SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of
report (Date of earliest event reported): October 5, 2007 (October 1,
2007)
GENESIS
TECHNOLOGY GROUP, INC.
(Exact
name of registrant as specified in Charter)
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Florida
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333-86347
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65-1130026
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(State
or other jurisdiction of
incorporation
or organization)
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(Commission
File No.)
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(IRS
Employee Identification
No.)
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7900
Glades Road, Suite 420
Boca
Raton, Florida 33434
(Address
of Principal Executive Offices)
(561)
988-9880
(Issuer
Telephone number)
Check
the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
¨
Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
¨
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Forward
Looking Statements
This
Form 8-K and other reports filed by Registrant from time to time with the
Securities and Exchange Commission (collectively the “Filings”) contain or may
contain forward looking statements and information that are based upon beliefs
of, and information currently available to, Registrant’s management as well as
estimates and assumptions made by Registrant’s management. When used in the
filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”,
“intend”, “plan” or the negative of these terms and similar expressions as they
relate to Registrant or Registrant’s management identify forward looking
statements. Such statements reflect the current view of Registrant with respect
to future events and are subject to risks, uncertainties, assumptions and other
factors (including the risks contained in the section of this report entitled
“Risk Factors”) relating to Registrant’s industry, Registrant’s operations and
results of operations and any businesses that may be acquired by Registrant.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended or planned.
Although
Registrant believes that the expectations reflected in the forward looking
statements are reasonable, Registrant cannot guarantee future results, levels
of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, Registrant does not intend
to update any of the forward-looking statements to conform these statements
to
actual results. The following discussion should be read in conjunction with
Registrant’s pro forma financial statements and the related notes filed with
this Form 8-K.
In
this Form 8-K, references to “we,” “our,” “us”, “Genesis” or the “Registrant”
refer to Genesis Technology Group, Inc., a Florida
corporation.
Item 1.01 Entry
into a Material Definitive Agreement
On
October 1, 2007, Genesis Technology Group, Inc., a Florida corporation
(“Genesis”),
executed a Share Acquisition and Exchange Agreement (“Exchange
Agreement”)
by and
among Genesis, Karmoya International Ltd., a British Virgin Islands company
(“Karmoya”),
and
the shareholders of 100% of Karmoya’s capital stock (the “Karmoya
Shareholders”).
The
following is a brief description of the terms and conditions of the Exchange
Agreement and the transactions contemplated thereunder that are material to
Genesis.
Issuance
of Preferred Stock.
At
Closing, Genesis issued 5,995,780 shares of its Series B Voting Convertible
Preferred Stock (the “Series
B Preferred Stock”)
and
597 shares of its common stock to the Karmoya Shareholders in exchange for
100%
of the capital stock of Karmoya. The shares of Series B Preferred Stock issued
are convertible, in the aggregate, into 299,789,000 shares of Genesis’s common
stock that, when combined with the 597 common shares issued to the Karmoya
Shareholders, would equal 75% of the issued and outstanding shares of Genesis’s
common stock on a fully-diluted basis if the preferred shares were to be
converted on the Closing Date.
Consulting
Agreement with Karmoya Shareholder.
Under
the Exchange Agreement, Genesis agreed to engage Cawston Enterprises, Ltd.,
a
Beijing-based consulting company and a Karmoya Shareholder, immediately
following the Closing, to assist Karmoya and Genesis in the business transition
pursuant to the Exchange Agreement, both in China and the U.S. For a period
of
six (6) months, Genesis shall pay to the consultant $25,000 per month or a
single payment, to cover the same period, of $100,000 to be paid within three
(3) days of Closing.
Conversion
of Options into Common Stock.
Under
the Exchange Agreement, Genesis also agreed to cause 8,806,250 of its
outstanding options to be converted into 1,761,250 shares of common stock,
such
that there were 7,777,343 options outstanding at Closing.
Call
of Special Shareholders’ Meeting.
Under
the Exchange Agreement, Genesis agreed to cause its board of directors to call
a
special shareholders’ meeting to be held within 60 days of the Closing to vote
upon (i) an increase in the authorized number of shares of Genesis common stock
to at least 600,000,000; or alternatively, a reverse stock split in which at
least every seven (7) shares of common stock shall be combined into one (1)
share, or a combination of the two and (ii) an increase of the authorized number
of directors.
Change
in Management.
In
connection with the Closing of this transaction, and as more fully described
in
Item 5.02 below, certain of Genesis’s directors and all of Genesis’s officers
resigned (and their respective employment agreements were terminated) and
designees of Karmoya were appointed as new directors and officers of Genesis
effective at Closing.
The
closing of this transaction (the “Closing”)
occurred on October 1, 2007 (the “Closing
Date”).
A
copy of the Exchange Agreement was filed as Exhibit 2.1 to our Current Report
on
Form 8-K filed on October 2, 2007.
Item 2.01 Completion
of Acquisition or Disposition of Assets
As
more
fully described in Item 1.01 above, on October 1, 2007, Genesis Technology
Group, Inc., a Florida corporation (“Genesis”)
executed a Share Acquisition and Exchange Agreement (“Exchange
Agreement”)
by and
among Genesis, Karmoya International Ltd., a British Virgin Islands company
(“Karmoya”),
and
the following shareholders of 100% of Karmoya’s capital stock (the “Karmoya
Shareholders”):
Wang
Shuo, Ai Yunian, Zhao Qun, Chang Zhaozhen, Cawston Enterprises Ltd., Greenview
Capital Advisors LLC, Cao Wubo, Xun Guihong, and Zhang Yihua. 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 8-K, 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.
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. 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.
In
connection with the Exchange Agreement, we agreed to form and issue voting
only
preferred stock to a major Karmoya shareholder, so that such shareholder would
hold a majority of the outstanding Genesis voting securities after the Closing.
This was a material inducement into causing Karmoya and their shareholders
to
enter into the Exchange Transaction.
The
Karmoya Shareholders have acknowledged that the current assets of Genesis will
be distributed to the Genesis shareholders other than the former Karmoya
Shareholders and their assignees or transferees.
Prior
to
the Exchange Transaction, we were a business development and marketing firm
that
specialized in advising and providing a turnkey solution for Chinese small
and
mid-sized companies entering Western markets. However, in the past year, our
primary business and operations generated losses for us. As a result of the
Exchange Transaction, we acquired 100% of the capital stock of Karmoya and,
consequently, control of the business and operations of the LJ Group. From
and
after the Closing Date of the Exchange Agreement, our primary operations consist
of the business and operations of the LJ Group, which are conducted by Laiyang
Jiangbo in China.
Our
primary operations after the Exchange Transaction will be the business of the
LJ
Group, therefore, we are disclosing information about the LJ Group’s business,
financial condition, and management in this Form 8-K. However, prior to the
Exchange Transaction, we were a business with over $8.0 million in assets and
were not a shell company, as defined in Rule 12b-2 of the Securities Exchange
Act of 1934, as amended.
In
this
Form 8-K, references to the “combined entity” refer to Genesis and the LJ Group
entities as a combined entity. Copies of the LJ Agreements were filed as
Exhibits 99.1 to 99.5 to our Current Report on Form 8-K filed on October 2,
2007.
DESCRIPTION
OF BUSINESS
The
LJ
Group was formed to develop, manufacture, market and distribute pharmaceutical
products and health supplements in the People's Republic of China (“PRC”
or
“China”).
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 Pharmaceutical Co., Ltd., a PRC
limited liability company (“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
consolidate Laiyang Jiangbo's results, assets and liabilities in our financial
statements. For a description of these contractual arrangements, see
“Contractual Arrangements with Laiyang Jiangbo and its Shareholders”
below.
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 members of the LJ Group:
(1)
GJBT, the LJ Group’s wholly foreign owned enterprise in PRC, and (2) Laiyang
Jiangbo, the LJ Group’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.
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 chemicals for medical use in
China. Approximately 25% of its products are Chinese herbal-based drugs and
75%
are Western medical drugs and liquid chemical supply. 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 30 types of drugs.
Laiyang
Jiangbo’s top five products include Clarithromycin sustained-release tablets,
Itopride Hydrochloride granules, Kanggusuiyan tablets, 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 $132.6 million (US $17.66 million) in
2006, 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, Clarithromycin sustained-release tablets are the leading
product in the PRC domestic antibiotic sustained-release tablets market. Laiyang
Jiangbo’s goal is to enlarge its output and sales revenue for Clarithromycin
sustained-release tablets and attempt to obtain as much market share as
possible.
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 $152.26 million (US $20.29
million) in 2006, which is approximately 43% 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.
Kanggusuiyan
tablets
Kanggusuiyan
tablets are a curing drug for osteomyelitis based on a mixed formulation of
Western medicine and Chinese herbal medicine. This drug is on the list of State
Protected Herbal Drugs in China, and Laiyang Jiangob is the only manufacturer
in
China. Laiyang Jiangbo’s sales for this drug reached RMB $102.19 million (US
$13.62 million) in 2006, which is approximately 52% of the total market for
all types of osteomyelitis curing drugs in China.
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 $84 million (US $11.19 million) in 2006, 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 $52 million (US $6.93 million), which is approximately 12.1% 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
August 2007, Laiyang Jiangbo has completed its entire distribution network
for
this product and its goal is to reach sales volume of RMB $200 million (US
$26.65 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:
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1.
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publishing
advertisements and articles in national as well as specialized
and
provincial newspapers, magazines, and in other media, including
the
Internet;
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2.
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participating
in national meetings, seminars, symposiums, exhibitions for pharmaceutical
and other related industries;
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| |
3.
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organizing
cooperative promotional activities with distributors;
and
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4.
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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 since inception and does not anticipate any work stoppage in
the foreseeable future. Management believes that its relations with its
employees and its 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.
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, or 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.
