UNITED STATES
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: May 15, 2006
(Date of earliest event reported): May 11, 2006
COMET TECHNOLOGIES, INC.
---------------------------------------------------------------
(Exact Name of small business issuer as specified in its charter)
Nevada 0-26059 87-0430322
----------------------- -------------------- ------------------------
(State of Incorporation) (Commission File No.) (IRS Employer ID Number)
8 East Broadway #428, Salt Lake City, Utah 84111
------------------------------------------------------
(Address of principal executive offices)
(801) 532-7851
------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable.
------------------------------------------------------------
(Former name or former address, if changed since last report.)
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 (17CFR 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 ))
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
SUMMARY
On May 11, Comet Technologies, Inc. ("Comet" or the "Company") entered
into a Stock Exchange Agreement (the "Exchange Agreement") with American
California Pharmaceutical Group, Inc., a California corporation ("ACPG"), and
the shareholders of ACPG. Pursuant to the terms of the Exchange Agreement,
Comet has agreed to issue a total of 10,193,377 shares of its common voting
stock to the stockholders of ACPG, in exchange for 100% of the capital stock
of ACPG. Subject to the satisfaction of certain conditions, it is expected
that the transaction will be completed on or before May 30, 2006.
Upon the closing of the transaction, ACPG will be a wholly-owned
subsidiary of Comet, and Comet, which previously had no material operations,
will be a holding company for the business of ACPG and its subsidiaries,
described below. ACPG is a California holding corporation, which owns all of
the issued and outstanding shares of registered capital of Harbin Tian Di Ren
Medical Science and Technology Company ("TDR"), a limited liability company
organized in Heilongjiang Province in the People's Republic of China ("PRC" or
"China"). TDR is engaged in the manufacture, marketing and sale of
over-the-counter nutraceutical and medicinal products, primarily in China (See
"Business of TDR and Subsidiaries," below).
As a result of the closing of the Exchange Agreement, there will be a
change in voting control of Comet, expected to occur approximately as of May
30, 2006. The former shareholders of ACPG will hold a total of 10,193,377
shares of common stock of ACPG, or approximately 93% of the outstanding common
stock of Comet, the original Comet shareholders will hold a total of 735,993
shares of common stock, or 7% of the outstanding common stock, including stock
to be granted under a consulting agreement to Comet's two current officers,
who will resign as officers and directors at the closing. In addition, Comet
has a total of 31,250 shares issuable under outstanding options and warrants.
(See "Description of the Securities of Comet," below).
The Exchange Agreement was determined through negotiations between Comet
and ACPG representatives. Prior to the transaction, there were no material
relationships between the Company and ACPG or any of their respective
affiliates, directors or officers or any associates of such officers or
directors.
The Exchange Agreement is filed as an exhibit to this Form 8-K and is
incorporated herein by reference.
In connection with the consummation of the acquisition, Comet will
change the address of its principal executive offices to No. 38 Dingxin 3rd
Street, Nangang District, Heilongjiang Province, Harbin, China 150001. Its
new telephone number will be 86-451-5399-4073, effective as of the closing of
the Exchange Agreement.
Comet is a public company whose securities are quoted on the
over-the-counter Bulletin Board under the symbol "COMT."
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this annual report, references to "Comet," the Company," "we," "us,"
and "our" refer to Comet Technologies, Inc.
Except for the historical information contained herein, some of the
statements in this Report contain forward-looking statements that involve
risks and uncertainties. These statements are found in the sections under this
Item 2.01, entitled "Business of TDR and Subsidiaries," "Management's
Discussion and Analysis or Plan of Operation," and "Risk Factors," as well as
other sections. They include statements concerning: the pending transaction
with ACPG and information concerning its: business strategy; expectations of
market and customer response; liquidity and capital expenditures; future
sources of revenues; expansion of proposed product line; and trends in
industry activity generally. In some cases, you can identify forward-looking
statements by words such as "may," "will," "should," "expect," "plan,"
"could," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "goal," or "continue" or similar terminology. These statements
are only predictions and involve known and unknown risks, uncertainties and
other factors, including, but not limited to, the risks outlined under "Risk
Factors," that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements. Although we believe that the
expectations reflected in the forward looking statements are reasonable, we
cannot guarantee future events, results, levels of activity, performance or
achievements. Unless we are required to do so under US federal securities laws
or other applicable laws, we do not intend to update or revise any
forward-looking statements.
INFORMATION CONCERNING AMERICAN CALIFORNIA PHARMACEUTICAL
GROUP, INC., AND SUBSIDIARIES
All of the business of American California Pharmaceutical Group, Inc.
("ACPG") is conducted through ACPG's wholly-owned subsidiary, Harbin Tian Di
Ren Medical Science and Technology Company ("TDR"), and TDR's subsidiaries,
described below.
ACPG was incorporated on December 16, 2005, in the State of California,
under the name "QQ Group, Inc." It changed its name to "American California
Pharmaceutical Group, Inc." in anticipation of the stock exchange transaction
with Comet. On December 8, 2005, ACPG completed a stock exchange transaction
with TDR and TDR's subsidiaries, pursuant to an agreement of that date. Under
the terms of the agreement, ACPG exchanged 100% of its issued and outstanding
common stock for 100% of the capital stock of TDR and its subsidiaries,
described below.
ACPG is only a holding company, and has no revenues (and relatively
nominal expenses), except those related to its ownership of TDR and its
subsidiaries.
TDR, formerly known as "Harbin City Tian Di Ren Medical Co.," was
originally formed in 1994 and maintained its principal executive office in
Harbin City of Heilongjiang Province, the PRC. TDR was reorganized and
incorporated as a limited liability company on December
2
29, 2000, under the "Corporation Laws and Regulations" of the PRC with an
authorized capital of $l,330,314 (Renminbi ("RMB") 11.015 million). The
Company has two wholly-owned subsidiaries, Harbin First Bio-Engineering
Company Limited and Kangxi Medical Care Product Factory. In the remainder of
this Form 8-K, the reference to "ACPG" shall mean ACPG, together with TDR and
its subsidiaries, and the reference to "TDR" shall mean TDR and its
subsidiaries, unless the context otherwise indicates.
BUSINESS OF TDR AND SUBSIDIARIES
GENERAL
ACPG is engaged, through TDR and its subsidiaries, in the development,
manufacture, marketing and sale of over-the-counter nutritional and medicinal
products. TDR's principal business is the manufacture and sale of branded
nutritional supplements and over-the-counter plant and herb based medicinal
products. TDR's manufacturing facilities are in the City of Harbin,
Heilongjiang Province. TDR has evolved into an integrated manufacturer,
marketer, and distributor of external use natural Chinese medicinal products
sold primarily to and through domestic pharmaceutical chain stores in China.
TDR's principal products are external use Traditional Chinese Herbal
Remedies/Medicines ("TCM"). Using various formulas, TDR produces a number of
TCM products with several forms of delivery including creams, sprays,
medicated skin patch products, and herbs believed to have complimentary
effects.
TDR's principal operations and sales are in the PRC, where TDR has sales
distribution covering most of China and the Hong Kong Special Administration
Region. The Company also exports its products to 11 other countries, including
Germany, Denmark, Switzerland, Hungary, South Korea, Singapore, and the United
States.
TDR has also established several long term relationships with well-known
universities and enterprises in the PRC, as described below under "Current
Research and Development." Through these relationships, TDR hopes to develop
a number of additional products it will be able to manufacture and market in
the PRC and in other countries.
The State Food and Drug Administration of the government of the PRC
("SFDA") issues the licenses and petitions for permission to manufacture and
market pharmaceutical products in the PRC. TDR has been granted 9 product
licenses and permits. These licenses and permits have allowed TDR to
commercialize a total of 32 products. TDR is undertaking efforts to develop a
series of 10 new products, and is planning to register these products with the
SFDA over the next 5 years. TDR has also registered 7 patents with the State
Intellectual Property Rights Bureau of the PRC, which includes packing design
patents as well as product ingredients patents. TDR plans to continue
registering patents resulting from its ongoing product research and
development.
3
Kangxi Medical Care Product Factory
The Kangxi Medical Care Product Factory ("Kangxi") is a wholly-owned
subsidiary of TDR. Kangxi was formed on July 20, 2001 in the city of Harbin
of Heilongjiang Province, in the PRC, with an authorized capital of $60,386
(RMB 500,000). Kangxi manufactures and sells branded external use Chinese
medicine and other natural products under the registered trademark "Kangxi."
Kangxi produces and sells its products to TDR for distribution and resale. It
has four production lines: spray, ointment and cream, powder, and patch.
Harbin First Bio-Engineering Company Limited
Harbin First Bio-Engineering Company Limited ("First") was formed in
Heilongjiang Province, in the PRC, on September 26, 2003 with an authorized
capital of $241,546 (RMB 2 million). First has been a wholly-owned subsidiary
of TDR since its inception. First focuses on research and development of the
use of natural medicinal plants and biological technology products, such as
Endothelin-1. First is one of the first companies in Heilongjiang Province
conducting research and development of high technology biological products.
Its facility is now under the final inspection by the SFDA for qualification
as a certified GMP production facility. First has two production lines: an
enzyme immunity reagent kit production line, and a colloid gold production
line.
PRODUCTS
TDR manufactures all of its branded products, which management believes
enables it to maintain better control over product quality and availability
while also reducing production costs. TDR's manufacturing operations are
conducted in its facilities located in Harbin City, China. TDR maintains a
working relationship with a number of outside manufacturers, including softgel
manufacturers and packagers, and utilizes these outside sources from time to
time.
TDR sells over thirty different products under three basic categories:
cosmetics (4 items); medical devices (4 items); and external use medicinal or
pharmaceutical external use products (over 22 items). TDR sells a variety of
products in different forms, including sprays, ointments and creams, powders,
and patches.
Set forth below is a description of TDR's principal products.
Sumei Slim Patch
The Sumei Slim Patch is marketed and sold in the PRC as a more natural
way to lose weight. The Sumei Slim Patch uses a-Saponin to regulate and
restrain the excessive secretion of certain hormones, while promoting others.
The Sumei Slim Patch is believed to foster weight loss and prevent weight
gain.
4
Dysmenorrheal Patch
Using rare Chinese herbs and plants, the dysmenorrheal (menstrual
cramps) patch is used to relieve menstrual pain. It is a soft patch
externally applied to the skin which combines traditional Chinese Point Theory
with modern trans-dermal technology.
Pain Killer Patch
A pain killer patch applied to the neck, shoulder and waist, this
product is a treatment to fend off fever, promote well-being and to relieve
diarrhea. The patch is used for a number of ailments, including fever,
headache, dysentery of a heat type, diarrhea and stiffness and pain in the
neck caused by hypertension.
Anti-Hypertension Patch
The anti-hypertension patch is based on five thousand years of Chinese
herbal vein therapy that has been adapted to a modern trans-dermal therapeutic
system (TTS). The product utilizes a Body-Yong-Guan point technique, which is
believed to maximize the effectiveness of the medicinal ingredients. The
product is believed to stimulate blood capillaries, and is believed to be
effective in improving circulation and in reducing blood pressure.
Dysmenorrhea Patch
This is a soft patch, applied externally, for pain relief from
dysmenorrhea (menstrual cramps) that combines traditional Chinese point
therapy and modern trans-dermal technology. This product contains a pure
herb formula selected from rare Chinese herbs or plants which is refined to
extract the effective ingredients. This product is believed to be effective
in regulating microcirculation, in balancing the functions of the human body
and in enhancing the immunity response of women. It is believed to be
effective in treating the dysmenorrhea (cramping) in a woman's critical days,
and in regulating pain and catamenia (menstruation period).
Yin Ke Psoriasis Spray
Psoriasis is a disease that is difficult to treat. TDR's scientists
have focused their efforts in finding treatments for this disease. This
product contains a Chinese herbal that is believed to be effective in killing
pathogenic ringworms inside or under the skin, causing scale-like skin to fall
off, and allowing healthy skin to grow.
Wart Removing Spray
This product has been developed to eliminate the virus in a tumor or
wart. The product is effective in removing warts, through a strong permeation
and sterilization process. The product is a highly concentrated washing
liquid that is applied to the topical area.
5
Chilblain Ointment
This product contains Rhizoma Paridis, Rhizoina Bletilae and Camphor,
and is refined from Chinese herbal materials. It is believed to be effective
in improving blood circulation, and in eliminating various symptoms of
Chilblain (a cold injury that appears as an inflamed swelling on the
extremities), including itching and swelling.
Hemorrhoids Ointment
This product contains Acetate, Radix notoginseng, and Rhizoma coptidis.
The product is made in a soft ointment that is effective in sterilizing and
relieving hemorrhoid symptoms, including itching, distending pain, burning,
and bleeding.
Tinea Pedis Spray, Ointment and Powder
This product contains Cortex Pseudolaricis and Cortex Phellodendri, and
is a treatment for killing various pathogens on the skin surface and
subcutaneously, such as mycete (a fungus), trichopytic, staphylococcal
bacteria aureus, bacillus coli, and candida albicans (thrush).
Dermatitis Spray
This product is effective in sterilization and in relieving itching in
various kinds of skin pruritis (intense itching condition) caused by eczema,
urticaria (hives), seborrheic dermatitis (flaking of skin, dandruff), herpes
zoster (shingles), neurodermitis and allergic dermatitis.
Dandruff Treatment Herbal Shampoo
This product has been specifically designed to treat dandruff, and is
not intended for use as an ordinary shampoo. The product is believed to be
effective in killing fungi and providing nutrition to pallium cells.
Runze Eye Drop
This product is refined from active ingredients extracted from natural
herbs or plants, and functions as a protection from infection, tiredness of
optic nerves and myopia.
Other Products
TDR offers a number of additional products made from Chinese herbs and
plants, including a leukoderma ointment, rheumatism spray, Coryza powder,
Hircus removing spray, gonorrheal cleaning spray, a snoring retardant,
deodorants, diet tea, cough arresting patch, pharyngitis spray, and others.
The following table sets forth our principal products and the
approximate amount and percentage of revenue from each of such products during
the fiscal year ended December 31, 2005:
6
Product Name Revenue in 2005
--------------------------------- --------------------------------------
Amount (U.S.$) Approx. % of Revenue
---------------- --------------------
Tinea Pedis Spray, Ointment
and Powder 628,661 8.23
Yin Ke Psoriasis Spray 285,219 3.73
Hemorrhoids Ointment 187,770 2.46
Wart Removing Spray 241,988 3.16
Sumei Slim Patch 1,612,152 21.10
Pain killer Patch 144,449 1.89
Anti-Hypertension Patch 2,757,588 36.09
Dermatitis Spray and Cream 287,148 3.76
Dandruff Shampoo 46,090 0.60
Chilblain Ointment 66,756 0.87
Other Products 1,500,459 19.65
RESEARCH AND DEVELOPMENT
TDR currently conducts all of its research and development ("R&D")
activities, either directly or through collaborative arrangements with
universities and research institutions in the PRC. TDR has its own research,
development and laboratory facilities located at its principal headquarters in
the city of Harbin, Heilongjiang Province. TDR's R&D team currently consists
of approximately 26 people, of which 19 people are full time researchers and 7
people are part time technical experts. Many of TDR's team members are
professors affiliated with universities in the PRC.
TDR has established several long term partnerships with well-known
universities and enterprises in the PRC. TDR has built a gene medicine
laboratory through a collaborative effort with Harbin Medical University;
established a cell laboratory with North East Agricultural University; and
founded a monoclonal antibody laboratory with Jilin University. As a result
of one of these collaborations with Harbin Medical University, a product known
as "Endothelin-1" is currently under development. At such time as
development is successfully completed, TDR will commence efforts to market
Edothelin-1 as a new anti-cancer medicine. There can be no assurance, of
course, that these development efforts, or that any subsequent efforts to
obtain SFDA approval of the product, will be successful. TDR, in
collaboration with Harbin Medical University, has completed a laboratory
experimental study pertaining to Edothelin-1, which is required prior to
clinical trials, and is currently applying for approval to enter clinical
experiments. This medicine has been recognized by the PRC as the "Top
Category in New Medicine." In order to qualify as the "Top Category in New
Medicine," a company must have intellectual property rights, high technology
involvement, strong innovation, and the medicine must be the first of its kind
to be introduced to the PRC. TDR has ownership of the intellectual property
rights pertaining to this technology, and has obtained an invention patent in
China. Under its partnership arrangements with other universities and
research institutions, TDR will generally hold the intellectual property
rights to any developed technology.
7
PRODUCTS UNDER RESEARCH AND DEVELOPMENT
At present, TDR's ongoing research is divided into four aspects: (1)
the development of an enzyme linked immune technique to prepare extraneous
diagnostic kits (see table below); (2) the development of an enzyme linked
gold colloid technique to prepare extraneous rapid diagnostic test strip; (3)
the development of a gene recombination technique to prepare gene drug; (4)
the development of a biology protein chip for various tumor diagnostic
applications.
TDR currently has ten biological products under development. The
development of these products will be completed as early as 2006 for some
products, and is expected to continue through 2009 or beyond for other
products. A summary of each of these products is set forth in the table
below.
BIO EXAMINATION KIT RESEARCH
-------------------------- ------------------------------------ -------------------------- ---------------
Patent or
Intellectual
Testing Kits Name Clinical Experiment and Status Application Area Property (IP)
-------------------------- ------------------------------------ -------------------------- ---------------
Urinate Micro Albumin Finished clinical experiment, Early stage diagnosis for patented
Examination Testing Kit approved by the State, production primary kidney disease,
certificate expected to be granted hypertension, diabetes.
in 2006
-------------------------- ------------------------------------ -------------------------- ---------------
Urinate Micro Albumin Completed clinical experiment, Early stage diagnosis for patented
Examination Testing Kit approved by the State, production primary kidney disease,
certificate expected to be granted hypertension, diabetes.
in 2006
-------------------------- ------------------------------------ -------------------------- ---------------
Cardiac Arrest Early Finished clinical experiment, Early stage diagnosis for Applying
Examination Kit applying for State approval and miocardial infarction for patent
production certificate.
-------------------------- ------------------------------------ -------------------------- ---------------
AIDS Early Examination Kit Conducting clinical testing, Early stage diagnosis Anti-body
expected to be finished by June. for AIDS preparation
Application for production permit is ACPG
in July-September 2006. know-how.
-------------------------- ------------------------------------ -------------------------- ---------------
Carcinoma Cervix Early Product formulated, just started Early stage diagnosis Anti-body
Examination Kit clinical experiment design, for Carcinoma Cervix preparation
estimated to start clinical is ACPG
experiment by June, 2006, and apply know-how.
for production permit by November.
-------------------------- ------------------------------------ -------------------------- ---------------
Breast Cancer Early Researching on product formula, Early stage diagnosis Anti-body
Examination Kit estimated to be finished by May, for Breast Cancer. preparation
and start clinical experiment by is ACPG
June, and apply for production know-how.
permit by December.
-------------------------- ------------------------------------ -------------------------- ---------------
Liver Cancer Early Researching on product formula, Early stage diagnosis Anti-body
Examination Kit estimated to be finished by for Live Cancer. preparation
November, 2006, and start clinical is ACPG
experiment by December and finished know-how.
by July, 2007.
-------------------------- ------------------------------------ -------------------------- ---------------
8
-------------------------- ------------------------------------ -------------------------- ---------------
Rectal Cancer Early Researching on product formula, Early stage diagnosis Anti-body
Examination Kit estimated to be finished by December for Rectal Cancer. preparation
and start clinical experiment by is ACPG
January 2007 and finished by March, know-how.
2007.
-------------------------- ------------------------------------ -------------------------- ---------------
Stomach Cancer Early Just established product research Early stage diagnosis for Anti-body
Examination Kit team and scheduled to finish by the Stomach Cancer Cancer. preparation
end of 2007 and launch by 2008. is ACPG
know-how.
-------------------------- ------------------------------------ -------------------------- ---------------
TDR is currently conducting toxicology experiments, quality standard
measurement and other experimentation for its products under development. It
is estimated that the experimental time takes about another seven to eight
months for each product. TDR cannot predict whether, and when, these efforts
will be successful, or the likelihood and/or timing of receiving SFDA approval
of each product.
Manufacturing and Selling procedures by PRC government
For diagnostic reagent manufacturing, the government of the PRC requires
the same international standard good manufacturing practices ("GMP") as is
required for other manufacturers of medicines. The construction of TDR's
workshop will be in accordance with GMP. Construction is nearly completed.
TDR expects to be prepared to apply for a GMP certificate in June. TDR has
engaged national GMP experts to discuss and instruct in the phase of designing
and construction, and it is expected that TDR will pass the GMP inspection.
In the PRC, the wholesaler and manufacturer with a medicine business
license can engage in medicine sales activities. For a diagnostic reagent, the
Chinese government adopts the same strategy as for medicines.
Sales approach of the biotech products
TDR has established a domestic marketing network for its products
covering most of the PRC mainland, and has employed sales agents in these
areas. TDR's target customer will be chain drug stores and hospitals in all
cities. TDR will use distributors to sell products in those countries and
remote regions where it does not have any sales agents.
TDR has established a marketing network through independent agents to
develop an international market. At present, TDR has established about 20
international agents to sell its products.
MATERIALS AND SUPPLIERS
TDR employs a purchasing staff with extensive knowledge of TDR products
that works with marketing, product development, and formulations and quality
control personnel to source raw materials for products and other items. Raw
materials are sourced principally in the PRC, and are generally available from
a variety of suppliers. No one supplier accounts for more than 20% of TDR's
total raw material purchases. TDR seeks to mitigate the risk of a shortage of
raw
9
materials, through identification of alternative suppliers for the same or
similar raw materials, where available. TDR manufactures bulk branded products
to allow more extensive vertical integration and to improve the quality and
consistency of raw materials.
CUSTOMERS AND DISTRIBUTION
Currently, TDR products are sold primarily in the PRC and, to a lesser
extent, in Hong Kong and in eleven other countries. Approximately 90% of TDR
revenue is from the sale of products in China and Hong Kong.
Over the past several years, TDR has continuously expanded its
distribution channels for its products. As a result, it has established
representative sales offices in 22 provinces and 125 municipalities, and
deployed sales managers and representatives in each of these markets.
TDR products are sold directly to retail stores, including pharmacies
and drug store chains, and through independent distributors. TDR currently
has approximately 780 customers, not including branches of retail and drug
supply chains. No single customer accounts for more than 5% of its total
revenue.
