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Item
1. Description of Business
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4
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Item
2. Description of Property
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24
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Item
3. Legal Proceedings
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25 |
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Item
4. Submission of Matters to a Vote of Security Holders
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25
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PART
II
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Item
5. Market for Common Equity and Related Shareholder
Matters
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25 |
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Item
6. Management's Discussion and Analysis or Plan of
Operation
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27
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Item
7. Financial Statements
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41
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Item
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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41
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Item
8A. Controls and Procedures
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41
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Item
8B. Other Information
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42
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PART
III
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Item
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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42
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Item
10. Executive Compensation
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46
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Item
11. Security Ownership of Certain Beneficial Owners and Management
and
Related Shareholder Matters
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51
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Item
12. Certain Relationships and Related Transactions
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53
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Item
13. Exhibits
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54
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Item
14. Principal Accountant Fees and Services
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INDEX
TO FINANCIAL STATEMENTS
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F-1
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain
statements in this annual report on Form 10-KSB 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," "GTEC," "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.
PART
I
ITEM
1. DESCRIPTION OF BUSINESS
We
were
originally incorporated in Florida on August 15, 2001 under the name Genesis
Technology Group, Inc. with a principal business objective to operate as a
business development and marketing firm specializing in advising and providing
turn-key solutions for Chinese small and mid-sized companies entering Western
markets. 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 executed a Share Acquisition and Exchange Agreement
(“Exchange Agreement”) by and among us, Karmoya International Ltd., a British
Virgin Islands company (“Karmoya”), and the shareholders of 100% of Karmoya’s
capital stock (the “Karmoya Shareholders”). 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. Throughout this Form
10-KSB, Karmoya, Union Well, GJBT and Laiyang Jiangbo are sometimes collectively
referred to as the “LJ Group.”
Under
the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock (the “Series B Preferred Stock”) to
the Karmoya Shareholders and 597 shares of our common stock in exchange for
100%
of the capital stock of Karmoya. The shares of Series B Preferred Stock issued
are convertible, in the aggregate, into a number of shares of our common stock
that, when combined with the common stock issued to the Karmoya Shareholders,
would equal 75% of the issued and outstanding shares of our common stock, if
the
shares were to be converted on the Closing Date. The closing of the Exchange
Agreement and the transactions contemplated thereunder (the “Exchange
Transaction”) occurred on October 1, 2007 (the “Closing Date”).
As
a
result of the Exchange 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. From and after the Closing Date,
through various consulting service agreements and equity-related agreements
between certain LJ Group entities (the “LJ Agreements”), our principal business
activities shall continue to be conducted through the LJ Group’s operating
company in China, Laiyang Jiangbo.
The
Exchange Transaction was accounted for as a reverse merger (recapitalization)
with Karmoya deemed to be the accounting acquirer, and us as the legal acquirer.
Accordingly, the historical financial information presented in future financial
statements will be that of Karmoya as adjusted to give effect to any difference
in the par value of ours and Karmoya’s stock with an offset to capital in excess
of par value. The basis of the assets, liabilities and retained earnings of
Karmoya, the accounting acquirer, have been carried over in the
recapitalization. Upon the closing of the Exchange Transaction, we became a
Chinese pharmaceutical company that researches, develops, manufactures, markets
and sells pharmaceutical products and health supplements in the People's
Republic of China (“PRC” or “China”)
DESCRIPTION
OF OUR PRIOR BUSINESS - GENESIS TECHNOLOGY GROUP, INC.
Prior
to
the Exchange Transaction, we were a business development and marketing firm
that
specialized in advising and providing a turn key solution for Chinese small
and
mid-sized companies entering Western markets. We fostered development projects
that required marketing, manufacturing, finance, and product deployment
expertise for companies in the United States and China. Our core competency
was
sourcing merger and acquisitions opportunities for both us and our contract
clients.
Effective
June 20, 2005, we established Genesis Equity Partners, LLC, a Florida limited
liability company (“GEP”), in which we owned 51% and strategic partners owned
the remaining 49%. On May 15, 2007, GEP amended its membership agreement and
accordingly, as of March 1, 2007, we own 71%. Subsequently, we organized
additional limited liability companies, dedicated to specific Chinese partner
companies. While our equity position in these LLCs varied, the minimum ownership
was maintained at 51%, to ensure reporting of consolidated earnings. The
following limited liability companies were established during our fiscal year
ended September 30, 2007:
o
Genesis
Equity Partners, LLC (Huayang) - established in the State of Delaware on
February 1, 2007 and which we own 100%.
o
Genesis
Equity Partners, LLC (Liziyuan) -established in the State of Delaware on
February 27, 2007 and which we own 100%.
o
Genesis
Equity Partners, LLC (Site) - established in the State of Delaware on March
28,
2007 and which we own 100%.
o
Genesis
Equity Partners II, LLC (GEP II) - established in the State of Florida on August
8, 2007 and which we own 71%. The
minority members of GEP II include China West II, LLC, holding 24.5% of GEP
II,
and Shaohua Tan, Inc., a company owned by Dr. Shaohua Tan, a former member
of
our board of directors, holding 24.5%.
Collectively,
the above LLCs are referred to as the "GEP Companies". The GEP Companies are
full service advisory companies specializing in small Chinese-based companies,
which are traded on or are expected to be traded on the U.S. public markets.
The
GEP Companies offer a comprehensive suite of services tailored to the specific
needs of their clients, including:
*
U.S.
representative offices
*
General
business consulting services
*
Merger
and acquisition strategy planning and analysis
*
Advice
on U.S. capital markets, including assessment of potential sources of investment
capital
*
Coordination of professional resources
*
Corporate asset evaluation
*
Public
relations
*
Advice
and structure assistance for strategic alliances, partnerships and joint
ventures
Because
the Exchange Transaction occurred subsequent to our fiscal year ended September
30, 2007, we are disclosing the consolidated results, assets and liabilities
of
our prior businesses, including GEP and the GEP Companies, in the section titled
“Management’s Discussion and Analysis” and the financial statements accompanying
this annual report on Form 10-KSB. We will disclose the consolidated results,
assets and liabilities of our current Pharmaceutical business in future
quarterly and annual reports.
DESCRIPTION
OF OUR CURRENT BUSINESS - GENESIS PHARMACEUTICALS ENTERPRISES,
INC.
On
October 1, 2007, we executed a Share Acquisition and Exchange Agreement
(“Exchange Agreement”) by and among us, Karmoya International Ltd., a British
Virgin Islands company (“Karmoya”), and the shareholders of 100% of Karmoya’s
capital stock (the “Karmoya Shareholders”). 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, the People's Republic of
China (“PRC” or “China”). Throughout this Form 10-KSB, Karmoya, Union Well, GJBT
and Laiyang Jiangbo are sometimes collectively referred to as the “LJ
Group.”
Under
the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock (the “Series B Preferred Stock”) to
the Karmoya Shareholders and 597 shares of our common stock in exchange for
100%
of the capital stock of Karmoya. The shares of Series B Preferred Stock issued
were convertible, in the aggregate, into a number of shares of our common stock
that, when combined with the common stock issued to the Karmoya Shareholders,
would equal 75% of the issued and outstanding shares of our common stock, if
the
shares were to be converted on the Closing Date. The closing of the Exchange
Agreement and the transactions contemplated thereunder (the “Exchange
Transaction”) occurred on October 1, 2007 (the “Closing Date”). On October 26,
2007, the 5,995,780 shares of Series B Voting Convertible Preferred Stok were
converted into 299,789,000 shares of our common stock.
As
a
result of the Exchange 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. From and after the Closing Date,
through various consulting service agreements and equity-related agreements
between certain LJ Group entities (the “LJ Agreements”), our principal business
activities shall continue to be conducted through the LJ Group’s operating
company in China, Laiyang Jiangbo.
The
Exchange Transaction was accounted for as a reverse merger (recapitalization)
with Karmoya deemed to be the accounting acquirer, and us as the legal acquirer.
Accordingly, the historical financial information presented in future financial
statements will be that of Karmoya as adjusted to give effect to any difference
in the par value of ours and Karmoya’s stock with an offset to capital in excess
of par value. The basis of the assets, liabilities and retained earnings of
Karmoya, the accounting acquirer, have been carried over in the
recapitalization. Upon the closing of the Exchange Transaction, through the
contractual relationship with Laiyang Jiangbo, we became a Chinese
pharmaceutical company that researches, develops, manufactures, markets and
sells pharmaceutical products and health supplements in China.
Karmoya
was incorporated under the laws of the British Virgin Islands on July 17, 2007.
Since incorporation, Karmoya has not conducted any substantive operations of
its
own and conducts its primary business operations through its variable interest
entity (“VIE”), Laiyang Jiangbo. PRC law currently has limits on foreign
ownership of certain companies. To comply with these foreign ownership
restrictions, we operate our pharmaceutical 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 pursuant to which we provide technology
consulting and other general business operation services to Laiyang Jiangbo.
Through these contractual arrangements, we also have the ability to
substantially influence Laiyang Jiangbo’s daily operations and financial
affairs, appoint its senior executives and approve all matters requiring
shareholder approval. As a result of these contractual arrangements, which
enable us to control Laiyang Jiangbo, we are considered the primary beneficiary
of Laiyang Jiangbo. Accordingly, we will consolidate Laiyang Jiangbo's results,
assets and liabilities in our future financial statements. For a description
of
these contractual arrangements, see “Contractual Arrangements with Laiyang
Jiangbo and its Shareholders” below.
Laiyaing
Jiangbo was incorporated under the laws of the PRC as a limited liability
company on August 18, 2003. The paid-in capital of Laiyang Jiangbo was funded
by
the majority shareholders of Karmoya. PRC law currently has limits on foreign
ownership of certain companies. To comply with these foreign ownership
restrictions, on September 21, 2007 Karmoya’s wholly owned subsidiary, GJBT (a
wholly foreign owned enterprise registered in the PRC on September 19, 2007),
entered into certain exclusive agreements with Laiyang Jiangbo and its
shareholders. Laiyang Jiangbo holds the licenses and approvals necessary to
operate our pharmaceutical business in China. Pursuant to these agreements,
GJBT
provides exclusive technology consulting and other general business operation
services to Laiyang Jiangbo in return for a consulting services fee which is
equal to Laiyang Jiangbo’s revenue. In addition, Laiyang Jiangbo’s shareholders
have pledged their equity interests in Laiyang Jiangbo to GJBT, irrevocably
granted GJBT an exclusive option to purchase, to the extent permitted under
PRC
law, all or part of the equity interests in Laiyang Jiangbo and agreed to
entrust all the rights to exercise their voting power to the person(s) appointed
by GJBT. Through these contractual arrangements, Karmoya, through its wholly
owned subsidiary GJBT, has the ability to substantially influence Laiyang
Jiangbo’s daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.
As
a
result of these contractual arrangements, which obligate Karmoya to absorb
a
majority of the risk of loss from Laiyang Jiangbo’s activities and enable
Karmoya to receive a majority of its expected residual returns, we believe
Laiyang Jiangbo is a VIE under FASB Interpretation No. 46R (“FIN 46R”),
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”,
because the equity investors in Laiyang Jiangbo do not have the characteristics
of a controlling financial interest and we should be considered the primary
beneficiary of Laiyang Jiangbo. Accordingly, we will consolidate Laiyang
Jiangbo’s results, assets and liabilities in the financial statements
accompanying our future annual and quarterly reports.
On
October 11, 2007, our board of directors and the majority holders of our capital
stock approved amendments to our Articles of Incorporation by written consent,
including: (1) a change of our corporate name to our current name, Genesis
Pharmaceuticals Enterprises, Inc. (the “Name Change”), (2) a change of our
principal offices and mailing address to our current address in the PRC (the
“Address Change”), (3) a change in our registered agent and registered office in
Florida (the “Registered Agent Change”), and (4) an increase in our authorized
common stock from 200,000,000 to 600,000,000 shares (the “Authorized Share
Amendment”). The Certificate of Amendment and Certificate of Change to our
Articles of Incorporation to 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
November 14, 2007, our Board of Directors, acting pursuant to the authority
granted by our Bylaws and the Florida Business Corporation Act, determined
by
unanimous written consent to change our fiscal year end from September 30 to
June 30.
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.
LAIYANG
JIANGBO PHARMACEUTICAL CO., LTD.
As
discussed above, our operations are conducted through Laiyang Jiangbo
Pharmaceutical Co., Ltd., a limited liability company headquartered in PRC
and
organized under the laws of PRC (“Laiyang
Jiangbo”).
Laiyang Jiangbo was organized on August 18, 2003 and its fiscal year ended
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 and liquid chemicals. Laiyang Jiangbo
has several Certificates of Good Manufacturing Practices for Pharmaceutical
Products (GMP Certificates) issued by the Shandong State Drug Administration
(SDA) and currently produces over five types of drugs.
Laiyang
Jiangbo’s top four products in fiscal 2007 include Clarithromycin
sustained-release tablets, Itopride Hydrochloride granules, Ciprofloxacin
Hydrochloride tablets, and Paracetamol tablets.
Drug
Development and Production
Development
and production of pharmaceutical products is Laiyang Jiangbo’s largest and most
profitable business. Its principal pharmaceutical products include:
Clarithromycin
sustained-release tablets
Clarithromycin
sustained-release tablets, Chinese Drug Approval Number H20052746, are
semi-synthetic antibiotics for curing Clarithromycin sensitive microorganism
infections. Laiyang Jiangbo is one of only two domestic Chinese pharmaceutical
companies having the technology to manufacture this drug. Laiyang Jiangbo’s
sales of this drug were over RMB 248.4 million (US $31.82 million) in fiscal
2007, which is approximately 50% of the market share in China for this type
of
drug.
Clarithromycin
is the second generation of macrolide antibiotic and replaces the older
generation of Erythromycin. Clarithromycin first entered the pharmaceutical
market in Ireland in 1989, and as of 2007, it is one of thirty medicines which
generate the greatest sales revenue all over the world. Chemically,
Clarithromycin has a wider antimicrobial spectrum and longer duration of acid
resistance. Its activity is 2 to 4 times better than Erythromycin, but the
toxicity is 2-12 times lower.
Clarithromycin
sustained-release tablets utilize sustained-release technology, which requires
a
high degree of production technology. Because of the high degree of technology
required to produce this product, PRC production requirements are very strict
and there are very few manufacturers who gain permission to produce this
product. Therefore, there is a significant barrier to entry in the PRC market.
Currently, our Clarithromycin sustained-release tablets are the leading product
in the PRC domestic antibiotic sustained-release tablets market. Our goal is
to
maintain our current market share for this product.
Itopride
Hydrochloride granules
Itopride
Hydrochloride granules, Chinese Drug Approval Number H20050932, are a stomach
and intestinal drug for curing digestive system-related diseases. Laiyang
Jiangbo’s sales for this drug reached RMB 228.08 million (US $29.22 million) in
fiscal 2007, which is approximately 12.6% of the market share in China for
this
type of drug. This product is widely regarded for its pharmacological
properties, i.e. rapid absorption, positive clinical effects, and few side
effects. Based on clinical observation, it has been shown that Itopride
Hydrochloride granules can improve 95.1% of gastrointestinal indigestion
symptoms.
Itopride
Hydrochloride granules are the fourth generation of gastrointestinal double
dynamic medicines, which are used for curing most symptoms due to functional
indigestion. The older generations are Metoclopramide Paspertin, Domperidone
and
Cisapride.
Itopride
Hydrochloride granules are SDA-approved and entered the PRC pharmaceutical
market in June 2005. Since 2005, Laiyang Jiangbo has seized the opportunity
presented by this product by rapidly establishing a domestic sales network
and
developing the market for this product. Currently, this product has competition
from two other famous stomach medicines, namely Dompendone Tablets and Vitamin
U
Belladonna and Aluminum Capsules II. Itopride Hydrochloride granules are a
new
product for Laiyang Jiangbo, but it already has a nationwide sales network
in
China. Laiyang Jiangbo’s goal is to have sales of Itopride Hydrochloride
granules exceed sales of the other two medicines in the near
future.
Ciprofloxacin
Hydrochloride tablets
Ciprofloxacin
Hydrochloride tablets, Chinese Drug Approval Number H37022737, are an antibiotic
drug used to cure infection caused by bacteria. Laiyang Jiangbo’s sales for this
drug reached RMB 91.73 million (US $11.75 million) in fiscal 2007, which is
approximately 19.61% of the total market for this type of antibiotic drug in
China.