SELECTED
CONSOLIDATED FINANCIAL DATA
You
should read the summary consolidated financial data set forth below in
conjunction with “Management’s
Discussion and Analysis of Financial Condition or Plan of
Operations”
and
the
LJ Group’s financial statements and the related notes included elsewhere in this
report. We derived the financial data for the years ended June 30, 2007 and
2006
and as of June 30, 2007 and 2006 from the LJ Group’s audited financial
statements included in this report. The historical results are not necessarily
indicative of the results to be expected for any future period.
| |
|
|
|
| |
|
Year
ended June 30,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Net
sales
|
|
$
|
72,259,812
|
|
$
|
45,242,987
|
|
|
Net
sales - related party
|
|
|
3,933,881
|
|
|
3,913,452
|
|
|
Cost
of sales
|
|
|
21,161,530
|
|
|
15,686,233
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
55,032,163
|
|
|
33,470,206
|
|
| |
|
|
|
|
|
|
|
|
Research
and development expense
|
|
|
11,143,830
|
|
|
13,642,200
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
Administrative expenses
|
|
|
25,579,361
|
|
|
7,894,672
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
18,308,972
|
|
|
11,933,334
|
|
|
Other
(income) expense
|
|
|
(6,375,340
|
)
|
|
386,816
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
24,684,312
|
|
|
11,546,518
|
|
|
Provision
for income taxes
|
|
|
2,631,256
|
|
|
3,810,351
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (Loss)
|
|
$
|
22,053,056
|
|
$
|
7,736,167
|
|
|
|
|
As
of June 30,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
17,737,208
|
|
$
|
3,371,598
|
|
$
|
1,237,784
|
|
|
Working
Capital
|
|
|
15,997,440
|
|
|
3,395,071
|
|
|
(4,072,834
|
)
|
|
Total
Assets
|
|
|
55,397,059
|
|
|
36,472,948
|
|
|
17,198,999
|
|
|
Total
Liabilities
|
|
|
28,101,398
|
|
|
27,032,473
|
|
|
15,623,003
|
|
|
Total
Shareholders’ Equity
|
|
|
27,295,661
|
|
|
9,440,475
|
|
|
1,575,997
|
|
Footnotes
The
Exchange Transaction contemplated under the Exchange Agreement is deemed
to be a
reverse acquisition, where Genesis (the legal acquirer) is considered the
accounting acquiree and the LJ Group (the legal acquiree) is considered the
accounting acquirer. The unaudited pro forma financial Statements for the
Exchange Transaction are attached hereto as Exhibit 99.11.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of the LJ Group for the fiscal years ended June 30, 2007 and 2006
should be read in conjunction with the Selected Consolidated Financial Data,
the
LJ Group’s financial statements, and the notes to those financial statements
that are included elsewhere in this Current Report on Form 8-K. Our discussion
includes forward-looking statements based upon current expectations that
involve
risks and uncertainties, such as our plans, objectives, expectations and
intentions. Actual results and the timing of events could differ materially
from
those anticipated in these forward-looking statements as a result of a number
of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this Form 8-K.
We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.
OVERVIEW
Genesis
Technology Group, Inc. (“Genesis”)
was
originally incorporated on August 15, 2001 in the State of Florida. On October
12, 2001, Genesis consummated a merger with NewAgeCities.com, an Idaho public
corporation originally formed in 1969. Genesis was the surviving entity after
the merger with the Idaho public corporation.
As
a
result of the Exchange Transaction that was completed on October 1, 2007
and
described more fully above in Items 1.01 and 2.02 of this Form 8-K, Karmoya,
a
British Virgin Islands company established as a “special purpose vehicle” for
the foreign fund rising for its PRC subsidiaries and became our wholly owned
subsidiary and our new operating business. Karmoya was incorporated under
the
laws of the British Virgin Islands on July 17, 2007 and conducts its business
operations through its wholly owned subsidiaries. Karmoya owns 100% of the
capital stock of Union Well International Limited, a Cayman Islands company,
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. Genesis Jiangbo (Laiyang) Biotech Technologies Co.,
Ltd. was incorporated under the laws of the People’s Republic of China on
September 17, 2007 and registered as a wholly foreign owned enterprise on
September 19, 2007. Genesis Jiangbo (Laiyang) Biotech Technologies Co., Ltd.
has
entered into a series of contractual agreements with Laiyang Jiangbo
Pharmaceutical Co., Ltd., a PRC limited liability company. Laiyang Jiangbo
Pharmaceutical Co., Ltd. was incorporated under the laws of the People’s
Republic of China on August 18, 2003. Throughout this Form 8-K, Karmoya and
its
subsidiaries are sometimes collectively referred to as the “LJ Group.” In this
Management’s Discussion and Analysis section, the LJ Group is sometimes referred
to as the “Company.” In this Management’s Discussion and Analysis section, the
LJ Group is sometimes referred to as the “Company.”
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
management's discussion and analysis of our financial condition and results
of
operations are based on our consolidated financial statements, which have
been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates
and
assumptions. We base our estimates on historical experience and on various
other
factors that we believe are reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying value of assets
and
liabilities that are not readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or
conditions.
While
our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements appearing at Exhibits 99.10 and 99.11,
we
believe that the following accounting policies are the most critical to aid
you
in fully understanding and evaluating this management discussion and
analysis:
Inventories
Inventories,
consisting of raw materials and finished goods related to the Company’s products
are stated at the lower of cost or market utilizing the weighted average
method.
Property
and equipment
Property
and equipment are stated at cost
less
accumulated depreciation. Depreciation is computed using straight-line method
over the estimated useful lives of the assets.
The
estimated useful lives of the assets are as follows:
| |
Useful
Life
|
|
Building
and building improvements
|
20
- 40
|
|
Years
|
|
Manufacturing
equipment
|
10
- 15
|
|
Years
|
|
Office
equipment and furniture
|
5-8
|
|
Years
|
|
Vehicle
|
5
|
|
Years
|
The
cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the
cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Long-lived
assets of the Company are reviewed periodically, or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the
future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may
not
be recoverable. The Company recognizes an impairment loss when the sum of
expected undiscounted future cash flows is less than the carrying amount
of the
asset. The amount of impairment is measured as the difference between the
asset’s estimated fair value and its book value.
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. The Company has recorded the costs paid to
acquire
a long-term interest to utilize the land underlying the Company's facility
as
land use rights. This type of arrangement is common for the use of land in
the
PRC. The land use rights are amortized on the straight-line method over the
term
of the land use rights of 50 years.
Purchased
technological know-how includes secret formulas, manufacturing processes,
technical, procedural manuals and the certificate of drugs production and
is
amortized using the straight-line method over the expected useful economic
life
of 5 years, which reflects the period over which those formulas, manufacturing
processes, technical and procedural manuals are kept secret to the Company
as
agreed between the Company and the selling parties.
Intangible
assets of the Company are reviewed periodically or more often if circumstances
dictate, to determine whether their carrying value has become impaired. The
Company considers assets to be impaired if the carrying value exceeds the
future
projected cash flows from related operations. The Company also re-evaluates
the
periods of amortization to determine whether subsequent events and circumstances
warrant revised estimates of useful lives.
Revenue
recognition
Product
sales are generally recognized when title to the product has transferred
to
customers in accordance with the terms of the sale. The Company recognizes
revenue in accordance with the Securities and Exchange Commission’s (SEC) Staff
Accounting Bulletin (SAB) No. 101, “Revenue
Recognition in Financial Statements”
as
amended by SAB No. 104 (together, “SAB 104”), and Statement of
Financial Accounting Standards (SFAS) No. 48 “Revenue
Recognition When Right of Return Exists.”
SAB 104 states that revenue should not be recognized until it is
realized or realizable and earned. In
general, the Company records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the
sales
price to the customer is fixed or determinable, and collectibility is reasonably
assured.
The
Company is generally not contractually obligated to accept returns. However,
on
a case-by-case negotiated basis, the Company permits customers to return
their
products. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 48, "Revenue Recognition when the Right of Return Exists", revenue
is recorded net of an allowance for estimated returns. Such reserves are
based
upon management's evaluation of historical experience and estimated costs.
The
amount of the reserves ultimately required could differ materially in the
near
term from amounts included in the consolidated financial
statements.
Shipping
and handling
Shipping
and handling costs related to costs of goods sold are included in selling,
general and administrative costs.
Research
and development
Research
and development costs are expensed as incurred. These costs primarily consist
of
cost of material used and salaries paid for the development of the Company’s
products and fees paid to third parties.
Income
taxes
The
Company is governed by the Income Tax Law of the People’s Republic of China.
Income taxes are accounted for under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. The charge for taxation is
based
on the results for the year as adjusted for items, which are non-assessable
or
disallowed. It is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it is related to items credited
or
charged directly to equity, in which case the deferred tax is also dealt
with in
equity.
Deferred
tax assets and liabilities are offset when they related to income taxes levied
by the same taxation authority and the Company intends to settle its current
ax
assets and liabilities on a net basis.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”), as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur.
The amount recognized is the largest amount of tax benefit that is greater
than
50% likely of being realized on examination. For tax positions not meeting
the
“more likely than not” test, no tax benefit is recorded. The adoption had no
affect on the Company’s financial statements.
Value
added tax
Enterprises
or individuals who sell products, engage in repair and maintenance or import
and
export goods in the PRC are subject to a value added tax in accordance with
Chinese laws. The value added tax standard rate is 17% of the gross sales
price.
A credit is available whereby VAT paid on the purchases of semi-finished
products, raw materials used in the production of the Company’s finished
products, and payment of freight expenses can be used to offset the VAT due
on
sales of the finished product.
Recent
accounting pronouncements
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes,” an
interpretation of FASB Statement No. 109 (“SFAS 109”). The
interpretation clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements in accordance with SFAS 109,
“Accounting
for Income Taxes.” It
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected
to be
taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact, if any,
of FIN 48 on its financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements”
(SFAS 157), which provides guidance for how companies should measure fair
value when required to use a fair value measurement for recognition or
disclosure purposes under generally accepted accounting principle (GAAP).
SFAS 157 is effective for fiscal years beginning after November 15,
2007. The Company is currently assessing the impact, if any, the adoption
of
SFAS 157 will have on its financial statements.
In
December 2006, FASB Staff Position No. EITF 00-19-2, “Accounting
for Registration Payment Arrangements,” was
issued. The FSP specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured
in
accordance with SFAS No. 5, “Accounting
for Contingencies.” The
Company believes that its current accounting is consistent with the FSP.
Accordingly, adoption of the FSP had no effect on its financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities, Including
an
Amendment of FASB Statement No. 115”,
under
which entities will now be permitted to measure many financial instruments
and
certain other assets and liabilities at fair value on an
instrument-by-instrument basis. This Statement is effective as of the beginning
of an entity’s first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on
or
before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS 157. The Company is currently assessing the impact, if
any, the adoption of SFAS 159 will have on its financial statements.
In
June
2007, the
FASB
issued FASB Staff Position No. EITF 07-3, “Accounting for Nonrefundable Advance
Payments for Goods or Services Received for use in Future Research and
Development Activities” (“FSP EITF 07-3”), which addresses whether nonrefundable
advance payments for goods or services that used or rendered for research
and
development activities should be expensed when the advance payment is made
or
when the research and development activity has been performed. The Company
is
currently evaluating the effect of this pronouncement on financial
statements.