TDR also exports a number of its products to 11 countries, including the
United States, Germany, Denmark, and others, and utilizes agents and
independent distributors for these marketing and sales efforts.
TDR will continue efforts during 2006 and beyond, to expand its markets
into other provinces and larger cities in the PRC, and to other markets
worldwide.
COMPETITION
Competition in the TCM and over-the-counter nutraceutical business is
intense in China and throughout the world. TDR competes with various firms,
many of which produce and market products similar to its products, and many of
which have greater resources than it does in terms of manufacturing and
marketing capabilities, management expertise and breadth, and financial
wherewithal.
TDR's direct competitors are other domestic firms engaged in developing,
manufacturing and marketing TCM and nutraceutical products. There are many of
these companies in the PRC, in Heilongjiang Province, and even in the city of
Harbin. In 2004 and 2005, a few of TDR's direct competitors included:
. Likang Medicine Company, located in the Economic Development
District of Su Zhou, Jiang Su Province. Likang markets a health
cream and skincare tablet in competition with many of TDR's
ointments and patches.
. Hei Long Jiang Tian Long Pharmaceutical Co., Ltd., located in
Harbin, Heilongjiang Province, which manufactures and markets an eye
drop, ointment, and other products that compete with TDR's products.
10
. Shan Dong Famine 3 Clean, located in Ji Nan, Shan Dong Province,
which markets a eye drop and cleansing products that compete with
TDR's products.
TDR expects that the competition for TCM and nutraceutical products in
the PRC and other world markets will become more intense over the next few
years. TDR will also face competition from foreign companies who may have
established products, a strong proprietary pipeline and strong financial
resources. TDR management believes it has certain competitive advantages in
introducing new products to market due to its R&D capabilities and its
relationship with certain universities and other research institutions.
However, there can be no assurance that it will be able to compete and
continue to grow in this highly competitive environment.
PRODUCTION AND OTHER FACILITIES
TDR, and its subsidiaries, have two separate facilities, headquartered
in the city of Harbin, Heilongjiang Province. The older facility includes
3,000 square meters of production space, and 1,000 square meters of warehouse.
The facility also includes an extraction workshop (approximately 1,200 square
meters) and filling workshop (approximately 500 square meters) for traditional
Chinese medicines; a patches production line (approximately 500 square
meters), packing workshop (approximately 500 square meters), testing workshop
(approximately 50 square meters), examination laboratory (approximately 100
square meters), sample laboratory (approximately 50 square meters), refining
room (approximately 100 square meters), and a work-in-process warehouse
(approximately 300 square meters); finished product warehouse (approximately
200 square meters), materials warehouse (approximately 100 square meters) and
a packing warehouse (approximately 400 square meters).
The newer facility covers consists of a four floor office building
(1,500 square meters for office purpose, 1,200 square meters for R&D center,
800 square meters for central examination lab, dormitory and eatery 1,000
square meters.), total 4,500 square meters construction area, and a factory of
3,500 square meters. The facilities also include: an enzyme immunity reagent
kit production workshop (1,500 square meters) and a colloid gold production
workshop (600 square meters); a packing workshop (800 square meters); and an
examination lab (500 square meters). The newer facility also includes a
research center covering approximately 1,200 square meters, for research
pertaining to the development of various products, including traditional
Chinese medicinals (TCM), biological medicine, gene medicine, immune body
research, and vitro diagnosis reagent. These facilities also include an
electricity room, heating and boiler room and garage. TDR's enzyme immunity
examination reagent kit production workshop includes antigen and immune body
areas, disinfection room, aseptic clothes room, cushion room, weighing room,
separation room, cleaning equipment room, a Wan Ji flow cushion room, and
antigen and immune body sign room. The enzyme sign processing area has
cushion room, cloth cleaning room, cleaning equipment room, packing material
temporary storage room, raw material temporary storage room, equipment storage
room, weighing room, seal protection room, seal foster room, drying room,
packing room, and middle cooler room. The work fluid separation loading room
includes a disinfection clean room, storage room, weighting room, loading
room, and immune body purification room. The colloid gold production workshop
has a darkroom, sample room, seal room, cementation room, cutting room, and a
packing room. The packing
11
workshop includes a central equipment room, a cooler room, material relay
room, label and temporary storage room, a packing material temporary storage
room, two examination cooler rooms, and two finished product cooler rooms.
TDR's production facilities are operated in accordance with "good
manufacturing practices" ("GMP"), and are GMP certified for its current
products.
GOVERNMENT REGULATION
Regulatory Environment
TDR's principal sales market is in the PRC. TDR is subject to the
Pharmaceutical Administrative Law of the PRC, which governs the licensing,
manufacturing, marketing and distribution of pharmaceutical products in the
PRC, and sets penalties for violations. In addition, our business is subject
to various regulations and permit systems of the government of the PRC.
The governmental approval process in the PRC for a newly developed
health product can be lengthy and difficult. A product sample is first sent
to a clinical testing agent designated by the Ministry of Health, which
conducts extensive clinical testing and examinations of the product to verify
if it has the specified functions as stated by the company producing the
product. A report will then be prepared and issued by the clinical testing
agent confirming or negating such functions. It generally takes six months
to one year for a report to be issued by the testing agent, after submittal to
the agent. The report must then be submitted to a provincial Health
Management Commission for approval. Following this submittal, a letter of
approval issued by such commission will be submitted to the Ministry of Health
for the issuance of a certificate that authorizes sale and marketing of the
product in the PRC.
This entire process will generally take between eighteen months and two
years. The approval process will depend to a certain extent on whether a
specified product is a plant based pharmaceutical ("PBP") or a plant based
nutracecutical ("PBN"). PBPs are products composed of herbs, roots and
plants that do not use synthetic chemicals, with certain medicinal functions
for treatment of one or more illnesses. PBPs are generally prescription-based
but in some cases may be sold over-the-counter. PBNs, also frequently known
as "dietary supplements" or "nutritional supplements," are also composed of
herbs, roots and plants, but are essentially prophylactic or preventive in
nature. All PBNs are available over-the-counter without a prescription. In
the PRC, PBPs require the approval of the SFDA, and PBNs only require the
approval of state and local governments prior to manufacturing and sale.
Obtaining the approval from the SFDA is generally more complex and lengthy.
Because TDR and is subsidiaries are wholly-owned enterprises, TDR is
subject to the law on foreign investment enterprises in the PRC, and the
foreign company provisions of the Company Law of China, which governs the
conduct of our wholly-owned subsidiaries and their officers and directors.
12
Compliance with Environmental Law
TDR complies with the Environmental Protection Law of the PRC, as well
as applicable local regulations. In addition to compliance with the PRC law
and local regulations, TDR consistently undertakes active efforts to ensure
the environmental sustainability of its operations. Because the
manufacturing of herb and plant-based products does not generally cause
significant damage or pollution to the environment, the cost of complying with
applicable environmental laws is not material. In the event TDR fails to
comply with applicable laws, it may be subject to penalties.
INTELLECTUAL PROPERTY
TDR regards its service marks, trademarks, trade secrets, patents and
similar intellectual property ("IP") as critical to its business. TDR has
relied, and will rely, on patent, trademark and trade secret law, as well as
confidentiality and license agreements with certain of its employees,
consultants, customers and others, to protect its proprietary rights.
Under the PRC State Protection law, certain herbal medicine products
which have received approval from the SFDA, have automatic protected IP rights
for a seven-year period from the date of grant of such approval. An
application can be submitted to extend such protection for up to three
consecutive seven-year periods. Once this protection period has expired, an
applicant may apply for patent protection in the PRC. To a large extent, TDR
relies on such State Protection law to protect its IP rights with respect to
its products. In addition, as of the date of this filing, TDR owns a total of
7 patents in the PRC, pertaining to its TCMs and biotech diagnostic kits and
drugs, as follows:
(1) Package foil bag design patent of Sumei slim patch;
(2) Package box design patent for all TCM products;
(3) Arts and crafts patent of Human Urinary Albumin Elisa Kit;
(4) Arts and crafts patent of Sumei slim patch;
(5) Arts and crafts design patent of Sumei slim patch;
(6) Arts and crafts patent of Suning cough removing patch; and
(7) Arts and crafts patent of Endostatin.
TDR has received the following awards by the government of the PRC:
(1) High Technology products certificates by Heilongjiang High
Technology Products Committee covering the following products:
(a) The Coryza Spray;
(b) Dermatitis Spary;
(c) Pharyngitis Spray;
(d) Tinea Pedis spray;
(e) Gonorrhea Cleaning Spray
(f) Wart-removing liquid;
(g) Sumei Slim patch;
(h) Suning Cough removing patch; and
(i) Psoriasis Spray.
13
(2) National Class Torch Project (pertaining to the Sumei slim patch);
(3) Excellence Products Award for Human Urinary Albumin Elisa Kit by
The 6th New & High Technology Fruits Fair Shen Zhen and National Commercial
Department;
(4) 100 important pre-phase projects in Heilongjiang Province covering
various medical diagnostics kits;
(5) Material Medical Technology Research and Development Company (by
Heilongjiang provincial Science and Technology Bureau); and
(6) High Technology Industrialized Base of Medical Area, by
Heilongjiang Provincial Development and Reform Committee (March of 2006).
TDR has registered "Kang Xi" as its trademark, which is used for all of
TDR's TCM products.
EMPLOYEES
The number of TDR's employees has increased over the past two years, due
to growth, increased R&D and expanded marketing and distribution of products
Currently TDR has a total of approximately 1,214 employees and manufacturers'
representatives, generally falling into the following categories:
By company:
Company Number of Employees
------------------- -------------------
TDR 1,117*
Kangxi 66
First 31
TOTAL: 1,214
By nature of job:
Type of Job Number of Employees
------------------- -------------------
Executives and Managers 17
Production and clerical 114
Sales and Marketing 1,057*
Research and Development,
Technology 26
*Includes manufacturers' representatives.
14
TDR has employment agreements with a number of our higher level
employees. None of the employees are covered by a collective bargaining
agreement; however, TDR believes its relationship with employees is good.
DESCRIPTION OF PROPERTY
The facilities of TDR and its subsidiaries are located on approximately
92,000 square meters of land, including two buildings in the city of Harbin,
Heilongjiang Province.
Under Chinese law, the government owns all of the land in the PRC and
companies and individuals are authorized to use the land only through land use
rights granted by the PRC government. The PRC has granted TDR a land use
grant covering the land and facilities in which its headquarters are located
in downtown Harbin City, which expires in 2046. The PRC has granted land use
rights on TDR's two production and warehouse facilities, expiring in 2048 and
2053, respectively. TDR's two buildings contain GMP production certified
facilities, and are used for manufacturing office, warehousing and staff
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ACPG AND SUBSIDIARIES
Attached to this Form 8-K are the audited consolidated financial
statements of ACPG (including TDR and subsidiaries) for the fiscal year ended
December 31, 2005; and the audited consolidated financial statements of TDR
(and subsidiaries) for the fiscal year ended December 31, 2004 (the
"Consolidated Financial Statements"). The discussion that follows is provided
by ACPG management and is based on the consolidated results of operations for
the years ended December 31, 2005 and 2004, respectively. This discussion
should be read in conjunction with the Consolidated Financial Statements and
the notes thereto included elsewhere herein.
The discussion and analysis of ACPG's and TDR's financial condition and
results of operations are based upon the Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
required ACPG and TDR to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. On an on-going basis,
ACPG and TDR evaluate these estimates, including those related to useful lives
of real estate assets, cost reimbursement income, bad debts, impairment, net
lease intangibles, contingencies and litigation. ACPG and TDR base their
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. There can be no
assurance that actual results will not differ from those estimates.
RESULTS OF OPERATIONS
ACPG's business is conducted through its wholly-owned subsidiary, TDR,
and TDR's subsidiaries. The results of operations of TDR have been included
in the financial statements
15
included in this report, since the acquisition date. References below to ACPG
shall mean ACPG combined with TDR and its subsidiaries.
Results from Operations - Comparison of Years Ended December 31, 2005 and 2004
Dec. 31, 2005 Dec. 31, 2004
-------------- --------------
Revenues
Sales $ 7,508,935 $ 4,232,020
Government grant 202,706 659,420
-------------- --------------
Total Revenues 7,711,641 4,891,440
Cost of Good Sold
Cost of good sold 2,099,252 1,127,134
Business Tax and Surcharges 114,416 66,207
-------------- --------------
Total Cost of Good Sold 2,213,668 1,193,341
-------------- --------------
Gross Profit $ 5,497,973 $ 3,698,099
============== ==============
Revenues increased by 77% in 2005 to $7,711,641 from $4,891,440 in 2004,
resulting in net income of $2,206,075 for 2005 compared to net income of
$1,420,019 in 2004. This was mainly attributable to sales associated with the
introduction of numerous new products, an increase in domestic distribution
centers, and increase in worldwide exports.
Government grant decreased by 69% in 2005 to $202,706 from $659,420 in
2004. Government grant was issued for supporting the Company's facility
construction, research, development, and production of medicines. The grant
is recognized as income over the period necessary to match with related cost.
This decrease in government grant received was also due to the expansion in
size of the combined company, and an increase in revenue and capital.
Cost of sales increased by 86% to $2,213,667 in 2005 as compared to
$1,193,340 for 2004. This increase was primarily due to a 77% increase in
sales.
Business tax and surcharges increased by $48,209 or 73% to $114,416 for
2005 compared to $66,207 for 2004 was due to significant increases in business
tax and value-added tax in 2005 as a result of net increment in sales revenues
by $2,820,201 or 77% to $7,711,641 from $4,891,440 in 2004.
Gross profit margin decreased by 4% during 2005. Gross profit margins
vary from product to product depending on a number of factors including: (a)
cost of patent; (b) customer demand; (c) cost of ingredients; and (d)
competitor pricing policies.
16
Dec. 31, 2005 Dec. 31, 2004
-------------- --------------
Operating Expenses
General and administrative expense $ 347,766 $ 324,227
Selling expense 2,528,216 1,788,370
-------------- --------------
Total Operating Expenses 2,875,982 2,112,597
-------------- --------------
Other Income (Expenses)
Interest income 1,321 10
Interest expense (19,941) (43)
-------------- --------------
Total Other Income (Expenses) $ (18,620) $ (33)
============== ==============
Finance costs increased to $18,620 in 2005 from $33 in 2004, and was
primarily due to the short-term borrowings TDR obtained from commercial bank.
Interest expenses of $19,941 represented the interest incurred in 2005
associated with the bank loans of $495,840. There was no short-term borrowing
in year 2004.
General and administrative expenses increased by $23,539 or 7% from
$324,227 in 2004 to $347,766 in 2005. The unfavorable variance was mainly
attributable to increase in salaries and welfare to administrative staff.
Salaries and welfare to administrative staff increased by $483,618 from
$792,696 in 2004.
Depreciation increased by $8,435 or 26% to $41,216 for 2005 compared to
2004 of $32,781. In 2005, ACPG purchased automobiles of $68,576. Due to the
growth of new medical products development, ACPG also acquired equipment of
$308,972.
Selling expenses represented expenditures in connection with the
distribution and selling of properties as well as expenses incurred by the
Sales Department.
Selling expense increased by $739,846 or 41% from $1,788,370 in 2004 to
$2,528,216 in 2005. The unfavorable variance was mainly attributed to
significant increases in business promotion, salaries to selling staff, and
sales commission.
LIQUIDITY AND CAPITAL RESOURCES
ACPG's assets primarily consist of its operating subsidiaries,
marketable properties for sales, cash and cash equivalents.
The combined company has approximately $2.8 million in cash and cash
equivalent at December 31, 2005, as compared to $1.9 million at December 31,
2004. The current ratio at December 31, 2005 was 2.74. ACPG's primary
sources of funds include cash balances, cash flow from operations, the
potentially, the proceeds of borrowing or offering of equity. Management
endeavors to ensure that the funds are always available to take advantage of
new investment opportunity and they are sufficient to meet future liquidity
and capital needs. Management considers current working capital and borrowing
capabilities adequate to cover ACPG's planned operating and capital
requirements.
17
Cash and equivalents increased by $921,785 or 48% to $2,841,352 as of
December 31, 2005, compared to $1,919,567 as of December 31, 2004, which was
mainly due to an increase in sales proceeds received from the sales of
existing and newly developed products.
There was no restrictive bank deposit pledged as of December 31, 2005
and 2004. Therefore, ACPG did not have to maintain any minimum balance in the
relevant deposit account as security.
Accounts receivables increased by $157,900 or 14% to $1,258,113 as of
December 31, 2005 compared to $1,100,213 of December 31, 2004. Ninety percent
of the Company's receivable aged is less than 60 days.
Inventories decreased by $270,501 or 42% to $381,140 as of December 31,
2005 from $651,641 as of December 31, 2004. The decrease in inventories is
primarily due to an increase in sales.
Properties and equipment, stated at cost less accumulated depreciation
and amortization, consist of:
Dec. 31, 2005 Dec. 31, 2004
-------------- --------------
Buildings $ 619,810 $ 619,810
Automobiles 133,998 65,422
Furniture and fixtures 4,382 3,008
Equipments 419,242 110,270
-------------- --------------
Total Property and Equipment 1,177,432 798,510
-------------- --------------
Less: Accumulated depreciation
and amortization (217,437) (176,221)
-------------- --------------
Property and Equipment, Net $ 959,995 $ 622,289
============== ==============
Net book value of fixed assets increased by $337,706 or 35% to $959,995
as of December 31, 2005, compared to $622,289 as of December 31, 2005, which
was attributable to the purchase of automobiles and equipments.
Construction-in-progress represents the facility project of Harbin First
Bio-Engineering Company Limited ("First"). Construction-in-progress
represents the cost of the land use rights, capitalized interest expenses,
related pre-approval capital expenditures and government approval fees.
18
A breakdown on these costs by project is as follows:
Construction-in-Progress Dec. 31, 2005 Dec. 31, 2004
-------------- --------------
Comprehensive building $ 559,044 $ 543,479
Dewatering excavation 120,773 120,773
Factory construction 495,169 495,169
Boiler project 60,386 60,386
Fire Prevention 90,580 90,580
Power supply system 96,618 96,618
Building engineering 289,855 289,855
Air-conditioning System 434,783 434,783
Road improvement 265,700 265,700
Lab construction 30,990 -
-------------- --------------
Construction-in-Progress $ 2,443,898 $ 2,397,343
============== ==============
Intangible assets increased by $433,861 or 299% to $578,788 as of
December 31, 2005 from $144,927 as of December 31, 2004, which was due to the
purchase of New Endothelin-1.
Current Liabilities Dec. 31, 2005 Dec. 31, 2004
-------------- --------------
Accounts payable and accrued expenses $ 580,941 $ 1,914,358
Customer deposits 142,523 69,520
Short-term loan - secured 495,840 -
Wages payable 122,643 81,016
Welfare payable 97,745 68,308
Taxes payable 145,621 47,766
Deferred revenue - government grant 55,782 101,334
-------------- --------------
Total Current Liabilities $ 1,641,095 $ 2,282,302
============== ==============
Current liabilities decreased by $641,207 or 28% to $1,641,095 as of
December 31, 2005 compared to $2,282,302 as of December 31, 2003, and was
attributable to the decrease in accounts payable and accrued expenses.
Accounts payable decreased by $1,333,417 or 70% to $580,941 as of
December 31, 2005 compared to $1,914,358 as of December 31, 2004, and was
attributable to the excessive funds generated from sales.
Short-term loans totaling $495,840 as of December 31, 2005 (2004: $0)
extended by a commercial bank, were used to finance First's construction
project. The bank loan is secured and bears monthly interest at 0.651% and is
mature on June 30, 2006. During the year ended December 31, 2005, TDR incurred
$19,941 of interest expenses associated with the borrowing on this loan.
19
Capital reserve represented that amount appropriated from net income
after tax (Enterprise Income Tax) for the period/year. As stipulated by the
relevant laws and regulations applicable to the PRC's foreign investment
enterprises, TDR is required to make appropriations from net income as
determined under accounting principles generally accepted in the PRC ("PRC
GAAP") to the statutory surplus reserves which include a general reserve, an
enterprises expansion reserve, and employee welfare and bonus reserves.
Pursuant to the relevant PRC regulations and the provisions of the TDR's
Memorandum and Articles of Association, TDR is required to appropriate 10% of
the net distributable profit after enterprise income tax to capital reserve,
profit attributable to the shareholders shall be appropriated in the following
sequence; the general reserve is used to offset future extraordinary losses as
defined under PRC GAAP. TDR may, upon a resolution passed by the owners,
convert the general reserve into capital.
The employee welfare and bonus reserve is used for the collective
welfare of the employees of TDR. The enterprise expansion reserve is used for
the expansion of TDR and can be converted to capital subject to approval by
the relevant authorities. TDR recorded reserves of $203,349 in 2005. No such
adjustments are required under accounting principles generally accepted in the
United States of America in 2005.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2005 and 2004, ACPG had no material derivative
instruments. ACPG may enter into derivative financial instrument transactions
in order to mitigate its interest rate risk on a related financial instrument
in the future.
ACPG's balance sheet includes assets and liabilities whose fair values
are subject to market risk. Market risk is the risk of loss arising from
adverse changes in market prices or interest rates. Generally, borrowing is
short to medium term in nature and therefore approximate fair value. ACPG
currently has interest rate risk as it related to its fixed maturity mortgage
participation interest. Management seeks to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs by
closely monitoring its interest rate debt.
ACPG's equity risk is related to its marketable equity securities, and
foreign currency risk relates to investments denominated in foreign
currencies. Because TDR and its subsidiaries are mainly located and doing
business in the PRC, there were no significant changes in exchange rates.
However, unforeseen developments may cause a significant change in exchange
rates. ACPG is subject to commodity price risks arising from price of
construction materials.
CONTROLS AND PROCEDURES
Under the supervision of and with the participation of ACPG's
management, including its principal executive officer and principal financial
officer, ACPG evaluated the effectiveness its disclosure controls and
procedures, as such term is defined under Rules 121-15(e) promulgated under
the Securities Exchange Act of 1934, as amended. Based on this evaluation,
ACPG's principal executive officer and principal financial officer concluded
that its disclosure and procedures were effective as of the end of the period
covered by this quarterly report. There was no change in ACPG's internal
controls over financial reporting or in other factors during
20
ACPG's last fiscal quarter that materially affected, or is reasonably likely
to materially affect, ACPG's internal controls over financial reporting. There
were no significant deficiencies or material weaknesses, and therefore there
were no corrective actions taken.