Due
to a
stoppage in production of raw material manufacturing in PRC in 2004, the price
of certain raw materials which are used to produce Ciprofloxacin Hydrochloride
tablets rose rapidly and Laiyang Jiangbo seized this opportunity by using its
stored raw materials to produce a significant amount of Ciprofloxacin
Hydrochloride tablets. As a result, Laiyang Jiangbo’s sales of this product won
a large percentage of the market in PRC from 2004 to 2006. However, other
companies resumed production in 2007, which has lead to stronger competition
and
a decrease in Laiyang Jiangbo’s profits for this product. Despite the recent
decrease in profits for this product, Laiyang Jiangbo’s goal is to continue
producing Ciprofloxacin Hydrochloride tablets as a principal product to promote
the popularity of its product and brand.
Paracetamol
tablets
Paracetamol
tablets, Chinese Drug Approval Number H37022733, are a nonprescription analgesic
drug, mainly used for curing fever due to common flu or influenza. It is also
used for relief of aches and pains. Laiyang Jiangbo’s sales for this drug
reached RMB 26.61 million (US $3.41 million) in fiscal 2007, which is
approximately 0.6% of the total market for similar types of drugs in
China.
Laiyang
Jiangbo is authorized by the PRC Ministry of Health to be an appointed producer
of common antibiotics in Jiangsu Province, Guangdong Province, Zhejiang
Province, Fujian Province, Shandong Province and Guangxi Province. Paracetamol
tablets are one of PRC’s national A-level Medicare medicines. This product
entered the Chinese market in July 2004.
Baobaole
Chewable tablets
Baobaole
Chewable tablets, Chinese Drug Approval Number Z20060294, are a new product
of
Laiyang Jiangbo and entered the market in August 2007. Baobaole Chewable tablets
are nonprescription drugs for gastric cavity aches. This drug stimulates the
appetite and promotes digestion. Baobaole is used to cure deficiencies in the
spleen and stomach, abdomen aches, loss of appetite, and loose bowels. Its
effects are mild and lasting.
As
of December 2007, Laiyang Jiangbo has completed its entire distribution
network for this product and its goal is to reach sales volume of RMB 140
million (US $17.93 million) for this product for the fiscal year ended June
30,
2008.
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 26 provinces in the PRC. Currently, Laiyang Jiangbo has
approximately 1,060 distribution agents throughout the PRC. Laiyang Jiangbo
will
continue to establish more representative offices and engage additional
distribution agents in order to strengthen its distribution network.
Laiyang
Jiangbo recognizes the importance of branding as well as packaging. All of
Laiyang Jiangbo’s products bear a uniform brand but have specialized designs to
differentiate the different categories of Laiyang Jiangbo's
products.
Laiyang
Jiangbo conducts promotional marketing activities to publicize and enhance
its
image as well as to reinforce the recognition of its brand name
including:
|
1.
|
publishing
advertisements and articles in national as well as specialized and
provincial newspapers, magazines, and in other media, including the
Internet;
|
|
2.
|
participating
in national meetings, seminars, symposiums, exhibitions for pharmaceutical
and other related industries;
|
|
3.
|
organizing
cooperative promotional activities with distributors;
and
|
|
4.
|
sending
direct mail to major physician offices and
laboratories.
|
Currently,
Laiyang Jiangbo has approximately 1,200 terminal clients. Terminal clients
are
hospitals and medical institutions which purchase large supplies of
pharmaceutical drugs. Laiyang Jiangbo is also authorized by the PRC Ministry
of
Health as an appointed Medicare medication supplier in six provinces, namely
Jiangsu Province, Shandong Province, Zhejiang Province, Fujian Province,
Guangdong Province and Guangxi Province.
For
the
fiscal years ended June 30, 2007, 2006 and 2005, five customers accounted for
approximately 33.3%, 30.5% and 47.39%, respectively, of Laiyang Jiangbo’s sales.
These five customers represent 28.9% and 26.5% of Laiyang Jiangbo’s total
accounts receivable as of June 30, 2007 and 2006, respectively.
COMPETITION
Laiyang
Jiangbo has two major competitors in the PRC: Zhuhai Lizhu and Beijing Nohua.
These companies have strong assets and a large market share in the
pharmaceutical 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. Other
than these two competitors, most other competitors produce only one or two
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.
PATENTS,
TRADEMARKS, LICENSES, FRANCHISES, CONCESSIONS, ROYALTY AGREEMENTS OR LABOR
CONTRACTS
Laiyang
Jiangbo relies on a combination of trademark, copyright and trade secret
protection laws in PRC and other jurisdictions, as well as confidentiality
procedures and contractual provisions to protect its intellectual property
and
brand. Laiyang Jiangbo has been issued design patents in PRC for drug packaging
and drug containers, each valid for 10 years, and it intends to apply for more
patents to protect its core technologies. Laiyang Jiangbo is currently in the
process of acquiring the rights to a new Class I drug recently patented and
made
available to Laiyang Jiangbo through its relationship with the Pharmaceutical
Institute of Shandong University. This is a Class I drug which means that all
PRC national hospitals and other major medical facilities must carry this drug.
Laiyang Jiangbo also enters into confidentiality, non-compete and invention
assignment agreements with its employees and consultants and nondisclosure
agreements with third parties. “Jiangbo” and a certain circular design
affiliated with our brand are our registered trademarks in the PRC.
Pharmaceutical
companies are at times involved in litigation based on allegations of
infringement or other violations of intellectual property rights. Furthermore,
the application of laws governing intellectual property rights in the PRC and
abroad is uncertain and evolving and could involve substantial risks to
us.
GOVERNMENT
APPROVAL AND REGULATION OF LAIYANG JIANGBO'S PRINCIPAL PRODUCTS OR
SERVICES
General
PRC Government Approval
The
Drug
Administration Law of the PRC governs Laiyang Jiangbo and its products. The
State Food & Drug Administration of the PRC regulates and implements PRC
drug laws. The State FDA has granted Laiyang Jiangbo government permits to
produce the following products: Clarithromycin sustained-released tablets,
Itopride Hydrochloride granules, Ciprofloxacin Hydrochloride tablets,
Paracetamol tablets, Baobaole Chewable tablets, Compound Sufamethoxazole
tablets, and Vitamin C tablets.
The
drug
approval process takes about two years: including local SFDA approval, Local
SFDA test, State SFDA processing, state SFDA expert valuation, clinical trial,
final approval.
No
enterprise may start production at its facilities until it receives approval
from the PRC Ministry of Agriculture to begin operations. Laiyang Jiangbo
currently has obtained the requisite approval and licenses from the Ministry
of
Agriculture in order to operate its production facilities.
Circular
106 Compliance and Approval
On
May
31, 2007, the PRC State Administration of Foreign Exchange (“SAFE”)
issued
an official notice known as "Circular 106," which requires the owners of any
Chinese companies to obtain SAFE’s approval before establishing any offshore
holding company structure for foreign financing as well as subsequent
acquisition matters in China.
In
early
September 2007, the three owners of 100% of the equity in Laiyang Jiangbo,
Cao
Wubo, Xun Guihong and Zhang Yihua, submitted their application to SAFE. On
September 19, 2007, SAFE approved their application, permitting these Chinese
citizens to establish an offshore company, Karmoya International Ltd., as a
“special purpose vehicle” for any foreign ownership and capital raising
activities by Laiyang Jiangbo.
After
SAFE’s approval, Cao Wubo, Xun Guihong and Zhang Yihua became the majority
owners of Karmoya International Ltd. on September 20, 2007.
RESEARCH
AND DEVELOPMENT
Laiyang
Jiangbo places great emphasis on product research and development and maintains
strategic relationships with many research institutions in PRC developing new
drugs, such as 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. Major projects
currently being undertaken by Laiyang Jiangbo focus on the following
products:
Ligustrazine
Ferulic Acid Acetate (LFAA)
LFAA
is a
Cardiac Cerebral Vascular innovative medicine, researched by Pharmaceutical
Institute of Shandong University. It is protected by patent. Its PRC invention
patent application number is 02135989X, publication number is CN1424313A and
patent number is ZL02135989X filed in December 2005.
LFAA
is a
synthetic innovation medicine based on Liqustrazine. It is the successor of
Liqustrazine, which has independent intellectual property rights. LFAA helps
to
reduce blood clotting and prevent platelets in the blood from clumping together.
Based on clinical studies, LFAA’s artery endothelium cell proliferation
stimulating function is 20 times better than Liqustrazine, its protecting
function for endothelium cell is 40 times better than Liqustrazine, and its
anti-cerebral ischemia activity is 4 times better than Liqustrazine. Laiyang
Jiangbo’s goal is to reach sales revenue of RMB $300 million for LFAA after it
is put into production.
Compound
Salvia Miltiorrhiza Cold Powder Injection
Compound
Salvia Miltiorrhiza Cold Powder Injection is a PRC “Level B” new medicine. It
has the effect of decreasing blood pressure, reducing blood fat and protecting
heart. It is an improved generation drug with higher content of active
ingredients, better stability and better clinical effectiveness than the older
generation drug. Laiyang Jiangbo’s goal is to reach sales revenue of RMB $300
million RMB for this product after it is put into production.
For
the
fiscal year ended June 30, 2007, Laiyang Jiangbo spent approximately US $11
million or approximately 14.6% of its fiscal 2007 revenue on research and
development of various pharmaceutical products. For the fiscal year ended June
30, 2006, Laiyang Jiangbo spent approximately US $13.6 million or approximately
27.8% of its fiscal 2006 revenue on research and development of
products.
COSTS
AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
In
compliance with PRC environmental regulations, Laiyang Jiangbo spent
approximately $1,500 in fiscal 2005, $1,600 in fiscal 2006, and approximately
$2,000 in fiscal 2007, mainly for the wastewater treatment in connection with
its production facilities.
EMPLOYEES
Laiyang
Jiangbo currently has more than 1,280 employees, including 220 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 710075.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated
into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
If
any of the following risks actually occurs, our business, financial condition
or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
have a
limited operating history. Laiyang Jiangbo commenced operations in 2003 and
first achieved profitability in the fiscal year ended June 30, 2005.
Accordingly, you should consider our future prospects in light of the risks
and
uncertainties experienced by early stage companies in evolving industries such
as the pharmaceutical industry in China. Some of these risks and uncertainties
relate to our ability to:
. |
maintain
our market position in the pharmaceuticals business in
China;
|
. |
offer
new and innovative products to attract and retain a larger customer
base;
|
. |
attract
additional customers and increase spending per
customer;
|
. |
increase
awareness of our brand and continue to develop user and customer
loyalty;
|
. |
respond
to competitive market conditions;
|
. |
respond
to changes in our regulatory
environment;
|
. |
manage
risks associated with intellectual property
rights;
|
. |
maintain
effective control of our costs and
expenses;
|
. |
raise
sufficient capital to sustain and expand our
business;
|
. |
attract,
retain and motivate qualified personnel;
and
|
. |
upgrade
our technology to support additional research and development of
new
products.
|
If
we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
May Need Additional Financing to Execute Our Business Plan
The
revenues from the production and sale of pharmaceutical products and the
projected revenues from these products may not be adequate to support our
expansion and product development programs. We may need substantial additional
funds to build our new production facilities, pursue further research and
development, obtain regulatory approvals, market our products, and file,
prosecute, defend and enforce our intellectual property rights. We will seek
additional funds through public or private equity or debt financing, strategic
transactions and/or from other sources. We could enter into collaborative
arrangements for the development of particular products that would lead to
our
relinquishing some or all rights to the related technology or
products.
There
are
no assurances that future funding will be available on favorable terms or at
all. If additional funding is not obtained, we will need to reduce, defer or
cancel development programs, planned initiatives or overhead expenditures,
to
the extent necessary. The failure to fund our capital requirements would have
a
material adverse effect on our business, financial condition and results of
operations.
Our
Success Depends On Collaborative Partners, 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
|
. |
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 PRC 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 PRC. Because patent applications are
maintained in secrecy in some cases, we cannot be certain that we or our
licensors are the first creators of inventions described in our pending patent
applications or patents or the first to file patent applications for such
inventions.
Most
of
our drug products have been approved by the PRC's Food and Drug Administration
(SFDA) but have not received patent protection. For instance, Clarithromycin
sustained-release tablets, one of our most profitable products, are produced
by
other companies in China. If any other company were to obtain patent protection
for Clarithromycin sustained-release tablets in China, or for any of our other
drug products, it would have a material adverse effect on our
revenue.
Other
companies may independently develop similar products and design around any
patented products we develop. We cannot assure you that:
. |
any
of our patent applications will result in the issuance of
patents
|
. |
we
will develop additional patentable
products
|
. |
the
patents we have been issued will provide us with any competitive
advantages
|
. |
the
patents of others will not impede our ability to do business;
or
|
. |
third
parties will not be able to circumvent our
patents.
|
A
number
of pharmaceutical, research, and academic companies and institutions have
developed technologies, filed patent applications or received patents on
technologies that may relate to our business. If these technologies,
applications or patents conflict with ours, the scope of our current or future
patents could be limited or our patent applications could be denied. Our
business may be adversely affected if competitors independently develop
competing technologies, especially if we do not obtain, or obtain only narrow,
patent protection. If patents that cover our activities are issued to other
companies, we may not be able to obtain licenses at a reasonable cost, or at
all; develop our technology; or introduce, manufacture or sell the products
we
have planned.
Patent
litigation is becoming widespread in the pharmaceutical industry. Such
litigation may affect our efforts to form collaborations, to conduct research
or
development, to conduct clinical testing or to manufacture or market any
products under development. There are no assurances that our patents would
be
held valid or enforceable by a court or that a competitor's technology or
product would be found to infringe our patents in the event of patent
litigation. Our business could be materially affected by an adverse outcome
to
such litigation. Similarly, we may need to participate in interference
proceedings declared by the U.S. Patent and Trademark Office or equivalent
international authorities to determine priority of invention. We could incur
substantial costs and devote significant management resources to defend our
patent position or to seek a declaration that another company's patents are
invalid.
Much
of
our know-how and technology may not be patentable, though it may constitute
trade secrets. There are no assurances that we will be able to meaningfully
protect our trade secrets. We cannot assure you that any of our existing
confidentiality agreements with employees, consultants, advisors or
collaborators will provide meaningful protection for our trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. Collaborators, advisors or consultants may dispute the ownership
of
proprietary rights to our technology, for example by asserting that they
developed the technology independently.
We
May Encounter Difficulties in Manufacturing our Products
Before
our products can be profitable, they must be produced in commercial quantities
in a cost-effective manufacturing process that complies with regulatory
requirements, including GMP, production and quality control regulations. If
we
cannot arrange for or maintain commercial-scale manufacturing on acceptable
terms, or if there are delays or difficulties in the manufacturing process,
we
may not be able to conduct clinical trials, obtain regulatory approval or meet
demand for our products. Production of our products could require raw materials
which are scarce or which can be obtained only from a limited number of sources.
If we are unable to obtain adequate supplies of such raw materials, the
development, regulatory approval and marketing of our products could be
delayed.
We
Could Need More Clinical Trials or Take More Time to Complete Our Clinical
Trials Than We Have Planned
Clinical
trials vary in design by factors including dosage, end points, length, and
controls. We may need to conduct a series of trials to demonstrate the safety
and efficacy of our products. The results of these trials may not demonstrate
safety or efficacy sufficiently for regulatory authorities to approve our
products. Further, the actual schedules for our clinical trials could vary
dramatically from the forecasted schedules due to factors including changes
in
trial design, conflicts with the schedules of participating clinicians and
clinical institutions, and changes affecting product supplies for clinical
trials.
We
rely
on collaborators, including academic institutions, governmental agencies and
clinical research organizations, to conduct, supervise, monitor and design
some
or all aspects of clinical trials involving our products. Since these trials
depend on governmental participation and funding, we have less control over
their timing and design than trials we sponsor. Delays in or failure to commence
or complete any planned clinical trials could delay the ultimate timelines
for
our product releases. Such delays could reduce investors' confidence in our
ability to develop products, likely causing our share price to
decrease.
We
May Not Be Able to Obtain the Regulatory Approvals or Clearances That Are
Necessary to Commercialize Our Products
The
PRC
and other countries impose significant statutory and regulatory obligations
upon
the manufacture and sale of pharmaceutical products. Each regulatory authority
typically has a lengthy approval process in which it examines pre-clinical
and
clinical data and the facilities in which the product is manufactured.