RESULTS
OF OPERATIONS
Comparison
of Years Ended June 30, 2007, 2006 and 2005.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales:
|
|
|
Year
Ended June 30,
|
|
%
of
|
|
Year
Ended June 30,
|
|
%
of
|
|
Year
Ended June 30,
|
|
%
of
|
|
|
|
|
2007
|
|
Revenue
|
|
2006
|
|
Revenue
|
|
2005
|
|
Revenue
|
|
|
SALES
|
|
$
|
72,259,812
|
|
|
94.84
|
%
|
$
|
45,242,987
|
|
|
92.04
|
%
|
$
|
10,852,106
|
|
|
85.11
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
- RELATED PARTY
|
|
|
3,933,881
|
|
|
5.16
|
%
|
|
3,913,452
|
|
|
7.96
|
%
|
|
1,899,266
|
|
|
14.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
21,161,530
|
|
|
27.77
|
%
|
|
15,686,233
|
|
|
31.91
|
%
|
|
8,771,942
|
|
|
68.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
55,032,163
|
|
|
72.23
|
%
|
|
33,470,206
|
|
|
68.09
|
%
|
|
39,79,430
|
|
|
31.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
25,579,361
|
|
|
33.57
|
%
|
|
7,894,672
|
|
|
16.06
|
%
|
|
1,689,004
|
|
|
13.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
11,143,830
|
|
|
14.63
|
%
|
|
13,642,200
|
|
|
27.75
|
%
|
|
1,240,252
|
|
|
9.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
18,308,972
|
|
|
24.03
|
%
|
|
11,933,334
|
|
|
24.28
|
%
|
|
1,050,174
|
|
|
8.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES(INCOME)
|
|
|
(6,375,340
|
)
|
|
(8.37
|
)%
|
|
386,816
|
|
|
0.79
|
%
|
|
253,319
|
|
|
1.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
24,684,312
|
|
|
32.40
|
%
|
|
11,546,518
|
|
|
23.49
|
%
|
|
796,855
|
|
|
6.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
2,631,256
|
|
|
3.45
|
%
|
|
3,810,351
|
|
|
7.75
|
%
|
|
262,962
|
|
|
2.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
|
22,053,056
|
|
|
28.94
|
%
|
|
7,736,167
|
|
|
15.74
|
%
|
|
533,893
|
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
Foreign
currency translation adjustment
|
|
|
1,018,130
|
|
|
1.34
|
%
|
|
128,311
|
|
|
0.26
|
%
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
|
23,071,186
|
|
|
30.28
|
%
|
|
7,864,478
|
|
|
16.00
|
%
|
|
533,893
|
|
|
4.19
|
%
|
Comparison
of Years Ended June 30, 2007 and 2006
REVENUES.
Our
revenues include revenues from sales and revenues from sales to related party
of
$72,259,812 and $3,933,881, respectively for the year ended June 30, 2007.
During the year ended June 30, 2007, we had revenues from sales of $72,259,812
as compared to revenues from sales of $45,242,987 for the year ended June
30,
2006, an increase of approximately 59.71%. During the year ended June 30,
2007,
we had revenues from sales to related party of $3,933,881 as compared to
revenues from sales to related party of $3,913,452 for the year ended June
30,
2006, an increase of approximately 0.52%. These increases are attributable
to
continued
strong sales of our best selling products, Ciprloxacin Hydrochloride tablets,
and Paracetamol tablets .
We
believe that our sales will continue to grow because we are strengthening
our
sales force, improving the quality of our products and continuing developing
new
products that will be well accepted in the market.
COST
OF REVENUES.
Cost of
revenues for 2007 increased $5,475,297 or 34.91%, from $15,686,233 for the
year
ended June 30, 2006 to $21,161,530 for the year ended June 30, 2007.
The
decrease in cost of revenue as a percentage of net revenues for the year
ended
June 30, 2006, approximately 27.77% as compared to the year ended June 30,
2006,
approximately 31.91%, was attributable to better and more efficient
manufacturing production.
GROSS
PROFIT.
Gross
profit was $55,032,163 for the year ended June 30, 2007 as compared to
$33,470,206 for the year ended June 30, 2006, representing gross margins
of
approximately 72.23% and 68.09%, respectively. The increase in our gross
profits
was mainly due to strong product sale and decrease in cost of revenue as
a
percentage of net revenue.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES.
Selling,
general and administrative expenses totaled $25,579,361for the year ended
June
30, 2007, as compared to $7,894,672 for the year ended June 30, 2006, an
increase of approximately 224.01%. This increase is primarily attributable
to
increase in product advertisement, marketing and promotion spending.
Additionally, the travel and entertainment expenses were also increased due
to
increased sales related travel and entertainment in 2007.
RESEARCH
AND DEVELOPMENT COSTS.
Research
and development costs, which consist of cost of material used and salaries
paid
for the development of the Company’s products and fees paid to third parties,
totaled $11,143,830 for the year ended June 30, 2007, as compared to $13,642,200
for the year ended June 30, 2006, an decrease of approximately 18.31%. The
decrease was mainly because we had less new product development projects
in
2007.
OTHER
(INCOME) EXPENSES.
Our
other (income) expenses consisted of corporate income tax and valued added
tax
exemption from the government, financial expenses and non-operating expenses.
We
had other income of $6,375,340 for the year ended June 30, 2007 as compared
to
other expense $386,816 for the year ended June 30, 2006, an decrease of
approximately 1748.16%. The decrease in other expenses is mainly due to
receiving of corporate income tax and value added tax exemption from the
government .
NET
INCOME.
Our net
income for the year ended June 30, 2007 was $22,053,056 as compared to
$7,736,167 for the year ended June 30, 2006. The increase in net income is
attributable to increased sales volume, lower average costs as well as
government income tax and value added tax exemption. Our management believes
that net income will continue to increase because we will continue to offer
better and more products and improve our manufacturing efficiency.
REVENUES.
Our
revenues include revenues from sales and revenues from sales to related party
of
$45,242,987 and $3,913,452, respectively for the year ended June 30, 2006.
During the year ended June 30, 2006, we had revenues from sales of $45,242,987
as compared to revenues from sales of $10,852,106 for the year ended June
30,
2005, an increase of approximately 316.91%. During the year ended June 30,
2006,
we had revenues from sales to related party of $3,913,452 as compared to
revenues from sales to related party of $1,899,266 for the year ended June
30,
2005, an increase of approximately 106.05%. These increases are attributable
to
continued
strong sales of our best selling products, Ciprloxacin Hydrochloride tablets,
and Paracetamol tablets.
COST
OF REVENUES.
Cost of
revenues for 2006 increased by $6,914,291or 78.82%, from $8,771,942 for the
year
ended June 30, 2005 to $15,686,233 for the year ended June 30, 2006.
The
decrease in cost of revenue as a percentage of total revenues for the year
ended
June 30, 2006, approximately 31.91% as compared to the year ended June 30,
2005,
approximately 68.79%, was attributable to lower material costs and better
and
more efficient manufacturing production.
GROSS
PROFIT.
Gross
profit was $33,470,206 for the year ended June 30, 2006 as compared to
$3,979,430 for the year ended June 30, 2005, representing gross margins of
approximately 68.09% and 31.21%, respectively. The increase in our gross
profits
was mainly due to strong product sale and decrease in cost of revenue as
a
percentage of net revenue.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES.
Selling,
general and administrative expenses totaled $7,894,672 for the year ended
June
30, 2006, as compared to $1,689,004 for the year ended June 30, 2005, an
increase of approximately 367.42%. This increase is primarily attributable
to
increase in product advertisement, marketing and promotion spending.
Additionally, the travel and entertainment expenses were also increased due
to
increased sales related travel and entertainment in 2007.
RESEARCH
AND DEVELOPMENT COSTS.
Research
and development costs, which consist of cost of material used and salaries
paid
for the development of the Company’s products and fees paid to third parties,
totaled $13,642,200 for the year ended June 30, 2006, as compared to $1,240,252
for the year ended June 30, 2005, an increase of approximately 999.95%. The
increase was mainly because we had more new product development projects
and the
average spending on each project was higher in 2006.
OTHER
(INCOME) EXPENSES.
Our
other (income) expenses consisted of corporate income tax and valued added
tax
exemption from the government, financial expenses and non-operating expenses.
We
had other expense of $386,816 for the year ended June 30, 2006 as compared
to
other expense of $253,319 for the year ended June 30, 2005, an increase of
approximately 52.70%. The increase in other expenses was mainly due to high
interest expenses in 2006.
NET
INCOME.
Our net
income for the year ended June 30, 2006 was $7,736,167 as compared to $533,893
for the year ended June 30, 2005. The increase in net income is attributable
to
largely increased sales volume and lower average costs.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Net
cash
flow used in operating activities was $2,943,843 in fiscal 2006 and while
net
cash flow provided by operating activities was $15,291,968 in fiscal 2007.
The increase of net cash flow provided by (used in) operating activities
in
fiscal 2007 was mainly due to increase in net income of $14,316,889, decrease
in
our inventories and deferred expense of $1,727,215 and $1,563,800, respectively
and offset by increase in our accounts receivable of $1,534,814 and decrease
in
our accounts payable, other payable, and other payable- related parties of
$2,027,968, $827,498,and $3,848,086, respectively.
Net
cash
flow used in investing activities was $183,237 in fiscal 2007 and $565,996
in
fiscal 2006. Uses of cash flow for investing activities included equipment
purchases and payments for intangible assets. The decrease of net cash flow
used
in investing activities in fiscal 2007 was mainly due to decrease in
property and equipments payments of $183,237.
Net
cash
flow used in financing activities was $1,216,850 in fiscal 2007 and while
net
cash flow provided by financing activities was $5,568,832 in fiscal 2006.
The
decrease of net cash flow provided by financing activities was mainly due
to
payments for bank loans of $5,688,450 offset by proceeds from bank loans
of
$4,471,600.
Our
working capital position increased $12,602,369 to $15,997,440 at June 30,
2007
from $3,395,071 at June 30, 2006. This increase in working capital is primarily
attributable to an increase of approximately $14.4 million in cash and accounts
receivable due from third parties (approximately $2.1 million) and a decrease
in
accounts payable (approximately $1.9 million), short term bank loans
(approximately $1million), other payable (approximately $0.7 million), other
payable related parties (approximately $3.7 million), tax payable (approximately
$2.1 million) and partially offset by a decrease in inventories (approximately
$1.4 million), deferred expense (approximately $1.5 million) and an increase
in
dividends payable (approximately $10.5 million), partially offset by an
decreased in inventories (approximately $1.4 million) and prepaid expense
and
other current assets (approximately $157,000). The increases in cash and
accounts receivable reflect the effects of increased sales in fiscal year
2007
and the corresponding receivables generated by those sales.
Our
cash requirements for the next twelve months are approximately $26.5 million,
including requirements for working capital (estimated to be approximately
$20
million) and research and development (estimated to be approximately $6.5
million). We expect to obtain the necessary funds from operations and private
offerings during the course of the twelve-month period and will manage our
activities accordingly.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in
the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of June 30, 2007,
and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
|
Payments
Due by Period
|
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years +
|
|
|
|
|
In
Thousands
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Indebtedness
|
|
$
|
13,013,240
|
|
$
|
13,013,240
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Other
Indebtedness
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Capital
Lease Obligations
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Operating
Leases
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Purchase
Obligations
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
Total
Contractual Obligations:
|
|
$
|
13,013,240
|
|
$
|
13,013,240
|
|
$ |
|
|
$ |
|
|
$ |
|
|
Bank
Indebtedness amounts include the short-term bank loans amount and notes payable
amount.
