Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K/A
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date
of
report (Date of earliest event reported): November 19, 2007 (October 1,
2007)
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
(Exact
name of registrant as specified in Charter)
|
Florida
|
333-86347
|
65-1130026
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Commission
File No.)
|
(IRS
Employee Identification
No.)
|
Middle
Section, Longmao Street, Area A, Laiyang Waixiangxing Industrial
Park
Laiyang
City, Yantai, Shandong Province, People’s Republic of China
710075
(Address
of Principal Executive Offices)
(0086)
535-7282997
(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/A 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/A.
In
this Form 8-K/A, references to “Genesis” or the “Registrant” refer to Genesis
Pharmaceuticals Enterprises, Inc. (formerly Genesis Technology Group, Inc.),
a
Florida corporation.
Introductory
Explanation
This
Form
8-K/A amends an earlier Current Report on Form 8-K which was filed by Genesis
on
October 9, 2007 and amended on October 10, 2007. Collectively, the Current
Report and the amendment are referred to as the “October
9 Report”.
As
reported in the October 9 Report, Genesis acquired 100% of the capital stock
of
Karmoya International Ltd, a British Virgin Islands company (“Karmoya”),
in a
share exchange transaction dated October 1, 2007 (the “Exchange
Transaction”).
As a
result of the Exchange Transaction, Genesis acquired control of the business
and
operations of Karmoya and its subsidiaries (collectively, the “LJ
Group”).
This
Form 8-K/A amends the October 9 Report to disclose a change in the Registrant's
fiscal year and to include unaudited consolidated interim financial statements
for the three month period ended September 30, 2007 for the LJ Group including
its operating company, Laiyang Jiangbo Pharmaceutical Co., Ltd. (“Laiyang
Jiangbo”).
This
Form 8-K/A does not include the financial results for the year ended September
30, 2007 for the Registrant, which will be covered in the Registrant's
Annual Report on Form 10-KSB for the year ended September 30,
2007.
Capitalized
terms used herein and not defined have the same meaning as in the October 9
Report. Items 1.01, 2.01, 3.02, 5.01, and 5.02 of the October 9 Report remain
unchanged and are hereby incorporated by reference. Except for the additional
disclosures made under Item 9.01 contained herein, all other disclosures in
Item
9.01 of the October 9 Report remain unchanged and are hereby incorporated by
reference.
Item
2.02. Results of Operations and Financial Condition.
On
November 19, 2007, the Registrant issued a press release announcing its
financial results for the LJ Group, including its operating company Laiyang
Jiangbo, for the LJ Group’s first quarter ended September 30, 2007. A copy of
the press release is attached as Exhibit 99.1, and the information in Exhibit
99.1 is incorporated herein by reference.
The
information in this Item 2.02, the information regarding the press release
in
Item 9.01(d) in this Current Report on Form 8-K/A, and the press release
exhibit
attached hereto shall not be deemed “filed” for the purpose of Section 18 of the
Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section, nor shall it be deemed incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except as expressly set forth by specific
reference in such a filing.
Item
5.03 Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year
On
November 14, 2007, the Registrant’s Board of Directors, acting pursuant to the
authority granted by the Registrant’s Bylaws and the Florida Business
Corporation Act, determined by unanimous written consent to change the
Registrant’s fiscal year end from September 30 to June 30. The report covering
the transition period will be covered on the Registrant’s Quarterly Report on
Form 10-QSB for the quarter ended December 31, 2007.
Item
8.01 Other
Events
The
following discussion and analysis of the results of operations and financial
condition of Karmoya International Limited for the three months ended September
30, 2007 and 2006 should be read in conjunction with Karmoya’s financial
statements and the notes to those financial statements that are included
elsewhere in this Current Report on Form 8-K/A (“Form 8-K”) and the October 9
Report. 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. References to “we,” “our,” “us” or the
“Company” refers to the LJ Group.
OVERVIEW
Genesis
Pharmaceuticals Enterprises, Inc. (formerly Genesis Technology Group, Inc.)
