GFR PHARMACEUTICALS, INC.
SUITE11405 - 201A STREET
MAPLE RIDGE, BRITISH COLUMBIA V2X 0Y3
November 18, 2005
VIA EDGAR
Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-0406
Attention: Linda Cvrkel, Branch Chief
RE: GFR PHARMACEUTICALS, INC.
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE #: 0-27959
Ladies and Gentlemen;
We have received your comments to our Form 10-KSB for the year ended
December 31, 2005 and thank for your review to assist and enhance the overall
disclosure in our Exchange Act filings. We supplementally respond to all your
comments as follows:
FORM 10-KSB
Item 6. Management's Discussion and Analysis
Results of Operations, page 8
1. We acknowledge your response to prior comment 5 regarding the correction of
the error. Please expand your disclosure to address the following:
o Provide introductory disclosure of the effects of the restatement in
MD&A.
o Please have Robison, Hill & Co. revise their report to include an
explanatory paragraph to note that the financial statements have been
restated.
o Revise Note 1 to your financial statements to clarify that the
restatement reduced net income by $311,182 and disclose the related per
share amounts.
o Please tell us if you considered the impact of the restatement on your
disclosures under Item 307 of Regulation S-B. Please tell us why you
continue to believe that your disclosure controls and procedures were
effective after considering the fact that the financial statements were
required to be restated.
Page 1
o Please disclose any changes in internal control over financial
reporting to correct the problem that resulted in the restatement.
Please refer to Item 308(c) of Regulation S-B.
o Please refer to the requirement to file an Item 4.02 Form 8-K when
previously issued financial statements can no longer be relied upon
because of an error in the financial statements.
RESPONSE:
o We have included an introductory paragraph disclosing the
effects of the restatement in MD&A.
o Robison, Hill & Co. have revised their report to include an
explanatory paragraph regarding the restatement of the
financial statements.
o We have added disclosure to Note 1 to clarify the reduction to
net income of $311,182 and the related per share amounts.
o We have modified our disclosure to state that disclosure
controls and procedures were not effective.
o We have added disclosure regarding changes to internal control
over financial reporting.
o We will file an 8-K to report item 4.02 due to the restatement
of our financial statements. We have attached a draft to this
response.
2. After the correction of the error, it appears that you still had a material
increase in net gains resulting from foreign currency transactions in 2004.
Please expand your disclosure to discuss the reason for the increase in the net
foreign currency transaction gains in 2004. We note that net foreign currency
transaction gains during the six months ended June 30, 2005 are material. Please
tell us whether the error that resulted in the restatement was corrected before
you filed your 2005 10-QSBs.
RESPONSE: We have expanded our disclosure to discuss the increase in net
gains resulting from foreign currency transactions and the
reasons for the increase in 2004
We did not correct the error prior to filing the 10-QSB's.
Please see the proposed revisions to our 10-QSB's for 1st and
2nd quarter.
3. Please expand your disclosure in response to prior comment 6 to clarify why
the net operating loss carry forwards utilized in 2004 were significantly higher
than 2003. Please explain to us why your net operating loss carry forwards were
not utilized in 2003.
RESPONSE: We have recalculated the reconciliation from book to tax based
on the net income per the restatement. The effective tax rates
per book are now 22% for 2004 compared to 48% for 2003. We
have added disclosure to Item 6. Managements Discussion and
Analysis regarding the drop in effective tax rates and
disclosed that the primary difference between book and tax is
a timing difference for depreciation deductions between book
and tax.
Page 2
Critical Accounting Policies, page 9
4. Your proposed disclosures in response to prior comment 7 appear to be a
reiteration of the accounting policies included in the notes to your financial
statements. Please revise your disclosures to discuss only your critical
accounting estimates and not all of your accounting policies. Please refer to
Financial Reporting Release 72 for guidance on disclosure of critical accounting
estimates.
RESPONSE: We have revised or disclosure to discuss only our critical
accounting policies.
