EX-99.1 2 ex99-1.txt FINANCIAL STATEMENTS Exhibit 99.1 NATURAL PHARMATECH, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2004 NATURAL PHARMATECH, INC. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm 1 Consolidated Balance Sheet as of December 31, 2004 2 Consolidated Statements of Operations for the years ended December 31, 2004 and 2003 3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004 and 2003 4 Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 5 Notes to the Consolidated Financial Statements 6 to 15 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Natural Pharmatech Inc. We have audited the accompanying consolidated balance sheet of Natural Pharmatech Inc. and Subsidiaries as of December 31, 2004 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Natural Pharmatech Inc. and Subsidiaries as of December 31, 2004 and the results of their operations and their cash flows for the years ended December 31, 2004 and 2003 in conformity with United States generally accepted accounting principles. /s/ Moore Stephens, P.C. -------------------------------- Moore Stephens, P.C. Certified Public Accountants New York, New York February 4, 2005 1 Natural Pharmatech Inc. Consolidated Balance Sheet December 31, 2004 ASSETS CURRENT ASSETS Cash $ 192,924 Accounts receivable 644,219 Related party receivable 77,066 Inventories 1,038,783 Other current assets 571,770 Prepaid expenses 58,401 ---------- Total Current Assets 2,583,163 ---------- PROPERTY, PLANT & EQUIPMENT, net 6,395,485 LAND LEASE, net 452,726 INTANGIBLE ASSETS 137,645 ---------- 6,985,856 ---------- Total Assets $9,569,019 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short term borrowings $1,328,800 Accounts payable and accrued expenses 513,907 Related party payable 305,427 Advance from customers 111,629 Other payables and accruals 658,239 Taxes payable 60,359 Other current liabiltities 56,238 ---------- Total Current Liabilities 3,034,599 ---------- MINORITY INTEREST 729,280 STOCKHOLDERS' EQUITY Common stock par value $ 0.01 per share; 43,850,000 shares authorized, issued and outstanding 438,500 Additional paid-in capital 5,056,557 Appropriated retained earnings -- Unappropriated retained earnings 310,085 ---------- Total Stockholders' Equity 5,805,142 ---------- Total Liabilities and Stockholders' Equity $9,569,019 ========== The accompanying notes are an integral part of these consolidated financial statements. 2 Natural Pharmatech Inc. Consolidated Statements of Operations For the Years Ended December 31, 2004 2003 ------------ ------------ SALES $ 1,555,670 $ 1,720,912 COST OF SALES 533,770 217,238 ------------ ------------ GROSS PROFIT 1,021,900 1,503,674 ------------ ------------ OPERATING EXPENSES Advertising 17,802 95,738 Research and development 507,578 426,379 Selling expenses 40,832 72,446 General and administrative expenses 886,528 804,923 ------------ ------------ 1,452,740 1,399,486 ------------ ------------ INCOME (LOSS) FROM OPERATIONS (430,840) 104,188 ------------ ------------ OTHER INCOME (EXPENSES) Miscellaneous income 892,845 313,020 Interest expense (129,609) (111,595) ------------ ------------ 763,236 201,425 ------------ ------------ INCOME BEFORE TAXES AND MINORITY INTERST 332,396 305,613 ------------ ------------ PROVISION FOR TAXES Current 17,776 89,223 Deferred -- 6,257 ------------ ------------ 17,776 95,480 ------------ ------------ INCOME BEFORE MINORITY INTEREST 314,620 210,133 MINORITY INTEREST (4,535) 88,646 ------------ ------------ NET INCOME $ 310,085 $ 298,779 ============ ============ EARNINGS PER COMMON SHARE: Basic and Diluted 0.01 0.01 ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 43,850,000 43,800,000 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 3 Natural Pharmatech Inc. Statements of Stockholders' Equity For the Years Ended December 31, 2004 and 2003

The accompanying notes are an integral part of these consolidated financial statements. 4 Natural Pharmatech Inc. Statements of Cash Flows For the Years Ended December 31,

NONCASH INVESTING AND FINANCING TRANSACTIONS During the year ended December 31, 2003, the Company received a contribution of fixed assets of $ 100,963. The accompanying notes are an integral part of these consolidated financial statements. 