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 share exchange transaction that was completed on October 1,
2007
and described more fully in the October 9 Report, Karmoya, a British Virgin
Islands company, established as a “special purpose vehicle” for the foreign
fundraising for its Chinese subsidiaries, became our wholly owned
subsidiary and our new operating business. Karmoya was incorporated under
the
laws of the British Virgin Islands on July 17, 2007 and conducts its business
operations through its wholly owned subsidiary, Genesis Jiangbo (Laiyang)
Biotech Technology Co., Ltd. which was incorporated under the laws of
the People’s Republic of China ("PRC") on September 16, 2007 and registered
as a wholly foreign owned enterprise on September 19, 2007.
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. Our consolidated financial statements do not include the
financial information of Genesis, which will be covered in Genesis’s Annual
Report on Form 10-KSB for the year ended September 30, 2007. 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 Exhibit 99.2, 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
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
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 three months ended September 30, 2007 and 2006
The
following table sets forth the results of our operations for the periods
indicated as a percentage of total net sales:
|
|
|
Three
Month Period Ended September 30,
|
|
%
of
|
|
Three
Month Period Ended September 30,
|
|
%
of
|
|
|
|
|
2007
|
|
Revenue
|
|
2006
|
|
Revenue
|
|
|
SALES
|
|
$
|
15,262,789
|
|
|
91.88
|
%
|
$
|
16,945,651
|
|
|
94.13
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
- RELATED PARTY
|
|
|
1,348,095
|
|
|
8.12
|
%
|
|
1,055,905
|
|
|
5.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
4,590,114
|
|
|
27.63
|
%
|
|
5,071,159
|
|
|
28.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
12,020,770
|
|
|
72.37
|
%
|
|
12,930,397
|
|
|
71.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
6,821,416
|
|
|
41.07
|
%
|
|
3,882,787
|
|
|
21.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESEARCH
AND DEVELOPMENT
|
|
|
264,920
|
|
|
1.59
|
%
|
|
3,644,720
|
|
|
20.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
4,934,434
|
|
|
29.71
|
%
|
|
5,402,890
|
|
|
30.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
106,089
|
|
|
0.64
|
%
|
|
119,253
|
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
|
|
4,828,345
|
|
|
29.07
|
%
|
|
5,283,637
|
|
|
29.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
1,593,353
|
|
|
9.59
|
%
|
|
1,783,367
|
|
|
9.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
3,234,992
|
|
|
19.48
|
%
|
|
3,500,270
|
|
|
19.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME
Foreign
currency translation adjustment
|
|
|
417,346
|
|
|
2.51
|
%
|
|
131,184
|
|
|
0.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
|
$ |
3,652,338
|
|
|
21.99
|
%
|
$ |
3,631,454
|
|
|
20.17
|
%
|
REVENUES.
Our
revenues include revenues from sales and revenues from sales to related party
of
$15,262,789 and $1,348,095, respectively for the three months ended September
30, 2007. During the three months ended September 30, 2007, we had revenues
from
sales of $15,262,789 as compared to revenues from sales of $16,945,651 for
the
three months ended September 30, 2006, a decrease of $1,682,862 or approximately
9.93%. During the three months ended September 30, 2007, we had revenues from
sales to related party of $1,348,095 as compared to revenues from sales to
related party of $1,055,905 for the three months ended September 30, 2006,
an
increase of $292,190 or approximately 27.67%. The overall decrease in total
revenue was attributable to a loss of production time due to a previously
scheduled maintenance project implemented by management according to Chinese
drug production industry standards. To better our drug safety and ensure our
manufacturing facility continue to meet the Good Manufacturing Practice (GMP)
standards, our facility stopped production for approximately five weeks to
perform maintenance regimen. We subsequently passed a full Chinese State Food
and Drug Administration inspection in November 2007 and successfully continue
to
maintain our GMP approved status. We believe that our sales will have
significant improvements and growth in remaining of fiscal year 2008 as our
new
product Baobaole Chewable tablets start to sell in the second quarter and we
continue 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 SALES.
Cost of
sales for the three months ended September 30, 2007 decreased $481,045 or 9.49%,
from $ 5,071,159 for the three months ended September 30, 2006 to $4,590,114
for
the three months ended September 30, 2007. The
decrease in cost of sales as a percentage of net revenues for the three months
ended September 30, 2007, approximately 27.63% as compared to the three months
ended September 30, 2006, approximately 28.17%, was attributable to more
efficient manufacture production.
GROSS
PROFIT.