RISK FACTORS
An investment in the Company's common stock involves a high degree of
risk. Any prospective investor should carefully consider the risks described
below, together with any additional information in this Form 8-K, as well as
information in any other reports filed by the Company with the U.S. Securities
and Exchange Commission ("SEC"), before making an investment decision.
Additional risks and uncertainties not presently foreseeable to the Company
may also impair business operations. If any of the following risks occur,
the Company's business, financial condition or operating results could be
materially and adversely affected. In such case, the trading price of the
Company's common stock could decline, and an investor could lose all or part
of his investment.
Most of the risks set forth below pertain to the business of the Company
following the closing of the Exchange Agreement with ACPG, which is expected
to occur in the end of May, 2006. At such time, the business of the Company
will be conducted through ACPG and its subsidiary, TDR (and its subsidiaries).
CHINA RELATED RISKS
The Company's business will be affected by the government regulation and
Chinese economic environment because most of our sales will be in the China
market.
Although ACPG has started exporting products to other countries, most of
its sales are in the PRC. It is anticipated that ACPG's products in China
will continue to represent a significant portion of sales in the near future.
As a result of ACPG's reliance on the China markets, its operating results and
financial performance could be affected by any adverse changes in economic,
political and social conditions in China.
The modernization of regulations for the pharmaceutical industry is
relatively new in the PRC, and the manner and extent to which it is regulated
will continue to evolve. As a pharmaceutical company, ACPG is subject to the
Pharmaceutical Administrative Law, which governs the licensing, manufacture,
marketing and distribution of pharmaceutical products in the PRC, and sets
penalty provisions for violations of provisions of the Pharmaceutical
Administrative Law. In addition as a "Foreign Owned Enterprise," ACPG will
be subject to the Foreign Company provisions of the Company Law of the PRC.
Changes in these laws or new interpretations of existing laws may have a
significant impact on ACPG's methods and its costs of doing business. For
example, if legislative proposals for pharmaceutical product pricing,
reimbursement levels, approval criteria or manufacturing requirements should
be proposed and adopted, such new legislation or regulatory requirements may
have a material adverse effect on ACPG's financial condition, results of
operations or cash flows. In addition, ACPG is subject to varying degrees of
regulation and licensing by governmental agencies in China. At this time, ACPG
is unaware of any China legislative proposals that could adversely affect its
business. There can be no assurance that future regulatory, judicial and
legislative changes will not have a
21
material adverse effect on ACPG, that regulators or third parties will not
raise material issues with regard to compliance or non-compliance with
applicable laws or regulations, or that any changes in applicable laws or
regulations will not have a material adverse effect on ACPG and its business.
The economy of the PRC has been transitioning from a planned economy to
market oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reforms, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in the PRC are still owned by the
Chinese government. For example, all lands are state owned and are leased to
business entities or individuals through governmental granting of State-owned
Land Use Rights. The granting process is typically based on government
policies at the time of granting and it could be lengthy and complex. This
process may adversely affect ACPG's future manufacturing expansion. The
Chinese government also exercises significant control over the PRC's economic
growth through the allocation of resources, controlling payment of foreign
currency and providing preferential treatment to particular industries or
companies. Uncertainties may arise with changing of governmental policies and
measures. At present, ACPG's development of research and development
technologies and products is subject to approvals from the relevant government
authorities in China. Such governmental approval processes are typically
lengthy and complex, and never certain to be obtained.
There are risks inherent in doing business in China.
The PRC is a developing country with a young market economic system
overshadowed by the state. Its political and economic systems are very
different from the more developed countries which are still in the stage of
change. China also faces many social, economic and political challenges that
may produce major shocks and instabilities and even crises, in both its
domestic arena and in its relationship with other countries, including but not
limited to the United States. Such shocks, instabilities and crises may in
turn significantly and adversely affect ACPG's performance.
Certain political and economic considerations relating to the PRC could
adversely affect ACPG.
While the PRC government has pursued economic reforms since its adoption
of the open-door policy in 1978, a large portion of the PRC economy is still
operating under five-year plans and annual state plans. Through these plans
and other economic measures, such as control on foreign exchange, taxation and
restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect
influence on the economy. Many of the economic reforms carried out by the PRC
government are unprecedented or experimental, and are expected to be refined
and improved. Other political, economic and social factors can also lead to
further readjustment of such reforms. This refining and readjustment process
may not necessarily have a positive effect on ACPG's operations or future
business development. ACPG's operating results may be adversely affected by
changes in the PRC's economic and social conditions as well as by changes in
the policies of the PRC
22
government, such as changes in laws and regulations (or the official
interpretation thereof), measures which may be introduced to control
inflation, changes in the interest rate or method of taxation, and the
imposition of additional restrictions on currency conversion.
The recent nature and uncertain application of many PRC laws applicable to
ACPG create an uncertain environment for business operations and they could
have a negative effect on ACPG.
The PRC legal system is a civil law system. Unlike the common law
system, the civil law system is based on written statutes in which decided
legal cases have little value as precedents. In 1979, the PRC began to
promulgate a comprehensive system of laws and has since introduced many laws
and regulations to provide general guidance on economic and business practices
in the PRC and to regulate foreign investment. Progress has been made in the
promulgation of laws and regulations dealing with economic matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. The promulgation of new laws, changes of existing laws and the
abrogation of local regulations by national laws could have a negative impact
on ACPG's business and business prospects. In addition, as these laws,
regulations and legal requirements are relatively recent, their interpretation
and enforcement involve significant uncertainty.
It may be difficult to effect service of process and enforcement of legal
judgments upon ACPG and its officers and directors because they reside outside
the United States.
As ACPG's operations are presently based in the PRC and its directors
and officers reside in the PRC, service of process on ACPG and such directors
and officers may be difficult to effect within the United States. Also,
substantially all of ACPG's assets are located in the PRC and any judgment
obtained in the United States against ACPG may not be enforceable outside the
United States.
ACPG's business may be affected by unexpected changes in regulatory
requirements in the jurisdictions in which ACPG operates.
ACPG and its subsidiaries are subject to many general regulations
governing business entities and their behavior in China and in other
jurisdictions in which ACPG and its subsidiaries have, or plan to have,
operations and market ACPG products. In particular, ACPG is subject to laws
and regulations covering food, dietary supplements and pharmaceutical
products. Such regulations typically deal with licensing, approvals and
permits. Any change in product licensing may make ACPG's products more or
less available on the market. Such changes may have a positive or negative
impact on the sale of ACPG's products and may directly impact the associated
costs in compliance and its operational and financial viability. Such
regulatory environment also covers any existing or potential trade barriers in
the form of import tariff and taxes that may make it difficult for ACPG to
import its products to certain countries and regions, such as Hong Kong, which
would limit its international expansion.
23
ACPG may have difficulty attracting talent in foreign countries.
Currently, over 90% of ACPG's sales are in the PRC and in Hong Kong.
ACPG is in the process of attempting to establish marketing and sales presence
in the United States and other countries. ACPG expects to establish an office
in the United States for investor relations. In the future, ACPG may explore
expanding its operations in the United States, as well as other countries
throughout the world. Upon effecting any such expansion, ACPG may not be able
to identify and retain qualified personnel due to its lack of understanding of
different cultures and lack of local contacts. This may impede international
expansion.
ACPG may experience currency fluctuation and longer exchange rate payment
cycles.
The local currencies in the countries in which ACPG sells products may
fluctuate in value in relation to other currencies. Such fluctuations may
affect the costs of ACPG's products sold and the value of ACPG's local
currency profits. While operations in countries other than China do not
comprise a substantial portion of revenue at the present time, ACPG intends to
expand its business in other countries, which would result in an increased
risk of exposure of its business to currency fluctuation.
Since most of ACPG's assets are located in China, any dividends of proceeds
from liquidation is subject to the approval of the relevant Chinese government
agencies.
As discussed above, ACPG's assets are predominantly located inside
China. Under the laws governing foreign invested enterprises in China,
dividend distribution and liquidation are allowed but subject to special
procedures under the relevant laws and rules. Any dividend payment will be
subject to the decision of the board of directors and subject to foreign
exchange rules governing such repatriation. Any liquidation is subject to both
the relevant government agency's approval and supervision as well as the
foreign exchange control. This may generate additional risk for investors in
case of dividend payment and liquidation.
FOREIGN EXCHANGE CONTROL RISKS
Currency conversion and exchange rate volatility could adversely affect ACPG's
financial condition.
The PRC government imposes control over the conversion of RMB into
foreign currencies. Under the current unified floating exchange rate system,
the People's Bank of China publishes an exchange rate, referred to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant to the Foreign Exchange Control Regulations of the PRC issued
by the State Council which came into effect on April 1, 1996, and the
Regulations on the Administration of Foreign Exchange Settlement, Sale and
Payment of the PRC which came into effect on July 1, 1996, regarding foreign
exchange control, conversion of RMB into foreign exchange by Foreign
24
Investment Enterprises, or FIE's, for use on current account items, including
the distribution of dividends and profits to foreign investors, is
permissible. FIEs are permitted to convert their after-tax dividends and
profits to foreign exchange and remit such foreign exchange to their foreign
exchange bank accounts in the PRC.
Conversion of RMB into foreign currencies for capital account items,
including direct investment, loans, and security investment, is still subject
to certain restrictions. On January 14, 1997, the State Council amended the
Foreign Exchange Control Regulations and added, among other things, an
important provision, which provides that the PRC government shall not impose
restrictions on recurring international payments and transfers under current
account items.
Enterprises in the PRC (including FIEs) which require foreign exchange
for transactions relating to current account items, may, without approval of
the State Administration of Foreign Exchange, or SAFE, effect payment from
their foreign exchange account or convert and pay at the designated foreign
exchange banks by providing valid receipts and proofs.
Convertibility of foreign exchange in respect of capital account items,
such as direct investment and capital contribution, is still subject to
certain restrictions, and prior approval from the SAFE or its relevant
branches must be sought.
ACPG is a FIE to which the Foreign Exchange Control Regulations are
applicable. There can be no assurance that ACPG will be able to obtain
sufficient foreign exchange to pay dividends or satisfy other foreign exchange
requirements in the future.
Since 1994, the exchange rate for RMB against the United States dollars
has remained relatively stable, most of the time in the region of
approximately RMB8.28 to US$1.00. However, in 2005, the Chinese government
announced that would begin pegging the exchange rate of the Chinese RMB
against a number of currencies, rather than just the U.S. dollar. As ACPG's
operations are primarily in China, any significant revaluation of the Chinese
RMB may materially and adversely affect cash flows, revenues and financial
condition. For example, to the extent that ACPG needs to convert United
States dollars into Chinese RMB for operations, appreciation of this currency
against the United States dollar could have a material adverse effect on
ACPG's business, financial condition and results of operations. Conversely,
if ACPG decides to convert Chinese RMB into United States dollars for other
business purposes and the United States dollar appreciates against this
currency, the United States dollar equivalent of the Chinese RMB that ACPG
converts would be reduced.
REGULATORY RISKS
ACPG's business is subject to many governmental regulatory and policy risks.
ACPG's business must be conducted in compliance with various government
regulations and in particular, the PRC State Food and Drug Administration
("SFDA") regulations. Government regulations may have material impact on
operations, increase costs and could prevent or delay ACPG in manufacturing
and selling its products. Research, development, testing, manufacturing and
marketing activities are subject to various governmental regulations
25
in China, including health and drug regulations. Government regulations,
among other things, cover the inspection of and controls over testing,
manufacturing, safety and environmental considerations, efficacy, labeling,
advertising, promotion, record keeping and sale and distribution of
pharmaceutical products. ACPG will not be able to license, manufacture, sell
and distribute the vast majority of its products without a proper approval
from government agencies and in particular the SFDA. There is no assurance
that ACPG will obtain such approvals.
In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation, administrative
action or changes in governmental policy and interpretation during the period
of product development and product assessment. Although ACPG has, so far,
obtained the rights to sell its products in China, it may not continue to
receive and maintain regulatory approvals for the sales of these products.
ACPG's marketing activities are also subject to government regulations with
respect to the prices that it intends to charge or any other marketing and
promotional related activities. Government regulations may substantially
increase the costs for developing, licensing, manufacturing and selling
products, impacting negatively ACPG's operations, revenue, income and cash
flow.
There could be changes in government regulations towards the pharmaceutical
and nutraceutical industries that may adversely affect ACPG's business.
The manufacture and sale of pharmaceutical and nutraceutical products in
the PRC is heavily regulated by many state, provincial and local authorities.
These regulations significantly increased the difficulty and costs involved in
obtaining and maintaining regulatory approvals for marketing new and existing
products. ACPG's future growth and profitability depend to a large extent on
its ability to obtain regulatory approvals.
The SFDA of China implemented new guidelines for licensing of
pharmaceutical products. All existing manufacturers with licenses, which are
currently valid under the previous guidelines, are required to apply for the
Good Manufacturing Practices ("GMP") certifications by June 30, 2004, and to
receive approvals by December 31, 2004. ACPG received certifications for its
current products. However, should ACPG fail to receive or maintain the GMP
certifications under the new guidelines in the future, or for new products,
its businesses would be materially and adversely affected.
Moreover, the laws and regulations regarding acquisitions of the
pharmaceutical and nutraceutical industries in the PRC may also change and may
significantly impact ACPG's ability to grow through acquisitions.
BUSINESS RISKS
Certain officers and directors have significant control over the Company.
Mr. Yan-qing Liu and Ms. Xiao-yan Han, who are officers and directors of
ACPG and TDR, will serve as the officers and two of the directors of Comet,
after the Exchange Agreement is consummated, which is expected to occur in the
end of May, 2006. Mr. Liu and Ms. Han will own, in the aggregate, 55% of
the issued and outstanding shares of common stock of the Company. As a
result, these shareholders will be able to control certain corporate
governance
26
matters requiring shareholders' approval. Such matters may include the
approval of significant corporate transactions such as increasing the
authorized number of our shares to complete the acquisition, if necessary, and
any other transactions requiring a majority vote without seeking other
shareholders' approval. They will also have the ability to control other
matters requiring shareholder approval including our election of directors
which could result in the entrenchment of management.
ACPG is subject to market and channel risks.
Over 90% of ACPG's sales are made in the PRC, where ACPG primarily sells
its products through drug chain stores. Because of this, ACPG is dependent to
a large degree upon the success of that distribution channel as well as the
success of specific retailers in the distribution channel. Many of the drug
stores are individual stores or very small chains, and only a few are large
chain drug stores. ACPG relies on these distribution channels to purchase,
market, and sell its products. ACPG's success is dependent, to a large
degree, on the growth and success of the drug stores, which may be outside its
control. There can be no assurance that the drug store distribution channels
will be able to grow or prosper as it faces price and service pressure from
other channels, including the mass market. There can be no assurance that
retailers in the drug store distribution channel, in the aggregate, will
respond or continue to respond to ACPG's marketing commitment in these
channels.
ACPG is highly dependent upon the public perception and quality of its
products.
ACPG is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies. Thus, the mere publication of reports asserting that such products
may be harmful could have a material adverse effect on ACPG, regardless of
whether these reports are scientifically supported. Adverse publicity may
have a material adverse effect on ACPG's business, financial condition, and
results of operations. There can be no assurance of future favorable
scientific results and media attention or of the absence of unfavorable or
inconsistent findings.
ACPG's expansion plan may not be successful.
ACPG is implementing a strategy to expand the sales of its existing
products in the PRC and other countries, and to introduce additional products
under development into these markets. This expansion strategy may be based on
incorrect assumptions and may be flawed, and may even damage its performance,
competitive position in the market and ultimately even its ability to survive
in the marketplace. Even if the strategy is correct, ACPG may never be able
to successfully implement its strategy.
There are many safety risks involved in ACPG's products and services.
ACPG's products and services involve direct or indirect impact on human
health and life. The drugs, products and services ACPG manufactures and sells
may be flawed and cause dangerous side effects and even fatality in certain
cases and lead to major business losses and legal and other liabilities and
damages to ACPG.
27
Significant competition from existing and new entities could adversely affect
revenues and profitability.
ACPG competes with other companies, many of which are offering and/or
developing, or can be expected to develop and offer, products similar to
ACPG's. ACPG's market is a large market with many competitors. Many of
ACPG's competitors are more established than ACPG, and have significantly
greater financial, technical, marketing and other resources than ACPG. Some
of ACPG's competitors have greater name recognition and a larger customer
base. These competitors may be able to respond more quickly to new or
changing opportunities and customer requirements and may be able to undertake
more extensive promotional activities, offer more attractive terms to
customers, and adopt more aggressive pricing policies. ACPG cannot assure
investor that it will be able to compete effectively with current or future
competitors or that the competitive pressures it faces will not harm its
business.
ACPG's plan to develop and introduce new products and technologies may not be
readily accepted or meet the need in the marketplace.
Newly developed products and technologies may not be compatible with
market needs. Because markets for various products differ geographically
inside the PRC, ACPG's challenge will be to develop and manufacture products
to accurately target specific markets to enhance product sales. If it fails
to take necessary steps, including market research, to understand the health
needs of consumers in different geographic areas, ACPG may face limited market
acceptance of its products, which could have a material adverse effect on
sales and earnings.
ACPG's success will depend on its research and the ability to develop new
products.
ACPG's growth depends on its ability to consistently discover, develop
and commercialize new products and find new and improve on existing
technologies, platforms and products. As such, if ACPG fails to make
sufficient investments in research, to be attentive to consumer needs, or
fails to focus on the most advanced technologies, its current and future
products could be surpassed by more effective or advanced products of other
companies.
ACPG may have difficulty in defending intellectual property rights from
infringement.
ACPG's success depends, in large part, on its ability to protect current
and future technologies and products and to defend its intellectual property
rights. If it fails to protect its intellectual property adequately,
competitors may manufacture and market similar products. A number of patents
covering ACPG's products have been issued, and ACPG has filed, and expects to
continue to file, patent applications seeking to protect newly developed
technologies and products in various countries, particularly in the PRC. Some
patent applications in the PRC are maintained in secrecy until the patent is
issued. Because the publication of discoveries tends to follow their actual
discovery by many months, ACPG may not be the first to invent, or file patent
applications on any of its discoveries. Patents may not be issued with
respect to any of its patent applications and existing or future patents
issued to or licensed by ACPG may not provide competitive advantages for its
products. Patents that are issued may be challenged, invalidated or
circumvented by competitors. Furthermore, ACPG's patent rights may not
prevent its
28
competitors from developing, using or commercializing products that are
similar or functionally equivalent to its products.
To the extent that ACPG markets products in other countries, it may have
to take additional action to protect its intellectual property. The measures
it takes to protect its proprietary rights may be inadequate, and ACPG cannot
provide any assurance that its competitors will not independently develop
formulations and processes that are substantially equivalent or superior to
ACPG's products or copy its products.
ACPG also relies on trade secrets, non-patented proprietary expertise
and continuing technological innovation that it seeks to protect, in part, by
entering into confidentiality agreements with licensees, suppliers, employees
and consultants. These agreements may be breached and there may not be
adequate remedies in the event of a breach. Disputes may arise concerning the
ownership of intellectual property or the applicability of confidentiality
agreements. Moreover, trade secrets and proprietary technology may otherwise
become known or be independently developed by competitors. If patents are not
issued with respect to products arising from research, ACPG may not be able to
maintain the confidentiality of information relating to these products.
ACPG will be subject to risks relating to third parties that may claim that
ACPG infringes on their proprietary rights and may prevent ACPG from
manufacturing and selling certain of its products.
There has been substantial litigation in the pharmaceutical and
nutraceutical industries with respect to the manufacturing, use and sale of
new products. These lawsuits relate to the validity and infringement of
patents or proprietary rights of third parties. ACPG may be required to
commence or defend against charges relating to the infringement of patent or
proprietary rights. Any such litigation could involve or result in:
. the incurrence of substantial expense, even if ACPG is successful in
the litigation;
. a diversion of significant time and effort of technical and
management personnel;
. the loss of ACPG's rights to develop or make certain products; and
. the payment of substantial monetary damages or royalties in order to
license proprietary rights from third parties.
Although patent and intellectual property disputes within these
industries have often been settled through licensing or similar arrangements,
costs associated with these arrangements may be substantial and could include
the long-term payment of royalties. These arrangements may be investigated by
regulatory agencies and, if improper, may be invalidated. Also, the required
licenses may not be made available to ACPG on acceptable terms. Accordingly,
an adverse determination in a judicial or administrative proceeding or a
failure to obtain necessary licenses could prevent ACPG from manufacturing and
selling some of its products or increase costs to market these products.
29
In addition, when seeking regulatory approval for some of its products,
ACPG is required to certify to regulatory authorities, including the SFDA that
such products do not infringe upon third party patent rights. Filing a
certification against a patent gives the patent holder the right to bring a
patent infringement lawsuit against ACPG. Any lawsuit would delay regulatory
approval by the SFDA. A claim of infringement and the resulting delay could
result in substantial expenses and even prevent ACPG from manufacturing and
selling certain of its products.
The launch of a product prior to a final court decision or the
expiration of a patent held by a third party may result in substantial damages
to ACPG. Depending upon the circumstances, a court may award the patent
holder damages equal to three times their loss of income. If ACPG is found to
infringe a patent held by a third party and become subject to such treble
damages, these damages could have a material adverse effect on the results of
ACPG's operations and financial condition.
ACPG's failure to comply with accounting policies and regulations in making
reasonable estimates and judgments could negatively impact its financial
position and results of operation.
When the Exchange Agreement is consummated, the combined company (Comet
and ACPG) will be subject to critical accounting policies and actual results
may vary from estimates. The Company and ACPG have followed, and the combined
companies will continue to follow, generally accepted accounting principles
for the United States in preparing financial statements. As part of this work,
ACPG must make many estimates and judgments concerning future events. These
affect the value of the assets and liabilities, contingent assets and
liabilities, and revenue and expenses reported in such financial statements.
ACPG believes that these estimates and judgments are reasonable, and has made
them in accordance with accounting policies based on information available at
the time. However, actual results could differ from estimates, and this could
require ACPG to record adjustments to expenses or revenues that could be
material to its financial position and results of operations in the future.
The loss or unavailability of key personnel could harm operations.
ACPG depends on key management and technological personnel. The
unavailability or departure of such key personnel may seriously disrupt and
harm its operations, business and the implementation of its business strategy
and plans. Although many of these personnel are founders and shareholders of
ACPG, there can be no assurance that ACPG can be successful in retaining them.