Item 12. Certain Relationships and Related Transactions, page 17
5. We note your responses to comment 9. Please file as exhibits the agreements
underlying each of the transactions discussed in this section.
RESPONSE: We will file the agreements as exhibits to the amended 10-KSB.
We have included a draft of the exhibits in this response.
6. Please expand the first paragraph to state how the $253,409 accounts payable
to Richard Pierce arose; the second paragraph to disclose how the promissory
note arose or for what you used the proceeds from the loan, as may be
applicable; and the fourth paragraph to describe the amount, nature, and age of
the equipment leased from Mr. Pierce. Also, please disclose the cost to Mr.
Pierce of the equipment he has leased to the company.
RESPONSE: We have added the requested disclosure.
7. In the third paragraph, you state "the MONTHLY rent charge is approximately
$50,000 ($60,000 Canadian) PER YEAR" (emphasis added). Please clarify whether
the stated rent amount is a monthly or a yearly amount.
RESPONSE: We have clarified that the $50,000 is the yearly amount.
Item 13. Exhibit and Reports on Form 8-K, page 18
8. We note that in response to comment 4, you plan to file the lease agreements
with your amended Form 10-KSB, and you have included them in the draft
amendment. Please include in your exhibit index a reference to these exhibits
and to all other exhibits you will file with your amendment.
RESPONSE: We have referenced the exhibits in the index.
Consolidated Financial Statements, page F-1
Notes to Consolidated Financial Statements, page F-7
9. We reiterate our prior comment 10. Please tell us why you have not included
the disclosures required by paragraph 38 of SFAS 131.
RESPONSE: We did not include geographic information as in our view it
did not appear material in amount due to the fact that there
were only two sales made to customers outside Canada in 2004
and zero sales in 2003. However, to satisfy SFAS 131 paragraph
38 we have now added the requested disclosure.
Page 3
Signatures, page 20
10. We note the revisions you made pursuant to comment 8. Please add the title
of "director" to caption accompanying Mr. Pierce's signature.
RESPONSE: We have added the title of "director" to the caption
accompanying Mr. Pierce's signature.
Respectfully Submitted,
/s/ Richard Pierce
Richard Pierce,
President and C.E.O.
Page 4
Proposed 8K Filing
UNITES STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) SEPTEMBER 23, 2005
------------------
GFR PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
NEVADA 000-27959 77-0517964
- --------------------------------------------------------------------------------
(State or other jurisdiction Commission (I.R.S. Employer
of incorporation or organization) file number Identification No.)
Suite 11405 - 201A Street, Maple Ridge, British Columbia V2X 0Y3
(Address of principal executive office) Zip/Postal Code
Issuer's telephone number: (604) 460-8440
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 Instructions A.2. Below):
[] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[] Pre-commencement communications pursuant to Rule 13e4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
1
Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a
Related Audit Report or Completed Interim Review
Restatement and non-reliance
On September 23, 2005, our independent auditors, Robison, Hill & Co., informed
us that they had discovered and error in our financial statements for the year
ended December 31, 2004.
Following our discussion with Robison, Hill & Co., we determined that the
December 31, 2004 financial statements should be restated to reflect the
correction of this error as well as the financial statements for the quarters
ended March 31, 2005 and June 30, 2005.
On the date hereof, GFR Pharmaceuticals, Inc. is filing an amendment to its
Annual Report on Form 10-KSB for the year ended December 31, 2004, to amend and
restate financial statements and other financial information for the year 2004.
We are also filing on the date hereof, ammendments to the Quarterly Reports of
Form 10-QSB for the quarters ended March 31, 2005 and June 30, 2005.