Regulatory submissions must meet complex criteria to demonstrate the safety
and
efficacy of the ultimate products. Addressing these criteria requires
considerable data collection, verification and analysis. We may spend time
and
money preparing regulatory submissions or applications without assurances as
to
whether they will be approved on a timely basis or at all.
Our
product candidates, some of which are currently in the early stages of
development, will require significant additional development and pre-clinical
and clinical testing prior to their commercialization. These steps and the
process of obtaining required approvals and clearances can be costly and
time-consuming. If our potential products are not successfully developed, cannot
be proven to be safe and effective through clinical trials, or do not receive
applicable regulatory approvals and clearances, or if there are delays in the
process:
. |
the
commercialization of our products could be adversely
affected;
|
. |
any
competitive advantages of the products could be diminished;
and
|
. |
revenues
or collaborative milestones from the products could be reduced or
delayed.
|
Governmental
and regulatory authorities may approve a product candidate for fewer indications
or narrower circumstances than requested or may condition approval on the
performance of post-marketing studies for a product candidate. Even if a product
receives regulatory approval and clearance, it may later exhibit adverse side
effects that limit or prevent its widespread use or that force us to withdraw
the product from the market.
Any
marketed product and its manufacturer will continue to be subject to strict
regulation after approval. Results of post-marketing programs may limit or
expand the further marketing of products. Unforeseen problems with an approved
product or any violation of regulations could result in restrictions on the
product, including its withdrawal from the market and possible civil
actions.
In
manufacturing our products we will be required to comply with applicable good
manufacturing practices regulations, which include requirements relating to
quality control and quality assurance, as well as the maintenance of records
and
documentation. 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
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.
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.
We
may be adversely affected by complexity, uncertainties and changes in PRC
regulation of pharmaceutical business and companies, including limitations
on
our ability to own key assets.
The
PRC
government regulates the pharmaceutical industry including foreign ownership
of,
and the licensing and permit requirements pertaining to, companies in the
pharmaceutical industry. These laws and regulations are relatively new and
evolving, and their interpretation and enforcement involve significant
uncertainty. As a result, in certain circumstances it may be difficult to
determine what actions or omissions may be deemed to be a violation of
applicable laws and regulations. Issues, risks and uncertainties relating to
PRC
government regulation of the pharmaceutical industry include the
following:
. |
we
only have contractual control over Laiyang Jiangbo. We do not own
it due
to the restriction of foreign investment in Chinese businesses;
and
|
. |
uncertainties
relating to the regulation of the pharmaceutical business in China,
including evolving licensing practices, means that permits, licenses
or
operations at our company may be subject to challenge. This may disrupt
our business, or subject us to sanctions, requirements to increase
capital
or other conditions or enforcement, or compromise enforceability
of
related contractual arrangements, or have other harmful effects on
us.
|
The
interpretation and application of existing PRC laws, regulations and policies
and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, pharmaceutical businesses in China,
including our business.
In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our pharmaceutical business through Laiyang Jiangbo by means of
contractual arrangements. If the PRC government determines that these
contractual arrangements do not comply with applicable regulations, our business
could be adversely affected.
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.
Our
contractual arrangements with Laiyang Jiangbo and its shareholders may not
be as
effective in providing control over these entities as direct
ownership.
Since
PRC
law limits foreign equity ownership in companies in China, we operate our
pharmaceutical business through an affiliated Chinese company, 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 as 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 their agreements with us, we may have
to
rely on legal remedies under PRC law, 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
Adverse
changes in economic and political policies of the PRC government could have
a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
Substantially
all of our business operations are conducted in China. Accordingly, our results
of operations, financial condition and prospects are subject to a significant
degree to economic, political and legal developments in China. China's economy
differs from the economies of most developed countries in many respects,
including with respect to the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. While the PRC economy has experienced significant growth in the past
20 years, growth has been uneven across different regions and among various
economic sectors of China. The PRC government has implemented various measures
to encourage economic development and guide the allocation of resources. Some
of
these measures benefit the overall PRC economy, but may also have a negative
effect on us. For example, our financial condition and results of operations
may
be adversely affected by government control over capital investments or changes
in tax regulations that are applicable to us. Since early 2004, the PRC
government has implemented certain measures to control the pace of economic
growth. Such measures may cause a decrease in the level of economic activity
in
China, which in turn could adversely affect our results of operations and
financial condition.
If
PRC law were to phase out the preferential tax benefits currently being extended
to foreign invested enterprises and “new or high-technology enterprises” located
in a high-tech zone, we would have to pay more taxes, which could have a
material and adverse effect on our financial condition and results of
operations.
Under
PRC
laws and regulations, a foreign invested enterprise may enjoy preferential
tax
benefits if it is registered in a high-tech zone and also qualifies as “new or
high-technology enterprise”. As a foreign invested enterprise as well as a
certified “new or high-technology enterprise” located in an economic development
zone in Laiyang City, GJBT is entitled to a three-year exemption from enterprise
income tax beginning from its first year of operation, a 7.5% enterprise income
tax rate for another three years followed by a 15% tax rate so long as it
continues to qualify as a “new or high-technology enterprise.” Laiyang Jiangbo
is currently subject to a 15% enterprise income tax rate for so long as its
status as a “new or high-technology enterprise” remains unchanged. Furthermore,
GJBT may apply for a refund of the 5% business tax levied on its total revenues
derived from its technology consulting services. If the PRC law were to phase
out preferential tax benefits currently granted to “new or high-technology
enterprises” and technology consulting services, we would be subject to the
standard statutory tax rate, which currently is 33%, and we would be unable
to
obtain business tax refunds for our provision of technology consulting services.
Loss of these preferential tax treatments could have a material and adverse
effect on our financial condition and results of operations.
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
To
Date, We Have Not Paid Any Cash Dividends and No Cash Dividends Will be Paid
in
the Foreseeable Future.
We
do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even
if
the funds are legally available for distribution, we may nevertheless decide
not
to pay any dividends. We intend to retain all earnings for our
operations.
The
Application of the "Penny Stock" Rules Could Adversely Affect the Market Price
of Our Common Stock and Increase Your Transaction Costs to Sell Those
Shares.
As
long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000
or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received
the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission 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
“Over-the-Counter 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 Current 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.
Volatility
in Our Common Share Price May Subject Us To Securities
Litigation.
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 will own approximately
75%
of our outstanding ordinary shares, representing approximately 75% 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 as well as
proposed legislative initiatives following the Enron bankruptcy 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 Item 3, “Legal Proceedings” for more information.
The
market price for our stock may be volatile.
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;
|
. |
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.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our
shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from a proposed offering will be sufficient
to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may
seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to
our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
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
Securities and Exchange Commission (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,
as well as 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
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 710075, where we have developed approximately 45,356 square meters
of production, office, and garage space. Our
total
building area is 7172 square meters and our production workshop area is more
than 3132 square meters.
On
August
13, 2003, the Laiyang Development Planning Agency approved Laiyang Jiangbo’s
plan to invest in Section A of the Industrial Park for construction of garage
and office space. On August 18, 2003, the Laiyang Industrial Park Administration
certified Laiyang Jiangbo’s investment of RMB $10 million (US $1.33 million) in
Section A of the Industrial Park for a total construction of 13,000 square
meters.
We
currently do not lease any real property.
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, our
former Chief Executive Officer James Wang, and certain others, alleging breach
of contract. As of the date of this report, neither we nor our registered agent
have been served with a complaint in this action, and we have only become aware
of this lawsuit as a result of recent due diligence performed by one of our
potential financing sources. As of the date of this report, we are
unable to estimate a loss, if any, we may incur related to this lawsuit. We
plan
to vigorously defend our position.
Kenneth
Clinton vs. Genesis Pharmaceuticals Enterprises, Inc., GTEC Holdings, Capital
Growth Financial, Inc., Gary L. Wolfson and Pacific Rim Consultants, Inc. -
Case
No. 50 2007 CA 023923, Palm Beach County, Florida
On
December 21, 2007, Kenneth Clinton, a former director and former President
of
the Company, filed a lawsuit against the Company and certain entities and
persons related to our predecessor Genesis Technology Group, Inc. The complaint
alleges, among other things, breach of contract against the Company for an
agreement to pay the plaintiff certain shares of other public companies
(collectively, the “Reverse Merger Shares”) in connection with reverse merger
transactions arranged by our predecessor, and breach of contract against the
Company for failure to allow the plaintiff to exercise certain stock options
for
shares in the Company or exchange such options for new shares in the Company.
The plaintiff is seeking relief in the form of (1) delivery of the Reverse
Merger Shares, or in the alternative damages in the amount of those shares,
(2)
a judgment against the Company to allow the plaintiff to exchange and exercise
his stock option for shares in the Company, or in the alternative damages in
the
amount of those shares, and (3) a declaratory judgment regarding a pledge and
escrow agreement with defendant Capital Growth Financial. As of the date of
this
report, we are unable to estimate a loss, if any, we may incur related to this
lawsuit. We plan to vigorously defend our position.
CRG
Partners, Inc. and Genesis Technology Group, Inc., n/k/a Genesis Pharmaceuticals
Enterprises, Inc. (ARBITRATION) - Case No. 32 145 Y 00976 07, American
Arbitration Association, Southeast Case Management Center
On
December 4, 2007, CRG Partners, Inc. (“CRG”), a former consultant of the
Company, filed a demand for arbitration against the Company alleging breach
of
contract and seeking damages of approximately $10 million as compensation for
consulting services rendered to the Company. The amount of damages sought by
the
claimant is equal to the dollar value as of 29,978,900 shares of the Company’s
common stock which the claimant alleges are due and owing to CRG. On December
5,
2007, we gave notice of termination of our relationship with CRG under the
consulting agreement. The arbitration is scheduled to be conducted in Miami
Dade
County, Florida. We plan to vigorously defend our position.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We
have
not submitted any matters to a vote of security holders during the fourth
quarter of the fiscal year covered by this annual report on Form
10-KSB.
PART
II
Item
5. MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
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 “GTEC.OB”. 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.
|
LOW
|
HIGH
|
2007
|
|
|
Quarter
ended September 30, 2007
|
$0.085
|
$0.15
|
Quarter
ended June 30, 2007
|
$0.101
|
$0.185
|
Quarter
ended March 31, 2007
|
$0.12
|
$0.185
|
|
|
|
2006
|
|
|
Quarter
ended December 31, 2006
|
$0.08
|
$0.179
|
Quarter
ended September 30, 2006
|
$0.09
|
$0.185
|
Quarter
ended June 30, 2006
|
$0.16
|
$0.361
|
Quarter
ended March 31, 2006
|
$0.031
|
$0.55
|
|
|
|
2005
|
|
|
Quarter
ended December 31, 2005
|
$0.03
|
$0.64
|
As
of
January 14, 2008, the closing sales price for shares of our common stock was
$0.25 per share on the Over-The-Counter Bulletin Board.
Holders
As
of
January 1, 2008, there were approximately 881 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
never paid cash dividends on our common stock. We intend to keep future
earnings, if any, to finance the expansion of our business, and we do not
anticipate that any cash dividends will be paid in the foreseeable future.
In
the past our board of directors has declared dividends on our then outstanding
preferred stock. We paid these preferred stock dividends with common stock.
Our
future payment of dividends will depend on our earnings, capital requirements,
expansion plans, financial condition and other relevant factors that our board
of directors may deem relevant. Our retained earnings deficit currently limits
our ability to pay dividends.
Recent
Sales of Unregistered Securities
This
information has been previously included in a current report on Form 8-K and
therefore need not be furnished pursuant to SEC rules regarding Form 10-KSB.
Reference is made to Item 3.02 of our Current Report on Form 8-K filed on
October 5, 2007, which is hereby incorporated by reference, for a description
of
our recent sales of unregistered securities during the period covered by this
annual report on Form 10-KSB.
ITEM
6. MANAGEMENT’S DISCUSSION AND ANALYSIS
The
following analysis of our consolidated financial condition and results of
operations for the years ended September 30, 2007 and 2006, should be read
in
conjunction with the consolidated financial statements, including footnotes,
and
other information presented elsewhere in this annual report on Form 10-KSB.
When
used in this section, "fiscal 2007" means our fiscal year ended September 30,
2007 and "fiscal 2006" means our fiscal year ended September 30,
2006.
OVERVIEW
We
were
originally incorporated in Florida on August 15, 2001 under the name Genesis
Technology Group, Inc. with a principal business objective to operate as a
business development and marketing firm specializing in advising and providing
turn-key solutions for Chinese small and mid-sized companies entering Western
markets. 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.
Effective
June 20, 2005, we established Genesis Equity Partners, LLC, a Florida limited
liability company (“GEP”), in which we owned 51% and strategic partners owned
the remaining 49%. On May 15, 2007, GEP amended its membership agreement and
accordingly, as of March 1, 2007, we own 71%. Subsequently, we organized
additional limited liability companies, dedicated to specific Chinese partner
companies. While our equity position in these LLCs varied, the minimum ownership
was maintained at 51%, to ensure reporting of consolidated earnings. The
following limited liability companies were established during fiscal
2007:
o
Genesis
Equity Partners, LLC (Huayang) - established in the State of Delaware on
February 1, 2007 and which we own 100%.
o
Genesis
Equity Partners, LLC (Liziyuan) -established in the State of Delaware on
February 27, 2007 and which we own 100%.
o
Genesis
Equity Partners, LLC (Site) - established in the State of Delaware on March
28,
2007 and which we own 100%.
o
Genesis
Equity Partners II, LLC (GEP II) - established in the State of Florida on August
8, 2007 and which we own 71%. The
minority members of GEP II include China West II, LLC, holding 24.5% of GEP
II,
and Shaohua Tan, Inc., a company owned by Dr. Shaohua Tan, a former member
of
our board of directors, holding 24.5%.
Collectively,
the above LLCs are referred to as the "GEP Companies". The GEP Companies are
full service advisory companies specializing in small Chinese-based companies,
which are traded on or are expected to be traded on the U.S. public markets.
The
GEP Companies offer a comprehensive suite of services tailored to the specific
needs of their clients, including:
*
U.S.
representative offices
*
General
business consulting services
*
Merger
and acquisition strategy planning and analysis
*
Advice
on U.S. capital markets, including assessment of potential sources of investment
capital
*
Coordination of professional resources
*
Corporate asset evaluation
*
Public
relations
*
Advice
and structure assistance for strategic alliances, partnerships and joint
ventures
GEP
and the GEP Companies
The
GEP
Companies enter into agreements with their consulting clients which provide
for
a fixed fee to it for its services. The amount of fee varies based upon the
scope of the services GEP renders. For the year ended September 30. 2006, all
of
the GEP Companies' fees were paid in shares of their clients' securities which
are valued at fair market value for the purposes of revenue recognition. The
shares received are unregistered shares. Our policy is to sell securities we
receive as compensation as soon as we remove any restriction and not to hold
these securities as investments.
In
March
2006, GEP, organized in the State of Florida, signed a General Partnership
Agreement with Liang Fang Pharmaceutical, Ltd. ("Liang"), a company registered
in the People's Republic of China. In August 2006, GEP and the members of Liang
established Lotus Pharmaceutical International, Inc., a Nevada company ("Lotus")
and in September 2006, Lotus and its stockholders closed a reverse merger with
Lotus Pharmaceuticals, Inc. (formerly S.E. Asia Trading Company, Inc.), a
publicly-trading company ("LTUS"). At closing, GEP received 13,209,600
restricted common shares of LTUS for services performed in assisting Lotus
facilitate the merger with LTUS and for other business development services.
We
valued the 13,209,600 shares received at $.51 per share based on an accredited
business valuation performed by an independent party. Accordingly, during fiscal
year 2006, we recorded revenue of $6,736,896 related to the receipt of these
restricted marketable equity securities. On September 28, 2006, GEP immediately
distributed 3,170,304 shares of LTUS valued at $1,616,855 to Shaohua Tan, Inc.,
a company owned by Dr. Tan, which represented 24% of the shares received as
compensation for our services. In addition, during year ended September 30,
2007
we distributed 3,469,067 shares of LTUS valued at $1,850,891 to the beneficial
owner, China West, LLC.