The combined company does not plan to declare or pay any dividends to our
shareholders in the near future.
Neither the Company nor ACPG declared any dividends for the year ended
December 31, 2005. Following the closing of the Exchange Agreement, the
combined company does not intend to distribute dividends in the near future.
The declaration, payment and amount of any future dividends will be made at
the discretion of the board of directors, and will depend upon,
30
among other things, the results of operations, cash flows and financial
condition, operating and capital requirements, and other factors as the board
of directors considers relevant. There is no assurance that future dividends
will be paid, and if dividends are paid, there is no assurance with respect to
the amount of any such dividend.
The Company is required to be in compliance with the registered capital
requirements of the PRC.
Under the Company Law of the PRC, the combined company will be required
to contribute a certain amount of "registered capital" to its wholly owned
subsidiary. By law, ACPG and its subsidiaries are required to contribute at
least 10% of after tax net income (as determined in accordance with Chinese
GAAP) into a statutory surplus reserve until the reserve is equal to 50% of
ACPG and its subsidiaries' registered capital, and between 5% and 10% of its
after tax net income, as determined by ACPG's board of directors, into a
public welfare fund. These reserve funds are recorded as part of shareholders'
equity but are not available for distribution to shareholders other than in
the case of liquidation. As a result of this requirement, the amount of net
income available for distribution to shareholders will be limited.
Since most of ACPG's assets are located in the PRC, any dividends or proceeds
from liquidation are subject to the approval of the relevant PRC government
agencies.
Because ACPG's assets are predominantly located inside the PRC, ACPG
will be subject to the law of the PRC in determining dividends. Under the
laws governing foreign invested enterprises in the PRC, dividend distribution
and liquidation are allowed but subject to special procedures under the
relevant laws and rules. Any dividend payment will be subject to the decision
of the board of directors and subject to foreign exchange rules governing such
repatriation. Any liquidation is subject to both the relevant government
agency's approval and supervision as well the foreign exchange control. This
may generate additional risk for investors in case of dividend payment and
liquidation.
ACPG needs to manage growth in operations to maximize its potential growth and
achieve its expected revenues.
ACPG's success depends on its ability to achieve continued growth. In
order to maximize potential growth in current and potential markets, ACPG
believes that it must expand its manufacturing and marketing operations. This
expansion will place a significant strain on management and operational,
accounting, and information systems. ACPG expects that it will need to
continue to improve financial controls, operating procedures, and management
information systems. It will also need to effectively train, motivate, and
manage its employees. Its failure to manage its growth could disrupt
operations and ultimately prevent ACPG from generating the revenues it
expects.
ACPG cannot assure an investor that its growth strategy will be successful.
Part of ACPG's strategy is to grow through increasing the distribution
and sales of its products by penetrating existing markets in the PRC and Hong
Kong, and entering new
31
geographic markets in the PRC as well as Asia, the United States and other
countries. However, many obstacles to entering such new markets exist,
including, but not limited to, international trade and tariff barriers,
shipping and delivery costs, costs associated with marketing efforts abroad
and maintaining attractive foreign exchange ratios. ACPG cannot, therefore,
assure an investor that it will be able to successfully overcome such
obstacles and establish its products in any additional markets. Its inability
to implement this growth strategy successfully may have a negative impact on
growth, future financial condition, results of operations or cash flows.
ACPG will need additional capital to fund growing operations, and it may not
be able to obtain sufficient capital and may be forced to limit the scope of
its operations.
ACPG expects it will require substantial capital to fund future
operations and to fund growth. Its capital needs will depend on numerous
factors, including (1) its profitability; (2) the release of competitive
products by its competition; (3) the level of our investment in research and
development; and (4) the amount of its capital expenditures. It cannot assure
an investor that it will be able to obtain capital in the future to meet its
needs.
If ACPG cannot obtain additional funding, it may be required to:
. reduce its investments in research and development;
. limit its marketing efforts in the PRC and other countries; and
. decrease or eliminate capital expenditures.
Such reductions could materially adversely affect its business and its
ability to compete.
Even if ACPG (or the combined company, following the closing of the
Exchange Agreement) is successful in finding a source(s) of additional
capital, it may not be able to negotiate terms and conditions for receiving
the additional capital that are acceptable to ACPG. Any future capital
investments could dilute or otherwise materially and adversely affect the
holdings or rights of its shareholders. In addition, new equity or
convertible debt securities issued by the combined company to obtain financing
could have rights, preferences and privileges senior to the common stock.
There can be no assurance that any additional financing will be available, or
if available, will be on terms favorable to ACPG (or the combined company).
ACPG products could expose it to substantial liability.
ACPG faces an inherent business risk of exposure to product liability
claims in the event that the use of its products is alleged to have resulted
in adverse side effects. Side effects or marketing or manufacturing problems
pertaining to any of ACPG's products could result in product liability claims
or adverse publicity. These risks will exist for those products in clinical
development and with respect to those products that have received regulatory
approval for commercial sale. To date, ACPG has not experienced any product
liability claims. However, that does not mean that it will not have any such
claims with respect to its products in the future. ACPG does not currently
carry product liability insurance. The lack of product liability
32
insurance may expose ACPG to enormous risks associated with potential product
liability claims.
ACPG depends on its key management personnel and the loss of their services
could adversely affect its business.
ACPG places substantial reliance upon the efforts and abilities of its
executive officers, Liu Yan-qing, Chief Executive Officer and Chairman of the
Board, Han Xiao-yan, Chief Financial Officer, and Wang Hai-feng,
Secretary/Treasurer. The loss of the services of any of these executive
officers could have a material adverse effect on the business, operations,
revenues or prospects of ACPG. ACPG does not maintain key man life insurance
on the lives of these individuals.
International operations require ACPG to comply with a number of U.S. and
international regulations.
ACPG is required to comply with a number of international regulations in
countries outside of the United States. In addition, it must comply with the
Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies or
their agents and employees from providing anything of value to a foreign
official for the purposes of influencing any act or decision of these
individuals in their official capacity to help obtain or retain business,
direct business to any person or corporate entity or obtain any unfair
advantage. Any failure by ACPG to adopt appropriate compliance procedures and
ensure that its employees and agents comply with the FCPA and applicable laws
and regulations in foreign jurisdictions could result in substantial penalties
and/or restrictions in its ability to conduct business in certain foreign
jurisdictions. The U.S. Department of The Treasury's Office of Foreign Asset
Control, or OFAC, administers and enforces economic and trade sanctions
against targeted foreign countries, entities and individuals based on U.S.
foreign policy and national security goals. As a result, ACPG is restricted
from entering into transactions with certain targeted foreign countries,
entities and individuals except as permitted by OFAC which may reduce its
future growth.
The combined company may incur significant costs to ensure compliance with
U.S. corporate governance and accounting requirements.
Following the closing of the Exchange Agreement, the combined company
will incur significant costs associated with public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission. All of
these applicable rules and regulations can be expected to increase legal and
financial compliance costs and to make some activities more time consuming and
costly. Management also expects that these applicable rules and regulations
may make it more difficult and more expensive to obtain director and officer
liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for the combined company to
attract and retain qualified individuals to serve on our board of directors or
as executive officers.
33
The combined company may have difficulty raising necessary capital to fund
operations as a result of market price volatility for its shares of common
stock.
In recent years, the securities markets in the United States have
experienced a high level of price and volume volatility, and the market price
of securities of many companies have experienced wide fluctuations that have
not necessarily been related to the operations, performances, underlying asset
values or prospects of such companies. For these reasons, the shares of
common stock of the Company can also be expected to be subject to volatility
resulting from purely market forces over which it will have no control. If
its business development plans are successful, the combined company may
require additional financing to continue to develop and exploit existing and
new technologies and to expand into new markets. The exploitation of existing
and new technologies may, therefore, be dependent upon the Company's ability
to obtain financing through debt and equity or other means.
RISKS RELATED TO COMMON STOCK
There are substantial risks of lack of liquidity and volatility risks.
Currently, the Company's common stock is quoted in the OTC Bulletin
Board market under the symbol "COMT." The liquidity of our common stock may
be very limited and affected by its limited trading market. The OTC Bulletin
Board market is an inter-dealer market much less regulated than the major
exchanges, and is subject to abuses and volatilities and shorting. There is
currently no broadly followed and established trading market for our common
stock. An established trading market may never develop or be maintained.
Active trading markets generally result in lower price volatility and more
efficient execution of buy and sell orders. Absence of an active trading
market reduces the liquidity of the shares traded there.
The trading volume of our common stock may be limited and sporadic. As
a result of such trading activity, the quoted price for our common stock on
the OTC Bulletin Board may not necessarily be a reliable indicator of its fair
market value. In addition, if our shares of common stock cease to be quoted,
holders would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, our common stock and as a result, the
market value of our common stock likely would decline.
We may be subject to the risks inherent in a penny stock.
The Company's common stock may be subject to regulations prescribed by
the SEC relating to "Penny Stock." The SEC has adopted regulations that
generally define a penny stock to be any equity security that has a market
price (as defined in such regulations) of less than $5.00 per share, subject
to certain exceptions. If the Company's common stock meets the definition of
a penny stock, it will be subject to these regulations, which impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited
investors generally institutions with assets in excess of $5,000,000 and
individuals with a net worth in excess of $1,000,000 or annual income
exceeding $200,000 (individually) or $300,000 (jointly with their spouse).
34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth the number of shares of common stock
beneficially owned by (i) those persons or groups known to beneficially own
more than 5% of the Company's common stock prior to the closing of the
Exchange Agreement, (ii) those persons or groups known to beneficially own
more than 5% of the Company's common stock on and after the closing of the
Exchange Agreement, (iii) each current director and each person that will
become a director upon the closing of the Exchange Agreement, (iv) all current
directors and executive officers as a group and (v) all directors and
executive officers on and after the closing of the Exchange Agreement as a
group. The information is determined in accordance with Rule 13d-3
promulgated under the Exchange Act. Except as indicated below, the
stockholders listed possess sole voting and investment power with respect to
their shares.
Before Closing of Exchange After Closing of Exchange
Agreement (1) Agreement (2)
---------------------------- -----------------------
Name and Address of Common Percent Common Percent
Beneficial Owner Stock Of Class Stock of Class
----------------------- ------------- -------------- ------------ ----------
Officers and Directors:
Jack M. Gertino (3)
8 East Broadway #428
Salt Lake City, UT
84111 53,975 10.44 163,581(6) 1.49
Richard B. Stuart (3)
PO Box 236
Edmonds, WA 98020 50,960 9.86 160,566(6) 1.46
Liu Yan-qing (4)(5) 0 0.00 4,660,595 42.52
Han Xiao-yan (4)(5) 0 0.00 1,402,907 12.80
Wang Hai-feng (4)(5) 0 0.00 0 0.00
All Officers and Directors
as a group (2 persons prior
to and three persons
following the consummation
of the Exchange Agreement): 104,935 20.30 6,063,502 55.32
Other Principal Shareholders:
The Harker Group Limited
1717 Monte Carlo Drive
Salt Lake City, UT 84121 51,944 10.05 51,944 *
Jin Zheng (4) 0 0.00 812,284 7.41
Sun Xiao-guang (4) 0 0.00 1,085,402 9.90
Qu Zhi-hua (4) 0 0.00 1,090,912 9.95
*Less than 1%
35
(1) As of the date of this Form 8-K, the Company had 516,780 shares of common
stock outstanding.
(2) Based on 10,960,620 shares of the Company's common stock projected to be
outstanding following the closing of the transactions contemplated by the
Exchange Agreement.
(3) Current officer and director of the Company.
(4) The street address of the named beneficial and other principal shareholder
is No. 38 Dingxin 3rd Street, Nangang District, Harbin Heilongjiang
Province, People's Republic of China 150001.
(5) Officer and director after closing of the Exchange Agreement in the end of
May, 2006.
(6) In connection with the closing of the Exchange Agreement, Messrs. Gertino
and Stuart will be issued a total of 219,212 shares, or 109,606 shares
each, under a Consulting Agreement. (See "Certain Relationships and
Related Transactions").
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND OFFICERS
Current Management of the Company
Effective upon the completion of the transaction under the Exchange
Agreement and following the expiration of the ten-day period beginning on the
later of the date of the filing of an Information Statement with the SEC
pursuant to Rule 14f-1, the Company's board of directors will be reconstituted
and fixed at three directors. On that date, Jack M. Gertino and Richard B.
Stuart will resign as directors of the Company, and Liu Yan-qing, Han Xiao-yan
and Wang Hai-feng will be appointed as directors and shall constitute the
entire board of directors immediately following the closing of the
transactions contemplated by the Exchange Agreement. The following tables set
forth information regarding the Company's current executive officers and
directors and the Company's proposed executive officers and directors after
completing the proposed transaction under the Exchange Agreement.
Each member of the Company's board of directors serves a term of one
year or from the date of election until the end of the designated term and
until the successor is elected and qualified.
Current Executive Officers and Directors
Set forth below are the current officers and directors of the Company,
who are expected to resign in approximately the end of May, 2006, in
connection with the closing of the Exchange Agreement.
Name Age Positions Since
---------------------- ------ ------------------------------------ -----
Richard B. Stuart 72 President and Director 1986
Jack M. Gertino 67 Secretary, Treasurer and Director 1986
36
The following is information on the business experience of each current
director and officer.
Richard B. Stuart earned his Bachelor of Arts degree at New York
University in 1955 and masters and doctoral degrees at Columbia University in
1960 and 1965, respectively. He currently holds the following positions:
President, Behavior Change Systems (Ann Arbor, MI), a firm offering business
consulting and program development services; Clinical Professor Emeritus,
Department of Psychiatry, University of Washington (Seattle, WA). Dr. Stuart
also provides psychological services through a private practice in Seattle,
WA. From 1972 to 1983, he was Psychological Director of Weight Watchers
International and President of its subsidiary, One-To-One Weight Control
Clinics. Dr. Stuart has also been a consultant to companies involved in
businesses ranging from wholesale groceries to auto parts production and human
services.
Jack M. Gertino has been a private investor and business consultant in
Salt Lake City, Utah, for the past ten years. For the past ten years, he has
also been engaged in the private development of, and investment in, commercial
and residential real estate in Utah, Arizona and New Mexico. He currently
provides consulting services for financial institutions. Mr. Gertino has been
involved in private and public financings over the past twenty years. From
February 1992 to August 2005, he served as a director of Red Horse
Entertainment Corporation, a publicly held shell corporation.
Executive Officers and Directors After the Closing of the Exchange Agreement
The following individuals are expected to be appointed as the officers
and directors in the end of May, 2006, in connection with the closing of the
Exchange Agreement ("New Management").
Name Age Positions
------------------------ ---- ---------------------------------
Liu Yan-qing 42 CEO, President and Director
Han Xiao-yan 40 CFO and Director
Wang Hai-feng 30 Secretary/Treasurer and Director
The following is information on the business experience of each of the
members of management after the closing of the Exchange Agreement.
Liu Yan-qing is the Director of Harbin Tian Di Ren Medical Science and
Technology Company and also the General Manager of Harbin First
Bio-Engineering Company Limited. He graduated from Prophylactic Department of
Harbin Medicine University, where he obtained his bachelor's degree. In
2005, he studied at Tsing Hua University and got an Executive Masters of
Business. Before establishing his own company, he had 8 years of experience
as a reporter of Family Health Newspaper. He has 10 years of experience in
drug marketing, R&D of new drugs and enterprise management. He has been
instrumental in establishing TDR's sales program and sales network covering
the PRC.
37
Han Xiao-yan is the General Manager of TDR and the Vice Director of
Harbin First Bio-Engineering Company Limited. She received a masters of
business administration at Harbin Industrial University. She had five years
of hygiene and medical media experience before becoming employed by TDR, and
has been instrumental in developing and marketing TDR's products and expanding
its sales. She serves as senior marketing manager and administrative manager.
She has 10 years of financial management experience. In 2004, she was
appointed the general manager of TDR, with responsibility for financing,
production, quality control and purchasing. In 2003, she was appointed vice
director of First Bio-Engineering Company Limited.
Wang Hai-feng graduated from Heilongjiang University where he majored in
English Literature and received two bachelors degrees in English and
International Trade. He joined TDR in 2003 and has served as the manager of
the international business department, and the assistant to the president and
the secretary of the board of directors. He has been instrumental in the
establishment of the Company's international business department and the
expansion of foreign trade. In 2005, he assisted in product innovation and
branding for international markets. Through the efforts of Mr. Wang, the
Company has established strategic relationships with several foreign partners.
Before his employment by TDR, Mr. Wang had experience in product exporting,
translating and project operations in foreign companies.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
Current Management
The following sets forth the compensation of Comet's current executive
officers for the three fiscal years ended December 31, 2005. These
individuals are expected to resign and be replaced by New Management in the
end of May, 2006, in connection with the closing of the Exchange Agreement.
------------------------------------------------------------------------------
Fiscal
Name and Principal Year ended All other
Position December 31 Salary($) Bonus($) Options(#)Compensation($)
-------------------- ------------ --------- -------- --------- ---------------
Richard B. Stuart 2005 0 0 0(4) 10,000(1)
President and Chief 2004 0 0 0 19,265(2)
Executive Officer 2003 0 0 0 10,000(3)
------------------------------------------------------------------------------
Jack M. Gertino 2005 0 0 0(4) 20,000(1)
Secretary/Treasurer 2004 0 0 0 38,530(2)
and Chief Financial 2003 0 0 0 20,000(3)
Officer
------------------------------------------------------------------------------
(1) The Company recorded compensation expense for Richard B. Stuart and Jack
M. Gertino, computed on an hourly basis, in the amounts indicated, for their
efforts in reviewing specific business opportunities for a possible business
combination during the fiscal year, participating in meetings and conference
calls in connection with such opportunities, and undertaking related
activities.
38
(2) The Company recorded compensation expense for Richard B. Stuart and Jack
M. Gertino, computed on an hourly basis, in the amounts indicated, for their
efforts in reviewing a possible business combination during the fiscal year
2004, participating in meetings and conference calls in connection with such
opportunity, assisting in the negotiation and preparation of agreements and in
the preparation of disclosure documents, and undertaking related activities.
(3) The Company recorded compensation expense for Richard B. Stuart and Jack
M. Gertino, computed on an hourly basis, in the amounts indicated, for their
efforts in reviewing the business opportunity in 2003.
(4) On March 11, 1999, the Company granted to Richard B. Stuart, Phillip C.
Gugel (deceased) and Jack M. Gertino, officers and directors, options to
purchase 25,000 shares of common stock each at an exercise price of $1.50,
which was the average of the bid and asked prices for the common stock on that
date. The options were issued to compensate these persons for their services
to the Company over the past 13 years, for which they had received no other
compensation. On September 26, 2005, the Company's current officers and
directors agreed to eliminate certain indebtedness owed to them through the
exercise of certain stock options referenced above. Accordingly, Jack M.
Gertino exercised his stock options in full, for the conversion of a total of
$37,500 in indebtedness to him, into a total of 25,000 shares of restricted
common stock at a price of $1.50 per share. Richard B. Stuart agreed to
convert the entire obligation to him ($23,265), into a total of 15,510 shares
of common stock under his stock options at a price of $1.50 per share.
Because Dr. Stuart did not exercise all of his stock options, he was reissued
stock options to purchase a total of 9,490 shares at $1.50 per share. These
options were exercised on January 28, 2006, for cash. Therefore, the options
of Richard B. Stuart and Jack M. Gertino have now been fully exercised. The
options of Mr. Gugel have now passed on to his estate.
New Management (expected to be appointed in the end of May, 2006)
The Company expects that in the end of May, 2006, current management of
the Company will resign, and the designees of ACPG will be appointed, in
connection with the closing of the Exchange Agreement. The following sets
forth the compensation of these individuals from ACPG and its wholly-owned
subsidiary, TDR, for the three fiscal years ended December 31, 2005.
39
------------------------------------------------------------------------------
Fiscal
Name and Principal Year ended All other
Position December 31 Salary($) Bonus($) Options(#)Compensation($)
-------------------- ------------ --------- -------- --------- ---------------
Liu Yang-qing 2005 19,500 0 0 0
President and Chief 2004 15,000 0 0 0
Executive Officer 2003 12,000 0 0 0
-------------------- ------------ --------- -------- --------- --------------
Han Xiao-yan 2005 16,500 0 0 0
Chief Financial 2004 9,000 0 0 0
Officer 2003 6,000 0 0 0
-------------------- ------------ --------- -------- --------- --------------
Wang Hai-feng 2005 13,500 0 0 0
Secretary/Treasurer 2004 5,375 0 0 0
2003 4,500 0 0 0
------------------------------------------------------------------------------
*Based on conversion rate of approximately 8.00RMB for $1.00US.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 26, 2005, Jack Gertino and Richard Stuart, M.D., officers
and directors, exercised Options resulting in the issuance of 29,515 shares
and 15,510 shares of restricted common stock, respectively, to Mr. Gertino and
Dr. Stuart. Mr. Gertino and Dr. Stuart were owed $46,530, and $23,265,
respectively, for services rendered to the Company, primarily in connection
with a possible merger transaction that, after several months of efforts, was
terminated. The options were issued in exchange for the cancellation of debt
to Messrs. Gertino and Stuart. For additional information concerning these
transactions, reference is made to a Current Report on Form 8-K filed on or
about September 28, 2005, incorporated herein by reference. Following this
transaction, Dr. Stuart's remaining option entitled him to purchase an
additional 9,490 shares at $1.50 per share, which he exercised for cash on
January 28, 2006.
Except as indicated above, there are no proposed transactions and no
transactions during the past two years to which the Company was a party and in
which any officer, director, or principal shareholder, or their affiliates or
associates, was also a party.
In connection with the Exchange Agreement, the Company and ACPG have
entered into a Consulting Agreement dated May 11, 2006, with Jack M. Gertino
and Richard B. Stuart, officers and directors who will resign at closing,
providing for their services as consultants following the closing. Messrs.
Gertino and Stuart have agreed to provide consulting services to the Company
for a two-year period in the areas of financial and management planning,
financing assistance and capital formation. For such services, the Company
and ACPG have agreed to compensate Messrs. Gertino and Stuart as follows: (a)
the sum of $3,000 per month for a period of two years; (b) the issuance of a
total of 219,212 shares of restricted common stock (or 109,606 shares each) of
the Company, of which one-half will be issued at closing and he other one-half
will be held in escrow and delivered after three months following the closing;
and (c) a Warrant to purchase up to $100,000 in equity securities of the
Company, on the same terms, and at the same exercise price, at which the
Company may offer equity securities in the next private or public equity
offering of securities by the Company. This transaction cannot be considered
the result of arms' length negotiations.