We are filing these amendments to correct an error relating to the translation
of our financial statements from Canadian dollars to U.S. dollars for reporting
purposes. The error impacts the year ended December 31, 2004 and the quarters
ended March 31, 2005 and June 30, 2005, but has no effect on the financial
statements issued in prior fiscal years. The restatement corrects an error
within the currency translation adjustment, which should be reported in the
equity section of the balance sheet, but was reported in error in the income
statement. The impact of the restatement reduced net income by $311,113, net of
tax and reduced earnings per share from $0.38 to $0.10 for the year ended
December 31, 2004. The restatements for the quarters reduced net income by
$109,806, net of tax and reduced earnings per share from $0.13 to $0.03 for the
period ended March 31, 2005, and reduced net income by $93,104, net of tax and
reduced earnings per share from $0.12 to $0.03 for the period ended June 30,
2005.
In light of the restatement, readers should no longer rely on our previously
filed financial statements and other financial information for the year ended
December 31, 2004 and the quarters ended March 31, 2005 and June 30, 2005.
We have discussed the matters disclosed in this current report on Form 8-K with
Robison, Hill and Co.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GFR PHARMACEUTICALS, INC.
(Registrant)
Date: November 18, 2005
/s/ Richard Pierce
Richard Pierce,
President, C.E.O. and Director
3
Proposed Form 10-KSB/A
U.S. Securities and Exchange Commission
Washington, Dc 20549
FORM 10-KSB/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
-----------------
Commission file number 000-27959
GFR Pharmaceuticals, Inc.
-------------------------
(Name of small business issuer in its charter)
Nevada 77-0517964
- --------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Suite 11405 - 201A Street, Maple Ridge, British Columbia V2X 0Y3
(Address of principal executive office) Zip/Postal Code
Issuer's telephone number: (604) 460-8440
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes (
X ) NO ( ).
Check here if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. ( X )
Issuer's revenues for its most recent fiscal year, were $5,859,763 .
-----------
1
Issuer's Common Shares outstanding at December 31, 2004 was 1,079,940.
The aggregate market value of voting and non-voting common equity held by
non-affiliates as of April 5, 2005 was $127,485, computed based on the average
bid and asked price of such common equity as of April 5, 2005.
Except for the historical information contained herein, the matters set
forth in this Form 10- KSB are forward looking statements within the meaning of
the "Safe Harbor" provision of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risk and uncertainties
that may cause actual results to differ materially. These forward-looking
statements speak only as of the date hereof and Laredo Investment Corp.
disclaims any intent or obligation to update these forward-looking statements.
Documents Incorporated by Reference: Certain exhibits
Explanatory Note
We are filing this Amendment No. 1 to our Annual Report on Form 10-KSB for the
year ended December 31, 2004 to respond to certain comments received by us from
the Staff of the Securities and Exchange Commission ("SEC"). We have restated
our balance sheet at December 31, 2004, and statements of income, stockholders'
equity and cash flows for the year ended December 31, 2004. The restatement
impacts the year ended December 31, 2004, but has no effect on the financial
statements issued in prior fiscal years. The restatement corrects an error
within the currency translation adjustment, which was expensed in error. The
impact of the restatement reduced net income by $311,113, net of tax and reduced
earnings per share from $0.38 to $0.10 for the year ended December 31, 2004.
For convenience and ease of reference we are filing this Annual Report in its
entirety with the applicable changes. Unless otherwise stated, all information
contained in this amendment is as of April 13, 2005, the filing date of our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004.
Accordingly, this Amendment No. 1 to the Annual Report on Form 10-KSB/A should
be read in conjunction with our subsequent filings with the SEC.
2
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development
GFR Pharmaceuticals, Inc. (Formerly Laredo Investment Corp.) was incorporated
under the laws of the State of Nevada on December 18, 1996. GFR Pharmaceuticals,
Inc. ceased all operating activities during the period from December 18, 1996 to
July 9, 1999 and was considered dormant. On July 9, 1999, GFR Pharmaceuticals,
Inc. obtained a certificate of renewal from the State of Nevada. From July 9,
1999 to January 21, 2000, GFR Pharmaceuticals, Inc. was in the development
stage.