Gross
profit was $12,020,770 for the three months ended September 30, 2007 as compared
to $12,930,397 for the three months ended June 30, 2006, representing gross
margins of approximately 72.37% and 71.83%, respectively. The increase in our
gross profits was mainly due to decrease in cost of sales as a percentage of
net
revenue.
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES.
Selling,
general and administrative expenses totaled $6,821,416 for the three months
ended September 30, 2007, as compared to $ 3,882,787 for the three months ended
September 30, 2006, an increase of $2,938,629 or approximately 75.68% as
summarized below:
|
|
|
Three
months ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
|
Advertisement,
marketing and promotion spending
|
|
$
|
5,908,778
|
|
$
|
3,669,504
|
|
|
Travel
and entertainment- sales related
|
|
|
194,603
|
|
|
353
|
|
|
Depreciation
and amortization
|
|
|
89,014
|
|
|
46,896
|
|
|
Shipping
and handling
|
|
|
48,373
|
|
|
88,050
|
|
|
Salaries,
wages and related benefits
|
|
|
190,098
|
|
|
30,152
|
|
|
Travel
and entertainment- non sales related
|
|
|
50,386
|
|
|
7,851
|
|
|
Other
|
|
|
340,164
|
|
|
39,981
|
|
| |
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,821,416
|
|
$
|
3,882,787
|
|
The
changes in these expenses from the three months ended September 30, 2007 as
compared to the three months ended September 30, 2006 included the
following:
| · |
An
increase of $2,239,274 or approximately 61.02% in advertisement,
marketing
and promotion spending primarily due to TV commercials and magazine
advertisements expenses to establish our Baobaole
Chewable tablets brand name.
|
| · |
Travel
and entertainment -sales related expenses increased by $154,573 or
approximately 174.85% primarily due to our marketing activities related
to
promoting our Baobole Chewable tablets and establishing the distribution
network for the product.
|
| · |
Shipping
and handling expenses decreased by $39,377 or approximately 45.06%
primarily because more customers directly pick up their shipments
from the
distribution points and less sales made in
2008
|
| · |
Depreciation
and amortization increased by $42,119 or approximately 89.81% due
to
purchasing of equipments in 2007. As such, we incurred more depreciation
expenses.
|
| · |
An
increase of $159,946 or approximately 530.46% in salaries, wages
and
related benefits was primarily due to increase in number of employees
and
sales representatives as a result of expanding our distribution network
from 26 provinces to 29 provinces.
|
| · |
And
increase of $42,535 or approximately 541.80% in travel, entertainment-
non
sales related expenses was primarily due to increase in corporate
executives’ and managers’ travel.
|
| · |
Other
selling, general and administrative expenses, which includes utilities,
office supplies and expenses increased by $300,183 or 750.81% primarily
due to increase in consulting expenses as well as office expenses.
|
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 $ 264,920 for the three months ended September 30, 2007, as compared
to
$3,644,720 for the three months ended September 30, 2006, a decrease of
$3,379,800 or approximately 92.73%. The decrease was mainly due to timing
difference in payments for new drug clinical trials and project expenses. In
September 2007, we established a formal cooperative relationship with a
provincial university with strong research and development emphasis and make
monthly payments to the designated university research and development projects
plus expense incurred. Additionally, we will also provide internship
opportunities to the university students.
If
a new
drug formula is successfully developed under the program and the patent is
obtained, we will have the primary ownership of patent.
OTHER
EXPENSES.
Our
other expenses consisted of financial expenses and non-operating expenses.
We
had other expenses of $ 106,089 for the three months ended September 30, 2007
as
compared to other expenses $ 119,253 for the three months ended September 30,
2006, a decrease of $13,164 or approximately 11.04%. The decrease in other
expenses is mainly due to decrease in interest expenses.
NET
INCOME.
Our net
income for the three months ended September 30, 2007 was $3,234,992 as compared
to $3,500,270 for the three months ended September 30, 2006. The decrease in
net
income is attributable to decrease sales volume due to production interruption
and increase in selling, general and administrative expenses. Our management
believes that net income will have significant improvements in the near future
because we have successfully passed the GMP full inspection and we do not
anticipate other interruption in our production. We will also continue to offer
better and more products and improve our manufacturing efficiency.