40
Effective March 9, 2006, the Company completed a 1-for-8 reverse split
of its outstanding common stock. All numbers in this report give effect to
the reverse split.
DESCRIPTION OF THE SECURITIES OF COMET
Comet is presently authorized to issue up to 50,000,000 shares of stock,
par Value of $0.001 per share. The Company currently has a total of 516,780
shares of common stock outstanding. Following the closing of the Exchange
Agreement, expected to occur in the end of May, 2006, the Company will have a
total of 10,960,620 shares issued and outstanding, after giving effect to the
issuance of a total of 10,193,377 shares to the ACPG shareholders, and an
additional 219,212 shares to the former officers under a consulting agreement,
described above. The Company also has outstanding: (a) options to purchase
25,000 shares of common stock at an exercise price of $1.50, which expire in
March 2009; and (b) warrant to purchase 6,250 shares of the Company's common
stock at an exercise price of $1.50, which expires in March 2009.
All shares of common stock outstanding may be sold without restriction
under Rule 144(k) promulgated under the Securities Act of 1933, except shares
which are held by officers and directors ("Control Shares"). Control Shares
may be sold subject to complying with all of the terms and conditions of Rule
144, except the one-year holding period, which has been satisfied.
Since its inception, no dividends have been paid on the Company's common
stock. The Company intends to retain any earnings for use in its business
activities, so it is not expected that any dividends on the common stock will
be declared and paid in the foreseeable future.
All shares of common stock are equal to each other with respect to
voting, liquidation and dividend rights. Holders of shares of common stock
are entitled to one vote for each share they own at any stockholders' meeting.
Holders of shares of common stock are entitled to receive such dividends as
may be declared by the Board of Directors out of funds legally available
therefor, and upon liquidation are entitled to participate pro rata in a
distribution of assets available for such a distribution to stockholders.
There is no conversion, preemptive, redemption, or other rights or privileges
with respect to any shares. Reference is made to the Company's Articles of
Incorporation and its By-Laws as well as to the applicable statutes of the
State of Nevada for a more complete description of the rights and liabilities
of holders of common stock. The common stock of the Company has no cumulative
voting rights that mean that fifty per cent of the shareholders may elect all
of the directors of the Company to be elected at a shareholders' meetings if
they choose to do so. In such event, the holders of the remaining shares
aggregating less than 50% will be unable to elect any directors.
PRICE RANGE OF COMMON STOCK
The Company's common stock is quoted on the OTC Bulletin Board under the
symbol "COMT.OB." Although quotations for the Company's common stock appear
on the OTC Bulletin Board, there is no established trading market for the
common stock. For the past two calendar years to the present, transactions in
the common stock can only be described as sporadic. Consequently, the Company
is of the opinion that any published prices cannot be
41
attributed to a liquid and active trading market and, therefore, are not
indicative of any meaningful market value.
The following table sets forth, for the periods indicated, the high and
low bids for the Company's common stock; the bids reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions. The last reported bid for the Company's common stock on the OTC
Bulletin Board on May 12, 2006, was $3.00 per share.
Calendar Quarter Ended High Bid ($) Low Bid ($)
---------------------------------- ------------ -----------
March 31, 2004 2.4000 1.2000
June 30, 2004 2.0000 1.9200
September 30, 2004 2.3200 1.6000
December 31, 2004 2.3200 1.6800
March 31, 2005 2.7200 1.2000
June 30, 2005 1.6000 1.2800
September 30, 2005 2.6400 1.6000
December 31, 2005 2.5600 1.6000
*All numbers give effect to a 1-for-8 reverse split effective as of March 9,
2006.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings,
and to the best of its knowledge, no such proceedings by or against the
Company have been threatened.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the closing of the Exchange Agreement, expected to
occur in the end of May, 2006, the Company will issue a total of 10,193,377
shares of common stock, par value $0.001 per share ("Common Stock"), to the
holders of common stock of ACPG. No underwriters were involved in the
acquisition described herein. The securities will be issued to ACPG's
stockholders in reliance upon the exemption from the registration requirements
of the Securities Act, as set forth in Section 4(2) under the Securities Act,
relating to sales by an issuer not involving any public offering, to the
extent an exemption from such registration is required. The purchasers have
represented they are acquiring the shares for investment and not distribution,
that they could bear the risk of the investment and could hold the securities
for an indefinite period of time. All the purchasers received written
disclosures that the securities will not be registered under the Securities
Act and that any resale must be made pursuant to a registration or an
available exemption from such registration. The sales of these securities
will be made without general solicitation or advertising.
On January 28, 2006, Richard B. Stuart, an officer and director of the
Company, exercised his remaining option to purchase a total of 9,490 shares of
the Company's common stock at a price of $1.50 per share, or a total purchase
price of $14,235. This was a private transaction and was entered into in
reliance upon an exemption from the registration provisions
42
of the Securities Act of 1933 (the "Act"), as amended, under Section 4(2) of
the Act, as a transaction not involving a public offering. The transaction
occurred without the use of an underwriter, and the certificates representing
the shares of common stock bear a restrictive legend permitting transfer only
upon registration or pursuant to an exemption from registration under the Act.
In connection with the Exchange Agreement, Jack M. Gertino and Richard
B. Stuart, officers and directors, who are expected to resign in the end of
May, 2006, have entered into a Consulting Agreement with the Company and ACPG,
pursuant to which they will receive, among other things, 219,212 shares of
restricted common stock for consulting services rendered (See "Certain
Relationships and Related Transactions" above). These securities will be
issued in reliance upon the exemption set forth under Section 4(2) of the Act.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Chapter 78 of the Nevada General Corporation Law ("NGCL") provides that
a corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit or proceeding if he is not liable
pursuant to NGCL Section 78.138 or acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. NGCL Chapter 78 further
provides that a corporation similarly may indemnify any such person serving in
any such capacity who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred in connection with the defense or settlement of such
action or suit if he is not liable pursuant to NGCL Section 78.138 or acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the court or other court of competent jurisdiction in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court or other court of competent jurisdiction shall deem proper.
The Company's Articles of Incorporation and By-laws provide that we may
indemnify its officers, directors, agents and any other persons to the fullest
extent permitted by the NGCL.
43
ITEM 5.01 CHANGES IN CONTROL OF REGISTRANT
The information set forth above under "Item 2.01 Completion of
Acquisition or Disposition of Assets" is incorporated herein by reference.
ITEM 5.02 DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION OF
DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS
The information set forth above under "Item 2.01 Completion of
Acquisition or Disposition of Assets" is incorporated herein by reference.
As indicated in Item 2.01, current management is expected to resign, subject
to compliance with certain conditions, in the end of May, 2006, and the
designees of ACPG will be appointed as the new officers and directors at that
time.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
Financial Statements
Attached to this Form 8-K are the following financial statements
required under Item 9.01(a), and pro forma financial information required
under Item 9.01(b) of Form 8-K.
1. Audited Consolidated Financial Statements of Harbin Tian Di Ren
Medical Science and Technology Company and Subsidiaries for the year ended
December 31, 2004, together with the report of e-Fang Accountancy Corp., &
CPA, certified public accountants, dated February 25, 2006;
2. Audited Consolidated Financial Statements of American Pharmaceutical
Group, Inc. and Subsidiaries, for the year ended December 31, 2005, together
with the report of e-Fang Accountancy Corp., & CPA, certified public
accountants, dated March 18, 2006; and
3. Pro Forma Consolidated Financial presentation of Comet Technologies,
Inc. and American California Pharmaceutical Group, Inc., as of December 31,
2005.
Exhibits
Copies of the following exhibits are included as exhibits to this Form
8-K pursuant to Item 601 of Regulation S-B.
Exhibit No. Title
------------ ------
10.1 Stock Exchange Agreement dated May 11, 2006
99.1 Press Release dated May 15, 2006
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has caused this report to be
signed on its behalf by the undersigned, hereunto duly authorized.
REGISTRANT:
COMET TECHNOLOGIES, INC.
Date: May 15, 2006 By /s/ Jack M. Gertino
Jack M. Gertino, Secretary/Treasurer
45
HARBIN TIAN DI REN MEDICAL SCIENCE AND TECHNOLOGY
COMPANY AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
46
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Table of contents
Page
Independent Auditors Report..........................................1
Consolidated Balance Sheets..........................................2
Consolidated Statements of Operations................................3
Consolidated Statements of Members Equity............................4
Consolidated Statements of Cash Flows ...............................5
Notes to the Consolidated Financial Statements......................6 to 22
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
Harbin Tian Di Ren Medical Science and Technology Company and Subsidiaries
(Incorporated in Heilongjiang Province with limited liability)
We have audited the accompanying balance sheets of Harbin Tian Di Ren Medical
Science and Technology Company and its subsidiaries (the "Company") as of
December 31, 2004 and the related statements of operations, retained earnings
and cash flows for the years ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards as established by the Auditing Standards Board (United States) and
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis
for our opinion.
We did not make a count of its physical inventory in December 31, 2004, stated
in the accompanying financial statements at $651,641. The Company records did
not permit the application of other auditing procedures to inventories.
Since we did not take physical inventories and we were not able to apply other
auditing procedures to satisfy ourselves as to inventory quantities, the scope
of our work was not sufficient to enable us to express, an opinion on these
financial statements.
e-Fang Accountancy Corp., & CPA
Certified Public Accountants
/s/ Eva Fang Tsai
City of Industry, USA
February 25, 2006
Page 1
48
HARBIN TIAN DI REN MEDICAL SCIENCE AND TECHNOLOGY COMPANY
AND SUBSIDIARIES
Consolidated Balance Sheet
As Of December 31, 2004
(Expressed in US dollars)
ASSETS
Current Assets
Cash and Cash Equivalents (Note 5) $ 1,919,567
Accounts Receivable, Net (Note 6) 1,100,213
Inventories (Note 7) 651,641
Prepaid Account 23,200
----------------
Total Current Assets 3,694,621
----------------
Property and Equipment
Fixed Assets, Net of Accumulated Depreciation (Note 8) 622,289
Land 510,886
Construction-in-progress (Note 9) 2,397,343
----------------
Total Property and Equipment 3,530,518
----------------
Other Assets
Intangible Assets (Note 10) 144,927
----------------
Total Other Assets 144,927
----------------
Total Assets $ 7,370,066
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses (Note 11) $ 1,983,878
Wages Payable 81,016
Welfare Payable 68,308
Taxes Payable (Note 12) 47,766
Deferred Revenue - Government Grant (Note 13) 101,334
----------------
Total Current Liabilities 2,282,302
----------------
Total Liabilities 2,282,302
----------------
Commitments and Contingencies (Note 18)
Shareholders' Equity
Registered Capital 1,330,314
Additional Paid-in Capital 1,485,507
Retained earnings 2,271,943
----------------
Total Shareholders' Equity 5,087,764
----------------
Total Liabilities and Shareholders' Equity $ 7,370,066
================
The accompanying notes are an integral part of these financial statements.
Page 2
49
HARBIN TIAN DI REN MEDICAL SCIENCE AND TECHNOLOGY COMPANY
AND SUBSIDIARIES
Consolidated Statement of Operations
For the Year Ended December 31, 2004
(Expressed in US dollars)
REVENUES
Net Sales (Note 3) $ 4,232,020
Tax Exempt Government Grant (Note 3) 659,420
----------------
Total Revenues 4,891,440
Less: Cost of Good Sold 1,193,340
----------------
Gross Profit 3,698,100
----------------
OPERATING EXPENSES
General, Administrative, and Selling 2,145,378
----------------
Total Operating Expenses 2,145,378
----------------
Income from Operations 1,552,722
Interest Expenses, Net 33
----------------
Income before Provision for Income Taxes 1,552,689
Less: Provision for Income Taxes (Note 14) 132,640
----------------
Net Income $ 1,420,049
================
The accompanying notes are an integral part of these financial statements.
Page 3
50
HARBIN TIAN DI REN MEDICAL SCIENCE AND TECHNOLOGY COMPANY
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2004
(Expressed in US dollars)
Cash flows from operating activities:
Net income $ 1,420,049
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 32,781
Changes in assets and liabilities:
Decrease in accounts receivable (107,372)
Decrease in inventories 75,411
Decrease in prepaid accounts 8,893
Increase in accounts payable and accrued expenses 1,319,219
Increase in wages payable 34,086
Increase in welfare payable 19,785
Decrease in taxes payable (4,178)
Increase in deferred government grant 101,334
----------------
Net cash provided by operating activities 2,900,008
----------------
Cash flows from investing activities:
Purchases of fixed assets (73,857)
Purchases of land (510,886)
Purchases of intangible assets (120,772)
Increase in construction-in-process (2,397,343)
----------------
Net cash used by investing activities (3,102,858)
----------------
Cash flows from financing activities:
----------------
Net cash provided by financing activities -
----------------
Net decrease in cash (202,850)
Cash at beginning of year 2,122,417
----------------
Cash at end of year $ 1,919,567
================
Supplemental Disclosure of Cash Flow information
Cash paid for interest $ 43
Cash paid for income tax $ 136,818
The accompanying notes are an integral part of these financial statements.
Page 4
51
HARBIN TIAN DI REN MEDICAL SCIENCE AND TECHNOLOGY COMPANY
AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
For the Year Ended December 31, 2004
(Expressed in US dollars)
Additional Total
Registered Paid-in Capital Retained Shareholders'
Capital Capital Reserve Earnings Equity
------------ ------------ ---------- ------------ ------------
Balance at
December 31, 2003 $ 1,330,314 $ 1,485,507 $ 73,494 $ 778,400 $ 3,667,715
Net income for
the year 2004 - - - 1,420,049 1,420,049
Transfer to
Capital Reserve - - 73,739 (73,739) -
------------ ------------ ---------- ------------ ------------
Balance at
December 31, 2004 $ 1,330,314 $ 1,485,507 $ 147,233 $ 2,124,710 $ 5,087,764
============ ============ ========== ============ ============
The accompanying notes are an integral part of these financial statements.
Page 5
52
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
1. Description of Business
Harbin Tian Di Ren Medical Science and Technology Company (TDR), formerly
known as Harbin City Tian Di Ren Medical Co., was originally formed in 1994
and maintained its principal executive office in Harbin City of Heilongjiang
Province, the People's Republic of China ("PRC"). TDR was reorganized and
incorporated as a limited liability company on December 29, 2000 pursuant to
"Corporation Laws and Regulations" of the People's Republic of China with an
authorized capital of $1,330,314 (RMB11.015 million) with par value of $0.12
(RMB1.00) per share. The Company has two wholly-owned subsidiaries, Harbin
First Bio-Engineering Company Limited and Kangxi Medical Care Product Factory.
For convenience purposes, in this report, the terms "Company," "TDR," may be
used to refer to Harbin Tian Di Ren Medical Science and Technology Company
and/or its subsidiaries, except where otherwise indicated.
The Company commenced its business in the sale of branded nutritional
supplements and over-the-counter pharmaceutical products in Heilongjiang
Province. TDR has subsequently evolved into an integrated manufacturer,
marketer, and distributor of external use natural Chinese Medicine products
sold primarily to and through domestic pharmaceutical chain stores.
TDR operates in the over-the-counter pharmaceutical product market segments.
The Company's principal products are external use traditional Chinese herbal
medicine. These medicines were produced using various formulas and have
several delivery forms including creams, sprays, medicated skin patch products
and whole herbs with complementary effects. Its principle country of
operation is in The People's Republic of China ("PRC"), with sales
distribution covering most of China and Hong Kong Special Administration
Region. The Company also exports its products to 11 different countries,
including Germany, Denmark, Swiss, Hungary, South Korea, Singapore, and United
States.
The Company has established several long term partnerships with well-known
universities and enterprises. The Company has built the gene medicine
laboratory collectively with Harbin Medical University, established the cell
laboratory together with North East Agricultural University, and founded the
monoclonal antibody laboratory with Jilin University. New Endothelin-1, a new
anti-cancer medicine the company developed collectively with Harbin Medical
University, is one of the results from these agreements. The project has
completed its laboratory experimental study required prior to the clinical
experiments. The medicine is currently applying for approval to enter
clinical experiments. The Company has full ownership of the intellectual
property right regarding the product and has obtained invention patent. This
medicine has been recognized by the State as the "Top Category New Medicine."
The "Top Category New Medicine" is the highest level for new medicines. A
medicine, in order to qualify as the "Top Category New Medicine," must have
intellectual property right, high technology involvement, strong innovation,
and be introduced to the State for the first time.
Page 6
53
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
1. Description of Business (Continued)
Kangxi Medical Care Product Factory ("Kangxi"), a subsidiary 100% wholly owned
by TDR, was formed on July 20, 2001 in the city of Harbin of Heilongjiang
Province, the People's Republic of China with an authorized capital of $60,386
(RMB500,000). Kangxi manufactures and sells branded external use Chinese
medicine and other natural products under the registered trademark "Kangxi."
Kangxi produces the products and sells its products to TDR for the
distribution and resell. It has 6 production lines: spray, ointment, powder,
patch, and cream. Kangxi has becoming one of the leading external use Chinese
medicine factories with full range of product lines and development capacity.
Harbin First Bio-Engineering Company Limited ("First") was formed in
Heilongjiang Province, the People's Republic of China on September 26, 2003
with an authorized capital of $241,546 (RMB2 million). First has been a wholly
owned subsidiary of TDR since its inception. First focuses on research and
development of the use of natural medicinal plants and biological technology
products such as New Endothelin-1. First is one of the first companies in
Heilongjiang Province conducting research and development of high technology
biological products. Its facility is now under the final inspection by the
Chinese State Food and Drug Administration ("SFDA") for the qualification of
certified GMP production facility.
The State Food and Drug Administration of the Government of The Peoples
Republic of China issues the licenses and permits for permission to market and
manufacture pharmaceutical products in The Peoples Republic of China. TDR has
been granted 9 product licenses and permits of which all of the granted
licenses are currently commercialized. TDR has continued developing 10 new
series of products, and are planning to register these products with the State
Food and Drug Administration in the coming 3 to 5 years. The Company also has
registered 7 patents with the State Intellectual Property Rights Bureau, which
includes packing design patents as well as product ingredients patents. TDR
plans to continue registering patents from the results of its on going product
research and development.
2. Basis of Preparation of Financial Statements
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries, TDR, Kangxi, and First. All
inter-company transactions and balances were eliminated.
These financial statements are stated in US Dollars and have been prepared in
accordance with accounting principles generally accepted in the United States
of America.
Page 7
54
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies
Use of estimates - The preparation of these financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affected the
reported amounts of assets, liabilities, disclosure of contingent assets and
liabilities at the dates of the financial statements, and the reported amounts
of net sales and expenses during the reported periods.
Significant estimates included values and lives assigned to acquire intangible
assets, reserves for customer returns and allowances, uncollectible accounts
receivable, slow moving and/or obsolete/damaged inventory, and stock option
valuation. Actual results may differ from these estimates.
Cash and cash equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying consolidated
balance sheet for cash and cash equivalents approximate their fair value.
Accounts receivable - Provision is made for estimated bad debts based on a
periodic analysis of individual customer balances including an evaluation of
days of sales outstanding, payment history, recent payment trends, and
perceived credit worthiness.
Inventories - inventories were accounted for using the first-in, first-out
method and included freight-in, materials, packing materials, labor, and
overhead costs. Values stated were at the lower of cost or market while cost
was determined by a moving weighted average. Provisions were made for slow
moving, obsolete and/or damaged inventory based on a periodic analysis of
individual inventory items including an evaluation of historical usage and/or
movement, age, expiration date, and general conditions.
Property and equipment - Property and equipment are stated at the historical
cost less accumulated depreciation. Depreciation on property, plant, and
equipment is provided using the straight-line method over the estimated useful
lives of the assets. An estimated residual value of 5% of cost or valuation
was made for each items for both financial and income tax reporting purposes.
The estimated lengths of useful lives are as follows:
Buildings 30 years
Land use rights (no depreciation) 50 years
Furniture & Fixtures 7 years
Equipments 7 years
Vehicles 10 years
Motor vehicles 5 years
Machineries 10 years
Page 8
55
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Expenditures for renewals and betterments were capitalized while repairs and
maintenance costs were normally charged to the statement of operations in the
year in which they were incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to obtain from the use of the asset, the
expenditure is capitalized as an additional cost of the asset. Upon sale or
disposal of an asset, the historical cost and related accumulated depreciation
or amortization of such asset were removed from their respective accounts, and
any gain or loss was recorded in the Consolidated Statements of Operations.
Property and equipment are evaluated for impairment in value annually or
whenever an event or change in circumstances indicates that the carrying
values may not be recoverable. If such an event or change in circumstances
occurs and potential impairment is indicated because the carrying values
exceed the estimated future undiscounted cash flows of the asset, the Company
would measure the impairment loss as the amount by which the carrying value of
the asset exceeds its fair vale.
Construction-in-progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees, and the interest expenses for the purpose of
financing the project capitalized during the course of construction.
Upon completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to facility. In the case of
construction-in-progress, management takes into consideration the estimated
cost to complete the project when making the lower of cost or market
calculation.
Intangible assets - TDR purchased secret Chinese medicine formulas with
exclusive right to the formulas. Those identifiable intangible assets having
indefinite useful economic lives supported by clearly identifiable cash flows
are not subject to regular periodic amortization. Instead, the carrying amount
of the intangible is to be tested for impairment annually. Test would be
conducted again between annual tests if events or circumstances warrant such a
test. An impairment loss is recognized if the carrying amount exceeds the fair
value. Furthermore, amortization of the asset is to commence when evidence
suggests that its useful economic life is no longer deemed indefinite.
Page 9
56
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Intangible assets are accounted for in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). Intangible assets with finite useful lives are amortized while
intangible assets with indefinite useful lives are not amortized. As
prescribed by SFAS 142, goodwill and intangible assets are tested periodically
for impairment. The Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long- Lived Assets", effective January 1, 2002.
Accordingly, the Company reviews its long-lived assets, including property and
equipment and finite-lived intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of its long-lived
assets, the Company evaluates the probability that future undiscounted net
cash flows will be less than the carrying amount of the assets. Impairment
costs, if any, are measured by comparing the carrying amount of the related
assets to their fair value.