On January 21, 2000, the Company entered into an Acquisition Agreement with GFR
Pharm, Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia corporation,
(GFR), Richard Pierce and Lucretia Schanfarber (the GFR Majority Shareholders)
to acquire their shares representing 100% of the outstanding common stock of GFR
in exchange for 19,000,000 newly issued shares of Laredo's restricted common
stock. The transaction was recorded as a reverse acquisition. GFR was
incorporated in March 1997 as Helm Developments Ltd. In June 1998, the Company
formally changed its name to GFR Nutritionals Ltd. GFR was 100% owned by the
President and CEO, Richard Pierce from inception until January 17, 2000, when a
10% interest was acquired by Lucretia Schanfarber. Business operations began in
October 1998 after acquiring manufacturing equipment and arranging to
manufacture nutritional supplements under a private label contract.
On June 21, 2000, the Company entered into an Acquisition Agreement with
Nutritionals (USA) Direct.Com, a Washington corporation, (NDC), to acquire 100%
of the outstanding common stock of NDC in exchange for $1,000. The transaction
has been recorded as a purchase. NDC operations were wound down in October 2002
and the company became dormant.
On November 1, 2000, GFR Pharmaceuticals, Inc. entered into an Acquisition
Agreement with R & L Health, Inc., a British Columbia corporation, (R&L), to
acquire 100% of the outstanding common stock of R&L in exchange for $0.01. The
transaction was recorded as a purchase.
On April 5, 2004, GFR Nutritionals, Ltd. and R&L Health, Inc. changed its name
to GFR Pharma, Inc. and GFR Health, Inc., respectively.
On August 9, 2004, Laredo Investment Corp. changed its name to GFR
Pharmaceuticals, Inc.
Narrative Description of the Business
GFR Pharma, Ltd. (Formerly GFR Nutritionals Ltd.), GFR Pharmaceuticals, Inc.'s
wholly owned subsidiary is an established manufacturer of quality nutritional
supplement products. GFR Pharma, Ltd. (Formerly GFR Nutritionals Ltd.), operates
a full service manufacturing facility that produces natural-source nutritional,
vitamin, mineral, herbal sports nutrition products and over the counter
pharmaceutical products which are sold on a private label basis to wholesale and
retail clients. GFR Health, Inc. (Formerly R&L Health Inc.), GFR
Pharmaceuticals, Inc.'s wholesale division markets products manufactured by GFR
to mass market retailers.
3
Nutritional supplements are being increasingly recognized by the medical and
scientific communities as an integral component of a healthy lifestyle. Much of
the growth in this industry is driven by six key factors:
o Positive publicity - For several years, medical journals and
news reports have widely and consistently publicized the
positive effects of nutritional supplements. Many of these
reports focus on the correlation between consumed nutrients
and the reduced incidence of certain diseases. As a result,
the nutritional supplement industry has experienced greater
acceptance and popularity.
o Increased research - The more the scientific community learns
about the human body, more is proved that an individual's diet
and health are undoubtedly connected. Government agencies,
universities, and private companies are increasing their
sponsorship of research assessing the benefits of nutritional
supplements and herbs.
o Favorable regulatory environment - The US Dietary Supplement
Health and Education Act (DSHEA) created a set of guidelines
specific to the supplement industry and established a
regulatory environment which allows responsible nutrition
companies to thrive and allows the industry to regulate itself
with supervision by the FDA. Health Canada has followed suit
and defined Good Manufacturing Practices, with which
compliance in the industry is voluntary.
o Mass market distribution - Nutritional supplements, including
all-natural products, vitamins, minerals and herbs, are
increasingly sold in mass volume retail stores. Due to this
new market channel, millions of shoppers are exposed to these
products as they are introduced into the mainstream.
o Ageing of the population - The largest demographic group in
the history of North America is now turning 50 years old. Over
the next 15 years, approximately 80 million more "baby
boomers" will join this group of individuals who are concerned
with preserving their health and fitness, directly increasing
the demand for nutritional supplements.
o Trend toward preventative care - The collective health
consciousness of the population that began over 20 years ago
is gaining momentum and, along with regular exercise, it
embraces nutritional supplements.