Off-balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered
into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest
in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest
in
any unconsolidated entity that provides financing, liquidity, market risk
or
credit support to us or engages in leasing, hedging or research and development
services with us.
Related
Party Transactions
For
a
description of our related party transactions, see the section of this Current
Report entitled “Certain Relationships and Related Transactions.”
Quantitative
and Qualitative Disclosures about Market Risk
Karmoya
does not use derivative financial instruments in its investment portfolio
and
has no foreign exchange contracts. Our financial instruments consist of cash
and
cash equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased
with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, Genesis
may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded
in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
Interest
Rates.
Our
exposure to market risk for changes in interest rates relates primarily to
our
short-term investments and short-term obligations; thus, fluctuations in
interest rates would not have a material impact on the fair value of these
securities. At June 30, 2007, we had approximately $17,737,208 in cash and
cash
equivalents. A hypothetical 2 % increase or decrease in interest rates would
not
have a material impact on our earnings or loss, or the fair market value
or cash
flows of these instruments.
Foreign
Exchange Rates.
All of
our sales are denominated in Renminbi (“RMB”). As a result, changes in the
relative values of U.S. Dollars and RMB affect our reported levels of revenues
and profitability as the results are translated into U.S. Dollars for reporting
purposes. In particular, fluctuations in currency exchange rates could have
a
significant impact on our financial stability due to a mismatch among various
foreign currency-denominated sales and costs. Fluctuations in exchange rates
between the U.S. dollar and RMB affect our gross and net profit margins and
could result in foreign exchange and operating losses.
Our
exposure to foreign exchange risk primarily relates to currency gains or
losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency
of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We recorded net foreign currency gains of $1,018,130 and
$128,311 in 2007 and 2006, respectively. We have not used any forward contracts,
currency options or borrowings to hedge our exposure to foreign currency
exchange risk. We cannot predict the impact of future exchange rate fluctuations
on our results of operations and may incur net foreign currency losses in
the
future. As our sales denominated in foreign currencies, such as RMB and Euros,
continue to grow, we will consider using arrangements to hedge our exposure
to
foreign currency exchange risk.
Our
financial statements are expressed in U.S. dollars but the functional
currency of our operating subsidiary is RMB. The value of your investment
in our
stock will be affected by the foreign exchange rate between U.S. dollars
and RMB. To the extent we hold assets denominated in U.S. dollars,
including the net proceeds to us from this offering, any appreciation of
the RMB
against the U.S. dollar could result in a change to our statement of
operations and a reduction in the value of our U.S. dollar denominated
assets. On the other hand, a decline in the value of RMB against the
U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our company and the dividends
we may pay in the future, if any, all of which may have a material adverse
effect on the price of our stock.
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.
Previously,
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.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
SECURITY
OWNERSHIP PRIOR TO CHANGE OF CONTROL
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of September 30, 2007, for each of the following persons, prior
to the transactions contemplated by the Exchange Agreement:
|
|
• |
each
of our directors and named officers prior to the Closing of the Exchange
Agreement;
|
|
|
• |
all
of the directors and executive officers as a group prior to the Closing
of
the Exchange Agreement; 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
Genesis Technology Group, Inc., Boca Corporate Plaza, 7900 Glades Road, Suite
420, Boca Raton, Florida 33434. The percentage of class beneficially owned
set
forth below is based on 87,664,120 shares of common stock outstanding on
September 30, 2007.
|
Name
of shareholder
|
|
Number
of
Shares
beneficially
owned
|
|
Percentage of
class beneficially
owned before the
Transaction
|
|
|
Named
executive officers and directors:
|
|
|
|
|
|
|
Gary
Wolfson (1)
|
|
|
8,915,531
|
|
|
9.6
|
%
|
|
Kenneth
Clinton (2)
|
|
|
5,644,531
|
|
|
6.0
|
%
|
|
Adam
Wasserman (3)
|
|
|
1,243,738
|
|
|
1.4
|
%
|
|
Dr.
Shaohua Tan (4)
|
|
|
4,394,531
|
|
|
4.8
|
%
|
|
Rodrigo
Arboleda
|
|
|
500,000
|
|
|
*
|
|
|
Robert
D. Cain
|
|
|
500,000
|
|
|
*
|
|
|
Other
5% Shareholders:
|
|
|
|
|
|
|
|
|
None
|
|
|
0
|
|
|
0.0
|
%
|
|
All
directors and executive officers as a group (six persons)
|
|
|
21,198,331
|
|
|
20.5
|
%
|
* Represents
less than one percent (1%).
| (1) |
Includes
options to purchase 5,644,531 shares of common
stock.
|
| (2) |
Includes
options to purchase 5,644,531 shares of common
stock.
|
| (3) |
Includes
options to purchase 250,000 shares of common
stock.
|
| (4) |
Includes
options to purchase 4,394,531 shares of common
stock.
|
SECURITY
OWNERSHIP AFTER CHANGE OF CONTROL
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of October 2, 2007, for each of the following persons, after
giving effect to transaction under the Exchange Agreement:
|
|
• |
each
of our directors and each of the named officers in the
“Management—Executive Compensation” section of this report;
|
|
|
• |
all
directors and executive 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
87,664,120 shares of common stock outstanding on October 2, 2007.
|
|
|
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
|
|
|
68.9
|
%
|
|
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 (2)
|
|
|
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
|
|
|
69.3
|
%
|
| |
|
|
|
|
|
|
|
|
5%
Shareholders:
|
|
|
|
|
|
|
|
|
Verda
International Limited (3)
|
|
|
194,263,661
|
|
|
68.9
|
%
|
|
Wang
Renhui (4)
|
|
|
22,384,290
|
|
|
20.3
|
%
|
* Represents
less than one percent (1%).
| (1) |
Includes
(i) 3,885,273 shares of Series B Preferred Stock convertible into
194,263,650 shares of common stock, and (ii) 11 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) |
Includes
(i) 7,994 shares of Series B Preferred Stock convertible into 399,700
shares of common stock, and (ii) 19 shares of common stock owned
by Ge
Jian.
|
| (3) |
Includes
(i) 3,885,273 shares of Series B Preferred Stock convertible into
194,263,650 shares of common stock, and (ii) 11 shares of common
stock.
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.
|
| (4) |
Includes
(i) 447,685 shares of Series B Preferred Stock convertible into 22,384,250
shares of common stock, and (ii) 40 shares of common stock owned
by Wang
Renhui. The mailing address for Wang Renhui is No. 57-2-14-1 Chaoyang
Street, Dalin, China.
|
DIRECTORS
AND EXECUTIVE OFFICERS
Appointment
of New Directors and Officers
In
connection with the Exchange Transaction, Gary Wolfson, Kenneth Clinton, and
Dr.
Shaohua Tan resigned as members of our board of directors, and we appointed
six
new directors to our board of directors. Furthermore, concurrent with the
Closing of the Exchange Transaction, Gary Wolfson resigned as our Chief
Executive Officer, Adam Wasserman resigned as our Chief Financial Officer,
and
Kenneth Clinton resigned as our President. Immediately following the
resignations of Mr. Wolfson, Mr. Wasserman and Mr. Clinton as executive
officers, we appointed seven new executive officers. Descriptions of our newly
appointed directors and officers can be found below in the section titled
“Current Management.”
Current
Management
The
following table sets forth the names and ages of our directors and executive
officers, as of the date of this Current Report on Form 8-K:
|
Name
|
|
Age
|
|
Position
|
|
Cao
Wubo
|
|
42
|
|
Chief
Executive Officer and Chairman of the Board
|
|
Elsa
Sung
|
|
33
|
|
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
|
|
24
|
|
Director
|
|
Ge
Jian
|
|
36
|
|
Director
|
|
Zhang
Yihua
|
|
26
|
|
Director
|
|
Rodrigo
Arboleda
|
|
65
|
|
Director
|
|
Robert
Cain
|
|
45
|
|
Director
|
Cao
Wubo,
age 42,
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 33,
is currently Vice President of CFO Oncall, Inc. and shall serve as Chief
Financial Officer of the combined entity effective October 1, 2007. Prior to
joining CFO Oncall, Inc., Ms. Sung was an Audit Manager at Sherb & Co., Boca
Raton, Florida. She was responsible for managing, monitoring, as well as
performing audits for domestic and international clients. Ms. Sung was primarily
responsible for providing assurance services to public companies located in
China. 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 24,
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 the 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
the
board of directors.
Board
Committees; Director Independence
As
of
this date our board of directors has not appointed an audit committee 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.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between our board of directors and the board
of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
EXECUTIVE
COMPENSATION
Director
Compensation
Effective
October 1, 2007 in connection with our change in control, we do not pay any
compensation to members of our board of directors for their service on the
board. However, we intend to review and consider future proposals regarding
board compensation.
Executive
Compensation
The
following executive compensation disclosure reflects all compensation for
fiscal
year 2007 received by Laiyang Jiangbo’s principal executive officer, principal
financial officer, and most highly compensated executive officers. We refer
to
these individuals in this Current Report as “named executive officers.”
Summary
Compensation
The
following table reflects all compensation awarded to, earned by or paid to
our
named executive officers for Laiyang Jiangbo’s fiscal year ended June 30, 2007:
Summary
Compensation for Laiyang Jiangbo’s Fiscal Year-Ended June 30,
2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
and Principal Position
|
|
Fiscal
Year Ended
|
|
Salary(1)
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan Compensa-tion
($)
|
|
Nonqualified
Deferred Compensa-tion Earnings
($)
|
|
All
Other Compensa-tion ($)
|
|
Total
($)
|
|
|
Cao
Wubo,
Chief
Executive Officer, President
|
|
|
2007
|
|
|
2,460
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,460
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elsa
Sung,
Chief
Financial Officer (2)
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xu
Haibo,
Vice
President, Chief Operating Officer
|
|
|
2007
|
|
|
1,845
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,845
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Expressed in U.S. Dollars based on the average interbank exchange rate of
7.8070
PRC Dollars for each 1.00 U.S. Dollar for fiscal year ended June 30, 2007.
(2)
Ms.
Sung was appointed as our Chief Financial Officer effective October 1, 2007,
subsequent to the end of the most recent fiscal year ended June 30, 2007.
Accordingly, no compensation information is available for Ms. Sung for this
period. A description of her employment agreement can be found below in the
section titled “Employment Agreements”.
Grants
of Plan-Based Awards
We
did
not make any grants of plan-based awards to our named executive officers
during
Laiyang Jiangbo’s fiscal year-ended June 30, 2007.
Outstanding
Equity Awards
There
are
no unexercised options, stock that has not vested, or equity incentive plan
awards for any of our named executive officers outstanding as of June 30,
2007.