Foreign currency translation - These financial statements have been prepared
in U.S. dollars. The functional currency for the Company is denominated in
"Renminbi"("RMB") or "Yuan". Non-monetary assets and liabilities are
translated at historical exchange rates. Monetary assets and liabilities are
translated at the exchange rates in effect at the end of the year. The income
statement accounts are translated at average exchange rates.
There were no material translation gains or losses during the year ended
December 31, 2004 as the Renminbi was tied to the U.S. Dollar during the time
period covered in these financial statements. The resulting translation
adjustments, if any, were recorded in accumulated other comprehensive income
which is a component of stockholders equity.
Revenue recognition - Revenue is recognized in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition, which states that revenue
should be recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) the product has been shipped and the
customer takes ownership and assumes the risk of loss; (3) the selling price
is fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
upon shipment from its facilities. Revenue is reduced by provisions for
estimated returns and allowances as well as specific known claims, if any,
which are based on historical averages that have not varied significantly for
the periods presented.
Page 10
57
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
The Company occasionally applies to various government agencies for research
grants. Revenue from such research grants is recognized when earned. In
situations where the TDR receives payment in advance for the performance of
research and development services, such amounts are deferred and recognized as
revenue as the related services are performed. Such grants, which are not
refundable, generally do not involve difficult, subjective or complex
judgments. The government grants that require the completion of certain
objectives in the research and/or development processes are recognized as
revenue when specific objectives were met. This sometimes requires management
to judge whether or not a milestone has been met, and when it should be
recognized in the financial statements. The company recognized revenue from
such grants in the approximate amounts of $659,420 for 2004. Deferred revenues
amounting to $101,334 were included in liabilities for the year ended December
31, 2004.
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable.
Research and development - Research and development expenses include the costs
associated with the Company's internal research and development as well as
research and development conducted by third parties. These costs primarily
consist of salaries, clinical trials, outside consultants, and materials. All
research and development costs discussed above are expensed as incurred. For
the year ended December 31, 2004 the Company incurred $26,363 in research and
development expenditures.
Advertising - The Company expensed advertising costs the first time the
respective advertising took place. These costs were included in selling,
general and administrative expenses. The total advertising expenses accrued
for year 2004 was $981,101.
Taxation - Income taxes are computed using the asset and liability method.
Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
currently enacted tax rates and laws. A valuation allowance is provided for
the amount of deferred tax assets that, based on available evidence, are not
expected to be realized.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable profits
less available tax relief for losses brought forward.
Page 11
58
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Enterprise income tax
---------------------
Under the Provisional Regulations of The People's Republic of China Concerning
Income Tax on Enterprises promulgated by the State, income tax is payable by
enterprises at a rate of 33% of their taxable income. Preferential tax
treatment may, however, be granted pursuant to any law or regulations from
time to time promulgated by the State Council.
According to "Enterprise Income Tax and Certain Preferential Policies Notice"
published by the Ministry of Finance and the National Tax Affairs Bureau, if
the enterprise is authorized by the State Council as a special entity, the
enterprise income tax rate is reduced to 15%. The income tax rate for TDR and
Kangxi is 15% respectively.
The High-Tech Industrial Development District was established in China to
accelerate the development and industrialization of high-tech industries in
some economic zones of the Peoples Republic of China. In order to create
unique incentives for companies to locate in the High-Tech Industrial
Development District, favorable corporate income tax rates have been
established. The companies that have chosen to locate in the High-Tech
Industrial Development District will be levied at 15 percent annually. Newly
founded high-tech enterprises, including First, will enjoy exemption from
income tax for 2 years from the first year of operation.
Enterprise income tax ("EIT") is provided on the basis of the statutory profit
for financial reporting purposes, adjusted for income and expense items, which
are not assessable or deductible for income tax purposes.
Value added tax
---------------
The Provisional Regulations of The People's Republic of China Concerning Value
Added Tax promulgated by the State Council came into effect on January 1,
1994. Under these regulations and the Implementing Rules of the Provisional
Regulations of the PRC Concerning Value Added Tax, value added tax is imposed
on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
Value added tax payable in The People's Republic of China is charged on an
aggregated basis at a rate of 13% or 17% (depending on the type of goods
involved) on the full price collected for the goods sold or, in the case of
taxable services provided, at a rate of 17% on the charges for the taxable
services provided, but excluding, in respect of both goods and services, any
amount paid in respect of value added tax included in the price or charges,
and less any deductible value added tax already paid by the taxpayer on
purchases of goods and services in the same financial year.
Page 12
59
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
According to "Agriculture Product Value Added Tax Rate Adjustment and Certain
Items Value Added Tax Waiver" published by the Ministry of Finance and the
National Tax Affairs Bureau, the value added tax for agriculture related
products is to be taxed at 13%. Furthermore, traditional Chinese medicine and
medicinal plant are by definition agriculture related products.
Contingent liabilities and contingent assets - A contingent liability is a
possible obligation that arises from past events and whose existence will only
be confirmed by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the Company. It can also be a
present obligation arising from past events that is not recognized because it
is not probable that outflow of economic resources will be required or the
amount of obligation cannot be measured reliably.
A contingent liability is not recognized but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs so
that outflow is probable, they will then be recognized as a provision.
A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain events not wholly within the control of the Company.
Contingent assets are not recognized but are disclosed in the notes to the
financial statements when an inflow of economic benefits is probable. When
inflow is virtually certain, an asset is recognized.
Related companies - A related company is a company in which the director has
beneficial interests in and in which the Company has significant influence.
Retirement benefit costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement scheme organized by municipal government in the province in which
the Company was registered and all qualified employees are eligible to
participate in the scheme.
Contributions to the scheme are calculated at 23.5% of the employees salaries
above a fixed threshold amount and the employees contribute 2% to 8% while the
Company contributes the balance contribution of 21.5% to 15.5%. The Company
has no other material obligation for the payment of retirement benefits beyond
the annual contributions under this scheme.
Fair value of financial instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial notes
receivable, other receivables, accounts payable, commercial notes payable,
accrued expenses, and other payables approximate their fair values as at
December 31, 2004 because of the relatively short-term maturity of these
instruments.
Page 13
60
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Recent accounting pronouncements - In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity. This standard
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equities.
As of December 31, 2005, the Company had no financial instruments with these
characteristics.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
Consolidation of Variable Interest Entities, which addresses the consolidation
of variable interest entities ("VIEs") by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient
equity investment at risk to permit it to finance its activities without
additional subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest.
The primary beneficiary of a VIE is the enterprise that has the majority of
the risks or rewards associated with the VIE. In December 2003, the FASB
issued a revision to FIN 46, Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46, and to defer certain entities from adopting
until the end of the first interim or annual reporting period ending after
March 15, 2004. Application of FIN 46R is required in financial statements of
public entities that have interests in structures that are commonly referred
to as special-purpose entities for periods ending after December 15, 2003.
Application for all other types of VIEs is required in financial statements
for periods ending after March 15, 2004. We believe the Company does not have
arrangements that would require the application of FIN 46R. The Company has no
material off-balance sheet arrangements.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
This statement amends and clarifies financial accounting and reporting for
derivative instruments and for hedging actives under FASB No. 133, Accounting
for Derivative Instruments and Hedging Activities. As of December 31, 2005,
the Company has no derivative or hedging activities.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an amendment
of ARB No. 43, Chapter 4. SFAS No. 151 requires that certain abnormal costs
associated with the manufacturing, freight, and handling costs associated with
inventory be charged to current operations in the period in which they are
incurred. The adoption of SFAS 151 had no impact on the Company's financial
position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets-amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with
a general exception for exchange transactions that do not have commercial
substance, defined as transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. This statement
is effective for exchanges of non-monetary assets occurring after June 15,
2005.
Page 14
61
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Management believes adoption of this new statement will not have any
significant effect on the Company's financial condition or results of
operations.
In November 2002, the FASB approved FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies",
relating to a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. Specifically, FIN 45 requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The provisions for initial
recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective
of a guarantor's fiscal year end. However, the disclosure provisions of FIN 45
are effective for financial statements of interim or annual periods ending
after December 15, 2002.
The adoption of FIN 45 is not expected to have a significant impact on the
Company's consolidated financial statements
4. Concentrations of Business and Credit Risk
Substantially all of the Company's bank accounts are in banks located in the
PRC and are not covered by any type of protection similar to that provided by
the FDIC on funds held in U.S banks. The Company places its cash in high
credit quality financial institutions.
The Company obtains detailed credit evaluations of customers generally without
requiring collateral, and establishes credit limits as required. Exposure to
losses on receivables is principally dependent on each customer financial
condition. The Company continuously monitors collections and payments from its
customers and maintains an allowance for estimated credit losses based on the
creditworthiness of each customer as well as any specific customer collection
issues are identified.
Concentration of credit risk with respect to trade receivables is limited due
to the Company's large number of diverse customers in different locations in
China. The Company does not require collateral or other security to support
financial instruments subject to credit risk. 90 percent the age of the
Company's accounts receivable are less than 60 days. While such credit issues
have not been significant, there can be no assurance that the Company will
continue to experience the same level of credit losses in the future.
The Company is operating in China, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese currency RMB.
Page 15
62
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
5. Cash and Cash Equivalents
As of December 31, 2004, Cash and Cash Equivalents consist of the following:
Cash and Cash Equivalents 2004
Cash on Hand $ 49,587
Bank Deposits 1,869,980
----------------
Total Cash and Cash Equivalents $ 1,919,567
================
6. Accounts Receivable
As of December 31, 2004, Accounts Receivable totals $1,100,213 net of
Provisions for Doubtful Accounts. 90 percent of the Company's receivable aged
less than 60 days.
Accounts Receivable 2004
Trade receivables $ 1,101,231
Allowance for doubtful accounts ( 1,018)
----------------
Total Accounts Receivable $ 1,100,213
================
7. Inventories
The Company values its inventories at the lower of cost and market method.
Inventories are accounted for using the first-in, first-out method.
Inventories in the balance sheet include packing materials, raw materials,
supplemental materials, work-in-process, and finished products.
As of December 31, 2004, Inventories consist of the following:
Inventory 2004
Packing Material $ 92,042
Raw Material 111,849
Supplemental Material 38,911
Work-in-Process 179,703
Finished Products 229,136
-------------------
Total Inventory $ 651,641
===================
Page 16
63
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
8. Property and Equipment
As of December 31, 2004, Property and Equipment consist of the following:
Property and Equipment 2004
Buildings $ 619,810
Automobiles 65,422
Furniture and Fixtures 3,008
Equipments 110,270
----------------
Total Property and Equipment 798,510
Less: Accumulated Depreciation (176,221)
----------------
Property and Equipment, Net $ 622,289
=================
For the year ended December 31, 2004, depreciation expenses totaled $30,760.
9. Construction-in-process
As of December 31, 2004, Construction-in-Process of the First's facility
project consists of the following:
Construction-in-Progress 2004
Comprehensive Building $ 543,479
Dewatering excavation 120,773
Factory construction 495,169
Boiler Project 60,386
Fire Prevention 90,580
Power Supply System 96,618
Building Engineering 289,855
Air-conditioning System 434,783
Road Improvement 265,700
----------------
Construction-in-Progress $ 2,397,343
================
10. Intangible Assets
As of December 31, 2004, the Intangible Assets consist of the following:
Intangible Assets 2004
Urinates the micro albumin examination reagent box $ 120,772
Other secret formulas and processes procedures 24,155
------------
Total Intangible Assets $ 144,927
============
Page 17
64
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
11. Accounts Payable and Accrued Expense
As of December 31, 2004, Accounts Payable and Accrued Expense consist of the
following:
Accounts Payable and Accrued Expense 2004
Accounts Payable and Accrued Expense $ 1,914,358
Customer deposits 69,520
----------------
Total Accounts Payable and Accrued Exp $ 1,983,878
================
Customer deposits represent advanced purchase deposits from the buyers as of
the balance sheet date.
12. Taxes Payable
As of December 31, 2004, Taxes Payable consist of the following:
Taxes Payable 2004
Value Added Tax $ 29,591
Enterprise Income Tax 11,905
City Tax 2,071
Payroll Tax 2,611
Other Tax Payable 1,588
---------------
Total Taxes Payable $ 47,766
===============
13. Deferred Revenue -Government Grant
The Company received several federal government grants supporting the facility
construction, research, development, and production of medicines. These
grants were nonrefundable to the State once awarded as long as the grants are
used in the areas requested by the grants. First used these federal grants to
fund research and development projects, build infrastructure for development
and/or manufacturing of medicines, and other activities that are within the
scope of grants. The remainder of the grants is deferred to the following
years for qualified research and development activities. All the completed
projects and activities funded by the government grants were reported to and
approved by the funding agencies for qualification of future grants. For the
year ended December 31, 2004, the Company has recognized $659,420 federal
grant, with the balance $101,334 deferred.
Page 19
65
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
14. Income Taxes
TDR is incorporated in the PRC which is governed by the Income Tax Law of the
PRC concerning Enterprises and various local income tax laws (the "Income Tax
Laws"). Under the Income Tax Laws, enterprises generally are subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in
specially designated regions or cities for which more favorable effective
rates apply.
As of December 31, 2004, TDR has attained profitable operations for tax
purposes. TDR and Kangxi are the enterprises authorized by the State Council
as special entities; the enterprise income tax rate is reduced to 15%.
First that has chosen to locate in the province designed High-Tech Industrial
Development District will be levied at 15 percent annually. However, First,
considered as a newly founded high-tech enterprise, is enjoying exemption from
income tax for 2 years from the first year of operation commencing with
profits, and thereafter with a 50% exemption for the next three years.
For the year ended December 31, 2004, the Company has recognized $659,420
federal grant, with the balance $101,334 deferred. Such grant is
nonrefundable to the State once obtained. The government grant is tax exempt
income and considered as Additional Paid-in Capital instead of income under
the Chinese accounting system. We recognized revenue from government
non-refundable grants in the approximate amounts of $659,420, for 2004.
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate, for the years ended December 31, 2004, is as
follow:
2004
Profit before Taxation $ 1,552,689
Taxation calculated at favorable effective rate 15% 232,903
Tax effect of non-taxable Government Grants (98,913)
Tax effect of deprecation adjustment deductible
for taxation purposes (1,350)
--------------
Tax Provision for the Year 2004 $ 132,640
==============
Page 19
66
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
15. Related Party Transactions
Kangxi, the 100% subsidiary sells products to TDR. During the year ended
December 31, 2005, the related party sales between TDR and Kangxi were
$1,549,535 which was eliminated from the consolidated financial statements.
The amounts due from/(to) related parties at December 31, 2004 are as follows:
Balance at Maximum Outstanding Security
NAME 12/31/2004 Balance During the Year Held
--------------------------------------------------------------------------
First - 100% owned
Subsidiary $ 1,885,266 $ 1,890,097 none
The amounts due are unsecured, interest free and have no fixed repayment
terms, which was eliminated from the consolidated financial statements.
16. Capital Reserves (other than retained earnings)
As stipulated by the relevant laws and regulations applicable to China's
foreign invested enterprises, TDR is required to make appropriations from net
income as determined under accounting principles generally accepted in the PRC
("PRC GAAP") to the statutory surplus reserves, which include a general
reserve, an enterprises expansion reserve, and employee welfare and bonus
reserves. In accordance with the provisions of the Company's Memorandum and
Articles of Association, the Company is required to appropriate 10% of the net
distributable profit after enterprise income tax to capital reserve.
The general reserve is used to offset future extraordinary losses as defined
under PRC GAAP. TDR may, upon a resolution passed by the owners, convert the
general reserve into capital. The employee welfare and bonus reserve is used
for the collective welfare of the employees of TDR. The enterprise expansion
reserve is used for the expansion of TDR and can be converted to capital
subject to approval by the relevant authorities. The Company recorded
reserves of US$76,879 in 2004. No such adjustments are required under
accounting principles generally accepted in the United States of America in
2004.
17. Employee Retirement Benefits and Post Retirement Benefits
According to the Heilongjiang Provincial regulations on State pension scheme,
both employees and employers have to contribute to pension. The pension
contributions include an 8% that was contributed by individuals (employees)
and contributions from the Company to the state retirement plan based on 20%
of the employees monthly basic salaries. TDR's employees in the PRC are
entitled to retirement benefits calculated with reference to their basic
salaries on retirement and their length of service in accordance with a
government managed benefits plan. The PRC government is responsible for the
benefit liability to these retired employees.
Page 20
67
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
18. Commitments and Contingencies
The formulation, manufacturing, processing, packaging, labeling, advertising,
distribution and sale of external use Chinese medicine such as those sold by
the Company are subject to regulations by one or more federal agencies. The
principal federal agencies include The State Food and Drug Administration of
the Government of The Peoples Republic of China, The Food and Drug
Administration (the "FDA"), and, to a lesser extent, the Consumer Product
Safety Commission. These activities are also regulated by various governmental
agencies for the countries, states and localities in which the Company's
products are sold.
Although management believes that the Company is in material compliance with
the statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company's compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will not
lead to material adverse effects on the Company's financial position, results
of operations, or cash flows.
The Company, like any other distributor or manufacturer of products that are
designed to be ingested, also exposes to the inherent risk of product
liability claims in the events of possible injuries caused by the use of its
products. The Company does not have liability insurance with respect to
product liability claims; the insurance environment of China is neither
sufficient nor mature. Inadequate insurance or lack of contractual
indemnification from parties supplying raw materials or marketing its
products, product liabilities related to defective products could have
material adverse effects on the Company.
The Company is not involved in any legal matters arising in the normal course
of business. While incapable of estimation, in the opinion of the management,
the individual regulatory and legal matters in which it might involve in the
future are not expected to have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
19. Subsequent Events
Construction-in-progress
Upon completion and readiness for use of the First facility project, the cost
of construction-in-progress was transferred to facility as of January 15,
2006. The facility is now under the final inspection by the Chinese State Food
and Drug Administration ("SFDA") for the qualification of certified GMP
production facility.
Page 21
68
Harbin Tian Di Ren Medical Science and Technology Company And Subsidiaries
Notes to the Consolidated Financial Statements.
December 31, 2004
(Expressed in US Dollars)
19. Subsequent Events (Continued)
Merger with American California Pharmaceutical Group, Inc.
On December 8, 2005, American California Pharmaceutical Group, Inc., formerly
known as QQ Group, Inc. which was incorporated on December 16, 2003, in the
state of California, completed its merger with Harbin Tian Di Ren Medical
Science and Technology Company and its subsidiaries, pursuant to the
Agreement, dated as of December 8, 2005, by and among American California
Pharmaceutical, Inc., Harbin Tian Di Ren Medical Science and Technology
Company, and its two 100% owned subsidiaries, Kangxi Medical Care Product
Factory, and Harbin First Bio-Engineering Company Ltd. The merger was
approved by both company's stockholders on December 8, 2005 by exchanging 100%
of the American California Pharmaceutical Group common stock for 100% of the
outstanding common stock of TDR and its subsidiaries.
Page 22
69
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
AND SUBSIDIARIES
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005
70
American California Pharmaceutical Group, Inc. And Subsidiaries
Table of contents
Page
Independent Auditors Report................................1
Consolidated Balance Sheets ...............................2
Consolidated Statements of Operations......................3
Consolidated Statements of Members Equity..................4
Consolidated Statements of Cash Flows......................5
Notes to the Consolidated Financial Statements..........6 to 23
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
American California Pharmaceutical Group, Inc. And Subsidiaries
(Incorporated in Heilongjiang Province with limited liability)
We have audited the accompanying balance sheets of American California
Pharmaceutical Group, Inc. and its subsidiaries (the "Company") as of December
31, 2005 and the related statements of operations, retained earnings and cash
flows for the years ended December 31, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards as established by the Auditing Standards Board (United States) and
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American California
Pharmaceutical Group, Inc. and its subsidiaries as of December 31, 2005 and
the Company's results of its operations and cash flows for the year ended
December 31, 2005 in conformity with accounting principles generally accepted
in the United States of America.
e-Fang Accountancy Corp., & CPA
Certified Public Accountants
/s/ Eva Fang Tsai
City of Industry, USA
March 18, 2006
Page 1
71
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheet
As Of December 31, 2005
(Expressed in US dollars)
ASSETS
Current Assets
Cash and Cash Equivalents (Note 5) $ 2,841,352
Accounts Receivable (Note 6) 1,258,113
Inventories (Note 7) 381,140
Prepaid Accounts 18,316
----------------
Total Current Assets 4,498,921
----------------
Property and Equipment
Fixed Assets, Net of Accumulated Depreciation (Note 8) 959,995
Land 510,886
Construction-in-progress (Note 9) 2,443,898
----------------
Total Property and Equipment 3,914,779
----------------
Other Assets
Intangible Assets (Note 10) 578,788
----------------
Total Other Assets 578,788
----------------
Total Assets $ 8,992,488
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable and Accrued Expenses (Note 11) $ 723,464
Short-term Loans - Secured (Note 12) 495,840
Wages Payable 122,643
Welfare Payable 97,745
Taxes Payable (Note 13) 145,621
Deferred Revenue - Government Grant (Note 14) 55,782
----------------
Total Current Liabilities 1,641,095
----------------
Total Liabilities 1,641,095
----------------
Commitments and Contingencies (Note 20)
Shareholders' Equity
Registered Capital 1,330,314
Additional Paid-in Capital 1,485,507
Currency Conversion Adjustment (Note 3) 57,554
Retained Earnings 4,787,018
----------------
Total Shareholders' Equity 7,351,393
----------------
Total Liabilities and Shareholders' Equity $ 8,992,488
================
The accompanying notes are an integral part of these financial statements.
Page 2
72
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Operations
For the Year Ended December 31, 2005
(Expressed in US dollars)
REVENUES
Sales (Note 3) $ 7,508,935
Tax Exempt Government Grant (Note 3) 202,706
----------------
Total Revenues 7,711,641
Less: Cost of Good Sold 2,213,667
----------------
Gross Profit 5,497,974
----------------
OPERATING EXPENSES
General, Administrative, and Selling 2,917,198
----------------
Total Operating Expenses 2,917,198
----------------
Income from Operations 2,580,776
Other Expense (Income)
Interest Income (1,321)
Interest Expense 19,941
----------------
Total Other Expense (Income) 18,620
Income before Tax Provision 2,562,156
Less: Provision for Income Taxes (Note 15) 356,081
----------------
Net Income $ 2,206,075
================
The accompanying notes are an integral part of these financial statements.