According to the Nutrition Business Journal, the US nutrition industry, which
includes natural foods, dietary supplements, and natural personal care products,
has grown 14-16% annually over the past two years and is expected to sustain
double digit growth for the near future. The Nutrition Business Journal states
that the US nutrition industry generated $28.8 billion of consumer sales in
2002. Canadian sales tend to approximate 10% of the US market.
4
Principal Products: GFR Pharmaceuticals, Inc. currently manufactures 300
different products in capsule, tablet, powder, and liquid form. GFR specializes
in production of:
- Vitamin and mineral formulations
- Indication and herbal formulas (nutritional and herbal)
- Nutritional herbal formulas for women
- Nutritional herbal formulas for men
- "Boomer nutrition" - nutritional and herbal formulas for 50+
- Sports nutrition products
- Family fitness products
- Weight loss and diet products
- Soy and whey protein shakes
- Green food powders
- Daily nutrient packets
Markets: Established market channels for nutritional products within the
industry include distribution through health food retail stores, mass market
retail through department and grocery stores, multi-level marketing, mail order,
health practitioners, and the Internet.
Currently, GFR Pharmaceuticals, Inc. manufactures nutritional supplements under
private label contracts with wholesale distributors. During 2004 and 2003, one
private label customer, Prairie Naturals, Inc. has comprised approximately 41%
and 45%, respectively of GFR Pharmaceuticals, Inc.'s sales.
GFR Pharmaceuticals, Inc.'s primary goal is to achieve a level of annual
revenues in excess of $8.0 million by the fiscal year ended 2005 resulting from
expanded marketing efforts and vertical integration through acquisitions and
expansion into new markets. GFR Pharmaceuticals, Inc. is also pursing
opportunities to market direct sales to consumers through the Internet.
Competition: The main competitors in the Canadian natural health product
industry are privately owned corporations. A couple of larger companies that
manufacture their products for retail distribution are Jamieson Laboratories and
Natural Factors. There are also many companies which manufacture only for
private label sales. Many smaller manufacturers have their products sold
strictly in specialty health food and nutrition stores.
Natural health product manufacturing has significant cost barriers for new start
up companies. Start up costs include set up of manufacturing facilities through
purchase of equipment, acquiring skilled labor and research and implementation
of processes acceptable to government standards.
Regulation: In both the US and Canada, the natural health products industry is
self regulating. In Canada, products are not required to be approved prior to
introduction to the market, however Health Canada has defined Good Manufacturing
Practices, with which compliance is voluntary. Health Canada has indicated that
stricter regulations for natural health products will be enacted in future
years.
5
In 1996, US Congress enacted the Dietary Supplement Health and Education Act
(DSHEA) which included a set of guidelines specific to the supplement industry
and established a self regulatory environment for the industry.
Employees: GFR Pharmaceuticals, Inc. currently has 55 employees. Executive
management and office administration personnel are comprised of 17 individuals.
Operations personnel is made up of 38 individuals, including the Quality Control
Director and Production Manager. Future employees will be hired as dictated by
increases in business volume.
ITEM 2. DESCRIPTION OF PROPERTY.
GFR Pharmaceuticals, Inc.'s operations are located in a building that is owned
by a major shareholder. The lease agreement is for a two year term ending
December 31, 2005. Under the terms of the lease agreement, the monthly rent
charge is approximately $4,000 ($5,000 Canadian), and GFR Pharmaceuticals, Inc.
is responsible for paying the property taxes, utility charges, and any costs of
repair and maintenance. Any repairs and maintenance expenses paid for by the
landlords are required to be reimbursed by GFR Pharmaceuticals, Inc. at cost
plus 15%. All other terms are consistent with those standard to lease
agreements.