In
the
fall of 2005, GEP signed a General Partnership Agreement with Inner Mongolia
Jin
Ma Construction Co., Ltd. and its related companies, Inner Mongolia Jin Ma
Real
Estate Development Co., Ltd and Inner Mongolia Jin Ma Hotel Co., Ltd., (the
"Jin
Ma companies"), a construction, real estate development, and hospitality company
in Western China. On August 28, 2006, the members of Jin Ma established Gold
Horse International, Inc., a Nevada company ("Gold Horse"). On June 29, 2007,
Gold Horse and the stockholders of 100% of Gold Horse's common stock executed
a
Share Exchange Agreement ("Gold Horse Exchange Agreement") with Speedhaul
Holdings, Inc., Inc., a publicly-trading company ("SPEH"). The Gold Horse
Exchange Agreement closed on June 29, 2007 and GEP received 16,750,000
restricted common shares of SPEH for services performed in helping Gold Horse
facilitate the merger with SPEH and for other business development services.
Gold Horse owns 100% of Global Rise International, Limited ("Global Rise"),
a
Cayman Islands corporation. Through Global Rise, Gold Horse operates, controls
and beneficially owns the Jin Ma Companies under a series of contractual
arrangements.
In
order
to complete the transaction and to provide funds necessary to satisfy our
obligations under our agreement with the Jin Ma Companies, we borrowed $325,000
from a former officer of the Company under a secured promissory note due
December 31, 2007. We valued the 16,750,000 shares we received as our
compensation at $0.18 per share based on an accredited business valuation
performed by an independent party. We believe that it was appropriate to use
an
independent valuation for purposes of valuing the shares of SPEH received in
as
much as SPEH was essentially a shell corporation with no sales and assets.
The
essential basis for the valuation of the restricted common shares received
by us
was predicated on the valuation of the operation, history and prospects of
the
Jin Ma Companies, in as much as the common shares received by us occurred in
conjunction with the completed merger.
Based
on
the circumstances, we believe that in order to determine the fair value of
the
restricted shares of SPEH received on June 29, 2007, the valuation report would
provide a more cogent estimation of the value of the restricted common shares
received than the lack of trading prices posted for SPEH prior to the merger.
In
connection with the receipt of the restricted common shares of SPEH, the Company
recorded revenue of $3,015,000, which accounts for approximately 99.3% of our
revenues for the year ended September 30, 2007. We immediately distributed
an
aggregate of 4,857,500 shares of SPEH valued at $874,350 to the minority members
of GEP, and we transferred an additional 3,350,000 shares of SPEH valued at
$603,000 to a former officer of the Company as compensation expense in
connection with a short-term promissory note.
On
November 20, 2006, one of the GEP Companies organized in the State of Delaware
signed a contract with a Chinese environmental technologies company in the
power
generation and industrial dyeing sectors. GEP could receive a significant equity
position and ongoing consulting fees for coordination and oversight of the
U.S.
business activities of the Chinese company. This Chinese company required that
the GEP Company refrain from publicizing its name or exact location until the
audit by an accredited U.S. accounting firm has been completed. We were
responsible for paying for the audit and other expenses, and the procedure
typically takes 60-120 days, unless unforeseen complexities are discovered
during the process. A New York-based auditing firm was engaged in early February
2007. In September 2007, we determined that this transaction could not be
completed and related deferred contract costs should be fully written
off.
On
March
11, 2007, one of the GEP Companies organized in the State of Delaware, signed
a
contract with a Chinese health foods beverage company. GEP could receive a
significant equity position and ongoing consulting fees for coordination and
oversight of the U.S. business activities of the Chinese Company. This Chinese
company required that GEP refrain from publicizing its name or exact location
until the audit by an accredited U.S. accounting firm has been completed. GEP
was responsible for paying for the audit and other expenses, and the procedure
typically takes 60-120 days, unless unforeseen complexities are discovered
during the process. In July 2007, we determined that this transaction could
not
be completed and related deferred contract costs should be fully written
off.
In
May
2007, GEP of Florida, signed a General Partnership Agreement with Laiyang
Jiangbo Pharmaceutical Co., Ltd. (“Laiyang Jiangbo”), a company registered in
the People's Republic of China. Our wholly-owned subsidiary, Karmoya
International Ltd., a British Virgin Islands company (“Karmoya”), was
established as a “special purpose vehicle” for the purpose of engaging in
foreign capital-raising for Laiyang Jiangbo. China’s State Administration of
Foreign Exchange (“SAFE”) requires the owners of any Chinese companies to obtain
SAFE’s approval before establishing any offshore holding company structure for
foreign financing as well as subsequent acquisition matter under the “Circular
106” in PRC. On September 19, 2007, Karmoya was approved by local Chinese SAFE
as a “special purpose vehicle” offshore company.
On
September 20, 2007, Karmoya acquired 100% of Union Well International Limited
(“Union Well”), a Cayman Islands corporation established on May 9, 2007. On
September 17, 2007, Union Well established a 100% subsidiary, Genesis Jiangbo
(Laiyang) Biotech Technology Co., Ltd. (“GJBT”), in PRC as a wholly owned
foreign limited liability company.
On
October 1, 2007, we executed a Share Acquisition and Exchange Agreement by
and
among us, Karmoya, and the shareholders of 100% of Karmoya’s capital stock (the
“Karmoya Shareholders”). As a result of this exchange 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 Karmoya, Union Well,
GJBT
and Laiyang Jiangbo (the “LJ Group”). Through various consulting service
agreements and equity-related agreements between certain LJ Group entities,
our
principal business activities shall be conducted through the LJ Group’s
operating company in China, Laiyang Jiangbo. Laiyang Jiangbo is engaged in
the business of developing, manufacturing and selling healthy
medicines.
While
it
is not our policy to hold securities we accept as payment for services as
long-term investments, we are not always able to immediately liquidate such
securities as a result of either market conditions or restrictions on resale
imposed by Federal securities laws. These unsold securities comprise
substantially all of our assets at September 30, 2007. Our balance sheet
reflects investments in marketable securities, which are securities which are
freely saleable by us, and restricted investments in marketable securities
held
for sale, which represent securities which are not freely saleable under Federal
securities laws. Realized gains or losses on securities are recognized at the
time the securities are sold. Unrealized gains or losses on trading securities
are recognized on a monthly basis in our statement of operations based upon
the
changes in the fair market value of the securities. Unrealized gains or losses
on investment in marketable securities held for sale are recognized as a
component of comprehensive income on a monthly basis based on changes in the
fair market value of the securities. These changes in valuations of the
securities can have the effect of significantly increasing our net income and
comprehensive income, if the price of the securities increases from the original
value assigned to it at the time the related revenue was recognized. Conversely,
if the price were to decline, such decreases could negatively impact our net
income and comprehensive income.
Our
revenues for fiscal 2006 and fiscal 2007 were materially dependent on a limited
number of consulting clients. In addition, under our present business model,
our
ability to generate revenues from our consulting contracts is dependent upon
factors which may be out of our control. Accordingly, while we could enter
into
agreement with companies which may produce revenue for us in future periods,
it
is also possible that the events necessary for us to receive payment for our
services may never occur. In addition, we are responsible for the payment of
various fees and expenses to third parties related to the services we provide,
which such payments are not conditioned upon our receipt of payment from our
client. While we do not believe it to be likely, it is possible that we could
expend significant funds on behalf of a particular client and never earn our
fee
from that client.
SPECIAL
CONSIDERATIONS REGARDING THE INVESTMENT ACT OF 1940
It
has
not been our intention to function as an investment company and to be primarily
engaged and operate in a manner in which our asset base would be comprised
in
substantial part of securities and passive investments in which we would not
have a significant control relationship. As is evidenced from our historical
experience, our primary asset until mid-February 2006 was our 80% owned
subsidiary, Chorry Technology Development Co., Ltd. In addition, we held at
least a majority owned interest in several other companies which we disposed
of
or discontinued their operations between the end of 2004 and September 30,
2006.
U.S.
companies that have more than 100 shareholders or are publicly traded in the
U.S. and are, or hold themselves out as being, engaged primarily in the business
of investing, reinvesting or trading in securities, are subject to regulation
under the Investment Company Act of 1940. While we do not believe our company
is
an "investment company" within the scope of the Investment Company Act of 1940,
by virtue of the percentage of the value of securities that we hold to our
total
assets, under certain circumstances we could be subject to the provisions of
the
Investment Company Act of 1940 in the event we are unable to fulfill our
business model in a timely manner.
Because
Investment Company Act regulation is, for the most part, inconsistent with
our
business model, we cannot feasibly operate our business as a registered
investment company. Our board of directors has adopted a resolution stating
that
it is not our intent to become subject to the Investment Company Act of 1940
and
authorizing our officers to take such actions as are necessary, including the
periodic liquidation of any marketable equity securities we may own to reduce
those holdings below the threshold level as prescribed by the Investment Company
Act of 1940. There are no assurances we will be able to timely liquidate a
sufficient number of these shares or increase our asset base in a manner so
as
to reduce our holdings to a level below the necessary threshold.
If
we are
deemed to be, and are required to register as, an investment company, we will
be
forced to comply with substantive requirements under the Investment Company
Act
of 1940, including:
o
limitations on our ability to borrow;
o
limitations on our capital structure;
o
restrictions on acquisitions of interests in associated companies;
o
prohibitions on transactions with affiliates;
o
restrictions on specific investments; and
o
compliance with reporting, record keeping, voting, proxy disclosure and other
rules and regulations.
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 1 to the audited
consolidated financial statements included in this Form 10-KSB. 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.
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.
Marketable
equity securities consist of investments in equity of publicly traded and
non-public domestic companies and are stated at market value based on the most
recently traded price of these securities at September 30, 2006. We have
marketable securities classified as trading and available for sale securities
at
September 30, 2007. Realized and unrealized gains and losses on trading
securities are included in earnings. Unrealized gains and losses on available
for sale securities, determined by the difference between historical purchase
price and the market value at each balance sheet date, are recorded as a
component of Accumulated Other Comprehensive Income in Stockholders' Equity.
Realized gains and losses are determined by the difference between historical
purchase price and gross proceeds received when the marketable securities are
sold. Realized gains or losses on the sale or exchange of equity securities
and
declines in value judged to be other than temporary are recorded in gains
(losses) on equity securities, net. Marketable equity securities are presumed
to
be impaired if the fair value is less than the cost basis continuously for
three
consecutive quarters, absent evidence to the contrary.
Our
investment impairment analysis generally included and will include in the future
review and analysis of several factors, including:
1.
Discussions with each company's respective management to review the status
of
key internally established development milestones. As a result of our strategic
alliance with partner companies, we regularly had access to information
regarding technology developments and business initiatives that was generally
not available to the investor community.
2.
Our
knowledge of partner company's activities relating to new agreements, new
investor funding and milestone achievements.
3.
Our
review of financial position, primarily the cash resources and operating cash
flow, to determine if cash levels were sufficient to continue to fund projected
operations and ongoing technology development.
Additionally,
we consider EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments" ("EITF 03-01"). According
to EITF 03-01, a security is impaired when its fair value
is
less than its carrying value, and an impairment is other than- temporary if
the
investor does not have the "ability and intent" to hold the investment until
a
forecasted recovery of its carrying amount. EITF 03-01 holds that the impairment
of each security must be assessed using the ability-and-intent-to-hold criterion
regardless of the severity or amount of the impairment. We intend to hold its
investment in marketable securities for a period of time sufficient to allow for
any anticipated recovery in market value.
Paragraph
16 of SFAS 115 and SAB Topic 5M provide that numerous factors must be
considered, including the following, in determining whether a decline in value
requires a write-down to a new cost basis for an individual security, which
we
consider:
o
The
length of time and extent to which the market value has been less than
cost;
o
The
financial condition and near-term prospects of the issuer, including any
specific events that may influence the operations of the issuer (e.g., changes
in technology, or the planned discontinuance of a line of business);
and
o
The
intent and ability of the holder to retain its investment in the issuer for
a
period of time sufficient to allow for any anticipated recovery in market
value.
Revenue
recognition - We follow the guidance of the securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, we record
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer
is
fixed or determinable, and collectability is reasonably assured. The following
policies reflect specific criteria for our revenues stream:
Consulting
income is recognized on a straight-line basis over the period of the service
agreement. Deferred revenues relates to consulting revenues that is being
recognized over the period of the service agreement.
Substantially
all of the services we provide are paid in common shares issued by our clients.
These instruments are classified as marketable equity securities on the
consolidated balance sheet, if still held at the financial reporting date.
These
instruments are stated at fair value in accordance with the provision of
Statement of Financial Accounting Standards No. 115,"Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115) and EITF 00-8
"Accounting by a grantee for an equity instrument to be received in conjunction
with providing goods or services." Primarily all of the equity instruments
are
received from small public companies.
RESULTS
OF OPERATIONS
YEAR
ENDED SEPTEMBER 30, 2007 COMPARED THE YEAR ENDED SEPTEMBER 30, 2006
|
|
|
2007
|
|
|
2006
|
|
|
$
Change
|
|
|
Change
(+/-)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
3,305,000
|
|
$
|
6,750,229
|
|
$
|
(3,71,229
|
)
|
|
(55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of services performed
|
|
|
659,066
|
|
|
318,916
|
|
|
340,
150
|
|
|
106.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
expense
|
|
|
1,195,147
|
|
|
137,506
|
|
|
1,057,641
|
|
|
769.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and non-cash compensation
|
|
|
5,084,451
|
|
|
965,803
|
|
|
4,118,648
|
|
|
426.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
loss on deferred contract cost
|
|
|
632,357
|
|
|
-
|
|
|
632,357
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
selling and general and administrative expenses
|
|
|
1,301,745
|
|
|
652,219
|
|
|
649,526
|
|
|
99.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
8,872,766
|
|
|
2,074,444
|
|
|
6,798,322
|
|
|
327.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss )from operations
|
|
|
(5,837,766
|
)
|
|
4,675,785
|
|
|
(10,513,551
|
)
|
|
(224.6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on sale of marketable securities
|
|
|
154,020
|
|
|
1,046,916
|
|
|
(892,896
|
)
|
|
(85.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on impairment of none marketable securities
|
|
|
(26,000
|
)
|
|
(20,300
|
)
|
|
(5,700
|
)
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on trading securities
|
|
|
547,811
|
|
|
-
|
|
|
(547,811
|
)
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
expense
|
|
|
(184,540
|
)
|
|
-
|
|
|
-
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6,631
|
|
|
17,351
|
|
|
(10,720
|
)
|
|
(61.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense- related party
|
|
|
(3,287
|
)
|
|
-
|
|
|
(3,287
|
)
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
494,635
|
|
|
1,043,967
|
|
|
(549,332
|
)
|
|
(52.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before discontinued operations, income taxes, and minority
interest
|
|
|
(5,434,131
|
)
|
|
5,719,752
|
|
|
(11,062,883
|
)
|
|
(193.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
gain (loss) from discontinued operations
|
|
|
-
|
|
|
246,501
|
|
|
(246,501
|
)
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in income (loss) of subsidiary
|
|
|
(477,453
|
)
|
|
(3,056,647
|
)
|
|
2,579,194
|
|
|
(84.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(5,820,584
|
)
|
|
2,909,606
|
|
|
(8,730,190
|
)
|
|
(300.1
|
%)
|
REVENUES
For
the
year ended September 30, 2007, we had consolidated revenues of $3,035,000 as
compared to $6,750,220 for the year ended September 30, 2006, an decrease of
$3,715,220 or 55%. The decrease in revenue is primarily attributable to a Share
Exchange Agreement closed on June 29, 2007 by and among SPEH whereby GEP, our
51%-owned subsidiary, received 16,750,000 restricted common shares of SPEH
for
services performed in helping Gold Horse facilitate the merger with SPEH and
for
other business development services. We valued these shares at $.18 per share
based on an accredited business valuation performed by an independent party.
Accordingly, we recorded revenue of $3,015,000 related to the receipt of these
restricted marketable equity securities. These revenues do not represent
recurring revenues. As set forth above, GEP immediately distributed 4,857,500
shares of SPEH valued at $874,350 to the minority members of GEP which
represented 29% of the shares received as compensation for our services.
Additionally, in connection with a loan of $325,000 to us made by a former
officer of the Company which is secured by additional stock we own and due
on
December 31, 2007, we distributed 3,350,000 shares of SPEH common stock valued
at $603,000 to him as compensation expense. Accordingly, we own the remaining
8,542,500 shares of SPEH which we received as compensation for our services.
As
described later in this report, there are no assurances when or if we will
be
able to liquidate these shares to generate cash to fund our
operations.