Page 3
73
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Year Ended December 31, 2005
(Expressed in US dollars)
Cash flows from operating activities:
Net income $ 2,206,075
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 41,216
Changes in assets and liabilities:
Increase in accounts receivable (157,900)
Decrease in inventories 270,501
Decrease in prepaid accounts 4,884
Decrease in accounts payable and accrued expenses (1,260,414)
Increase in wages payable 41,627
Increase in welfare payable 29,437
Increase in taxes payable 97,855
Decrease in deferred government grant (45,552)
----------------
Net cash generated by operating activities 1,227,729
----------------
Cash flows from investing activities:
Purchases of fixed assets (378,922)
Purchases of intangible assets (433,861)
Increase in construction-in-process (46,555)
----------------
Net cash used by investing activities (859,338)
----------------
Cash flows from financing activities:
Proceeds from short-term loan 495,840
----------------
Net cash provided by financing activities 495,840
----------------
Effect of foreign currency exchange rate changes 57,554
Net increase in cash 921,785
Cash at beginning of year 1,919,567
----------------
Cash at end of year $ 2,841,352
================
Supplemental Disclosure of Cash Flow information
Cash paid for interest $ 19,941
Cash paid for income tax $ 259,176
The accompanying notes are an integral part of these financial statements.
Page 4
74
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
For the Year Ended December 31, 2005
(Expressed in US dollars)
Additional Currency Total
Registered Paid-in Conversion Capital Retained Shareholders'
Capital Capital Adjustment Reserve Earnings Equity
------------ ------------ ---------- ------------ ------------ -------------
Balance at
December 31, 2004 $ 1,330,314 $ 1,485,507 $ - $ 147,233 $ 2,124,710 $ 5,087,764
Net income for
the year 2005 - - - - 2,206,075 2,206,075
Currency Conversion
Adjustment - - 57,554 - - 57,554
Transfer to
Capital Reserve - - - 203,349 (203,349) -
------------ ------------ ---------- ------------ ------------ -------------
Balance at
December 31, 2005 $ 1,330,314 $ 1,485,507 $ 57,554 $ 350,582 $ 4,127,436 $ 7,351,393
============ ============ ========== ============ ============ =============
The accompanying notes are an integral part of these financial statements.
Page 5
75
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
1. Description of Business
American California Pharmaceutical Group, Inc. ("American California
Pharmaceutical") was incorporated on December 16, 2003, in the State of
California, under the name QQ Group, Inc. On December 8, 2005, American
California Pharmaceutical completed its merger with Harbin Tian Di Ren Medical
Science and Technology Company ("TDR") and its subsidiaries, pursuant to the
Agreement, dated as of December 8, 2005, by and among American California
Pharmaceutical Group, Inc., and Harbin Tian Di Ren Medical Science and
Technology Company. The merger was approved by both company's stockholders on
December 8, 2005. American California Pharmaceutical exchanged 100% of its
issued and outstanding common stock for 100% of TDR & its subsidiaries 100%
issued and outstanding shares of common stock.
The American California Pharmaceutical Group is only a holding company; it has
no revenues but with slight expenses, except those related to its ownership
interest in TDR & Subsidiaries.
Harbin Tian Di Ren Medical Science and Technology Company (the "Company" or
"TDR"), formerly known as Harbin City Tian Di Ren Medical Co., was originally
formed in 1994 and maintained its principal executive office in Harbin City of
Heilongjiang Province, the People's Republic of China ("PRC"). TDR was
reorganized and incorporated as a limited liability company on December 29,
2000 pursuant to "Corporation Laws and Regulations" of the People's Republic
of China with an authorized capital of $1,330,314 (RMB11.015 million). The
Company has two wholly-owned subsidiaries, Harbin First Bio-Engineering
Company Limited and Kangxi Medical Care Product Factory.
For convenience purposes, in this report, the term "TDR," may be used to refer
to Harbin Tian Di Ren Medical Science and Technology Company and its
subsidiaries, except where otherwise indicated.
TDR operates in the over-the-counter pharmaceutical product market segments.
It commenced its business in the sale of branded nutritional supplements and
over-the-counter pharmaceutical products in Heilongjiang Province. The
Company has subsequently evolved into an integrated manufacturer, marketer,
and distributor of external use natural Chinese Medicine products sold
primarily to and through domestic pharmaceutical chain stores.
TDR's principal products are external use traditional Chinese herbal medicine.
These medicines were produced using various formulas and have several delivery
forms including creams, sprays, medicated skin patch products and whole herbs
with complementary effects. Its principle country of operation is in The
People's Republic of China ("PRC"), with sales distribution covering most of
China and Hong Kong Special Administration Region. The Company also exports
its products to 11 different countries, including Germany, Denmark, Swiss,
Hungary, South Korea, Singapore, and United States.
Page 6
76
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
1. Description of Business (Continued)
TDR has established several long term partnerships with well-known
universities and enterprises. It has built the gene medicine laboratory
collectively with Harbin Medical University, established the cell laboratory
together with North East Agricultural University, and founded the monoclonal
antibody laboratory with Jilin University. New Endothelin-1, a new
anti-cancer medicine the company developed collectively with Harbin Medical
University, is one of the results from these agreements. The project has
completed its laboratory experimental study required prior to the clinical
experiments. The medicine is currently applying for approval to enter
clinical experiments. TDR has full ownership of the intellectual property
right regarding the product and has obtained invention patent. This medicine
has been recognized by the State as the "Top Category New Medicine." The "Top
Category New Medicine" is the highest level for new medicines. A medicine, in
order to qualify as the "Top Category New Medicine," must have intellectual
property right, high technology involvement, strong innovation, and be
introduced to the State for the first time.
Kangxi Medical Care Product Factory ("Kangxi"), a subsidiary 100% wholly owned
by TDR, was formed on July 20, 2001 in the city of Harbin of Heilongjiang
Province, the People's Republic of China with an authorized capital of $60,386
(RMB500,000). Kangxi manufactures and sells branded external use Chinese
medicine and other natural products under the registered trademark angxi.
Kangxi produces the products and sells its products to TDR for the
distribution and resell. It has 6 production lines: spray, ointment, powder,
patch, and cream. Kangxi has becoming one of the leading external use Chinese
medicine factories with full range of product lines and development capacity.
Harbin First Bio-Engineering Company Limited ("First") was formed in
Heilongjiang Province, the People's Republic of China on September 26, 2003
with an authorized capital of $241,546 (RMB2 million). First has been a wholly
owned subsidiary of TDR since its inception. First focuses on research and
development of the use of natural medicinal plants and biological technology
products such as New Endothelin-1. First is one of the first companies in
Heilongjiang Province conducting research and development of high technology
biological products. Its facility is now under the final inspection by the
Chinese State Food and Drug Administration ("SFDA") for the qualification of
certified GMP production facility.
The State Food and Drug Administration of the Government of The People's
Republic of China issues the licenses and permits for permission to market and
manufacture pharmaceutical products in The People's Republic of China. TDR has
been granted 9 product licenses and permits of which all of the granted
licenses are currently commercialized. TDR has continued developing 10 new
series of products, and are planning to register these products with the State
Food and Drug Administration in the coming 3 to 5 years. The Company also has
registered 7 patents with the State Intellectual Property Rights Bureau, which
includes packing design patents as well as product ingredients patents. TDR
plans to continue registering patents from the results of its on going product
research and development.
Page 7
77
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
2. Basis of Preparation of Financial Statements
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its subsidiaries, American California
Pharmaceutical Group, TDR, Kangxi, and First. All inter-company transactions
and balances were eliminated.
These financial statements are stated in US Dollars and have been prepared in
accordance with accounting principles generally accepted in the United States
of America. This basis of accounting differs from that used in the statutory
financial statements in the PRC. No material adjustment was required. Certain
amounts in prior years have been reclassified to conform to current year's
classification.
3. Summary of Significant Accounting Policies
Use of estimates - The preparation of these financial statements in conformity
with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions that affected the
reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the dates of the financial statements, and the reported
amounts of revenues and expenses during the reported periods.
Significant estimates included values and lives assigned to acquire intangible
assets, reserves for customer returns and allowances, uncollectible accounts
receivable, slow moving and/or obsolete/damaged inventory. Actual results may
differ from these estimates.
Cash and cash equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying consolidated
balance sheet for cash and cash equivalents approximate their fair value.
Accounts receivable - Accounts receivable are stated at net realizable value,
net of an allowance for doubtful accounts. Provision of allowance is made for
estimated bad debts based on a periodic analysis of individual customer
balances including an evaluation of days of sales outstanding, payment
history, recent payment trends, and perceived credit worthiness.
Prepaid Account - Prepaid account included advances to employees, that
included cash prepaid to employees for their travel, entertainment and
transportation expenditures.
Inventories - inventories were accounted for using the first-in, first-out
method and included freight-in, materials, packing materials, labor, and
overhead costs. Values stated were at the lower of cost or market while cost
was determined by a moving weighted average. Provisions were made for slow
moving, obsolete and/or damaged inventory based on a periodic analysis of
individual inventory items including an evaluation of historical usage and/or
movement, age, expiration date, and general conditions.
Page 9
78
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Property and equipment - Property and equipment are stated at the historical
cost less accumulated depreciation. Depreciation on property, plant, and
equipment is provided using the straight-line method over the estimated useful
lives of the assets. An estimated residual value of 5% of cost or valuation
was made for each items for both financial and income tax reporting purposes.
The estimated lengths of useful lives are as follows:
Buildings 30 years
Land use rights (no depreciation) 50 years
Furniture & Fixtures 7 years
Equipments 7 years
Vehicles 10 years
Motor vehicles 5 years
Machineries 10 years
Expenditures for renewals and betterments were capitalized while repairs and
maintenance costs were normally charged to the statement of operations in the
year in which they were incurred. In situations where it can be clearly
demonstrated that the expenditure has resulted in an increase in the future
economic benefits expected to obtain from the use of the asset, the
expenditure is capitalized as an additional cost of the asset. Upon sale or
disposal of an asset, the historical cost and related accumulated depreciation
or amortization of such asset were removed from their respective accounts, and
any gain or loss was recorded in the Consolidated Statements of Operations.
Property and equipment are evaluated for impairment in value annually or
whenever an event or change in circumstances indicates that the carrying
values may not be recoverable. If such an event or change in circumstances
occurs and potential impairment is indicated because the carrying values
exceed the estimated future undiscounted cash flows of the asset, the Company
would measure the impairment loss as the amount by which the carrying value of
the asset exceeds its fair vale.
Construction-in-progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees, and the interest expenses for the purpose of
financing the project capitalized during the course of construction.
Upon completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to facility. In the case of
construction-in-progress, management takes into consideration the estimated
cost to complete the project when making the lower of cost or market
calculation.
Page 9
79
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Intangible assets - TDR purchased intangible assets that are beneficial to its
product development processes and some secret Chinese medicine formulas with
exclusive right to the formulas. Those identifiable intangible assets having
indefinite useful economic lives supported by clearly identifiable cash flows
are not subject to regular periodic amortization. Instead, the carrying amount
of the intangible is to be tested for impairment annually. Test would be
conducted again between annual tests if events or circumstances warrant such a
test. An impairment loss is recognized if the carrying amount exceeds the fair
value. Furthermore, amortization of the asset is to commence when evidence
suggests that its useful economic life is no longer deemed indefinite.
Intangible assets are accounted for in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). Intangible assets with finite useful lives are amortized while
intangible assets with indefinite useful lives are not amortized. As
prescribed by SFAS 142, goodwill and intangible assets are tested periodically
for impairment. The Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long- Lived Assets", effective January 1, 2002.
Accordingly, the Company reviews its long-lived assets, including property and
equipment and finite-lived intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of its long-lived
assets, the Company evaluates the probability that future undiscounted net
cash flows will be less than the carrying amount of the assets. Impairment
costs, if any, are measured by comparing the carrying amount of the related
assets to their fair value.
Foreign currency translation - These financial statements have been prepared
in U.S. dollars. The American California Pharmaceutical Group is only a
holding company; it has no revenues but with slight expenses, except those
related to its ownership interest in TDR & Subsidiaries. The functional
currency for the TDR and its subsidiaries is denominated in "Renminbi" ("RMB")
or "Yuan". TDR maintains its books and accounting records in Renminbi
("RMB"), it is the currency of the primary economic environment in which the
entities operates. FASB Statement of Financial Accounting Standards No. 52,
oreign Currency Translation requires differentials to be calculated and
allocated using the current rate method if the foreign entity functional and
local currencies are the same. Non-monetary assets and liabilities are
translated at historical exchange rates. Monetary assets and liabilities are
translated at the exchange rates in effect at the end of the year. The income
statement accounts are translated at average exchange rates. The conversion
gains and losses are not recognized in the income statement under the
functional currency approach. They are accumulated in a separate account in
stockholders equity (i.e., the cumulative foreign exchange translation
adjustments account). This treatment is based on the FASB view that
translation gains or losses are not directly related to the foreign entities
operating cash flows. As a result, the Company recognized in equity the effect
of currency translation in the amount of $57,554.
Page 10
80
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Revenue recognition - Revenue is recognized in accordance with Staff
Accounting Bulletin No. 104, Revenue Recognition, which states that revenue
should be recognized when the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) the product has been shipped and the
customer takes ownership and assumes the risk of loss; (3) the selling price
is fixed or determinable; and (4) collection of the resulting receivable is
reasonably assured. The Company believes that these criteria are satisfied
upon shipment from its facilities. Revenue is reduced by provisions for
estimated returns and allowances as well as specific known claims, if any,
which are based on historical averages that have not varied significantly for
the periods presented.
The Company occasionally applies to various government agencies for research
grants. Revenue from such research grants is recognized when earned. In
situations where the TDR receives payment in advance for the performance of
research and development services, such amounts are deferred and recognized as
revenue as the related services are performed. Such revenues, which are not
refundable, generally do not involve difficult, subjective or complex
judgments. The government grants that require the completion of certain
objectives in the research and/or development processes are recognized as
revenue when specific objectives were met. This sometimes requires management
to judge whether or not a milestone has been met, and when it should be
recognized in the financial statements. The company recognized revenue from
such grants in the approximate amounts of $202,706 for 2005.
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable.
Research and development - Research and development expenses include the
costs associated with the Company's internal research and development as well
as research and development conducted by third parties. These costs primarily
consist of salaries, clinical trials, outside consultants, and materials. All
research and development costs discussed above are expensed as incurred. For
the year ended December 31, 2005, the Company incurred $51,469 in research and
development expenditures.
Third-party expenses were reimbursed under non-refundable research and
development contracts, and are recorded as a reduction to research and
development expense in the statement of operations.
Advertising - The Company expensed advertising costs the first time the
respective advertising took place. The total advertising expenses incurred
for year 2005 was $1,007,748.
Page 11
81
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Taxation - Income taxes are computed using the asset and liability method.
Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
currently enacted tax rates and laws. A valuation allowance is provided for
the amount of deferred tax assets that, based on available evidence, are not
expected to be realized.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable profits
less available tax relief for losses brought forward.
Enterprise income tax
---------------------
Under the Provisional Regulations of The People's Republic of China Concerning
Income Tax on Enterprises promulgated by the State, income tax is payable by
enterprises at a rate of 33% of their taxable income. Preferential tax
treatment may, however, be granted pursuant to any law or regulations from
time to time promulgated by the State Council.
According to "Enterprise Income Tax and Certain Preferential Policies Notice"
published by the Ministry of Finance and the National Tax Affairs Bureau, if
the enterprise is authorized by the State Council as a special entity, the
enterprise income tax rate is reduced to 15%. The income tax rate for TDR and
Kangxi is 15% respectively based on State Council approval.
The High-Tech Industrial Development District was established in China to
accelerate the development and industrialization of high-tech industries in
some economic zones of the People's Republic of China. In order to create
unique incentives for companies to locate in the High-Tech Industrial
Development District, favorable corporate income tax rates have been
established. The companies that have chosen to locate in the High-Tech
Industrial Development District will be levied at 15 percent annually. Newly
founded high-tech enterprises, including First, will enjoy exemption from
income tax for 2 years from the first year of operation.
Enterprise income tax ("EIT") is provided on the basis of the statutory profit
for financial reporting purposes, adjusted for income and expense items, which
are not assessable or deductible for income tax purposes.
Page 12
82
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Value added tax
---------------
The Provisional Regulations of The People's Republic of China Concerning Value
Added Tax promulgated by the State Council came into effect on January 1,
1994. Under these regulations and the Implementing Rules of the Provisional
Regulations of the PRC Concerning Value Added Tax, value added tax is imposed
on goods sold in or imported into the PRC and on processing, repair and
replacement services provided within the PRC.
Value added tax payable in The People's Republic of China is charged on an
aggregated basis at a rate of 13% or 17% (depending on the type of goods
involved) on the full price collected for the goods sold or, in the case of
taxable services provided, at a rate of 17% on the charges for the taxable
services provided, but excluding, in respect of both goods and services, any
amount paid in respect of value added tax included in the price or charges,
and less any deductible value added tax already paid by the taxpayer on
purchases of goods and services in the same financial year.
According to "Agriculture Product Value Added Tax Rate Adjustment and Certain
Items Value Added Tax Waiver" published by the Ministry of Finance and the
National Tax Affairs Bureau, the value added tax for agriculture related
products is to be taxed at 13%. Furthermore, traditional Chinese medicine and
medicinal plant are by definition agriculture related products.
Contingent liabilities and contingent assets - A contingent liability is a
possible obligation that arises from past events and whose existence will only
be confirmed by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the Company. It can also be a
present obligation arising from past events that is not recognized because it
is not probable that outflow of economic resources will be required or the
amount of obligation cannot be measured reliably.
A contingent liability is not recognized but is disclosed in the notes to the
financial statements. When a change in the probability of an outflow occurs so
that outflow is probable, they will then be recognized as a provision.
A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain events not wholly within the control of the Company.
Contingent assets are not recognized but are disclosed in the notes to the
financial statements when an inflow of economic benefits is probable. When
inflow is virtually certain, an asset is recognized.
Page 13
83
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
Related companies - A related company is a company in which the director has
beneficial interests in and in which the Company has significant influence.
Retirement benefit costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement scheme organized by municipal government in the province in which
the Company was registered and all qualified employees are eligible to
participate in the scheme.
Contributions to the scheme are calculated at 23.5% of the employees salaries
above a fixed threshold amount and the employees contribute 2% to 8% while the
Company contributes the balance contribution of 21.5% to 15.5%. The Company
has no other material obligation for the payment of retirement benefits beyond
the annual contributions under this scheme.
Fair value of financial instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial notes
receivable, other receivables, accounts payable, commercial notes payable,
accrued expenses, and other payables approximate their fair values as at
December 31, 2005 because of the relatively short-term maturity of these
instruments.
Recent accounting pronouncements - In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity. This standard
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equities.
As of December 31, 2005, the Company had no financial instruments with these
characteristics.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46")
Consolidation of Variable Interest Entities, which addresses the consolidation
of variable interest entities ("VIEs") by business enterprises that are the
primary beneficiaries. A VIE is an entity that does not have sufficient
equity investment at risk to permit it to finance its activities without
additional subordinated financial support, or whose equity investors lack the
characteristics of a controlling financial interest.
The primary beneficiary of a VIE is the enterprise that has the majority of
the risks or rewards associated with the VIE. In December 2003, the FASB
issued a revision to FIN 46, Interpretation No. 46R ("FIN 46R"), to clarify
some of the provisions of FIN 46, and to defer certain entities from adopting
until the end of the first interim or annual reporting period ending after
March 15, 2004. Application of FIN 46R is required in financial statements of
public entities that have interests in structures that are commonly referred
to as special-purpose entities for periods ending after December 15, 2003.
Application for all other types of VIEs is required in financial statements
for periods ending after March 15, 2004. The Company does not have
arrangements that would require the application of FIN 46R.
Page 14
84
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
3. Summary of Significant Accounting Policies (Continued)
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
This statement amends and clarifies financial accounting and reporting for
derivative instruments and for hedging actives under FASB No. 133, Accounting
for Derivative Instruments and Hedging Activities. As of December 31, 2005,
the Company has no derivative or hedging activities.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment
of ARB No. 43, Chapter 4. SFAS No. 151 requires that certain abnormal costs
associated with the manufacturing, freight, and handling costs associated with
inventory be charged to current operations in the period in which they are
incurred. The adoption of SFAS 151 had no impact on the Company's financial
position, results of operations, or cash flows.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary
Assets-amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception
to fair value for exchanges of similar productive assets and replaces it with
a general exception for exchange transactions that do not have commercial
substance, defined as transactions that are not expected to result in
significant changes in the cash flows of the reporting entity. This statement
is effective for exchanges of non-monetary assets occurring after June 15,
2005. Management believes adoption of this new statement will not have any
significant effect on the Company's financial condition or results of
operations.
In November 2002, the FASB approved FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB
Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34". FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies",
relating to a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. Specifically, FIN 45 requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The provisions for initial
recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective
of a guarantor's fiscal year end. However, the disclosure provisions of FIN 45
are effective for financial statements of interim or annual periods ending
after December 15, 2002.
The adoption of FIN 45 is not expected to have a significant impact on the
Company's consolidated financial statements
4. Concentrations of Business and Credit Risk
Substantially all of the Company's bank accounts are in banks located in the
PRC and are not covered by any type of protection similar to that provided by
the FDIC on funds held in U.S banks. The Company places its cash in high
credit quality financial institutions.
Page 15
85
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
4. Concentrations of Business and Credit Risk (Continued)
The Company obtains detailed credit evaluations of customers generally without
requiring collateral, and establishes credit limits as required. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. The Company continuously monitors collections and payments from its
customers and maintains an allowance for estimated credit losses based on the
creditworthiness of each customer as well as any specific customer collection
issues are identified.
Concentration of credit risk with respect to trade receivables is limited due
to the Company's large number of diverse customers in different locations in
China. The Company does not require collateral or other security to support
financial instruments subject to credit risk. 90 percent the age of the
Company's accounts receivable are less than 60 days. While such credit issues
have not been significant, there can be no assurance that the Company will
continue to experience the same level of credit losses in the future.
The Company is operating in China, which may give rise to significant foreign
currency risks from fluctuations and the degree of volatility of foreign
exchange rates between U.S. dollars and the Chinese currency RMB.