Option
Exercises and Stock Vested
There
were no exercises of stock options, SARs or similar instruments, and no vesting
of stock, including restricted stock, restricted stock units and similar
instruments, during the last completed fiscal year for any of our named
executive officers.
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.
The
following disclosure sets forth certain information regarding written employment
agreements with our named executive officers:
Employment
Agreement with Elsa Sung.
Effective
October 1, 2007, Ms. Elsa Sung was appointed as our Chief Financial Officer.
Under the terms of the employment agreement, Ms. Sung will provide general
services to us as CFO, including but not limited to advising our management
about financial issues related to being a public company. We will 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 will
be
tied to the most recent price of our common shares in any financing by us.
We
will reimburse Ms. Sung for any out of pocket expenses, including travel
expenses.
The
following is a summary of the compensation to be paid under these employment
agreements in the upcoming fiscal year ended June 30, 2008 to our named
executive officers:
Summary
of Compensation To Be Paid Under Employment Agreements for Fiscal Year Ended
June 30, 2008
|
|
|
Annual
Compensation
|
|
|
Name
and Principal Position
|
|
Salary
|
|
Bonus(1)
|
|
Other
annual
compensation(1)
|
|
|
Cao
Wubo
Chairman
of the Board, Chief Executive Officer
|
|
$
|
156,000
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Elsa
Sung
Chief
Financial Officer
|
|
$
|
94,500
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Xu
Haibo
Vice
President, Chief Operating Officer
|
|
$
|
67,200
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As
of the date hereof, bonuses and other annual compensation for fiscal
year
ended June 30, 2008 have not been determined by the Board of Directors
or
committee thereof.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
AND
DIRECTOR INDEPENDENCE
Agreement
and Plan of Share Exchange
On
October 1, 2007, Genesis Technology Group, Inc., a Florida corporation (the
“Registrant”
or
“Genesis”)
executed a Share Exchange Agreement (“Exchange
Agreement”)
by and
among Karmoya International Limited, a British Virgin Islands company
(“Karmoya”),
and
the shareholders of 100% of Karmoya’s capital stock (the “Karmoya
Shareholders”)
on the
one hand, and the Registrant and the majority shareholders of the Registrant’s
capital stock (the “Genesis
Shareholders”)
on the
other hand. Separately, Karmoya owns 100% of the capital stock of Union Well
International Limited, a Cayman Islands company (“Union Well”), which has
established and owns 100% of the equity in Genesis Jiangbo (Laiyang) Biotech
Technologies Co., Ltd., a wholly foreign owned enterprise in the People’s
Republic of China (“GJBT”). GJBT has entered into consulting service agreements
and equity-related agreements with Laiyang Jiangbo Pharmaceutical Co., Ltd.
(“Laiyang Jiangbo”), a limited liability company headquartered in, and organized
under the laws of, China.
Under
the
Exchange Agreement, on the Closing Date, we issued 5,995,780 shares of our
Series B Voting Convertible Preferred Stock (the “Series
B Preferred Stock”)
to the
Karmoya Shareholders in exchange for 100% of the capital stock of Karmoya.
The
shares of Series B Preferred Stock issued are convertible, in the aggregate,
into a number of shares of our common stock that would equal 75% of the
outstanding shares of our common stock if the shares were to be converted on
the
Closing Date. As a result of this transaction, the Karmoya Shareholders became
our controlling shareholders and Karmoya became our wholly owned subsidiary.
In
connection with Karmoya becoming our wholly owned subsidiary, we acquired the
business and operations of the LJ Group, and our principal business activities
shall continue to be conducted through the LJ Group’s operating company in
China, Laiyang Jiangbo.
Our
Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders
PRC
law
currently limits foreign equity ownership of Chinese companies. To comply with
these foreign ownership restrictions, we operate our business in China through
a
series of contractual arrangements with Laiyang Jiangbo and its shareholders
that were executed on September 21, 2007. For a description of these contractual
arrangements, see “Contractual Arrangements with Laiyang Jiangbo and Its
Shareholders” under the “Business” section above.
Related
Party Transactions of Laiyang Jiangbo
Set
forth
below are the related party transactions since June 30, 2007 between Laiyang
Jiangbo’s shareholders, officers and/or directors, and Laiyang Jiangbo. As a
result of the Exchange Transaction, we have contractual arrangements with
Laiyang Jiangbo which give us the ability to substantially influence Laiyang
Jiangbo's daily operations and financial affairs, appoint its senior executives
and approve all matters requiring shareholder approval.
Laiyang
Jiangbo is engaged in business activities with three related parties, Jiangbo
Chinese-Western Pharmacy, Laiyang Jiangbo Medicals, Co., Ltd and Yantai Jiangbo
Pharmaceuticals Co., Ltd. At June 30, 2007 and 2006, accounts receivable from
product sales due from the three companies owned by Laiyang Jiangbo’s Chief
Executive Officer and major shareholders amounted to $498,940 and $413,850,
respectively. For the years ended June 30, 2007, 2006, and 2005, the Company
recorded net revenues of $3,018,502, 2,471,143 and $1,248,691 to Jiangbo
Chinese-Western Pharmacy, $436,909, $231,722, and $441,265 to Laiyang Jiangbo
Medicals, Co., Ltd and $478,470, $1,210,587, and $209,310 to Yantai Jiangbo
Pharmaceuticals Co., Ltd., respectively. In general, accounts receivable due
from related parties are payable in cash and are due within 3 to 6 months,
which
approximate normal business terms with unrelated parties.
Prior
to
fiscal year 2007, Laiyang Jiangbo received advances from its director,
shareholders and related parties for its operating activities. At June 30,
2007,
Laiyang Jiangbo had payable balances due to its shareholders and related parties
amounting $757,531 and $175,601 respectively. At June 30, 2006, Laiyang Jiangbo
had payable balances due to its director, shareholders and related parties
amounting $2,456,852, $1,397,602 and $795,238, respectively. These advances
are
short-term in nature and bears interest rate at 5.84%, and 6.03%, for 2007
and
2006, respectively. The interest rate for 2007 was calculated by using Laiyang
Jiangbo’s 2007 average outstanding bank loan interest rate; and the interest
rate for 2006 was calculated by using the 2006 Bank of China 6 months to 1
year
basic bank loan interest rate.
At
June
30, 2007 and 2006, other payable-related parties consisted of the
following:
| |
|
2007
|
|
2006
|
|
|
Payable
to Cao Wubo, Chief Executive Officer and Chairman of the Board, with
annual interest at 5.84% and 6.03%, for 2007 and 2006 respectively,
and
unsecured.
|
|
$
|
447,531
|
|
$
|
2,456,852
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guihong, shareholder and sister of CEO’s spouse, with annual
interest at 5.84% and 6.03%, for 2007 and 2006 respectively, and
unsecured.
|
|
|
280,334
|
|
|
1,369,358
|
|
| |
|
|
|
|
|
|
|
|
Payable
to Zhang Yihua, shareholder of the Company and Yantai Jiangbo
Pharmaceuticals, and niece of CEO, with annual interest at 5.84%
and
6.03%, for 2007 and 2006 respectively, and unsecured.
|
|
|
29,665
|
|
|
28,244
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to Yantai Jiangbo Pharmaceuticals, an affiliated company, with annual
interest at 5.84% and 6.03%, for 2007 and 2006 respectively, and
unsecured.
|
|
|
106,910
|
|
|
727,788
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to Laiyang Jiangbo Medicals, an affiliated company, with annual interest
at 5.84% and 6.03%, for 2007 and 2006 respectively, and
unsecured.
|
|
|
68,249
|
|
|
67,029
|
|
|
|
|
|
|
|
|
|
|
|
Payable
to Xun Guifang,
|
|
|
443
|
|
|
420
|
|
| |
|
|
|
|
|
|
|
|
Total
other payable-related parties
|
|
$
|
933,132
|
|
$
|
4,649,691
|
|
Related
Party Transactions of Genesis
Set
forth
below are the related party transactions since June 30, 2007 between Genesis’s
shareholders, officers and/or directors, and Genesis.
On
August
1, 2007, we entered a letter of intent whereby we would sell in two installments
an aggregate of 3,400,000 shares of Lotus Pharmaceuticals, Inc. ("LTUS")
common
stock owned by us to an investor at $0.55 per share. On August 10, 2007, we
sold
680,000 of the LTUS shares for proceeds of $374,000. The investor may purchase
2,720,000 shares of LTUS for $1,496,000 on or before September 15, 2007. In
order to have the sufficient number of LTUS shares to sell, in conjunction
with
the sale of 2,720,000 shares of LTUS, we must repay a $325,000 promissory note
to an officer of the company and the LTUS collateral shares held in escrow
must
be released.
On
July
31, 2007, our 51% owned subsidiary, Genesis Equity Partners LLC, II
(“GEP
II”),
issued a promissory note to a member of GEP II in the amount of $190,000 for
working capital purposes. The note bears interest at 10% per annum and is due
on
July 31, 2008. 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.
On
July
23, 2007, we entered into a one-year consulting agreement for business advisory
and investor relations services with a company related to a member of our
subsidiary, Genesis Equity Partners, LLC (“GEP”).
In
connection with this agreement, we transferred 100,000 shares of LTUS to this
consultant with a fair market value of $100,000.
Director
Independence
For
our
description of director independence, see “Board of Directors” under the section
entitled “Directors and Executive Officers ”above.
LEGAL
PROCEEDINGS
We
are
not currently involved in any material legal proceedings, nor have we been
involved in any such proceedings that has had or may have a significant effect
on our company. We are not aware of any other material legal proceedings pending
against us.
MARKET
PRICE OF AND DIVIDENDS ON 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
October 4, 2007, the closing sales price for shares of our common stock was
$0.28 per share on the Over-The-Counter Bulletin Board.
Holders
As
of
October 2, 2007, there were approximately 855 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
Reference
is made to Item 3.02 of this Current Report on Form 8-K for a description
of recent sales of unregistered securities, which is hereby incorporated by
reference.
DESCRIPTION
OF SECURITIES
The
following information describes our capital stock and provisions of our articles
of incorporation and our bylaws, all as in effect upon the Closing of the
Exchange Transaction. This description is only a summary. You should also refer
to our articles of incorporation, bylaws and articles of amendment which have
been incorporated by reference or filed with the Securities and Exchange
Commission as exhibits to this Current Report on Form 8-K.
General
Our
authorized common stock consists of 200,000,000 shares of common stock, $0.001
par value per share. Our authorized preferred stock consists of 20,000,000
shares of preferred stock, $0.001 par value per share, of which (i) on January
15, 2004 our board of directors designated 218,000 shares as Series A 6%
Cumulative Convertible Preferred Stock and (ii) on September 30, 2007 our board
of directors designated 8,000,000 shares as Series B Voting Convertible
Preferred Stock. As of October 2, 2007, there were 87,664,120 shares of common
stock outstanding, 15,400 shares of Series A 6% Cumulative Convertible Preferred
Stock outstanding, and 5,995,780 shares of Series B Voting Convertible Preferred
Stock.