Both GFR Pharmaceuticals, Inc.'s administration office and manufacturing
operations are located in the same premises. The total square footage of the
building is 10,000. The area used by manufacturing currently comprises 3,625 of
that total. In management's opinion, the space leased is sufficient to support
operational growth for the foreseeable future. Currently, production is only run
on one shift per day for five days each week. Production shifts can be increased
to a maximum of three shifts per day for seven days each week and still be
accommodated within the current space. The only potential requirement for
additional space could arise due to stock held on hand as business volumes
increase.
During 2002, GFR Pharmaceuticals, Inc. entered into a lease agreement for
warehouse space. The lease is month to month with a six month notice of
termination clause. Under the terms of the lease agreement, the monthly rent
charge is approximately $4,600 ($5,500 Canadian).
ITEM 3. LEGAL PROCEEDINGS.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for a vote of security holders of GFR Pharmaceuticals,
Inc. during the fourth quarter of the fiscal year ended December 31, 2004.
6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTER.
Market Information
GFR Pharmaceuticals, Inc.'s stock has been listed for sale on the OTC Electronic
Bulletin Board under the symbol "GFRP." The high and low bid prices of the
Common Stock of GFR Pharmaceuticals, Inc. have been as follows:
Period High Low
- --------------------------------------- ------------------
1st Qtr 2004 $ 0.100 $ 0.060
2nd Qtr 2004 0.110 0.040
3rd Qtr 2004 1.450 0.020
4thQtr 2004 1.300 0.350
1st Qtr 2003 $ 0.160 $ 0.020
2nd Qtr 2003 0.180 0.040
3rd Qtr 2003 0.160 0.050
4thQtr 2003 0.170 0.070
The above quotations reflect inter-dealer prices, without retail mark-up,
markdown, or commission and may not necessarily represent actual transactions.
Holders
There were approximately 18 holders of GFR Pharmaceuticals, Inc.'s 1,079,940
shares of common stock outstanding as of December 31, 2004.
Dividends
GFR Pharmaceuticals, Inc. has not declared any dividends since inception, and
has no present intention of paying any cash dividends on its common stock in the
foreseeable future. The payment by GFR Pharmaceuticals, Inc., of dividends, if
any, in the future, rests within the discretion of its Board of Directors and
will depend, among other things, upon GFR Pharmaceuticals, Inc.'s earnings, its
capital requirements and its financial condition, as well as other relevant
factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
We have restated our balance sheet at December 31, 2004, and statements of
income, stockholders' equity and cash flows for the year ended December 31,
2004. The restatement impacts the year ended December 31, 2004, but has no
effect on the financial statements issued in prior fiscal years. The restatement
corrects an error within the currency translation adjustment, which was expensed
7
in error. The impact of the restatement reduced net income by $311,113, net of
tax and reduced earnings per share from $0.38 to $0.10 for the year ended
December 31, 2004.
Plan of Operations
The Company is currently working on securing additional private label
manufacturing contracts. The key target for private label sales are wholesale
distributors of health food nutrition products.
Liquidity and Capital Resources
GFR Pharmaceuticals, Inc.'s working capital ratio was 1.35 at December 31, 2004
compared to 1.52 at December 31, 2003. Key contributing factors for this change
were the approximate $212,000 increase in accounts payable, an increase of
approximately $613,000 in the bank line and an increase in shareholder s
payables of approximately $254,000.
Current liabilities include as of December 31, 2004 and 2003, $139,159 and
$114,416 promissory note payable to a party related to the major shareholder,
which bears interest at 12% annually. These funds are repayable on demand
however, the request for repayment occurring at this time is not expected.