OPERATING
EXPENSES
For
the
year ended September 30, 2007, operating expenses which includes
cost of services performed, consulting fees, compensation expense, professional
fees and other selling, general and administrative, were $8,872,766 compared
to
$2,074,444 for the year ended September 30, 2006, an increase of $6,798,322
or
327,7%.
The
increase in operating expenses was primarily attributable to the
following:
*
Our
cost of services performed increased to $659,006 for the year ended September
30, 2007 as compared to $318,916 for the year ended September 30, 2006. The
increase in the cost of services was primarily attributable to increase in
direct costs incurred in rendering the services to our client companies, which
include marketing, travel, legal, accounting fees, and third party consultants
fees directly related to SPEH.
*
Our
consulting expense increased to $1,195,147 for the year ended September 30,
2007
from $137,506 for the year ended September 30, 2006, an increase of $1,057,641
or 769.2%. The increase was due to an increase in the use of consultants to
actively pursuit small to medium size China -base client companies for business
opportunities as well as corporate financing activities. For the year ended
September 30, 2007, stock-based consulting expense amounted to $281,345 as
compared to $122,581 in fiscal 2006. Cash payments to consultants amount to
$894,828 as compared to $14,925 in fiscal 2006.
*
Compensation expense, which includes salaries and stock-based compensation
expense, increase to $5,084,451
for the year ended September 30, 2007 from $965,803 for year ended September
30,
2006, an increase of $4,118,648 or 426.5%. The increase in salaries and
stock-based compensation expense was attributable to-
|
1. |
An
increase in the amount of stock-based compensation of $2,608,128
in fiscal
2007 as compared to the fiscal 2006 of $851,301 recognized from
amortization of deferred compensation in connection with the granting
of
stock options to officers, employees, and directors in fiscal
2007.
|
|
2. |
In
fiscal 2007, we paid a bonus to two former officers of the Company
in the
aggregate amount of $733,506 consisting of a distribution of 653,690
shares (326,845 each) of common stock of LTUS held by the Company
to the
two former officers with a fair value of $653,690 and cash payments
of
$79,816. We also paid a compensation expense in the aggregate amount
of
$136,750 consisting of a distribution of 2,200,001shares of common
stock
of Dragon Capital Group (DRGV) with a fair value of $66,000 and a
cash
payments of $42,075.
|
|
3. |
In
connection with a loan of $325,000 to us made by a former officer
of the
Company which is secured by additional stock we own and due on December
31, 2007, we distributed 3,350,000 shares of SPEH common stock valued
at
$603,000 to him as compensation
expense.
|
|
4. |
We
recorded compensation expense of $435,269 to a former director in
connection with the distribution of restricted marketable equity
securities to this former director in excess of his basis in GEP.
On April
13, 2007, our then-current board of directors unanimously consented
that
GEP member Shaohua Tan, Inc., owned by a former director of the Company,
shall bear no direct, indirect or personal expenses for managing
the GEP
program and shall be reimbursed, on a timely basis, for any charges
that
he bears and incurs. Accordingly, we recorded compensation expense
of
$435,269 which represents the distribution of his proportionate percentage
of restricted common stock received by GEP for services rendered
in excess
of the former director's basis in
GEP.
|
|
5. |
We
incurred an increase in overall salary expense of 10% for our executive
officers, and we reduced stock-based compensation by $48,119 due
to a
one-time cancellation of common stock. At September 30, 2007, we
had
deferred compensation of $28,750. Included in our compensation expense
for
fiscal 2007 is approximately $718,000 in cash compensation, approximately
$2,608,000 in stock-based compensation, and approximately $ 1,758,000
in
distribution of our investment stocks as compared to approximately
$115,000, $851,000 and $0 in fiscal
2006
|
*We
recorded impairment loss on deferred contract costs of $608,357 in fiscal 2007.
In an effort to preserve and enhance stockholder value,
we
sought
to
identify, evaluate and consider various companies and compatible or alternative
business opportunities pursuant to which we would acquire a target company
with
an operating business and continue the acquired company’s business as a
publicly-held entity. We identified the target company, Laiyang Jiangbo, in
May
2007. In September 2007, we determined to complete the Laiyang Jiangbo
acquisition and subsequently decided to cease our business development and
marketing operations. We deemed the carrying value of our deferred contract
costs was not recoverable. As a result, we wrote down the carrying value of
deferred acquisition cost of $608,357 and recorded this expense as an impairment
loss on deferred contract cost.
*
Other
selling, general and administrative expenses increased to $1,301,745 for the
year ended September 30, 2007 from $652,219 for the year ended September 30,
2006, an increase of $27,086 or 4%. Other selling, general and administrative
expenses included the following:
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Professional
fees
|
|
$
|
816,021
|
|
$
|
250,171
|
|
Rent
|
|
|
55,214
|
|
|
50,536
|
|
Travel
and entertainment
|
|
|
159,555
|
|
|
88,883
|
|
Other
selling, general and administrative
|
|
|
264,956
|
|
|
262,629
|
|
Total
|
|
$
|
1,295,746
|
|
$
|
652,219
|
|
In
fiscal
2006, professional fees increased by $610,850 or 297.7% due to an increase
in
legal fees of $254,000 related to general corporate matters, acquisition,
litigation matter against two former employees, and other legal matters in
which
we are the plaintiff, and an increase in accounting and auditing fee of
approximately $378,000 primarily due to acquisition related activities.
Rent
expense increase to $55,214 for the year ended September 30, 2007 from $50,536
for year ended September 30, 2006, a slight increase decrease of $4,678 or
9.3%.
The increase was due to increase in rate related charges.
During
the year ended September 30, 2007, travel related expenses increased
by $70,672 or 79.5% as compared to fiscal 2006 and was attributable to increase
in executives’ travel to China.
Other
selling, general and administrative expenses include office expenses
and supplies, telephone and communications, and other expenses. In fiscal
2007, other selling, general and administrative expenses amounted to
$264,956
compared to $262,629 during fiscal 2006, a slight increase of $2,327 or 0.9%.
GAIN
FROM
SALE/DISPOSAL OF MARKETABLE SECURITIES
In
fiscal
2007, we recorded a gain from the sale of marketable securities of $154,020
compared to $1,046,916 for the year ended September 30, 2006. The gain from
the
sale of marketable securities relates to marketable securities that we had
previously received for business development services rendered by us and which
we had previously valued and recorded as revenue over the contract period.
The
gain represents the difference in the sale price of the marketable securities
and the fair value of services provided which was previously recorded as
revenue. Additionally, in connection with services previously rendered, we
were
granted warrants to purchase marketable securities which we exercised at a
price
less than fair market value. These marketable securities were sold and
contributed to the gain from sale of marketable securities.
UNREALIZED
GAIN ON TRADING SECURITIES
We
recorded an unrealized gain on trading securities of $547,811 for the year
ended
September 30, 2007 as compared to $0 for the year ended September 30, 2006.
The
unrealized gain on trading securities relates to marketable securities that
we
had previously received for business development services rendered by us and
which we had previously valued and recorded as revenue over the contract period.
The gain represents the difference between the fair values at the end of each
reporting period.
LOSS
ON
IMPAIRMENT OF MARKETABLE SECURITIES
In
fiscal
2007, we recorded an impairment loss of $26,000 as compared to $20,300 in 2006
related to the reduction in the fair market value of certain marketable equity
securities that management deemed to be other than temporary. These securities
represented shares which we had received as compensation for our services in
fiscal 2004. At the time of receipt we recognized revenue of $22,000 related
to
these securities
INTEREST
INCOME
Interest
income was $6,631for the year ended September 30, 2006 as compared to interest
income of $17,351for the year ended September 30, 2005, a decrease of $10,720
or
61.8%. The decrease was attributable to an decrease in interest-bearing cash
balances.
INCOME
BEFORE DISCONTINUED OPERATIONS, INCOME TAXES AND MINORITY INTEREST
For
the
year ended September 30, 2007 our loss before discontinued operations, income
taxes and minority interest is $5,343,131 as compared to an income before
discontinued operations, income taxes and minority interest of $5,719,752 for
the year ended September 30, 2006, a decrease of $11,062,883 as a result of
decrease net revenues and increased expenses.
GAIN
(LOSS) FROM DISCONTINUED OPERATIONS
For
the
year ended September 30, 2006, we recorded a gain from discontinued operations
of $9,124 associated with the discontinuation of our Chorry subsidiary which
was
sold on February 14, 2006 and from Extrema.
On
November 2, 2005, we entered into a stock purchase agreement with Dragon
Ventures (OTC: DRGV), a Nevada public corporation, for the sale of our
majority-owned subsidiary, Chorry Technology Development Co., Inc (“Chorry”). In
connection with this agreement, we delivered 100% of our shares in Chorry,
representing our 80% ownership of that subsidiary, to DRGV, we received
17,159,965 common shares of DRGV valued at closing at approximately $463,000
calculated at the average closing price of $.027 per share on December 15,
2005.
In connection with the sale of Chorry, for the year ended September 30, 2006,
we
reported a gain from the sale of Chorry of $237,377.
The
following table sets forth for the fiscal years indicated selected financial
data of our discontinued operations.
|
|
2006
|
|
Revenue
|
|
$
|
7,398,358
|
|
Cost
of sales
|
|
|
7,259,500
|
|
Gross
profit
|
|
|
138,858
|
|
Operating
and other non-operating expenses
|
|
|
129,734
|
|
Gain
(loss) from discontinued operations
|
|
|
9,124
|
|
Gain
(loss) from disposal of discontinued operations
|
|
|
237,377
|
|
Total
gain (loss) from discontinued operations
|
|
|
246,501
|
|
Minority
interest
For
the
year ended September 30, 2007, we reported a minority interest expense of
$477,453 as compared to minority interest income of $3,056,647 for the year
ended September 30, 2006. The minority interest is attributable to GEP's
minority LLC members, and had the effect of reducing our net
income.
OVERALL
We
reported a net loss for the year ended September 30, 2007 of $5,820,584 compared
to a net loss for the year ended September 30, 2005 of $2,909,606. This
translates to an overall basic and diluted per-share loss available
to shareholders of $.07 for the year ended September 30, 2007, respectively,
compared to basic and diluted per-share income of $.04 for year ended September
30, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
The following table provides certain selected balance sheet comparisons between
September 30, 2007 and September 30, 2006:
|
|
September
30
|
|
2007
v.s.
|
|
%
Change
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
(+/-)
|
|
Working
capital
|
|
|
(1,106,424
|
)
|
|
868,915
|
|
|
(1,975,339
|
)
|
|
-227.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
534,950
|
|
|
592,610
|
|
|
(57,660
|
)
|
|
-9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
equity securities, at market
|
|
|
370,330
|
|
|
601,565
|
|
|
(231,235
|
)
|
|
-38.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
contract cost
|
|
|
|
|
|
100,503
|
|
|
(100,503
|
)
|
|
-100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
945,900
|
|
|
1,301,408
|
|
|
(355,508
|
)
|
|
-27.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
marketable securities, at market
|
|
|
1,746,809
|
|
|
4,184,917
|
|
|
(2,438,108
|
)
|
|
-58.3
|
%
|
Restricted
marketable securities, at market- related party
|
|
|
-
|
|
|
1,684,224
|
|
|
(1,684,224
|
)
|
|
-100.0
|
%
|
Other
receivable- related party
|
|
|
3,250,000
|
|
|
-
|
|
|
3,250,000
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
5,949,792
|
|
|
7,231,773
|
|
|
(1,281,981
|
)
|
|
-17.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
payable- related parties
|
|
|
515,000
|
|
|
-
|
|
$
|
515,000
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expense
|
|
|
1,085,323
|
|
|
207,504
|
|
|
877,819
|
|
|
423.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
from discontinued operationgs
|
|
|
120,709
|
|
|
150,709
|
|
|
(30,000
|
)
|
|
-19.9
|
%
|
Due
to related party
|
|
|
331,292
|
|
|
75,000
|
|
|
256,292
|
|
|
341.7
|
%
|
Total
current liabiltiies
|
|
|
2,052,324
|
|
|
433,213
|
|
|
1,619,111
|
|
|
373.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
121,063
|
|
|
1,577,395
|
|
|
(1,456,332
|
)
|
|
-92.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
3,776,405
|
|
|
5,221,165
|
|
|
(1,444,760
|
)
|
|
-27.7
|
%
|
At
September 30, 2007, we had cash on hand of approximately $545,000 and working
capital of approximately $(1,106,000). Our current assets primarily include
approximately $370,000 in investments in trading marketable equity securities.
Our current liabilities primarily consist of $1,085,000 of accounts payable
and
accrued expenses, $331,000 due to a former director for services rendered,
and
$121,000 of liabilities from discontinued operations. Subsequent to September
30, 2007, we effectively sold all of our investments in trading marketable
equity securities to satisfy our accounts payable and accrued expense
obligation.
At
September 30, 2007, our marketable equity securities consist of the
following:
Description
|
|
Fair
Market Value
|
|
|
|
|
|
Un-restricted
marketable equity securities:
|
|
|
|
|
|
|
|
Lotus
Pharmaceuticals Inc.
|
|
$
|
320,621
|
|
Dragon
International Corp
|
|
|
13,112
|
|
Com-guard.com,
Inc.
|
|
|
140
|
|
Other
mutual funds
|
|
|
36,457
|
|
|
|
$
|
370,330
|
|
Restricted
marketable equity securities:
|
|
|
|
|
|
|
|
|
|
Gold
Horse International (GHII, formally SPEH)
|
|
$
|
1,474,650
|
|
Dragon
Capital Group (DRGV.PK)
|
|
|
272,159
|
|
|
|
$
|
1,746,809
|
|
While
the
value of investments in restricted marketable equity securities held for sale
represent substantially all of our assets, we are not presently able to
liquidate these securities and generate cash to pay our operating expenses.
Under Federal securities laws these securities cannot be readily resold by
us
generally absent a registration of those securities under the Securities Act
of
1933. We cannot predict when, if ever, that we will be able to liquidate those
securities or the amount of proceeds we can expect to receive from the sale.
While under generally accepted accounting principles we are required to reflect
the fair value of these securities on our balance sheet, they are not readily
convertible into cash. We have met our obligations from cash proceeds received
from the sale of marketable equity securities. Although proceeds from sales
of
marketable equity securities have allowed us to meet our obligations in the
recent past, there can be no assurances that our present methods of generating
cash flow will be sufficient to meet future obligations. Historically, we have,
from time to time, been able to raise additional capital from sales of our
capital stock, but there can be no assurances that we will be able to raise
additional capital in this manner.
Net
cash
used in operations was $2,054,137 for the year ended September 30, 2007 as
compared to net cash used in operations of $914,353 for the year ended September
30, 2006. For the year ended September 30, 2007, we used cash to fund our net
loss of $5,820,584 and recorded revenues from the receipt of restricted
marketable securities for services of $3,035,000, add back of non-cash items
such as stock-based compensation and consulting expense of $3,015,000,
depreciation and amortization expense of $17,561, loss on impairment of deferred
contract cost of $608,357, loss on impairment of cost-method investment of
$26,000, minority interest expense of $154,020, compensation expense from
distribution of restricted marketable equity securities of $1,691,856 as well
as
changes in assets and liabilities of $1,608,658 offset by gain on sale of
marketable securities of $154,020, unrealized gain on trading securities of
$547,811. For the year ended September 30, 2006, we used cash to fund our net
income of $2,909,606 ($2,663,105 from continuing operations and $246,501 from
discontinued operations) and recorded revenues from the receipt of restricted
marketable securities for services of $6,736,896, add back of non-cash items
such as stock-based compensation of $981,672, depreciation and amortization
expense of $7,915, loss on impairment of marketable securities of $20,300,
loss
on impairment of cost-method investment of $34,000, minority interest expense
of
$3,056,647 as well as changes in assets and liabilities of $113,488 offset
by
gain on sale of marketable securities of $1,046,916.
Net
cash
provided by investing activities for the year ended September 30, 2007 was
$,1849876 as compared to net cash used in investing activities for the year
ended September 30, 2006 of $812,976. For the year ended September 30, 2007,
we
received cash from the sales of marketable securities of $1,851,796 as compared
to $1,413,307 in 2006 In fiscal 2006, we exercised stock warrants and purchased
marketable securities for $600,331.
Net
cash
provided by financing activities was $176,601 for the year ended September
30,
2007 as compared to net cash provided by financing activities of $675,930 for
the year ended September 30, 2006. For the year ended September 30, 2007, net
cash provided by financing activities related to contributions from LLC members
of $176,601as compared to net cash provided by financing activities related
to
proceeds received from the exercise of stock options and warrants of $548,380
and contributions from LLC members of $127,550 in fiscal 2006.