Common
Stock
Holders
of common stock are entitled to one vote for each share on all matters submitted
to a shareholder vote. Holders of common stock do not have cumulative voting
rights. Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of common stock are entitled to share in all dividends
that the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, subject
to
preferences that may be applicable to any then-outstanding preferred stock,
each
outstanding share entitles its holder to participate in all assets that remain
after payment of liabilities and after providing for each class of stock, if
any, having preference over the common stock.
Holders
of common stock have no conversion, preemptive or other subscription rights,
and
there are no redemption or sinking fund provisions applicable to the common
stock. The rights of the holders of common stock are subject to any rights
that
may be fixed for holders of preferred stock, when and if any preferred stock
is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
Preferred
Stock
Our
board
of directors, without further shareholder approval, may issue preferred stock
in
one or more series from time to time and fix or alter the designations, relative
rights, priorities, preferences, qualifications, limitations and restrictions
of
the shares of each series. The rights, preferences, limitations and restrictions
of different series of preferred stock may differ with respect to dividend
rates, amounts payable on liquidation, voting rights, conversion rights,
redemption provisions, sinking fund provisions and other matters. Our board
of
directors may authorize the issuance of preferred stock which ranks senior
to
our common stock for the payment of dividends and the distribution of assets
on
liquidation. In addition, our board of directors can fix limitations and
restrictions, if any, upon the payment of dividends on our common stock to
be
effective while any shares of preferred stock are outstanding. The rights
granted to the holders of any series of preferred stock could adversely affect
the voting power of the holders of common stock and issuance of preferred stock
may delay, defer or prevent a change in our control.
Series
A 6% Cumulative Convertible Preferred Stock
In
January 2004 our board of directors created a series of 218,000 shares of our
preferred stock and designated that series as Series A 6% Cumulative Convertible
Preferred Stock (“Series
A Preferred Stock”).
The
designations, rights and preferences of the Series A Preferred Stock
include:
*
the
stated value of each share is $10.00,
*
the
shares of Series A Preferred Stock have no voting rights,
*
the
outstanding shares are entitled to receive preferential cumulative dividends
in
cash out of any our funds legally available at the time for declaration of
dividends before any dividend or other distribution is paid or declared and
set
apart for payment on any shares of our common stock, or other class of stock
which is authorized in the future, at the rate of 6% simple interest per annum
on the stated value per share, payable quarterly commencing with the period
ending March 31, 2004. At the holder's option, declared dividend payments may
be
made in additional fully paid and on assessable shares of Series A Preferred
Stock at a rate of one share for each $10 of declared dividend not paid in
cash,
*
upon
the dissolution, liquidation or winding up of our company, the shares of Series
A Preferred Stock carry a liquidation preference of $10.00 per share plus any
accrued but unpaid dividends,
*
the
shares of Series A Preferred Stock are convertible into such number of shares
of
our common stock as equal(i) the sum of (A) the stated value of $10.00 per
share
and (B) at the holder's election accrued and unpaid dividends on such share,
divided by (ii) the conversion price of $0.232 per share. The right of the
holder to convert the shares of Series A Preferred Stock into shares of our
common stock is limited if such conversion would result in the holder having
beneficial ownership of more than 9.99% of the outstanding shares of our common
stock. The holder is not limited to successive exercises which would result
in
the aggregate issuance of more than 9.99%,
*
so long
as the shares of Series A Preferred Stock are outstanding, we cannot amend
our
articles of incorporation without the approval of the holders of a majority
of
the issued and outstanding shares of Series A Preferred Stock if such amendment
would have the effect of:
-
changing the seniority rights of the holders of the Series A Preferred Stock
as
to the payment of dividends,
-
reducing the liquidation preference, or
-
canceling or modifying the conversion rights.
*
the
dividend rate of the shares of Series A Preferred Stock is subject to increase
from 6% per annum to 15% per annum upon the occurrences of certain events,
including:
-
failure
to pay a dividend,
-
breach
of any material covenant, term or condition of the designations of the Series
A
Preferred Stock or the subscription agreement related to its sale,
-
bankruptcy, insolvency, reorganization, liquidation or an assignment of a
substantial part of our property or business for the benefit of our creditors,
or the appointment of a trustee or receiver for a substantial party of our
properties or business,
-
a
judgment or similar process against us in excess of $50,000,
-
failure
to timely deliver a stock certificate upon the conversion of shares of Series
A
Preferred Stock into common stock,
-
if our
common stock is no longer quoted on the OTC Bulletin Board or the principal
exchange on which it is traded,
-
if we
effect a reverse stock split without the consent of the holders of the Series
A
Preferred Stock, or
-
a
default by us under any agreement to which we are a party.
Series
B Voting Convertible Preferred Stock
On
September 30, 2007, our board of directors created a series of 8,000,000 shares
of our preferred stock and designated that series as Series B Voting Convertible
Preferred Stock (“Series
B Preferred Stock”).
The
Certificate of Designation of the Series B Preferred Stock was filed on October
1, 2007. On October 1, 2007, we issued 5,995,780 shares of the Series B
Preferred Stock as part of the Exchange Transaction.
With
respect to dividend rights and rights on liquidation, dissolution and winding-up
of the affairs of the company, the Series B Preferred Stock ranks senior to
common stock and junior to each class or series of capital stock, including
the
Series A Preferred Stock, which expressly provides that it ranks senior to
the
Series B Preferred Stock as to dividends or upon liquidation, dissolution and
winding-up, or as to any other right or preference (except any other class
of
Series B Preferred Stock). The holders of Series B Preferred Stock are entitled
to the rights on liquidation, dissolution and winding-up of the affairs of
the
company as they would enjoy if they had converted their Series B Preferred
Stock
into common stock prior to the record date for such distribution event.
Upon
the
effective date of the company's filing of an amendment to its Articles of
Incorporation increasing the number of shares of common stock, the company
is
authorized to issue sufficient common stock to permit full conversion of all
shares of Series B Preferred Stock into shares of common stock (“Conversion
Event”),
and
each share of Series B Preferred Stock outstanding shall automatically convert
into fifty (50) fully paid and nonassessable shares of common stock. The shares
of Series B Preferred Stock are convertible, in the aggregate, into a number
of
shares of our common stock that would equal 75% of the outstanding shares of
our
common stock if the shares were to be converted on the Closing Date of the
Exchange Transaction. Each holder of the Series B Preferred Stock shall receive
shares of common stock, as converted, pro-rata, in proportion to such holder’s
ownership of shares of the Series B Preferred Stock.
The
holders of shares of Series B Preferred Stock have the right to one vote for
each share of common stock into which such Series B Preferred Stock could then
be converted, and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of common
stock, and shall be entitled to notice of any shareholder meeting in accordance
with the bylaws of the company, and shall be entitled to vote, together with
holders of common stock, with respect to any question upon which holders of
common stock or preferred stock have the right to vote.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Florida
Law
Florida
Statutes Section 607.0850 generally permits us to indemnify our directors,
officers, employees or other agents who are subject to any third-party actions
because of their service to the company if such persons acted in good faith
and
in a manner they reasonably believed to be in, or not opposed to, the best
interests of the company. If the proceeding is a criminal one, such person
must
also have had no reasonable cause to believe his conduct was unlawful. In
addition, we may indemnify our directors, officers, employees or other agents
who are subject to derivative actions against expenses and amounts paid in
settlement which do not exceed, in the judgment of our board of directors,
the
estimated expense of litigating the proceeding to conclusion, including any
appeal thereof, actually and reasonably incurred in connection with the defense
or settlement of such proceeding, if such person acted in good faith and in
a
manner such person reasonably believed to be in, or not opposed to, the best
interests of the company. To the extent that a director, officer, employee
or
other agent is successful on the merits or otherwise in defense of a third
party
or derivative action, such person will be indemnified against expenses actually
and reasonably incurred in connection therewith.
Florida
Statutes Section 607.0850 also permits us to further indemnify such persons
by
other means unless a judgment or other final adjudication establishes that
such
person's actions or omissions which were material to the cause of action
constitute (1) a crime (unless such person had reasonable cause to believe
his
conduct was lawful or had no reasonable cause to believe it unlawful), (2)
a
transaction from which he derived an improper personal benefit, (3) an action
in
violation of Florida Statutes Section 607.0834 (unlawful distributions to
shareholders), or (4) willful misconduct or a conscious disregard for the best
interests of the company in a proceeding by or in the right of the corporation
to procure a judgment in its favor or in a proceeding by or in the right of
a
shareholder.
Furthermore,
Section 607.0831 of the FBCA provides, in general, that no director shall be
personally liable for monetary damages to Industrial Services or any other
person for any statement, vote, decision, or failure to act, regarding corporate
management or policy, unless: (a) the director breached or failed to perform
his
duties as a director; and (b) the director's breach of, or failure to perform,
those duties constitutes (i) a violation of criminal law, unless the director
had reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful, (ii) a transaction from which the
director derived an improper personal benefit, either directly or indirectly,
(iii) a circumstance under which the liability provisions of Florida Statutes
Section 607.0834 are applicable, (iv) in a proceeding by or in the right of
the
company to procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the company, or
willful misconduct, or (v) in a proceeding by or in the right of someone other
than the company or a shareholder, recklessness or an act or omission which
was
committed in bad faith or with malicious purpose or in a manner exhibiting
wanton and willful disregard of human rights, safety, or property.
Charter
Provisions and Other Arrangements of the Registrant
Article
VIII of our articles of incorporation provides for the indemnification of any
and all persons who serve as our director, officer, employee or agent to the
fullest extent permitted under Florida law. In addition, we carry insurance
permitted by the laws of Florida on behalf of directors, officers, employees
or
agents which may cover, among other things, liabilities under the Securities
Act
of 1933, as amended (the “Securities
Act”).
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling the company pursuant
to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There
have been no changes in or disagreements with the company's independent
auditors. The company engaged its independent auditors, Sherb & Co., LLP, on
May 11, 2002.
Item 3.02 Unregistered
Sales of Equity Securities
As
more
fully described in Items 1.01 and 2.01 above, in connection with the Exchange
Agreement, on the Closing Date, we issued
5,995,780
shares
of our Series B Preferred Stock and 597 shares of our common stock to the
Karmoya Shareholders in exchange for 100% of the capital stock of Karmoya.