5 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY Natural Pharmatech, Inc. ("Natural" or the "Company") was incorporated on February 2, 2004 in the British Virgin Islands, to hold 100% of the outstanding common stock of Jilin Tian Yao Science and Technology Limited Company ("JTY"), which is located in Changchun, China. Natural merged with JTY on June 15, 2004 by issuing 43,800,000 of its common shares for all of the outstanding common shares of JTY. Under generally accepted accounting principles, the acquisition is considered to be a capital transaction in substance, rather than a business combination. That is, the acquisition is equivalent to the issuance of stock by JTY for the net monetary assets of Natural, accompanied by a recapitalization, and is accounted for as a change in capital structure. Accordingly, the accounting for the acquisition is identical to that resulting from a reverse acquisition, except that no goodwill is recorded. Under reverse takeover accounting, the comparative historical financial statements of the "legal acquiror", Natural, are those of the "accounting acquiror", JTY. JTY was organized as a Chinese limited liability company on February 7, 2001 in China. JTY and its subsidiaries are principally engaged in research and development of modern Chinese medicine and bio-pharmacy, the sale of this technology, and the manufacture and sale of Chinese medicine and vitamins throughout China. In October 2002, JTY reached an agreement with Ms. Xie Xiao, General Manager of Hainan Gong and Detoxification and Rehabilitation Centre ("HGAR"), to jointly invest in the establishment of Hainan Gong and Health-care Products Co., Ltd. ("HGA"). The registered capital of Gong An is $120,800 (RMB1,000,000), in which JTY has an 80% interest. In May 2004, JTY and HGAR agreed to cancel the investment agreement, effective as of December 31, 2003, by transferring the investment to Mr. Zhang Ping for approximately $71,660, which represents the original investment of $96,640 less the losses of $24,980 allocated to JTY in 2002 and 2003. JTY therefore recognized no gain or loss on the transfer. The actual payment to be received from Mr. Zhang is approximately $24,550, and it is due by June 30, 2005. The balance of approximately $47,110 represents a liability of JTY to HGAR, which will be offset against the transfer price of $71,660. In November 2002, JTY invested approximately $217,500 to acquire 51% ownership of HGAR, an approved medical organization of detoxification and rehabilitation in Hainan, in order to jointly develop detoxification and rehabilitation services. In March 2004 JTY and HGAR agreed to cancel the investment agreement, effective as of January 1, 2004, by having HGAR pay JTY $149,900, which represents the original investment of $217,500 less the losses of $ 67,600 allocated to JTY in 2002 and 2003. As the payment is equal to the investment, there is no gain or loss on disposal. The payment is to be received in two installments of approximately $72,500 in 2004 and $77,400 in 2005. 6 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Natural and its majority owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. Operations for all periods are primarily those of JTY (see Note 1). B. USE OF ESTIMATES In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Significant estimates include depreciation and allowance for doubtful accounts receivable. Actual results could differ from those estimates. C. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2004 the Company did not have any cash equivalents. D. INVENTORY Inventories are stated at the lower of cost or market. Substantially all inventory costs are determined using the first-in, first-out (FIFO) method. Inventory costs do not exceed net realizable value. E. PROPERTY AND EQUIPMENT, NET Property and equipment is stated at cost. Depreciation and amortization is provided principally by use of the straight-line method over the useful lives of the related assets. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized. 7 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED F. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards (`SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. G. REVENUE RECOGNITION Contract revenues earned from the transfer of technology are recognized in accordance with contract terms. Such revenues are approximately $476,000 and $1,313,000 in 2004 and 2003, respectively. Revenue derived from experiments, research and related ancillary services is recognized when the customer accepts the service. Such revenues are approximately $137,000 and $178,000 in 2004 and 2003, respectively Revenue from goods sold is recognized when title has passed to the purchaser, which generally is at the time of delivery. The revenues earned are approximately $942,000 and $229,000 in 2004 and 2003, respectively. Government grants are recognized as other income upon receipt. These revenues are approximately $892,000 and $255,000 in 2004 and 2003, respectively. H. IMPAIRMENT In accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" the Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized. 8 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED I. FOREIGN CURRENCY TRANSLATION The Company's functional currency is the Chinese Yuan (RMB) and its reporting currency is the US dollar. The Company's balance sheet accounts are translated into US dollars at the year-end exchange rates and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred. The translation gains and losses were immaterial for the years ended December 31, 2004 and 2003. The Chinese government imposes significant exchange restrictions on fund transfers out of China that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions. K. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments. These transactions are deemed immaterial for the years presented L. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Values of Financial Instruments", requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. For certain financial instruments, including cash, accounts, related party and other receivables, accounts payable, other payables and accrued expenses and short term debt, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations. 9 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-CONTINUED M. ADVERTISING COSTS Advertising costs are charged to operations when incurred. Advertising costs for each of the years ended December 31, 2004 and 2003 are approximately $17,800 and $95,700, respectively. N. EARNINGS PER SHARE Basic earnings per share is computed by dividing the earnings for the year by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by including other potential common stock, including stock options and warrants, in the weighted average number of common shares outstanding for a period, if dilutive. At December 31, 2004 and 2003, there were no common stock equivalents. O. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. Bad debt reserves are maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer's inability to meet its financial obligation, such as in the case of bankruptcy filings or deterioration in the customer's operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. As of December 31, 2004, the allowance for doubtful accounts was $0. P. APPROPRIATED RETAINED EARNINGS In accordance with Chinese regulations, the Company must appropriate fifteen percent of its annual profits as computed under Chinese generally accepted accounting principles. 10 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. INVENTORY Inventory is comprised of the following: December 31, 2004 ---------- Raw materials $ 313,100 Work in progress 322,500 Finished goods 327,300 Other 75,900 ---------- $1,038,800 ========== 4. OTHER CURRENT ASSETS The account is comprised of the following: a) approximately $295,000 advanced to vendors for purchasing equipment, to an agency for marketing new products and to a contractor for construction; b) approximately $138,000 advanced to employees and unrelated parties and c) approximately $138,800 as a refund of investment on HGA and HGAR. 5. PROPERTY AND EQUIPMENT, NET Property and equipment is comprised of the following: Estimated Useful Life In Years December 31, 2004 -------- ----------------- Buildings and improvements 20-40 $2,457,000 Building pledged as security to creditor 20-40 2,189,000 Machinery and equipment 5-10 2,677,000 Vehicles 10 136,000 Office equipment and other 5-10 214,000 ---------- Total at cost 7,673,000 Accumulated depreciation and amortization 1,278,000 ---------- $6,395,000 ========== Depreciation and amortization expense for each of the years ended December 31, 2004 and 2003 was approximately $392,000 and $281,800, respectively. The depreciation and amortization expenses are included in research and development and general and administrative expenses of approximately $326,000 and $66,000, respectively, for 2004. For 2003, the expenses are approximately $120,800 and $161,000, respectively. 11 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 6. INTANGIBLE ASSETS The Company's intangible assets of approximately $154,000 consist primarily of purchased technology of $127,000 and a self-developed patent of $27,000 to produce vitamins and medicine. Neither asset has any significant residual value. Both assets have an estimated useful life of twenty years but the legal rights are limited to ten years by the Chinese government. Amortization expense was approximately $13,400 and $2,600 for 2004 and 2003, respectively. At December 31, 2004 the accumulated amortization was approximately $14,850 and $3,150 for the purchased technology and patent, respectively. Amortization for each of the next five years is estimated to be $15,400 each year. 7. INVESTMENT IN LAND LEASE As of December 31, 2004 the Company has a parcel of land leased from the Chinese government. The term of the lease is fifty years. The consideration under the agreement amounts to approximately $488,000. The Company classifies the leases as operating and therefore amortizes the cost using the straight-line method over the life of the lease. Rent expense is approximately $8,600 for the years ended December 31, 2004 and 2003, respectively. Accumulated amortization at December 31, 2004 was approximately $35,300. The estimated amount of amortization expense for each of the five succeeding fiscal years is $9,800 annually. 