Our
working capital position increased $3,612,111 to $19,609,551 at September 30,
2007 from $15,997,440 at June 30, 2007. This increase in working capital is
primarily attributable to an increase in accounts receivable of approximately
$3.2 million, an increase in accounts receivable-related parties of
approximately $1.2 million, an increase in inventories of approximately $0.4
million, and increase in other receivables of $0.3 million, an increase in
advance to suppliers of $3.9 million, a decrease in accounts payable of $1.4
million, a descrease in notes payable of $2.9 million, a decrease in
other payable of $1.1 million, and a payment of dividend of $10.5 million,
and offset by a decrease in cash of $13.2 million, a decrease in restricted
cash
of $2.8 million, a increase in short term bank loans of $600,100 and an increase
in taxes payable of $4.8 million.
Net
cash
used in operating activities for the three months ended September 30, 2007
was
$3,240,358 as compared to net cash provided by operating activities of
$1,572,228 for the three months ended September 30, 2006. For the three months
ended September 30, 2007, net cash used in operating activities was primarily
attributable to increases in our accounts receivable, accounts
receivable-related parties, other receivable and advance to suppliers balances
of $3,173,544, $1,213,279, $334,460 and $3,875,363, respectively, and decreased
in accounts payables, and other payables of $1,385,815 and $1,091,944 offset
by
increase in taxes payable of $4,719,062 and net income of $3,234,992. For the
three months ended September 30, 2006, net cash provided by operating activities
was attributable primarily to our net income of $3,500,270, increases in our
accrued liabilities and taxes payable of $224,315 and $486,640, respectively,
and offset by increases in our accounts receivable, accounts receivable-related
parties, and inventories of $806,450, $819,972 and $562,905, respectively and
a
decrease in our other payables of $570,065.
Net
cash
used by investing activities for the three months ended September 30, 2007
was
$20,723 attributable to purchases of equipments. Net cash used in investing
activities for the three months ended September 30, 2006 amounted to $9,682
which consisted of attributable to purchases of equipments.
Net
cash
used in financing activities was $10,066,960 for the three months ended
September, 30, 2007 and was attributable to payments on dividend payable of
$10,596,800, payments for bank loans of $2,649,200 and a decrease in notes
payable of $2,906,702 and offset by proceeds from bank loans of $3,179,040
and
increased in restricted cash of $2,906,702.
We
reported a net decrease in cash for the three months ended September 30, 2007
of
$13,166,344 as compared to a net increase in cash of $1,611,686 for the three
months ended September 30, 2006.
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 September 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
|
|
$
|
10,807,534
|
|
$
|
10,807,534
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
Research
and development Obligations
|
|
$
|
9,338,000
|
|
$
|
2,934,800
|
|
$
|
6,403,200
|
|
$ |
- |
|
$ |
- |
|
|
Purchase
Obligations
|
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
|
Total
Contractual Obligations:
|
|
$
|
20,145,534
|
|
$
|
13,742,334
|
|
$
|
6,403,200
|
|
$ |
- |
|
$ |
- |
|
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 the October
9
Report entitled “Certain Relationships and Related Transactions.”
Quantitative
and Qualitative Disclosures about Market Risk
We
do 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, we 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 September 30, 2007, we had approximately $4,570,864 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 $ 417,346
and $ 131,184 in the three months ended September 30, 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.
Item 9.01 Financial
Statements and Exhibits
(a)
Financial Statements of the Business Acquired
The
unaudited consolidated financial statements of the LJ Group for the three month
period ended September 30, 2007, including the notes to such financial
statements, are incorporated herein by reference to Exhibit 99.2 of this Current
Report on Form 8-K/A.
(d)
Exhibits
INDEX
TO EXHIBITS
| |
|
|
|
Exhibit
Number
|
|
Description
|
| |
|
|
|
99.1
|
|
Press Release
dated
November 19, 2007. |
| |
|
|
|
99.2
|
|
Unaudited
consolidated financial statements of LJ Group for the three month
period
ended September 30, 2007, and accompanying notes to unaudited consolidated
financial statements.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Report on Form 8-K/A to be signed on its behalf by the
undersigned hereunto duly authorized.
| |
|
|
| |
GENESIS
PHARMACEUTICALS ENTERPRISES, INC.
|
| |
|
|
| |
By:
|
/s/
Cao Wubo
|
| |
|
Cao
Wubo
|
| |
|
Chief
Executive Officer
|
Dated:
November 19, 2007