Reference is made to the disclosures set forth under Items 1.01 and 2.01 of
this
Current Report on Form 8-K, which disclosures are incorporated herein by
reference. The shares of Series B Preferred Stock issued are convertible, in
the
aggregate, into a number of shares of our common stock that, when combined
with
the 597 shares of our common stock, would equal 75% of the outstanding shares
of
our common stock (on a fully-diluted basis) if the shares were to be converted
on the Closing Date. Under the terms of conversion, each share of Series B
Preferred Stock will not be convertible into common stock unless and until
we
amend our Articles of Incorporation to increase the authorized number of shares
of common stock available for issuance in an amount sufficient to permit the
conversion of all the shares of Series B Preferred Stock, and all of our other
convertible securities and instruments into common stock. As of the Closing
Date, we had not amended our Articles of Incorporation to effectuate such an
increase in authorized common stock. However, at such time as we effectuate
such
an increase in our authorized common stock, each share of Series B Preferred
Stock will automatically convert into fifty (50) fully paid and nonassessable
shares of our common stock. The issuance of the Series B Preferred Stock to
the
Karmoya Shareholders pursuant to the Exchange Agreement was exempt from
registration under the Securities Act pursuant to Section 4(2) and/or Regulation
D thereof. We made this determination based on the representations of the
Karmoya Shareholders which included, in pertinent part, that such shareholders
were (a) "accredited investors" within the meaning of Rule 501 of Regulation
D
promulgated under the Securities Act, and that such shareholders were acquiring
our common stock, for investment purposes for their own respective accounts
and
not as nominees or agents, and not with a view to the resale or distribution
thereof, and that each member understood that the shares of our common stock
may
not be sold or otherwise disposed of without registration under the Securities
Act or an applicable exemption therefrom.
On
May
17, 2007, we issued 357,143 shares of our common stock to a Beijing-based third
party consultant for business development services rendered in connection with
its operations for its partner company Genesis Equity Partners LLC, a Florida
limited liability partnership (“GEP”).
We
valued these shares of common stock at the fair market value on the date of
grant of $0.15 per share or $53,571 based on the trading price of shares of
our
common stock. Accordingly, we recorded deferred contract costs of $53,571,
which
will be expensed upon the completion of a certain GEP contract. The recipient
was an accredited or otherwise sophisticated investor and the transactions
were
exempt from registration under the Securities Act in reliance on an exemption
provided by Section 4(2) of that Act. The recipient had access to information
concerning our company.
On
May
15, 2007, in connection with a 90-day consulting agreement, we issued 265,000
shares of our common stock to Pentony Enterprises, Inc. for investor relations
services. We valued these shares of common stock at the fair market value on
the
date of grant of $0.155 per share or $41,075 based on the trading price of
shares of our common stock. Accordingly, for the nine months ended June 30,
2007, we recorded stock-based compensation expense of $20,537 and deferred
compensation of $20,538, which will be amortized over the remaining service
period. The recipient was an accredited or otherwise sophisticated investor
and
the transactions were exempt from registration under the Securities Act in
reliance on an exemption provided by Section 4(2) of that Act. The recipient
had
access to information concerning our company.
On
April
13, 2007, we issued 428,571 shares of common stock to a Beijing-based third
party consultant for business development services rendered in connection with
its GEP operations. We valued these shares of our common stock at the fair
market value on the date of grant of $0.14 per share or $60,000 based on the
trading price of shares of our common stock. Accordingly, the company recorded
deferred contract costs of $60,000, which will be expensed upon the completion
of a certain GEP contract. The recipient was an accredited or otherwise
sophisticated investor and the transactions were exempt from registration under
the Securities Act in reliance on an exemption provided by Section 4(2) of
that
Act. The recipient had access to information concerning our
company.
On
March
29, 2007, the company cancelled 343,706 shares of common stock previously issued
to officers of the company.
On
January 1, 2007, in connection with the appointment of a new director, Robert
D.
Cain, the company issued 500,000 shares of restricted common stock to the new
director member for services to be rendered for a one-year period. The company
valued these shares of common stock at the fair market value on the date of
grant of $.14 per share or $70,000 based on the trading price of shares of
our
common stock. Accordingly, the company recorded deferred compensation of
$70,000, which will be amortized over the remaining service period. The
recipient was an accredited or otherwise sophisticated investor and the
transactions were exempt from registration under the Securities Act in reliance
on an exemption provided by Section 4(2) of that Act. The recipient had access
to information concerning our company.
On
December 11, 2006, we issued 500,000 shares to a Beijing-based consultant for
business development services rendered in connection with its GEP operations.
We
valued these shares of common stock at the fair market value on the date of
grant of $0.12 per share or $60,000 based on the trading price of our shares
of
common stock. The recipient was an accredited or otherwise sophisticated
investor and the transactions were exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that Act. The
recipient had access to information concerning our company.
On
November 30, 2006, in connection with the appointment of a new director, Rodrigo
Arboleda, we issued 500,000 shares of restricted common stock to the new
director for services to be rendered for a one-year period. We valued these
shares of common stock at the fair market value on the date of grant of $0.135
per share or $67,500 based on the trading price of shares of our common stock.
The recipient was an accredited or otherwise sophisticated investor and the
transactions were exempt from registration under the Securities Act in reliance
on an exemption provided by Section 4(2) of that Act. The recipient had access
to information concerning our company.
On
November 20, 2006, we issued 600,000 shares to a Beijing-based consultant for
business development services rendered in connection with its GEP operations.
We
valued these shares of common stock at the fair market value on the date of
grant of $0.10 per share or $60,000 based on the trading price of shares of
our
common stock. The recipient was an accredited or otherwise sophisticated
investor and the transactions were exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that Act. The
recipient had access to information concerning our company.
On
May 5,
2006, we issued 1,000,000 shares of common stock for services. We valued these
shares of common stock at the fair market value on the date of grant at per
share price of $.23. The recipient was an accredited or otherwise sophisticated
investor and the transaction was exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that Act. The
recipient had access to information concerning our company.
During
May and June 2005, we issued 14,973 shares of common stock to two employees
as
compensation for services. The company valued these shares of common stock
at
the fair market value on the dates of grant of $.07 per share or $1,048 based
on
the trading price of shares of our common stock. The recipients were accredited
or otherwise sophisticated investors and the transactions were exempt from
registration under the Securities Act in reliance on an exemption provided
by
Section 4(2) of that Act. The recipients had access to information concerning
our company.
On
May
31, 2005, we issued 763,867 shares of common stock to two executives as
compensation for services. We valued these shares of common stock at the fair
market value on the dates of grant of $.06 per share or $45,832 based on the
trading price of shares of our common stock. The recipients were accredited
investors and the transactions were exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of that
Act.
On
April
25, 2005, in connection with a consulting agreement, we issued 1,500,000 shares
of common stock to a consultant as compensation for investor relations services.
We valued these shares of common stock at the fair market value on the dates
of
grant of $.061 per share or $91,500 based on the trading price of shares of
our
common stock. The recipient was an accredited or otherwise sophisticated
investor and the transaction was exempt from registration under the Securities
Act in reliance on an exemption provided by Section 4(2) of that Act. The
recipient had access to information concerning our company.
On
April
1, 2005, in connection with an employment agreement, we issued 500,000 shares
of
common stock to an employee as compensation for services. We valued these shares
of common stock at the fair market value on the dates of grant of $.07 per
share
or $35,000 based on the trading price of our common stock. The recipient was
an
accredited investor and the transaction was exempt from registration under
the
Securities Act in reliance on an exemption provided by Section 4(2) of that
Act.
On
April
1, 2005, we issued 1,626,977 shares of common stock to two executives as
compensation for services rendered. We valued these shares of common stock
at
the fair market value on the dates of grant of $.07 per share or $113,888 based
on the trading price of our common stock. The recipients were accredited
investors and the transactions were exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of that
Act.
In
December 2004 in connection with a separation and severance agreement with
Dr.
James Wang, we issued Dr. Wang 562,500 shares of our common stock. These
securities were issued in a private transaction exempt from registration under
the Securities Act in reliance on an exemption provided by Section 4(2) of
that
Act. The certificate evidencing the shares that were issued contained a legend
restricting their transferability absent registration under the Securities
Act
or the availability of an applicable exemption therefrom.
In
November 2004 in connection with an employment agreement, we issued Gary Wolfson
and Ken Clinton, officers and directors of our company, each 3,125,000 shares
of
our common stock representing an aggregate value of $718,750. These securities
were issued in a private transaction exempt from registration under the
Securities Act in reliance on an exemption provided by Section 4(2) of that
Act.
The certificates evidencing the shares that were issued contained a legend
restricting their transferability absent registration under the Securities
Act
or the availability of an applicable exemption therefrom.
In
October 2004 in connection with the execution of an employment agreement with
Dr. Li Shaoqing, we issued Mr. Shaoqing 1,000,000 shares of our common stock.
These securities were issued in a private transaction exempt from registration
under the Securities Act in reliance on an exemption provided by Section 4(2)
of
that Act. The certificate evidencing the shares that were issued contained
a
legend restricting their transferability absent registration under the
Securities Act or the availability of an applicable exemption
therefrom.
Item 5.01 Changes
in Control of Registrant.
As
more
fully described in Items 1.01 and 2.01 above, on October 1, 2007, Genesis
Technology Group, Inc., a Florida corporation (“Genesis”)
executed a Share Acquisition and Exchange Agreement (“Exchange
Agreement”)
by and
among Genesis, Karmoya International Ltd., a British Virgin Islands company
(“Karmoya”),
and
the shareholders of 100% of Karmoya’s capital stock (the “Karmoya
Shareholders”).
The
Closing of this transaction occurred on October 1, 2007. Reference is made
to
the disclosures set forth under Items 1.01 and 2.01 of this Current Report
on
Form 8-K, which disclosures are incorporated herein by reference.
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”)
and
597 shares of our common stock to the Karmoya Shareholders in exchange for
100%
of the capital stock of Karmoya. As a result of this transaction, the Karmoya
Shareholders acquired control of our company because the shares of Series B
Preferred Stock entitle the Karmoya Shareholders to voting rights with respect
to any and all matters presented to our shareholders for their action or
consideration that is equal to the number of shares of our outstanding shares
of
common stock in which such shares are convertible. The shares of Series B
Preferred Stock acquired by the Karmoya Shareholders are convertible, in the
aggregate, into a number of shares of our common stock that, when combined
with
the 597 shares of our common stock, would equal 75% of the outstanding shares
of
our common stock (on a fully-diluted basis) if the shares were to be converted
on the Closing Date. Each share of our outstanding common stock entitles the
holders of common stock to one vote. Thus, the Karmoya Shareholders hold 75%
or
the majority number of voting shares of our company on a fully diluted basis.