We
currently have no material commitments for capital expenditures.
Our
future growth is dependent on our ability to raise capital for working capital
purposes and expansion, and to seek additional revenue sources. In order to
fund
our GEP contracts or if we decide to pursue any acquisition opportunities or
other expansion opportunities, we may need to raise additional capital, although
there can be no assurance such capital-raising activities would be successful.
There are no assurances that such capital will be available to us when needed
or
upon terms and conditions which are acceptable to us. If we are able to secure
additional working capital through the sale of equity securities, the ownership
interests of our current stockholders will be diluted. If we raise additional
working capital through the issuance of debt or additional dividend paying
securities our future interest and dividend expenses will increase. If we are
unable to secure additional working capital as needed, our ability to grow
our
sales or meet our operating obligations as they become due and continue our
business and operations could be in jeopardy and we could be forced to limit
or
cease our operations.
RELATED
PARTY TRANSACTIONS
Distribution
of marketable equity securities
On
May
21, 2007, our then-current board of directors approved the distribution of
an
aggregate of 653,690 shares (326,845 each) of common stock of LTUS held by
us to
two former officers of the Company. In connection with the distribution of
the
LTUS shares, we recorded compensation expense of $653,690, which was based
on
the fair market value of the LTUS shares on the distribution date.
On
June
29, 2007, in connection with the receipt of 16,750,000 common shares of SPEH
for
services rendered, we immediately distributed 4,020,000 of these shares to
a
company that owns 24% of GEP II, our partially-owned subsidiary and is owned
by
Shaohua Tan, a former director of the Company. We also immediately distributed
837,500 of these shares to a member of GEP II that owns 5% of GEP II.
In
August
2007, we distributed 2,200,001 shares of Dragon Capital Group Corp. (“DRGV”) to
one of our former directors for services provide to us. The shares were valued
at $66,002 or $0.03 per share.
During
the year ended September 30, 2007, we distributed 3,469,067 shares of LTUS
to
China West, LLC, a member of GEP, an LLC organized in the State of Florida,
valued at $1,850,891.
Other
receivables - related party
In
connection with a $325,000 secured promissory note issued to the former
director/officer and in June 2007 (see “Loan payable” section below), 3,250,000
shares of Lotus Pharmaceuticals, Inc.'s ("LTUS") common stock owned by us are
held in escrow account in the name of the former director/officer. The LTUS
shares were valued at $3,250,000 or $1 per share at September 30, 2007 and
are
recorded as other receivable-related party in the accompanying consolidated
balance sheet since the shares are in the name of the former director/officer.
In December 2007, we placed $325,000 loan repayment fund in a trust account
and
notified the former director/officer that we intended to repay the loan amount
in full. The former director /officer has since declined to receive the $325,000
loan repayment and refused to return the 3,250,000 LTUS shares in escrow and
subsequently filed a complaint against us and our former CEO for breach of
contract. In his complaint, the former director/officer demanded that we issue
an additional 740,000 shares to him and allow him to exercise the options issued
to him in 2007 with a promissory note and agree to register his shares, or, in
the alternative, damages. We believe the claims of the former director/officer
are without merit and the possibility of any adverse decision to the Company,
with any contingent liability, to be remote, as the term is used in FASB 5
Accounting
for Contingencies.
As
such, we have not accrued a related loss contingency in the accompanying
financial statements pursuant to FAS 5.
Due
to
related party
At
September 30, 2007, we owed $331,292 to Shaohua Tan, a former director, for
services rendered during the year ended September 30, 2007.
Loan
payable
On
June
29, 2007, we issued a $325,000 secured promissory note to one of our former
officers in connection with a loan to provide us with cash to satisfy certain
contractual obligations under our agreement with the Jin Ma Companies. The
principal balance is and payable on December 31, 2007. In lieu of interest,
the
former officer received 20% interest in the capital stock position in SPEH
obtained by GEP. Accordingly, this former officer received 3,350,000 shares
of
SPEH common stock obtained by GEP. We valued these shares at $0.18 per share
or
$603,000 and for the six months ended June 30, 2007 recorded as compensation
expense of $603,000. The note is secured by 3,250,000 shares of Lotus
Pharmaceuticals, Inc.'s ("LTUS") common stock owned by us, which are held in
escrow.
On
July
31, 2007, our 71% owned subsidiary, 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. 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 GEP II
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.
Other
During
the year ended September 30, 2007, we incurred $77,148 in accounting fees to
a
company owned by Mr. Adam Wasserman, our former chief financial officer for
accounting services rendered related to contract clients of the various GEP
LLCs.
On
January 22, 2007, we entered into a consulting agreement with Venture Spark,
LLC, a company owned by Robert D. Cain, a member of our board of directors.
Venture Spark, LLC agreed to develop a business prospectus and other materials
for us to be used in business development activities. In connection with this
agreement, we paid Venture Sparks, LLC $18,000. Additionally, on April 13,
2007,
we entered into a one-year Financing Representation Agreement with this director
for financing and financial advisory services. In connection with this
agreement, the director is entitled to success fees of 5% of the financing
and
warrants to purchase our common stock. In August, 2007, we distributed 8,000
shares of LTUS to Mr. Cain for services provided to us and recorded $8,000
consulting expense accordingly.
On
April
13, 2007, our then-current board of directors unanimously consented that GEP
member Shaohua Tan, Inc., owned by our former director Dr. Joshua Tan shall
bear
no direct, indirect or personal expenses for managing the GEP program and shall
be reimbursed, on a timely basis, for any charges that he bears and incurs.
Accordingly, we recorded compensation expense of $435,269 which represents
the
distribution of his proportionate percentage of restricted common stock received
by GEP for services rendered in excess of the former director's basis in
GEP.
RECENT
ACCOUNTING PRONOUNCEMENTS
The
Financial Accounting Standards Board has recently issued several new accounting
pronouncements:
In
February 2006, the FASB issued Statement of Financial Accounting Standard No.
155, "Accounting for Certain Hybrid Instruments" ("SFAS 155"). FASB 155 allows
financial instruments that have embedded derivatives to be accounted for as
a
whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September
15,
2006.
In
July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), "Accounting for
Uncertainty in Income Taxes." This interpretation requires recognition and
measurement of uncertain income tax positions using a "more-likely-than-not"
approach. FIN No. 48 is effective for fiscal years beginning after December
15,
2006. Our management is still evaluating what effect this will have on the
our
financial statements. In September 2006, the SEC issued SAB 108, "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements." This SAB provides guidance on the
consideration of the effects of prior year misstatements in quantifying current
year misstatements for the purpose of a materiality assessment. SAB 108
establishes an approach that requires quantification of financial statement
errors based on the effects of each of the company's financial statements and
the related financial statement disclosures. SAB 108 permits existing public
companies to record the cumulative effect of initially applying this approach
in
the first year ending after November 15, 2006 by recording the necessary
correcting adjustments to the carrying values of assets and liabilities as
of
the beginning of that year with the offsetting adjustment recorded to the
opening balance of retained earnings. Additionally, the use of the cumulative
effect transition method requires detailed disclosure of the nature and amount
of each individual error being corrected through the cumulative adjustment
and
how and when it arose. We do not anticipate that SAB 108 will have a material
impact on our financial statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, "Fair Value Measurements" ("FAS 157"). This Statement defines fair value
as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure related to the use of fair value measures in financial statements.
This Statement is to be effective for our financial statements which will be
issued in 2008; however, earlier application is encouraged. We are currently
evaluating the timing of adoption and the impact that adoption might have on
its
financial position or results of operations.
In
February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement
No.
115", ("FAS 159") which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates.
A
business entity is required to report unrealized gains and losses on items
for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
In
December 2007 FASB issued FAS 141(R) “Business Combinations” and FAS
160 “Noncontrolling Interests in Consolidated Financial Statements” These
statements are effective for fiscal years, and interim periods within those
fiscal years in case of FAS 160, beginning on or after December 15,
2008. Earlier adoption is prohibited. Together these
statements revise the accounting rules with respect to accounting for
business combinations. Specifically, the objective of FAS 141(R) is to improve
the relevance, representational faithfulness and comparability of the
information that the reporting entity provides in its financial reports about
a
business combination and its effects. This statement thus establishes
principles and requirements for how the acquirer:
|
· |
Recognizes
and measures in its financial statements the identifiable assets
acquired,
the liabilities assumed, and any noncontrolling interest in the
acquiree
|
|
· |
Recognizes
and measures the goodwill acquired in the business combination or
a gain
from a bargain purchase
|
|
· |
Determines
what information to disclose to enable users of the financial statements
to evaluate the nature and financial effects of the business
combination.
|
The
objective of FAS 160 is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides
in
its consolidated financial statements by establishing accounting and reporting
standards that require:
|
· |
The
ownership interests in subsidiaries held by parties other than the
parent
be clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from
the
parent’s equity.
|
|
· |
The
amount of consolidated net income attributable to the parent and
to the
noncontrolling interest be clearly identified and presented on the
face of
the consolidated statement of
income.
|
|
· |
Changes
in a parent’s ownership interest while the parent retains its controlling
financial interest in its subsidiary be accounted for consistently.
A
parent’s ownership interest in a subsidiary changes if the parent
purchases additional ownership interests in its subsidiary or if
the
parent sells some of its ownership interests in its subsidiary. It
also
changes if the subsidiary reacquires some of its ownership interests
or
the subsidiary issues additional ownership interests. All of those
transactions are economically similar, and this Statement requires
that
they be accounted for similarly, as equity
transactions.
|
|
· |
When
a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at
fair value.
The gain or loss on the deconsolidation of the subsidiary is
measured
using the fair value of any noncontrolling equity investment
rather than
the carrying amount of that retained
investment.
|
|
· |
Entities
provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the
noncontrolling owners.
|
Together
these statements are not currently expected to have a significant impact on
the
entity consolidated financial statements. A significant impact may however
be realized on any future acquisition(s) by this company. The amounts
of such impact cannot be currently determined and will depend on the nature
and
terms of such future acquisition(s), if any.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the consolidated
financial
statements upon adoption.
ITEM
7. FINANCIAL STATEMENTS
See
"Index to Financial Statements" beginning on page F-1 below for our financial
statements included in this annual report on Form 10-KSB.
ITEM
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
have been no changes in or disagreements with our independent auditors. We
engaged our independent auditors, Sherb & Co., LLP, on May 11,
2002.
ITEM
8A. CONTROLS AND PROCEDURES
Our
Chief
Executive Officer and Chief Financial Officer (collectively, the "Certifying
Officers") are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) for us. Based upon such officers' evaluation
of these controls and procedures as of a date as of the end of the period
covered by this annual report, and subject to the limitations noted hereinafter,
the Certifying Officers have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed
by
us in this annual report is accumulated and communicated to management,
including our principal executive officers as appropriate, to allow timely
decisions regarding required disclosure.
The
Certifying Officers' evaluation has also concluded that there have been no
occurrences during the fourth quarter of the fiscal year covered by this annual
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
Our
management, including each of the Certifying Officers, does not expect that
our
disclosure controls or our internal controls will prevent all error and fraud.
A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. In addition, the design of a control system must reflect the fact
that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations 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 the control. The design of any systems of controls also is based
in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and
not be detected.
ITEM
8B. OTHER INFORMATION
None.
PART
III
ITEM
9. 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
|
|
Vice
President, Chief Operating Officer and Director
|
Dong
Lining
|
|
47
|
|
Vice
President, Director of Technology
|
Yang
Weidong
|
|
36
|
|
Vice
President, Director of Sales
|
Xin
Jingsheng
|
|
52
|
|
Director
of Equipment
|
Xue
Hong
|
|
39
|
|
Controller
|
Feng
Xiaowei
|
|
40
|
|
Director
|
Huang
Lei
|
|
26
|
|
Director
|
Ge
Jian
|
|
36
|
|
Director
|
Zhang
Yihua
|
|
26
|
|
Director
|
Rodrigo
Arboleda
|
|
65
|
|
Director
|
Robert
Cain
|
|
45
|
|
Director
|
Cao
Wubo,
age 43,
has served as the chairman and general manager of Laiyang Jiangbo since 2003,
and shall serve as Chairman and CEO of the combined entity. Mr. Cao was born
in
September 1965 and is of Chinese nationality. He graduated from Tsinghua
University with a masters degree. 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 until 2003, he was general manager of Laiyang Jiangbo Pharmacy Co. Ltd.
and
Laiyang Jiangbo Chinese and Western Pharmacy Co. Ltd. Since 2003, he has been
chairman and general manager of Laiyang Jiangbo Pharmaceutical 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 Chief Financial Officer of the combined entity since October
2007.
She is also Vice President of CFO Oncall, Inc. Prior to joining CFO Oncall,
Inc., Ms. Sung was an Audit Manager at Sherb & Co., Boca Raton, Florida,
responsible for managing, monitoring, as well as performing audits for domestic
and international clients. Before joining Sherb & Co., Ms. Sung was a Senior
Internal Auditor at Applica Consumer Products, Inc., a U.S. public traded
company. Prior to this, Ms. Sung was with Ernst & Young, LLP in West Palm
Beach, Florida as a Senior Auditor in the Assurance and Advisory Business
Service Group. Ms. Sung is a licensed CPA in the State of Georgia and a member
of the American Institute of Certified Public Accountants. She received her
Master of Business Administration and Bachelor’s Degree, graduated “Cum Laude”,
in Accounting from Florida Atlantic University. She also holds a Bachelor’s
Degree in Sociology from National Chengchi University in Taipei,
Taiwan.
Xu
Haibo,
age 36,
has served as a deputy general manager of Laiyang Jiangbo since August 2006,
and
shall serve as Vice President and COO of the combined entity. Mr. Xu was born
in
October 1970 and is of Chinese nationality. He graduated from Shanghai Financial
and Economic University on July 1, 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. From August 2006 until the present, he has been the deputy
general manager of Laiyang Jiangbo Pharmaceutical Co. Ltd. Mr. Xu has a national
registered accountant certificate in China.
Dong
Lining,
age 47,
has served as deputy manager of Laiyang Jiangbo since July 2003 and shall
continue to serve as Vice President and Director of Technology of the combined
entity. Mr. Dong Lining was born in January 1960 and is of Chinese nationality.
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 been deputy
manager of Laiyang Jiangbo Pharmaceutical Co. Ltd. from July 2003 until now.
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 36,
has served as a deputy general manager for Laiyang Jiangbo since August 2004
and
shall continue to serve as Vice President and Director of Sales of the combined
entity. Mr. Yang was born in 1971 and is of Chinese nationality. 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. Since August 2004, he has been deputy general manager in Laiyang Jiangbo
Pharmaceutical Co. Ltd.
Xin
Jingsheng,
age 52,
has served as a deputy general manager of Laiyang Jiangbo since October 2003
and
shall continue to serve as Director of Equipment of the combined entity. Mr.
Xin
was born in July 1955 and is of Chinese nationality. 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. Since October 2003, he has been deputy
general manager in China Laiyang Jiangbo Pharmaceutical Co. Ltd. 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 39,
has served as finance controller of Laiyang Jiangbo since April 2003 and shall
continue to serve as Controller of the combined entity. Ms. Xue was born in
November 1967 and is of Chinese nationality. From July 1988 to March 1989,
she
worked in Qingzhou Iron and Steel Works as quality control inspector and
auditor. From March 1999 to March 2000, she worked as an accountant at Laiyang
Yongkang Company. From March 2000 to September 2003, she was the chief
accountant of Laiyang Jiangbo Pharmacy. From April 2003 until now, she has
served as the finance controller for Laiyang Jiangbo Pharmaceutical Co.
Ltd.
Feng
Xiaowei,
age 40,
was born in August 1967 and is of Chinese nationality. Mr. Feng graduated from
Dalian Jiaotong University Railway Locomotive & Car Department with a
bachelors degree and Jilin University Postgraduate Research Institute Foreign
Economic Law Department with a masters degree. Over the course of his career,
he
has been procurator in Shenyang Railroad Transportation Procuratorate, associate
professor in Jilin University, counsel in China Jilin International Trust and
Investment Corporation, expert commissary of China Strategy and Administration
Association, and deputy secretary-general of the “China Strengthening
Self-Innovative Capacity and Building Innovative Nation Forum”. He has
participated in the Research on National Economic Development Strategy and
in
the subject investigation of Beijing Olympic Games, Guangzhou Development Zone
and Tianjin Development Zone. He has been commissioner of Yunnan Province Policy
and Economic Development Task Team, commissioner of the Xinjiang Uygur
Autonomous Region Policy and Economic Development Task Team and commissioner
of
the China Shi Hezi National Economic Development Zone Task Team. He is the
founder of the Chinese Young People Network Home Co. Ltd., and has presided
over
the China Young People Card Project.