5. Cash and Cash Equivalents
As of December 31, 2005, Cash and Cash Equivalents consist of the following:
Cash and Cash Equivalents 2005
Cash on Hand $ 6,219
Bank Deposits 2,835,133
---------------
Total Cash and Cash Equivalents $ 2,841,352
===============
6. Accounts Receivable
As of December 31, 2005, Accounts Receivable totals $1,258,113 net of
Provisions for Doubtful Accounts. 90 percent of the Company's receivable aged
less than 60 days.
Accounts Receivable 2005
Trade receivables $ 1,259,276
Allowance for doubtful accounts (1,163)
---------------
Total Accounts Receivable $ 1,258,113
===============
Page 16
86
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
7. Inventories
The Company values its inventories at the lower of cost and market method.
Inventories are accounted for using the first-in, first-out method.
Inventories in the balance sheet include packing materials, raw materials,
supplemental materials, work-in-process, and finished products.
As of December 31, 2005, Inventories consist of the following:
Inventory 2005
Packing Material $ 82,284
Raw Material 98,508
Supplemental Material 21,620
Work-in-Process 170,718
Finished Products 8,010
------------------
Total Inventory $ 381,140
==================
8. Property and Equipment
All the TDR and its subsidiaries buildings and fixed assets are located in the
PRC and the land is used pursuant to a land use right granted by the PRC for
50 years commencing in 1995.
As of December 31, 2005, Property and Equipment consist of the following:
Property and Equipment 2005
Buildings $ 619,810
Automobiles 133,998
Furniture and Fixtures 4,382
Equipments 419,242
------------------
Total Property and Equipment 1,177,432
Less: Accumulated Depreciation (217,437)
------------------
Property and Equipment, Net $ 959,995
==================
For the year ended December 31, 2005, depreciation expenses totaled $ 41,216.
Page 17
87
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
9. Construction-in-Process
As of December 31, 2005, Construction-in-Process of First's facility project
consists of the following:
Construction-in-Progress 2005
Comprehensive Building $ 559,044
Dewatering excavation 120,773
Factory construction 495,169
Boiler Project 60,386
Fire Prevention 90,580
Power Supply System 96,618
Building Engineering 289,855
Air-conditioning System 434,783
Road Improvement 265,700
Lab Construction 30,990
------------------
Construction-in-Progress $ 2,443,898
==================
10. Intangible Assets
As of December 31, 2005, the Intangible Assets consist of the following:
Intangible Assets 2005
Urinates the micro albumin examination reagent box $ 120,772
New Endothelin-1 433,861
Other secret formulas and processes procedures 24,155
-------------
Total Intangible Assets $ 578,788
=============
11. Accounts Payable and Accrued Expense
As of December 31, 2005, Accounts Payable and Accrued Expense consist of the
following:
Accounts Payable and Accrued Expense 2005
Accounts Payable and Accrued Expense $ 580,941
Other Accounts Payable 142,523
--------------
Total Accounts Payable & Accrued Expenses $ 723,464
==============
The other accounts payable is advance customer deposits which was the
collections of cash in advance to ensure the future delivery of goods or
services. Advances customer deposits are classified as current liabilities if
the goods and services are to be delivered within the next year (or the
operating cycle, if longer).
Page 18
88
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
12. Short-Term Loan
TDR has a secured loan with bank in the amount of $495,840, bears monthly
interest at a rate of 0.651%, secured by a real property with estimated value
of $619,988 and personal guaranteed by Yanqing Liu, the CFO/shareholder.
Principal payment is required on June 30, 2006, the final maturity date.
During the year ended December 31, 2005, TDR incurred $19,941 of interest
expenses associated with the borrowing on this loan.
13. Taxes Payable
As of December 31, 2005, Taxes Payable consists of the following:
Taxes Payable 2005
Value Added Tax $ 59,576
Enterprise Income Tax 79,453
City Tax 3,809
Payroll Tax 2,783
-------------------
Total Taxes Payable $ 145,621
===================
14. Deferred Revenue Government Grant
The Company received several federal government grants supporting the facility
construction, research, development, and production of medicines. These
grants were nonrefundable to the State once awarded as long as the grants are
used in the areas requested by the grants. First used these federal grants to
fund research and development projects, build infrastructure for development
and/or manufacturing of medicines, and other activities that are within the
scope of grants. The remainder of the grants is deferred to the following
years for qualified research and development activities. All the completed
projects and activities funded by the government grants were reported to and
approved by the funding agencies for qualification of future grants. For the
year ended December 31, 2005, the Company has recognized $202,706 federal
grant, with the balance $55,782 deferred.
15. Income Taxes
TDR is incorporated in the PRC which is governed by the Income Tax Law of the
PRC concerning Enterprises and various local income tax laws (the "Income Tax
Laws"). Under the Income Tax Laws, enterprises generally are subject to an
income tax at an effective rate of 33% (30% state income taxes plus 3% local
income taxes) on income as reported in their statutory financial statements
after appropriate tax adjustments unless the enterprise is located in
specially designated regions or cities for which more favorable effective
rates apply. As of December 31, 2005, TDR has attained profitable operations
for tax purposes. TDR and Kangxi are the enterprises authorized by the State
Council as special entities; the enterprise income tax rate is reduced to 15%.
Page 19
89
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
15. Income Taxes (Continued)
First that has chosen to locate in the province designed High-Tech Industrial
Development District will be levied at 15 percent annually. However, First,
considered as a newly founded high-tech enterprise, is enjoying exemption from
income tax for 2 years from the first year of operation commencing with
profits, and thereafter with a 50% exemption for the next three years.
For the year ended December 31, 2005, the Company has recognized $202,706
federal grants. The government grants are tax exempt income and considered as
Additional Paid-in Capital instead of income under the Chinese accounting
system. The Company recorded the grants based on the US GAAP.
A reconciliation of the federal statutory income tax to the Company's
effective income tax rate for the year ended December 31, 2005 is as follows:
2005
Income before tax provision $ 2,562,156
Taxation calculated at statutory rate 15% 384,323
Tax effect of tax exempt Government Grants (30,406)
Expenses were not deductible for taxation purposes 2,164
Deferred tax benefits arising from tax losses
of subsidiaries not recognized -
---------------
Tax charges for the Year 2005 $ 356,081
===============
The statutory tax rate represents the amount provided at the rate of 15% of
favorable rate on the estimated assessable profits of the year. Deferred
taxation has not been provided as there are no significant temporary
differences.
16. Related Party Transactions
Yanqing Liu and Xiaoyan Han the significant shareholders of TDR, owned 100%
common stock of American California Pharmaceutical Group, Inc. prior to the
merger.
Kangxi, the 100% subsidiary sells products to TDR. During the year ended
December 31, 2005, the related party sales between TDR and Kangxi were
$2,798,700 which was eliminated from the consolidated financial statements.
Page 20
90
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
16. Related Party Transactions (Continued)
The amounts due from (to) related parties as of December 31, 2005 are as
follows:
Balance at Maximum Outstanding Security
NAME 12/31/2004 Balance During the Year Held
--------------------------------------------------------------------------
First - 100% owned
Subsidiary $ 3,013,468 $ 3,013,468 None
The amounts due are unsecured, interest free and have no fixed repayment
terms, which was eliminated from the consolidated financial statements.
17. Capital Reserves (other than retained earnings)
As stipulated by the relevant laws and regulations applicable to China's
foreign invested enterprises, TDR is required to make appropriations from net
income as determined under accounting principles generally accepted in the PRC
("PRC GAAP") to the statutory surplus reserves which include a general
reserve, an enterprises expansion reserve, and employee welfare and bonus
reserves. Pursuant to the relevant PRC regulations and the provisions of
the Company's Memorandum and Articles of Association, the Company is required
to appropriate 10% of the net distributable profit after enterprise income tax
to capital reserve, profit attributable to the shareholders shall be
appropriated in the following sequence; the general reserve is used to offset
future extraordinary losses as defined under PRC GAAP. TDR may, upon a
resolution passed by the owners, convert the general reserve into capital.
The employee welfare and bonus reserve is used for the collective welfare of
the employees of TDR. The enterprise expansion reserve is used for the
expansion of TDR and can be converted to capital subject to approval by the
relevant authorities. The Company record reserves of $203,349 in 2005. No
such adjustments are required under accounting principles generally accepted
in the United States of America in 2005.
18. Employee Retirement Benefits and Post Retirement Benefits
According to the Heilongjiang Provincial regulations on State pension scheme,
both employees and employers have to contribute to pension. The pension
contributions include an 8% that was contributed by individuals (employees)
and contributions from the Company to the state retirement plan based on 20%
of the employees monthly basic salaries. TDR's employees in the PRC are
entitled to retirement benefits calculated with reference to their basic
salaries on retirement and their length of service in accordance with a
government managed benefits plan. The PRC government is responsible for the
benefit liability to these retired employees.
Page 21
91
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
19. Foreign Currency Transaction Adjustment
For purposes of SFAS No. 52, the Company considers the US Dollar to be the
reporting currency. The accompanying financial statements are presented in
U.S. Dollars. TDR's functional currency is Renminbi ("RMB"), the currency of
the primary economic environment in which the entity operates. The reporting
currency is USD in which financial statements are presented. The Company's
statements are translated in accordance with Statement of Financial Accounting
Standards No. 52 (SFA No. 52), which requires that foreign currency assets and
liabilities be translated using the exchange rates in effect at the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing during the period. The effects of unrealized exchange
fluctuations on translating foreign currency assets and liabilities into US
Dollars are accumulated as a cumulative translation adjustment in
shareholders' equity. As a result, the Company recognized in equity the
effect of currency conversion in the amount of $57,554.
20. Commitments and Contingencies
The formulation, manufacturing, processing, packaging, labeling, advertising,
distribution and sale of external use Chinese medicine such as those sold by
the Company are subject to regulations by one or more federal agencies. The
principal federal agencies include The State Food and Drug Administration of
the Government of The Peoples Republic of China, The Food and Drug
Administration (the "FDA"), and, to a lesser extent, the Consumer Product
Safety Commission. These activities are also regulated by various governmental
agencies for the countries, states and localities in which the Company's
products are sold.
Although management believes that the Company is in material compliance with
the statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company's compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will not
lead to material adverse effects on the Company's financial position, results
of operations, or cash flows.
The Company, like any other distributor or manufacturer of products that are
designed to be ingested, also exposes to the inherent risk of product
liability claims in the events of possible injuries caused by the use of its
products. The Company does not have liability insurance with respect to
product liability claims; the insurance environment of China is neither
sufficient nor mature. Inadequate insurance or lack of contractual
indemnification from parties supplying raw materials or marketing its
products, product liabilities related to defective products could have
material adverse effects on the Company.
The Company is not involved in any legal matters arising in the normal course
of business. While incapable of estimation, in the opinion of the management,
the individual regulatory and legal matters in which it might involve in the
future are not expected to have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
Page 22
92
American California Pharmaceutical Group, Inc.
And Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2005
(Expressed in US Dollars)
21. Subsequent Events
Construction-in-progress
Upon completion and readiness for use of the First facility project, the cost
of construction-in-progress was transferred to facility as of January 15,
2006. The facility is now under the final inspection by the Chinese State Food
and Drug Administration ("SFDA") for the qualification of certified GMP
production facility.
Page 23
93
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following pro forma consolidated financial information has been derived by
the application of pro forma adjustments to the historical consolidated
financial statements of the American California Pharmaceutical Group and
Subsidiaries (ACPG) and Comet Technologies, Inc. (Comet) for the years ended
December 31, 2005 and 2004. On May 11, 2006, Comet entered into a Stock
Exchange Agreement with ACPG and the shareholders of ACPG, providing for the
acquisition of all of the shares of ACPG, in exchange for the issuance of a
total of 10,193,377 shares representing approximately 93% of the then issued
and outstanding diluted shares of common stock of the Comet to the ACPG
shareholders. At closing, ACPG will become a wholly-owned subsidiary.
This transaction will be accounted for as a reverse takeover using the
purchase method. A reverse acquisition occurs when the former shareholders of
the nominal acquiree become the majority owners of the post-acquisition
consolidated enterprise with a stock-for-stock swap. The SEC has ruled that
no goodwill can be recognized in the case of a publicly held shell company and
a privately held acquiree. The acquisition was accounted for as a purchase in
conformity with Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations." The purchase accounting adjustments represent the
Company's preliminary determination of the adjustments necessary to present
fairly the Company's pro forma results of operations and financial position
and are based upon available information and certain assumptions considered
reasonable under the circumstances. The unaudited pro forma statements do not
reflect any synergies anticipated by the Company as a result of the
acquisition.
The unaudited pro forma financial statements are compiled based on the audited
consolidated financial statements of ACPG and the audited financial statements
of Comet. Assumptions underlying the pro forma adjustments necessary to
present fairly this pro forma information are described in the accompanying
notes, which should be read in conjunction with this pro forma consolidated
financial information. The pro forma adjustments described in the
accompanying notes have been made based on available information and, in the
opinion of management, are reasonable. The pro forma consolidated financial
information should not be considered indicative of actual results that would
have been achieved had the transactions occurred on the respective dates
indicated, and do not purport to indicate results of operations as of any
future date or for any future period.
94
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
& SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2005
(Expressed in U.S. dollars)
For the Year ended December 31,
2005 2004
------------------------------------------------------------ --------------
American
California Comet
Pharmaceutical Technologies Pro Forma
Group Inc. Adjustments Consolidated Consolidated
-------------- -------------- -------------- -------------- ---------------
ASSETS
Current Assets
Cash and equivalents $ 2,841,352 $ 95,981 $ - $ 2,937,333 $ 2,010,431
Accounts receivable, net 1,258,113 - - 1,258,113 1,100,213
Inventories 381,140 - - 381,140 651,641
Prepaid accounts 18,316 - - 18,316 23,200
-------------- -------------- -------------- -------------- ---------------
Total current assets 4,498,921 95,981 - 4,594,902 3,785,485
Property and equipment
Fixed assets, net of
accum. depreciation 959,995 - - 959,995 622,289
Land 510,886 - - 510,886 510,886
Construction-in-progress 2,443,898 - - 2,443,898 2,397,343
-------------- -------------- -------------- -------------- ---------------
Total property and
equipment 3,914,779 - - 3,914,779 3,530,518
Other assets
Intangible assets 578,788 - - 578,788 144,927
-------------- -------------- -------------- -------------- ---------------
Total assets $ 8,992,488 $ 95,981 $ - $ 9,088,469 $ 7,460,930
============== ============== ============== ============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and
accrued expenses $ 723,464 $ 586 $ - $ 724,050 $ 1,986,943
Short-term loans - unsecured 495,840 - - 495,840 -
Payable - related parties - 18,000 - 18,000 57,795
Wages payable 122,643 - - 122,643 81,016
Welfare payable 97,745 - - 97,745 68,308
Taxes payable 145,621 - - 145,621 47,766
Deferred revenue -
Government Grant 55,782 - - 55,782 101,334
-------------- -------------- -------------- -------------- ---------------
Total current liabilities 1,641,095 18,586 - 1,659,681 2,343,162
-------------- -------------- -------------- -------------- ---------------
Total Liabilities 1,641,095 18,586 - 1,659,681 2,343,162
Shareholders' equity
Registered capital 1,330,314 507 - 1,330,821 1,333,912
Additional paid-in-capital 1,485,507 336,447 - 1,821,954 1,724,068
Currency conversion
adjustment 57,554 - - 57,554 -
Retained profit (deficit) 4,478,018 (259,559) - 4,218,459 2,059,788
-------------- -------------- -------------- -------------- ---------------
Total members' equity 7,351,393 77,395 - 7,428,788 5,117,768
-------------- -------------- -------------- -------------- ---------------
Total liabilities and
members' equity $ 8,992,488 $ 95,981 $ - $ 9,088,469 $ 7,460,930
============== ============== ============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
2
95
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
& SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDING DECEMBER 31, 2005
(Expressed in U.S. dollars)
For the Year ended December 31,
2005 2004
------------------------------------------------------------ --------------
American
California Comet
Pharmaceutical Technologies Pro Forma
Group Inc. Adjustments Consolidated Consolidated
-------------- -------------- -------------- -------------- ---------------
REVENUES
Sales $ 7,508,935 $ - $ - $ 7,508,935 $ 4,232,020
Government Grant 202,706 - - 202,706 659,420
-------------- -------------- -------------- -------------- ---------------
Total revenues 7,711,641 - - 7,711,641 4,891,440
COST OF GOOD SOLD
Cost of Good Sold 2,099,252 - - 2,099,252 1,127,134
Business Tax and Surcharges 114,416 - - 114,416 66,207
-------------- -------------- -------------- -------------- ---------------
Total cost of good sold 2,213,668 - - 2,213,668 1,193,341
-------------- -------------- -------------- -------------- ---------------
Gross Profit 5,497,973 - - 5,497,973 3,698,099
Operating Expenses
General, administrative
and selling expenses 2,917,198 48,461 - 2,965,659 2,239,479
-------------- -------------- -------------- -------------- ---------------
Total operating expenses 2,917,198 48,461 - 2,965,659 2,239,479
-------------- -------------- -------------- -------------- ---------------
Income from operations 2,580,775 (48,461) - 2,532,314 1,458,620
Other Income (Expenses)
Interest income 1,321 1,057 - 2,378 360
Interest expense (19,941) - - (19,941) (43)
Reimbursement of fees - - - - 2,158
-------------- -------------- -------------- -------------- ---------------
Total other income
(expenses) (18,620) 1,057 - (17,563) 2,475
-------------- -------------- -------------- -------------- ---------------
Net Income before
Income Taxes 2,562,155 (47,404) - 2,514,751 1,461,095
Less: Provision for
Income Taxes 356,081 - - 356,081 132,640
-------------- -------------- -------------- -------------- ---------------
NET INCOME (LOSS) $ 2,206,074 $ (47,404) $ - $ 2,158,670 $ 1,328,455
============== ============== ============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
95
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
& SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
AS OF DECEMBER 31, 2005
(Expressed in U.S. dollars)
Additional Currency Total
Registered Paid-in Conversion Capital Retained Shareholders'
Capital Capital Adjustment Reserve Earnings Equity
-------------- -------------- ----------- ----------- -------------- -------------
Balance at
December 31, 2003 $ 1,333,912 $ 1,724,068 $ - $ 73,494 $ 657,838 $ 3,789,312
Net Income for
the year 2004 - - - - 1,328,455 1,328,455
Transfer to
Capital Reserve - - - 73,739 (73,739) -
-------------- -------------- ----------- ----------- -------------- -------------
Balance at
December 31, 2004 1,333,912 1,724,068 - 147,233 1,912,554 5,117,768
Net income for
the year 2005 - - - - 2,158,670 2,158,670
Decrease in
Registered Capital (3,091) - - - - (3,091)
Increase in
Additional
Paid-in Capital - 97,886 - - - 97,886
Currency Conversion
Adjustment - - 57,554 - - 57,554
Transfer to
Capital Reserve - - - 203,349 (203,349) -
-------------- -------------- ----------- ----------- -------------- -------------
Balance at
December 31, 2005 $ 1,330,821 $ 1,821,954 $ 57,554 $ 350,582 $ 3,867,875 $ 7,428,788
============== ============== =========== =========== ============== =============
The accompanying notes are an integral part of these consolidated financial statements.
4
96
AMERICAN CALIFORNIA PHARMACEUTICAL GROUP, INC.
& SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
AS OF DECEMBER 31, 2005
(Expressed in U.S. dollars)
For the year ended December 31,
2005 2004
-------------- --------------
Cash flows from operating activities
Net income $ 2,158,670 $ 1,328,455
Adjustments to reconcile net profit to net cash provided by
operating activities
Depreciation 41,216 32,781
Changes in assets and liabilities:
Accounts receivable (157,900) (107,371)
Inventories 270,501 75,411
Prepaid accounts 4,884 8,893
Accounts payable and accrued expenses (1,262,892) 1,322,284
Payables to related parties (39,795) 27,795
Wages payable 41,627 34,086
Welfare payable 29,437 19,785
Taxes payable 97,855 (4,178)
Deferred government grant (45,522) 101,334
-------------- --------------
Net cash provided by operating activities 1,138,051 2,839,275
-------------- --------------
Cash flows from investing activities
Purchases of fixed assets (378,922) (73,857)
Purchases of land - (510,886)
Purchases of intangible assets (433,861) (120,772)
Increase in construction-in-progress (46,555) (2,397,343)
-------------- --------------
Net cash provided by (used in) investing activities (859,338) (3,102,858)
-------------- --------------
Cash flows from financing activities
Decrease in registered capital (3,091) -
Increase in additional paid-in-capital 97,886 -
Proceeds from short-term loan 495,840 -
-------------- --------------
Net cash provided by/(used in) financing activities 590,635 -
-------------- --------------
Effect of foreign currency exchange rate changes 57,554 -
Net increase in cash 926,902 (263,583)
Cash at beginning of year 2,010,431 2,274,014
-------------- --------------
Cash at end of period/year $ 2,937,333 $ 2,010,431
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
5
97
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. BASIS OF PRESENTATION
The condensed financial statements include the accounts of Comet Technologies,
Inc., and American California Pharmaceutical Group, Inc., Harbin Tian Di Ren
Medical Science and Technology Company, Harbin First Bio-Engineering Company
Limited, and Kangxi Medical Care Product Factory from January 1, 2004 forward.
American California Pharmaceutical Group and its subsidiaries, Harbin Tian Di
Ren Medical Science and Technology Company, Harbin First Bio-Engineering
Company Limited and Kangxi Medical Care Product Factory, are hereinafter
collectively referred to as the "ACPG."
All significant inter-company transactions and balances within the Company are
eliminated on consolidation.
2. REVERSE TAKEOVER AND MERGER
Comet Technologies, Inc. has entered into an Exchange Agreement with ACPG and
the shareholders of ACPG, providing for the acquisition of all of the shares
of ACPG, in exchange for the issuance of a total of 10,193,377 shares of the
then issued and outstanding diluted shares of common stock of the Comet to the
ACPG shareholders. When the transaction is consummated, ACPG will become a
wholly-owned subsidiary of the Company, and the former shareholders of ACPG
will then hold approximately 93% of the outstanding shares of the Company,
after issuance of all shares in connection with the transaction and the
issuance of shares to consultants. This transaction is accounted for as a
reverse takeover using the purchase method.
6
98