In
connection with this change in control, and as explained more fully in Item
5.02
below, effective October 1, 2007, Gary Wolfson, Adam Wasserman and Kenneth
Clinton each resigned as our Chief Executive Officer, Chief Financial Officer,
and President, respectively. In addition, effective October 1, 2007, Gary
Wolfson, Kenneth Clinton, and Dr. Shaohua Tan each resigned as members of our
board of directors. Further, effective October 1, 2007, we appointed the
following new directors and officers:
|
Name
|
|
Age
|
|
Position
|
|
Cao
Wubo
|
|
42
|
|
Chief
Executive Officer and Chairman of the Board
|
|
Elsa
Sung
|
|
33
|
|
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
|
|
24
|
|
Director
|
|
Ge
Jian
|
|
36
|
|
Director
|
|
Zhang
Yihua
|
|
26
|
|
Director
|
Item 5.02
Departure
of Directors or Certain Officers; Election of Directors; Appointment of Certain
Officers; Compensatory Arrangements of Certain Officers.
As
more
fully described in Items 1.01, 2.01 and 5.01 above, on October 1, 2007, Genesis
Technology Group, Inc., a Florida corporation (“Genesis”)
executed a Share Acquisition and Exchange Agreement (“Exchange
Agreement”)
by and
among Genesis, Karmoya International Ltd., a British Virgin Islands company
(“Karmoya”),
and
the shareholders of 100% of Karmoya’s capital stock (the “Karmoya
Shareholders”).
The
Closing of this transaction occurred on October 1, 2007. Reference is made
to
the disclosures set forth under Items 1.01, 2.01 and 5.01 of this Current Report
on Form 8-K, which disclosures are incorporated herein by
reference.
(a) Resignation
of Directors
Effective
October 1, 2007, Gary Wolfson, Kenneth Clinton, and Dr. Shaohua Tan
(individually, a “Resigning
Director”
and
collectively, the “Resigning
Directors”)
resigned as members of our board of directors. There were no disagreements
between any Resigning Director and any of our officers or directors. We provided
a copy of the disclosures it is making in response to this Item 5.02 to the
Resigning Directors and informed each Resigning Director that he may furnish
the
company as promptly as possible with a letter stating whether he agrees or
disagrees with the disclosures made in response to this Item 5.02, and that
if he disagrees, then the company requests that he provide the respects in
which
he does not agree with the disclosures. We will undertake to file any letter
received from a Resigning Director, if any, as an exhibit to an amendment to
this current report on Form 8-K within two business days after receipt.
(b) Resignation
of Officers
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.
(c) Appointment
of Officers
Effective
October 1, 2007, the following persons were appointed as our newly appointed
officers (individually, a “New
Officer”
and
collectively, the “New
Officers”):
|
Name
|
|
Age
|
|
Position
|
|
Cao
Wubo
|
|
42
|
|
Chief
Executive Officer and Chairman of the Board
|
|
Elsa
Sung
|
|
33
|
|
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
|
There
are
no family relationships among any of our officers or directors. None of the
New
Officers currently has an employment agreement with Genesis. Other than the
Exchange Transaction, there are no transactions, since the beginning of our
last
fiscal year, or any currently proposed transaction, in which Genesis was or
is
to be a participant and the amount involved exceeds the lesser of $120,000
or
one percent of the average of Genesis’s total assets at year-end for the last
three completed fiscal years, and in which any of the New Officers had or will
have a direct or indirect material interest. Other than the Exchange
Transaction, there is no material plan, contract or arrangement (whether or
not
written) to which any of the New Officers is a party or in which any New Officer
participates that is entered into or material amendment in connection with
our
appointment of the New Officers, or any grant or award to any New Officer or
modification thereto, under any such plan, contract or arrangement in connection
with our appointment of the New Officers.
Descriptions
of our newly appointed directors and officers can be found in Item 2.01
above, in the section titled “DIRECTORS & EXECUTIVE OFFICERS - Current
Management.”
(d) Appointment
of Directors
Effective
October 1, 2007, the following persons were appointed as new members of our
board of directors (individually, a “New
Director”
and
collectively, the “New
Directors”):
|
Name
|
|
Age
|
|
Position
|
|
Cao
Wubo
|
|
42
|
|
Chairman
of the Board of Directors
|
|
Xu
Haibo
|
|
36
|
|
Director
|
|
Feng
Xiaowei
|
|
40
|
|
Director
|
|
Huang
Lei
|
|
24
|
|
Director
|
|
Ge
Jian
|
|
36
|
|
Director
|
|
Zhang
Yihua
|
|
29
|
|
Director
|
There
are
no family relationships among any of our officers or directors. None of the
New
Directors has been named or, at the time of this Current Report, is expected
to
be named to any committee of the board of directors. Other than the Exchange
Transaction, there are no transactions, since the beginning of our last fiscal
year, or any currently proposed transaction, in which Genesis was or is to
be a
participant and the amount involved exceeds the lesser of $120,000 or one
percent of the average of Genesis’s total assets at year-end for the last three
completed fiscal years, and in which any of the New Directors had or will have
a
direct or indirect material interest. Other than the Exchange Transaction,
there
is no material plan, contract or arrangement (whether or not written) to which
any of the New Directors is a party or in which any New Director participates
that is entered into or material amendment in connection with our appointment
of
the New Directors, or any grant or award to any New Director or modification
thereto, under any such plan, contract or arrangement in connection with our
appointment of the New Directors.
Descriptions
of our newly appointed directors and officers can be found in Item 2.01
above, in the section titled “DIRECTORS & EXECUTIVE OFFICERS - Current
Management.”
Item 9.01 Financial
Statement and Exhibits.
As
more
fully described in Item 2.01 above, on October 1, 2007 Genesis Technology Group,
Inc., a Florida corporation (the “Registrant”
or
“Genesis”)
executed a Share Exchange Agreement (“Exchange
Agreement”)
by and
among Karmoya International Limited, a British Virgin Islands company
(“Karmoya”),
and
the shareholders of 100% of Karmoya’s capital stock (the “Karmoya
Shareholders”)
on the
one hand, and the Registrant and the majority shareholders of the Registrant’s
capital stock (the “Genesis
Shareholders”)
on the
other hand. The closing of this transaction (the “Exchange
Transaction”)
occurred on October 1, 2007. 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 8-K, Karmoya, Union Well, GJBT and Laiyang Jiangbo
are sometimes collectively referred to as the “LJ Group.” As a result of our
acquisition of the LJ Group, our principal business activities after the
Exchange Transaction shall continue to be conducted through the LJ Group’s
operating company in China, Laiyang Jiangbo.
(a)
Financial Statements of the Business Acquired
The
audited consolidated financial statements of the LJ Group for the years ended
June 30, 2007, 2006 and 2005, including the notes to such financial statements,
are incorporated herein by reference to Exhibit 99.10 of this Current
Report.
(b)
Pro Forma Financial Information
The
unaudited pro forma combined financial statements of the combined entity as
of,
and for the year ended, June 30, 2007, including the notes to such financial
statements, are incorporated herein by reference to Exhibit 99.11 of this
Current Report.
The
unaudited pro forma consolidated financial statements are presented to
illustrate the estimated effects of our acquisition of the LJ Group and the
Exchange Transaction on our historical financial position and our results of
operations. We have derived our historical financial data for the nine months
ended June 30, 2007 from our unaudited financial statements contained on Form
10-QSB as filed with the Securities and Exchange Commission. We have derived
the
LJ Group’s historical consolidated financial statements as of June 30, 2007 from
the LJ Group’s audited consolidated financial statements for the year ended June
30, 2007 contained elsewhere in this Form 8-K. In accordance with Statement
of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141),
and
the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma combined condensed financial statements, the LJ Group is
considered the accounting acquiror. Because the LJ Group’s owners as a group
retained or received the larger portion of the voting rights in the combined
entity and the LJ Group’s senior management represents a majority of the senior
management of the combined entity, the LJ Group was considered the acquiror
for
accounting purposes and will account for the Exchange Transaction as a reverse
acquisition. The acquisition has been accounted for as a reorganization of
entities and the financial statements have been prepared as if the
reorganization had occurred retroactively. Our fiscal year will continue to
end
on June 30.
The
Exchange Transaction was completed on October 1, 2007. The unaudited pro forma
consolidated statements of operations for the year ended June 30, 2007 assume
that the Exchange Transaction, cancellation of shares, distribution of certain
assets and payment of liabilities were consummated on July 1, 2006. The
unaudited pro forma consolidated balance sheet as of June 30, 2007 assumes
the
Exchange Transaction and issuance of shares were consummated on that date.
The
information presented in the unaudited pro forma consolidated financial
statements does not purport to represent what our financial position or results
of operations would have been had the Exchange Transaction and issuance of
shares occurred as of the dates indicated, nor is it indicative of our future
financial position or results of operations for any period. You should not
rely
on this information as being indicative of the historical results that would
have been achieved had the companies always been consolidated or the future
results that the consolidated company will experience after the Exchange
Transaction and cancellation of shares.
The
pro
forma adjustments are based upon available information and certain assumptions
that we believe are reasonable under the circumstances. These unaudited pro
forma consolidated financial statements should be read in conjunction with
the
accompanying notes and assumptions and the historical financial statements
and
related notes of us and the LJ Group.
(d)
Exhibits
INDEX
TO EXHIBITS
|
Exhibit
Number
|
|
Description
|
|
2.1
|
|
Share
Acquisition and Exchange Agreement by and among Genesis, Karmoya
and
Karmoya Shareholders dated October 1, 2007 (1)
|
|
|
|
|
|
3.1
|
|
Articles
of Incorporation (2)
|
|
|
|
|
|
3.2
|
|
Bylaws
(2)
|
|
|
|
|
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
|
|
|
|
|
3.4
|
|
Articles
of Amendment to Articles of Incorporation (2)
|
|
|
|
|
|
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*
|
|
|
|
|
|
10.1
|
|
Employment
Agreement between Elsa Sung and Laiyang Jiangbo Pharmaceutical Co.,
Ltd.
dated October 1, 2007*
|
|
|
|
|
|
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)
|
|
|
|
|
|
99.10
|
|
Audited
consolidated financial statements of LJ Group for the years ended
June 30,
2007, 2006 and 2005, and accompanying notes to audited consolidated
financial statements*
|
|
|
|
|
|
99.11
|
|
Unaudited
pro forma consolidated financial statements of the combined entity
as of,
and for the year ended, June 30, 2007, and accompanying notes to
unaudited
pro forma consolidated financial
statements*
|
*
Filed
Herewith.
| (1) |
Previously
filed with Current Report on Form 8-K on October 2, 2007 and incorporated
by reference.
|
| (2) |
Previously
filed with Registration Statement on Form SB-2 on September 1, 1999
and
incorporated by reference.
|
| (3) |
Previously
filed with Current Report on Form 8-K on January 22, 2004 and incorporated
by reference.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Report on Form 8-K to be signed on its behalf by the
undersigned hereunto duly authorized.
| |
|
|
| |
GENESIS
TECHNOLOGY GROUP, INC.
|
| |
|
|
|
By: |
/s/
Cao Wubo
|
| |
Cao
Wubo
|
| |
Chief
Executive Officer
|
Dated:
October 5, 2007