Huang
Lei,
age 26,
was born in July 1983 and is of Chinese nationality. Ms. Huang graduated from
Kwantlen University College in Canada. She also earned her MBA degree from
the
University of British Columbia in October 2006. From November 2006 to 2007,
she
was a marketing manager in CúC Top Enterprises Ltd. While a student, Ms. Huang
has published articles on business administration at Canada Weekly and school
magazines, and earned the Best International Student Scholarship and a full
scholarship. Ms. Huang speaks English, French, Mandarin and Cantonese, and
has a
working knowledge of accountancy and business administration.
Ge
Jian,
age 36,
was born in January 1971 and is of Chinese nationality. Mr. Ge Jian graduated
from Shandong University Management Sciences Department with a Bachelor of
Business Administration in 1992. From 1992 to the end of 2000, he worked for
the
Development and Reform Commission of Yantai. From 2001 to 2006, he was the
minister of the Capital Operation Department and the minister of the Development
Department in Zhenghai Group Co. Ltd., and a director of Yantai Hualian
Development Group Co. Ltd. At present, he is general manager of Yantai Zhenghai
Pawn Co. Ltd.
Zhang
Yihua,
age 29,
has served as a director of Laiyang Jiangbo since November 2003. Ms. Zhang
was
born in July 1978 and is of Chinese nationality. She graduated from Shandong
Economic Institute in July 2001. From September 2001 to August 2003, she was
minister of human resources department in Yantai Huafa Pharmaceutical Co. Ltd.,
and from September 2002 to October 2003, she was also manager of the Labor
and
Personnel Department and General Manager Assistant. Since November 2003, she
has
been a director of Laiyang Jiangbo Pharmaceutical Co. Ltd. After years of
dealing with enterprise administration and management work, she has a deep
understanding about enterprise operations of administration and
management.
Rodrigo
Arboleda,
age 65,
has served as a director of the Registrant since November 30, 2006 and shall
continue to serve as a director of the combined entity. Mr. Arboleda has 40
years of experience in top executive positions in the private sector and is
currently a partner in Miami-based Globis Group, LLC (“Globis”).
Globis is a business development firm for the Ibero-American market, China
and
the United States. Among its current projects is securing a network of
distributorships in Latin America for AMI-First Automotive Works, the largest
vehicle manufacturer in China. In addition, Globis seeks opportunities for
the
Exxel Group, a large private equity fund based in Argentina. Prior to forming
Globis, Mr. Arboleda was the Executive VP of Ogden Corporation of NY, a Fortune
100 Service multinational corporation with worldwide interests in Aviation,
Energy and Entertainment. Mr. Arboleda was responsible for the Business
Development efforts in Latin America and Spain for almost 10 years. He lead
the
efforts of opening 10 bases of airport services in Latin America and in Spain,
of being awarded the largest airport management privatization project in the
world, 33 airports in Argentina, in consortium with Malpensa 2000 of Milan,
Italy, and a local Argentinean entrepreneur. He directed the construction of
the
largest Fair and Exhibit complex in Latin America, at La Rural de Palermo,
in
Buenos Aires, Argentina, a joint venture with the emblematic Sociedad Rural
Argentina. Mr. Arboleda holds a Bachelor of Architecture degree from
MIT.
Robert
D. Cain,
age 45,
has served as a director of the Registrant since January 2007 and shall continue
to serve as a director of the combined entity. Mr. Cain has sixteen years of
experience in the entertainment and Internet industries, primarily as a
production, finance, strategy and corporate development expert. He has consulted
to most of Hollywood's major studios and talent guilds, and to numerous
entertainment, Internet and software industry startups. Mr. Cain earned his
MBA
from the Wharton School at the University of Pennsylvania, after completing
his
undergraduate work in East Asian Studies at Harvard University. With decades
of
study, he speaks Chinese and has traveled extensively throughout the country
since 1987. Mr. Cain resides in Los Angeles, California.
Board
of Directors
Our
board
of directors is currently composed of eight members, two of whom, Mr. Cao Wubo
and Mr. Xu Haibo, are employees. All members of our board of directors serve
in
this capacity until their terms expire or until their successors are duly
elected and qualified. Our bylaws provide that the authorized number of
directors will be between three (3) and ten (10).
Mr. Cao
Wubo has been elected as the Chairman of our board of directors. In this
capacity he is responsible for meeting with our Chief Financial Officer to
review financial and operating results, reviewing agendas and minutes of board
and committee meetings, and presiding at the meetings of the committees of
our
board of directors.
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.
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.
Board
Committees and Director Independence
As
of
this date our board of directors has not appointed an audit, nominating or
compensation committee, however, we are not currently required to have such
committees. Accordingly, we do not have an “audit committee financial expert” as
such term is defined in the rules promulgated under the Securities Act of 1933
and the Securities and Exchange Act of 1934. The functions ordinarily handled
by
these committees are currently handled by our entire board of directors. Our
board of directors intends, however, to review our governance structure and
institute board committees as necessary and advisable in the future, to
facilitate the management of our business.
We
do not
believe that any of our current directors are considered “independent” under
Rule 4200(a)(15) of the National Association of Securities Dealers listing
standards. We are not currently subject to any law, rule or regulation, however,
requiring that all or any portion of our board of directors include
"independent" directors.
Code
of Ethics
In
January 2006, we adopted a Code of Ethics and Business Conduct to provide
guiding principles to our officers, directors and employees. Our Code of Ethics
and Business Conduct also strongly recommends that all directors and employees
of our company comply with the code in the performance of their duties.
Generally, our Code of Ethics and Business Conduct provides guidelines
regarding:
o |
compliance
with laws, rules and regulations,
|
o |
corporate
opportunities
|
o |
competition
and fair dealing,
|
o |
discrimination
and harassment,
|
o |
protection
and proper use of company assets,
and
|
o |
payments
to government personnel.
|
Our
Code
of Ethics and Business Conduct also provides guiding principles to our Chief
Executive Officer and Chief Financial Office in the performance of their duties.
A copy of our Code of Ethics and Business Conduct is incorporated by reference
as an exhibit to this annual report on Form 10-KSB.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
We
are
not subject to Section 16(a) of the Securities Exchange Act of 1934, which
requires our directors and executive officers, and persons who own more than
10%
of our common stock to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of our common
stock.
ITEM
10. EXECUTIVE COMPENSATION
Director
Compensation
Our
directors do not currently receive any cash compensation for service on our
board of directors or any committee. Directors are eligible for option and
stock
grants under our 2002 Stock Option Plan, our 2003 Stock Option and our 2004
Stock Plan, as amended, and any compensation plans not previously approved
by
our shareholders. See “Equity Compensation Plans” below.
The
following table sets forth information concerning the compensation of each
person who served as a non-employee director during our fiscal year ended
September 30, 2007. The compensation for each of our executive officers who
also
served as a director during fiscal year ended September 30, 2007 is fully
reflected under our “Summary Compensation of Named Executive Officers”
disclosure below.
Director
Compensation of Non-Employee Directors
for
Fiscal Year Ended September 30, 2007
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)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
Huang
Lei (1)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
Ge
Jian (1)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
Zhang
Yihua (1)
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
Rodrigo
Arboleda
|
|
56,250
|
|
--
|
--
|
--
|
$
56,250
|
Robert
D. Cain
|
|
52,500
|
|
--
|
--
|
$8,000
|
$
60,500
|
Shaohua
Tan, Former Director (2)
|
$35,304
|
$0
(3)
|
$369,135
(3)
(4)
|
--
|
--
|
$572,019
|
$976,458
|
(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 most recent fiscal year ended
September 30, 2007.
|
(2) |
Effective
October 1, 2007, Mr. Tan resigned as a member of our board of directors.
|
(3) |
The
aggregate number of stock awards and option awards issued to Mr.
Tan and
outstanding as of September 30, 2007 are 0 and 4,394,531,
respectively.
|
(4) |
During
our fiscal year ended September 30, 2007, we granted Mr. Tan options
for
2,894,531 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 Mr. Tan on July 1, 2007 pursuant to our 2007 Stock Option
Plan,
and they expire on December 31, 2010. The value of the option award
was
calculated using the Black-Scholes option pricing model based on
the
following assumptions: weighted average life of 3.5 years; risk-free
interest rate of4.5%; volatility rate of 195%; and fair market value
of
$0.128 per share at date of grant.
|
(5) |
Mr.
Tan’s fiscal 2006 and 2005 compensations were as
following-
|
Fiscal
Year
|
Fees
Earned
or
Paid in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
2006
2005
|
$75,000
|
--
|
$232,500
|
--
|
--
|
--
|
307,500
|
Effective
October 1, 2007, we do not pay any compensation to members of our board of
directors for their service on our board of directors. However, we intend to
review and consider future proposals regarding board compensation.
Executive
Compensation
The
following executive compensation disclosures reflect all compensation for our
fiscal years ended September 30, 2007, 2006 and 2006 received by our principal
executive officer, principal financial officer, and three most highly
compensated executive officers whose salary exceeded $100,000. We refer to
these
individuals in this annual report as “named executive officers.”
Summary
Compensation of Named Executive Officers
The
following table reflects all compensation awarded to, earned by or paid to
our
named executive officers for our fiscal years ended September 30, 2007, 2006,
and 2005
Summary
Compensation
of Named Executive Officers
for
Fiscal Year Ended September 30
Name
and Principal Position
|
Fiscal
Year Ended
|
Salary
($)
|
Bonus
($)
|
Other
Annual Compensation ($)
|
Restricted
Stock Awards
|
Non-Equity
Incentive Plan Compensa-tion
($)
|
Nonqualified
Deferred Compensa-tion Earnings
($)
|
All
Other Compensa-tion ($)
|
Total
($)
|
Cao
Wubo,
Chairman
of the Board, Chief Executive Officer, and President (1)
|
2007
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|
|
|
Elsa
Sung,
Chief
Financial Officer (2)
|
2007
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|
|
|
Xu
Haibo,
Director,
Vice President, and Chief Operating Officer (3)
|
2007
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|
|
|
|
|
|
|
|
|
|
Gary
Wolfson,
Former
Director and Former Chief Executive Officer (4)
|
2007
(5)
2006
(6)
2005
(7)
|
$181,500
$167,750
$152,500
|
$
415,970
--
--
|
$311,348(8)
$815,408
$
50,781
|
--
--
$359,
375
|
--
|
--
|
--
--
$77,676
|
$908,818
$983,158
$640,332
|
|
|
|
|
|
|
|
|
|
|
Adam
Wasserman,
Former
Chief Financial Officer (9)
|
2007
(9)
|
$107,
210
|
$36,500
|
--
|
--
|
--
|
--
|
--
|
$143,710
|
|
|
|
|
|
|
|
|
|
|
Kenneth
Clinton,
Former
Director and Former President (10)
|
2007
(11)
2006
(12)
2005
(13)
|
$181,500
$167,750
$131,660
|
$
350,112
$
-
$
-
|
$311,348(14)
$815,408
$50,781
|
$
--
--
$359,375
|
--
--
|
--
--
|
$603,000
--
$77,826
|
$1,445,960
$983,158
$619,642
|
|
|
|
|
|
|
|
|
|
|
James
Wang, Former Chairman of the Board and President
|
2005
(14)
|
$29,165
|
|
|
|
|
|
$184,675
|
$213,804
|
(1)
Mr.
Cao was appointed as our President and Chief Executive 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 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. A description of her employment agreement can be found below in the
section titled “Employment Agreements”.
(3)
Mr.
Xu was appointed as our Vice President and Chief Operating 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.
(4)
Effective October 1, 2007, Mr. Wolfson resigned from his positions as Chief
Executive Officer and a director of the Company.
(5)
Mr.
Wolfson's compensation for fiscal 2007 included $181,000 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 2,441,406 shares of
our
common stock at an exercise price of $0.105 per share representing other annual
compensation which were valued at $311,348 pursuant to the terms of his
employment
(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 1,953,125 shares of ou common stock upon the exercise of stock
options and 1,697,916 shares of our common stock valued at $84,896 issued to
him
in September 2005, options to purchase 3,700,000 shares of our common stock
at
an exercise price of $0.145 per share representing other annual compensation
which were valued at $512,675 pursuant to the terms of his employment agreement.
Options to purchase 1,953,125 shares of our common stock at an exercise price
of
$0.093 per share representing other annual compensation which were valued at
$302,733 pursuant to the terms of his employment agreement,
(7)
Mr.
Wolfson's compensation for fiscal 2005 included $152,500 salary payable under
the terms of his employment agreement, of which $50,000 was paid through the
issuance of 773,810 shares of our common stock, options to purchase 1,953,125
shares of our common stock at an exercise price of $0.041 per share representing
other annual compensation which were valued at $50,781 pursuant to the terms
of
his employment agreement, 3,125,000 shares of our common stock valued at
$359,375 which represent pursuant to the terms of his employment agreement,
and
1,140,319 shares of our common stock valued at $77,646 issued as other
compensation. Mr. Wolfson's fiscal 2005 compensation reported above excludes
1,697,916 shares of our common stock valued at $84,896 issued to him in
September 2005 for services to be rendered to us during fiscal
2006.
(8)
The
aggregate number of stock awards and option awards issued to Mr. Wolfson and
outstanding as of September 30, 2007 is 0 and 5,644,531, respectively. During
our fiscal year ended September 30, 2007, we granted Mr. Wolfson options for
2,441,406 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
Mr. Wolfson on July 1, 2007 pursuant to our 2007 Stock Option Plan. The options
expire on December 31, 2010. The value of the option award was calculated using
the Black-Scholes option pricing model based on the following assumptions:
weighted average life of 3.5 years; risk-free interest rate of4.5%; volatility
rate of 195%; and fair market value of $0.128 per share at date of
grant.
(9)
Effective October 1, 2007, Mr. Wasserman resigned as Chief Financial Officer
of
the Company. The aggregate number of stock awards and option awards issued
to
Mr. Wasserman and outstanding as of September 30, 2007 is 0 and 250,000,
respectively.
(10)
Effective October 1, 2007, Mr. Clinton resigned from his positions as President
and a director of the Company.
(10)
The
aggregate number of stock awards and option awards issued to Mr. Clinton and
outstanding as of September 30, 2007 is 0 and 5,644,531, respectively.
(11)
Mr.
Clinton's compensation for fiscal 2007 included $181,000 salary 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, and options to purchase 2,441,406 shares of our common stock
at an exercise price of $0.105 per share representing other annual compensation
which were valued at $311,348 pursuant to the terms of his employment.
(12)
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 1,953,125 shares of our common stock upon the exercise of stock
options and 1,697,916 shares of our common stock valued at $84,896 issued to
him
in September 2005, options to purchase 3,700,000 shares of our common stock
at
an exercise price of $0.145 per share representing other annual compensation
which were valued at $512,675 pursuant to the terms of his employment agreement,
and options to purchase 1,953,125 shares of our common stock at an exercise
price of $0.093 per share representing other annual compensation which were
valued at $302,733 pursuant to the terms of his employment
agreement,
(13)
Mr.
Clinton's fiscal 2005 compensation included: $131,660 salary payable under
the
terms of his employment agreement, of which $41,664 was paid through the
issuance of 664,800 shares of our common stock, options to purchase 1,953,125
shares of our common stock at an exercise price of $0.041 per share representing
other annual compensation which were valued at $50,781 pursuant to the terms
of
his employment agreement, 3,125,000 shares of our common stock valued at
$359,375 which represent pursuant to the terms of his employment agreement,
and
1,161,675 shares of our common stock valued at $77,826 issued as other
compensation. Mr.
Clinton's fiscal 2005 compensation reported above excludes 1,697,916 shares
of
our common stock valued at $84,896 issued to him in September 2005 for services
to be rendered to us during fiscal 2006.
(14)
During our fiscal year ended September 30, 2007, we granted Mr. Clinton options
for 2,441,406 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
Mr. Clinton on July 1, 2007 pursuant to our 2007 Stock Option Plan. The options
expire on December 31, 2010. The value of the option award was calculated using
the Black-Scholes option pricing model based on the following assumptions:
weighted average life of 3.5 years; risk-free interest rate of4.5%; volatility
rate of 195%; and fair market value of $0.128 per share at date of
grant.