8. MISCELLANEOUS INCOME In 2003, JTY contracted to receive, without consideration, assets of approximately $658,000 from Jilin Tong Yu County Assets Administrative Office ("Tong Yu"), a state entity. These assets were to be part of JTY's contribution, in return for 95% of the capital, to a subsidiary, Jilin Yi Cao Tang Pharmacy Co. Ltd., which was established in 2003. The contract gives Tong Yu the right to reclaim the assets if JTY does not receive certain government certifications. In August 4, 2004, JTY received the government certifications and recognized the grant as miscellaneous income of approximately $658,000 in the statement of operations for the year ended December 31, 2004. JTY also received approximately $234,000 of government grants in cash in 2004. 12 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 9. INCOME TAXES The deferred tax liability as of December 31, 2004 is immaterial and is included with other liabilities. Pursuant to the relevant laws and regulations in the Peoples' Republic of China ("PRC"), JTY is recognized as a New and High Technology Enterprise and is entitled to a reduced income tax rate of 15% in 2003. JTY qualified as a joint venture in 2004, which entitled it to an exemption from PRC income tax for two years beginning with its first profitable year. The same exemption applies to its subsidiary, Jilin BCT Pharmacy Company, Ltd. A reconciliation between taxes computed at the statutory rate of 15% and the Company's effective tax rate is as follows: December 31, --------------------------- 2004 2003 -------- -------- Income tax on pretax income at statutory rate $ 49,900 $ 45,800 Effect of 2004 income tax exemption (32,124) 0 Effect of subsidiary losses not consolidated for income tax purposes 0 49,680 -------- -------- Income tax at effective rate $ 17,776 $ 95,480 -------- -------- The Company is also subject to value added tax (VAT), business tax and surtax. 10. CONCENTRATIONS AND CREDIT RISK The Company operates principally in China and grants credit to its customers in this geographic region. Although China is considered economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Company's operations. At December 31, 2004 the Company has a credit risk exposure of uninsured cash in banks of approximately $193,000. The Company does not require collateral or other securities to support financial instruments that are subject to credit risk. For the year ended December 31, 2004, two customers accounted for approximately $513,000 (31%) of total sales as follows: Customer A at $338,000 (20%) and Customer B at $175,000 (11%). For the year ended December 31, 2003, one customer accounted for approximately $1,255,700 (74%) of total sales. 13 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 11. DEBT The Company has one short-term loan payable from a financial institution totaling approximately $1.3 million at December 31, 2004. The loan carries an annual interest rate of approximately 7% and matures on December 5, 2005. One of the Company's buildings collateralizes one of the loans. Interest expense was approximately $129,000 and $112,000 for the years ended December 31, 2004 and 2003, respectively. 12. RETIREMENT BENEFITS The Company is required by statutory Chinese employment laws to fund certain government sponsored retirement plans. The expense incurred by the Company for the years ended December 31, 2004 and 2003 is immaterial. 13. RELATED PARTY TRANSACTIONS As of December 31, 2004, the Company has the following amounts due from and to related parties: Advances due from related parties BCT Global Development Limited $ 18,000 Stockholders: Wang Ben Ji $ 36,000 Qu Dong Ming 23,000 59,000 Total $ 77,000 Advances due to related parties Dong Yuan Investment (HK) Limited $148,000 Stockholders: Fang De Wen $ 81,000 Xie Lian Zhen 77,000 $158,000 Total 306,000 These balances have no stated terms for repayment and are not interest bearing. The Company has approximately $0 and $115,700 of sales made to BCT Global Development Limited (a shareholder of BCT) in 2004 and 2003, respectively. 14 NATURAL PHARMATECH, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 14. NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123R, "Share-Based Payment, an Amendment of SFAS No. 123" SFAS No. 123R requires companies to recognize in the statement of operations the grant- date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective beginning in the Company's first quarter of fiscal 2006. The Company believes that the adoption of this standard will have no material impact on its financial statements. In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29. SFAS No. 153 eliminates the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The Company believes that the adoption of this standard will have no material impact on its financial statements. 15. SUBSEQUENT EVENT (UNAUDITED) On February 9, 2005, the Company entered into a share exchange agreement with Global Pharmatech, Inc. For accounting purposes, the combination is a reverse acquisition recapitalization, with the Company as the acquiror. Pro forma information is not presented as the transaction is not considered a business combination. The combined entity will be presented in the March 2005 financials. 15

Global Pharmatech, Inc. 8-K/A