GFR Pharmaceuticals, Inc. has a small business loan outstanding with a balance
of $26,959 and $56,455 as of December 31, 2004 and 2003. This loan bears
interest at 10.15% and matures on March 15, 2004. The Company has a second
business loan with an outstanding balance of $37,162 and $0 as of December 31,
2004 and 2003, respectively. This loan bears interest at prime plus 1 percent,
maturing August 23, 2009.
GFR Pharmaceuticals, Inc. acquired an additional $258,000 of manufacturing
equipment in 2004 in order to meet demands for new private label sales. An
additional $125,000 of manufacturing equipment is expected to be needed in 2005.
Plant renovations costing $9,400 were finished in 2003. GFR Pharmaceuticals,
Inc. is also expected to spend $20,000 for plant renovations to be completed in
2004. GFR Pharmaceuticals, Inc. acquired new software during 2004 at a cost of
$20,000. Increased sales volumes will also necessitate hiring additional
operations, sales and administrative personnel.
Results of Operations
2004 2003
---------------- ----------------
Sales $ 5,859,763 $ 5,042,189
Cost of Sales 4,207,405 3,712,178
Gross Profit 1,652,358 1,330,011
Gross Profit Margin 28.20% 26.38%
Administrative Expenses 1,490,334 889,320
Administrative Expenses as a % of Sales 25.43% 17.64%
8
For the year ended December 31, 2004, sales were approximately $818,000 higher
than 2003 and are expected to continue to grow during 2005. During 2004 and
2003, 41% and 45% of sales, respectively were to Prairie Naturals Inc., a
wholesale distributor for which GFR Pharmaceuticals, Inc. manufactures private
label products. GFR Pharmaceuticals, Inc. has a verbal arrangement to
manufacture, on an as-ordered basis, private label products that Prairie
Naturals Inc. distributes under the Prairie Naturals Inc. name. GFR
Pharmaceuticals, Inc. also has an exclusive written contract to manufacture one
product that Prairie Naturals Inc, distributes for a third party private label.
Operating margins in 2004 were 28.20% of sales revenue, 1.82% higher than 2003.
Cost of Sales includes the cost of raw materials used in manufacturing,
production labor costs and an applicable share of overhead expenses. The
increase in margin in 2004 can be attributed to a decrease in machine downtime
as compared to 2003. General and administrative expenses were 25.43% of sales in
2004, 7.79% higher than 2003. The increase in expense was due to increases in
staffing and an increase in marketing and advertising expenditure.
GFR Pharmaceuticals, Inc. anticipates realizing economies of scale as production
volumes increase. Selling and marketing expenses increased during 2004 due to
GFR Pharmaceuticals, Inc.'s plan to expand marketing efforts.
Income Taxes
The effective tax rate decreased from approximately 48 percent at December 31,
2003 to approximately 22 percent at December 31, 2004. This decrease was due to
differences in the recognition of income and expenses for income tax reporting
and financial statement reporting purposes. The primary difference are the
result of excess depreciation and capital cost allowance for income tax purposes
over the amount of depreciation expense for financial reporting purposes.
Foreign Currency Gains and Loses
Foreign currency gains and losses are the result of fluctuations in the exchange
rate between Canada and our Foreign customers and vendors. Our foreign currency
gains and losses result primarily due to the our purchasing of raw materials in
foreign currencies from both inside and outside Canada. During 2004 we purchased
approximately 43% of our raw materials in U.S. dollars compared to 32% for 2003.
We also have sales to foreign countries amounting to approximately 1% of our
total sales for 2004 and none in 2003. Foreign currency gains increased by
$32,936 to $34,419 in 2004 from $1,483 in 2003. We expect or purchases and sales
in foreign currencies to remain relatively constant over the next twelve months.
Because exchange rates are outside our control, however, exchange gains and
losses are unpredictable.
9
Effect of Inflation
GFR Pharmaceuticals, Inc. does not anticipate any financial impact, whether
beneficial or detrimental, as a result of inflation.