(15)
Dr.
Wang served as our Chairman of the Board and President until December 13, 2004.
Dr. Wang's compensation for fiscal 2005 included $29,165 of salary and severance
payments equal to cash of $100,000, $95,000 worth of marketable securities
held
by the Company and 562,500 shares of our common stock valued at $61,875.
Outstanding
Equity Awards
The
following table sets forth certain information concerning unexercised options,
stock that has not vested, and equity incentive plan awards outstanding as
of
September 30, 2007 for the named executive officers below:
Outstanding
Equity Awards at Fiscal Year Ended
September
30, 2007
|
Option
Awards
|
Stock
Awards
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
|
Option
Exercise
Price
($)
|
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
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
($)
|
Gary
Wolfson (1)
|
1,953,125
|
0
|
0
|
$0.093
|
8/1/2011
|
0
|
0
|
0
|
0
|
Gary
Wolfson (2)
|
1,250,000
|
0
|
0
|
$0.14
|
8/1/2008
|
0
|
0
|
0
|
0
|
Gary
Wolfson (3)
|
2,441,406
|
0
|
0
|
$0.105
|
12/31/2010
|
0
|
0
|
0
|
0
|
Adam
Wasserman (4)
|
250,000
|
0
|
0
|
$0.31
|
2/14/2011
|
0
|
0
|
0
|
0
|
Shaohua
Tan (5)
|
1,500,000
|
0
|
0
|
$0.093
|
8/1/2011
|
0
|
0
|
0
|
0
|
Shaohua
Tan (6)
|
2,894,531
|
0
|
0
|
$0.105
|
12/31/2010
|
0
|
0
|
0
|
0
|
Kenneth
Clinton (7)
|
1,953,125
|
0
|
0
|
$0.093
|
8/1/2011
|
0
|
0
|
0
|
0
|
Kenneth
Clinton (8)
|
1,250,000
|
0
|
0
|
$0.14
|
8/1/2008
|
0
|
0
|
0
|
0
|
Kenneth
Clinton (9)
|
2,441,406
|
0
|
0
|
$0.105
|
12/31/2010
|
0
|
0
|
0
|
0
|
(1) |
These
options were fully vested as of August 1,
2006.
|
(2) |
These
options were fully vested as of August 1, 2003.
|
(3) |
These
options were fully vested as of July 1,
2007.
|
(4) |
These
options were fully vested as of February, 14, 2006.
|
(5) |
These
options were fully vested as of August 1, 2006.
|
(6) |
These
options were fully vested as of July 1,
2007.
|
(7) |
These
options were fully vested as of August 1,
2006.
|
(8) |
These
options were fully vested as of August 1, 2003.
|
(9) |
These
options were fully vested as of July 1,
2007.
|
Pension
Benefits
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.
Potential
payments upon termination or change-in-control.
We
currently have no contract, agreement, plan or arrangement, whether written
or
unwritten, that provides for payments to a named executive officer at,
following, or in connection with any termination, including without limitation
resignation, severance, retirement or a constructive termination of a named
executive officer, or a change in control of the registrant or a change in
the
named executive officer's responsibilities, with respect to each named executive
officer.
Employment
Agreements.
Our
written employment agreements with our former Chief Executive Officer, Gary
Wolfson, and our former President, Kenneth Clinton, expired on August 1, 2007.
Effective October 1, 2007, Gary Wolfson resigned as our Chief Executive Officer,
Adam Wasserman resigned as our Chief Financial Officer, and Kenneth Clinton
resigned as our President.
We
have
an employment agreement with our current Chief Financial Officer, Elsa Sung.
Under the terms of the employment agreement, Ms. Sung provides general services
to us as CFO, including but not limited to advising our management about
financial issues related to being a public company. We pay Ms. Sung for her
services at an hourly rate of approximately $135 per hour. We estimate that
our
CFO fees will approximate $10,500 per month, of which $3,000 may be paid in
shares of our common stock at the beginning of each quarterly period. The share
price used to calculate the number of shares for our CFO fees are tied to the
most recent price of our common shares in any financing by us. We reimburse
Ms.
Sung for any out of pocket expenses, including travel expenses.
ITEM
11. 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 information regarding the beneficial ownership of
our
common stock as of December 31, 2007 for each of the following persons, after
giving effect to the transaction under the Exchange Agreement:
• each
of
our directors and officers;
• all
directors and officers as a group; and
• each
person who is known by us to own beneficially five percent or more of our common
stock prior to this offering.
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
Karmoya International Ltd., Middle Section, Longmao Street, Area A, Laiyang
Waixiangxing Industrial Park, Laiyang City, Yantai, Shandong Province, PRC
710075. The percentage of class beneficially owned set forth below is based
on
388,968,760 shares of common stock outstanding on December 31, 2007.
The
issued and outstanding shares do not include 40,740,611 shares of our common
stock issuable upon the exercise of our outstanding warrants and
options.
|
|
Common
Stock Beneficially Owned
|
|
Named
executive officers and directors:
|
|
Number
of
Shares
beneficially
owned
|
|
Percentage of
class beneficially
owned after the
Transaction
|
|
Cao
Wubo (1)
|
|
|
194,263,661
|
|
|
49.9
|
%
|
Elsa
Sung
|
|
|
0
|
|
|
*
|
|
Xu
Haibo
|
|
|
0
|
|
|
*
|
|
Dong
Lining
|
|
|
0
|
|
|
*
|
|
Yang
Weidong
|
|
|
0
|
|
|
*
|
|
Xin
Jingsheng
|
|
|
0
|
|
|
*
|
|
Xue
Hong
|
|
|
0
|
|
|
*
|
|
Feng
Xiaowei
|
|
|
0
|
|
|
*
|
|
Huang
Lei
|
|
|
0
|
|
|
*
|
|
Ge
Jian
|
|
|
399,719
|
|
|
*
|
|
Zhang
Yihua
|
|
|
0
|
|
|
*
|
|
Rodrigo
Arboleda
|
|
|
500,000
|
|
|
*
|
|
Robert
Cain
|
|
|
500,000
|
|
|
*
|
|
All
directors and executive officers as a group (13 persons)
|
|
|
195,663,380
|
|
|
50.3
|
%
|
|
|
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
Verda
International Limited (2)
|
|
|
194,263,661
|
|
|
49.9
|
%
|
Wang
Renhui (3)
|
|
|
22,384,290
|
|
|
5.7
|
%
|
Pope
Investments, LLC (4)
|
|
|
30,000,000
|
|
|
7.0
|
%
|
* Represents
less than one percent (1%).
(1) |
Includes
194,263,661 shares of common stock owned by Verda International Limited,
a
company of which Mr. Cao is the Executive Director and owner of 100%
of
the equity interest. The address for Verda International Limited
is A-1
Building Dasi Street,Laiyang City, Shandong province,
China.
|
(2) |
The
address for Verda International Limited is A-1 Building Dasi
Street,Laiyang City, Shandong province, China. The natural person
with
voting power and investment power on behalf of Verda International
Limited
is Mr. Cao Wubo.
|
(3) |
The
mailing address for Wang Renhui is No. 57-2-14-1 Chaoyang Street,
Dalin,
China.
|
(4) |
Includes
20,000,000 shares of our common stock issuable to Pope Investments
LLC, a
Delaware limited liability company (“Pope Investments”), upon conversion
of $5 million aggregate principal amount of our 6% Convertible Debentures
due November 30, 2010 and 10,000,000 shares of our common stock issuable
upon exercise of warrants issued in connection with the 6% Convertible
Debentures. Pope Investments acquired the Convertible Debentures
and
warrants pursuant to a Stock Purchase Agreement dated November 6,
2007.
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 our common stock. The
address
for Pope Investments is 5100 Poplar Avenue, Suite 805, Memphis, Tennessee
38137.
|
Securities
Authorized for Issuance Under Equity Compensation Plans or Individual
Compensation Arrangements
The
following table sets forth information as of September 30, 2007 regarding
securities authorized for issuance under equity compensation plans, including
individual compensation arrangements, by us under our 2002 Stock Option Plan
and
our 2003 Stock Option, our 2004 Stock Plan as amended and any compensation
plans
not previously approved by our shareholders as of September 30,
2007.
Equity
Compensation as of September 30, 2007
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)
|
|
|
|
|
2002
Stock Option Plan and 2003 Stock Option Plan
|
3,150,000
|
$0.079
|
0
|
|
|
|
|
2004
Stock Plan
|
0
|
$0
|
0
|
|
|
|
|
Equity
Compensation Plans or Individual Compensation Arrangements Not Approved
by
Security Holders (1)
|
16,396,954
|
$0.13
|
0
|
|
|
|
|
TOTAL
|
19,546,954
|
$0.122
|
0
|
(1) |
Equity
compensation plan not approved by shareholders is comprised of options
granted and/or restricted stock to be issued to employees and
non-employees, including directors, consultants, advisers, suppliers,
vendors, customers and lenders for purposes including to provide
continued
incentives, as compensation for services and/or to satisfy outstanding
indebtedness to them.
|
ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Agreement
and Plan of Share Exchange
On
October 1, 2007, we executed a Share Acquisition and Exchange Agreement
(“Exchange Agreement”) by and among us, Karmoya International Ltd., a British
Virgin Islands company (“Karmoya”), and the shareholders of 100% of Karmoya’s
capital stock (the “Karmoya Shareholders”). 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. Throughout this Form
10-KSB, Karmoya, Union Well, GJBT and Laiyang Jiangbo are sometimes collectively
referred to as the “LJ Group.”
Under
the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock (the “Series B Preferred Stock”) to
the Karmoya Shareholders and 597 shares of our common stock in exchange for
100%
of the capital stock of Karmoya. The shares of Series B Preferred Stock issued
are convertible, in the aggregate, into a number of shares of our common stock
that, when combined with the common stock issued to the Karmoya Shareholders,
would equal 75% of the issued and outstanding shares of our common stock, if
the
shares were to be converted on the Closing Date. The closing of the Exchange
Agreement and the transactions contemplated thereunder (the “Exchange
Transaction”) occurred on October 1, 2007 (the “Closing Date”).
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.
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
13. EXHIBITS
Exhibit
Number
|
|
Description |
|
|
|
2.1
|
|
Articles
of Merger between Genesis Technology Group and Newagecities.com
*
|
|
|
|
2.2
|
|
Share
Acquisition and Exchange Agreement by and among Genesis, Karmoya
and
Karmoya Shareholders dated October 1, 2007 (1)
|
|
|
|
3.1
|
|
Articles
of Incorporation of Genesis Technology Group, Inc., a Florida corporation
*
|
|
|
|
3.2
|
|
Amended
and Restated Articles of Incorporation *
|
|
|
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
|
|
|
3.4
|
|
Bylaws
of Genesis Technology Group, Inc., a Florida corporation
*
|
|
|
|
4.1
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series A Preferred Stock (3)
|
|
|
|
4.2
|
|
Articles
of Amendment to Articles of Incorporation, Preferences and Rights
of
Series B Voting Convertible Preferred Stock (4)
|
|
|
|
4.3
|
|
6%
Convertible Subordinated Debenture, dated November 7, 2007
(5)
|
|
|
|
4.4
|
|
Common
Stock Purchase Warrant, dated November 7, 2007 (5)
|
|
|
|
10.1
|
|
Genesis
Technology Group, Inc. 2002 Stock Option Plan (6)
|
|
|
|
10.2
|
|
Genesis
Technology Group 2002 Stock Option Plan, as amended (7)
|
|
|
|
10.3
|
|
Genesis
Technology Group 2003 Stock Option Plan (8)
|
|
|
|
10.4
|
|
Genesis
Technology Group 2004 Stock Option Plan, as amended (9)
|
|
|
|
10.5
|
|
Employment
Agreement with Elsa Sung dated October 1, 2007 (4)
|
|
|
|
10.6
|
|
Securities
Purchase Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(5)
|
|
|
|
10.7
|
|
Registration
Rights Agreement, dated as of November 6, 2007, between Genesis
Pharmaceuticals Enterprises, Inc. and Pope Investments, LLC
(5)
|
|
|
|
10.8
|
|
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 (5)
|
|
|
|
14.1
|
|
Code
of Business Conduct and Ethics (10)
|
21.1
|
List
of Subsidiaries *
|
|
|
31.1
|
Section
302 Certificate of Chief Executive Officer *
|
|
|
31.2
|
Section
302 Certificate of Chief Financial Officer *
|
|
|
32.1
|
Section
906 Certificate of Chief Executive Officer *
|
|
|
32.2
|
Section
906 Certificate of Chief Financial Officer *
|
|
|
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
|
Letter
of Resignation from Gary Wolfson to the Board of Directors
(1)
|
|
|
99.7
|
Letter
of Resignation from Kenneth Clinton to the Board of Directors
(1)
|
|
|
99.8
|
Letter
of Resignation from Shaohua Tan to the Board of Directors
(1)
|
|
|
99.9
|
Letter
of Resignation from Adam Wasserman to the Board of Directors
(1)
|
*Filed
Herewith
(1)
|
Incorporated
by reference to exhibits filed with our Current Report on Form 8-K
as
filed on October 2, 2007.
|
(2)
|
Incorporated
by reference to exhibits filed with our Current Report on Form 8-K
as
filed on October 26, 2007.
|
(3)
|
Incorporated
by reference to exhibits filed with our Current Report on Form 8-K
as
filed on January 22, 2004.
|
(4)
|
Incorporated
by reference to exhibits filed with our Current Report on Form 8-K
as
filed on October 9, 2007.
|
(5)
|
Incorporated
by reference to exhibits filed with our Current Report on Form 8-K
as
filed on November 9, 2007.
|
(6)
|
Incorporated
by reference to exhibits filed with our registration statement on
Form S-8
filed on March 26, 2002.
|
(7)
|
Incorporated
by reference to exhibits filed with our registration statement
on Form S-8
as filed on December 17,
2002.
|
(8)
|
Incorporated
by reference to exhibits filed with our registration statement on
Form S-8
as filed on June 5, 2003.
|
(9)
|
Incorporated
by reference to exhibit filed with our registration statement
on Form S-8
as filed on September 30,
2005.
|
(10)
|
Incorporated
by reference to exhibits filed with our Annual Report on Form
10-KSB for
the fiscal year ended September 30,
2005.
|
ITEM
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Sherb
& Co., LLP served as our independent registered public accounting firm for
fiscal 2007 and 2006. The following table shows the fees that were billed for
the audit and other services provided by each of this firm for the 2007 and
2006
fiscal years:
|
Fiscal
2007
|
Fiscal
2006
|
Audit
Fees
|
$82,500
|
$66,000
|
Audit-Related
Fees
|
$0
|
$0
|
Tax
Fees
|
$12,500
|
$0
|
All
Other Fees
|
$0
|
$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.
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
|
|
Number
|
|
|
|
|
|
Report
of Independent Certified Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of September 30, 2007
|
|
|
F-3
|
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended September 30, 2007
and 2006
|
|
|
F-4
|
|
|
|
|
|
|
Consolidated
Statements of Shareholders' Equity for the Years Ended September
30, 2007
and 2006
|
|
|
F-5
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended September 30, 2007 and
2006
|
|
|
F-6
|
|
|
|
|
|
|
Notes
to the Consolidated Financial Statements
|
|
|
F-7
through F-39
|
|
REPORT
OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To
the Board of Directors of
Genesis
Pharmaceuticals Enterprises, Inc. and Subsidiaries
(Formerly
known as Genesis Technology Group, Inc.)
To
the
Board of Directors
Genesis
Technology Group, Inc
Boca
Raton, Florida
We
have
audited the accompanying consolidated balance sheet of Genesis Technology
Group, Inc. and Subsidiaries as of September 30, 2007, and the related
consolidated statements of operations, shareholders' equity and cash
flows
for
the years ended September 30, 2007 and 2006. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated 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 purposes of expressing an
opinion
on the effectiveness of the Company's internal control over financial
reporting.
Accordingly, we express no such opinion. An audit includes examining
on
a test
basis, evidence supporting the amount and disclosures in the consolidated
financial statements. An audit also includes 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 Technology
Group, Inc. and Subsidiaries as of September 30, 2007, and the results
of their operations and their cash flows for the years ended September
30,
2007
and 2006, in conformity with accounting principles