Critical Accounting Policies
Our critical accounting policies are those which we believe require significant
judgements, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. A discussion of our critical accounting
policies is set forth below. A complete discussion of all our accounting
policies can be found in the Notes to our Financial Statements included as part
of this Report.
Inventories
Raw materials inventory is stated at a lower of weighted average cost and
replacement value. Inventories of work in progress is stated at the lower of
weighted average cost and net realizable value.
Revenue recognition
Revenue is recognized from sales of products at the time of shipment to
customers.
Foreign currency translation
The Company's functional currency is the Canadian dollar and the reporting
currency is the U.S. Dollar. All elements of financial statements are translated
using a current exchange rate. For assets and liabilities, the exchange rate at
the balance sheet date is used. Stockholders' Equity is translated using the
historical rate. For revenues, expenses, gains and losses the weighted average
exchange rate for the period is used. Translation gains and losses are included
as a separate component of stockholders' equity. Gain and losses resulting from
foreign currency transactions are included in net income.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles required management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
10
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, which addresses the consolidation of business
enterprises (variable interest entities), to which the usual condition of
consolidation, a controlling financial interest, does not apply. FIN 46 requires
an entity to assess its business relationships to determine if they are variable
interest entities. As defined in FIN 46, variable interests are contractual,
ownership or other interests in an entity that change with changes in the
entity's net asset value. Variable interests in an entity may arise from
financial instruments, service contracts, guarantees, leases or other
arrangements with the variable interest entity. An entity that will absorb a
majority of the variable interest entity's expected losses or expected residual
returns, as defined in FIN 46, is considered the primary beneficiary of the
variable interest entity. The primary beneficiary must include the variable
interest entity's assets, liabilities and results of operations in its
consolidated financial statements. FIN 46 is immediately effective for all
variable interest entities created after January 31, 2003. For variable interest
entities created prior to this date, the provisions of FIN 46 were originally
required to be applied no later than our first quarter of Fiscal 2004. On
October 8, 2003, the FASB issued FASB Staff Position (FSP) FIN 46-6, EFFECTIVE
DATE OF FASB INTERPRETATION NO. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES.
The FSP provides a limited deferral (until the end of our second quarter of
2004) of the effective date of FIN 46 for certain interests of a public entity
in a variable interest entity or a potential variable interest entity. We will
continue to evaluate FIN 46, but due to the complex nature of the analysis
required by FIN 46, we have not determined the impact on our consolidated
results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. In
particular, this Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. We adopted this standard for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on our consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This Statement
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities. We adopted this standard for financial instruments entered into or
modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
material impact on our consolidated results of operations or financial position.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS - AN AMENDMENT
OF ARB NO. 43, CHAPTER 4. This Statement amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4 previously stated that"...under
some circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs maybe so abnormal as to require treatment
as current period charges..." This Statement requires that those items be
recognized as current-period charges regardless of whether they meet
11
the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after Jun 15, 2005.
Management does not believe the adoption of this Statement will have any
immediate material impact on the Company.
On December 16, 2004, the FASB issued SFAS No. 123 ( R ), SHARE-BASED PAYMENT,
which is an amendment to SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
This new standard eliminates the ability to account for share-based compensation
transactions using Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and generally requires such
transactions to be accounted for using a fair-value based method and the
resulting cost recognized in our financial statements. This new standard is
effective for awards that are granted, modified or settled in cash in interim
and annual periods beginning after June 15, 2005. In addition, this new standard
will apply to unvested options granted prior to the effective date. We will
adopt this new standard effective for the fourth fiscal quarter of 2005, and
have not yet determined what impact this standard will have on our financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 152, ACCOUNTING FOR REAL ESTATE
TIME-SHARING TRANSACTIONS, which amends FASB statement No. 66, Accounting for
Sales of Real Estate, to reference the financial accounting and reporting
guidance for real estate time-sharing transactions that is provided in AICPA
Statement of Position (SOP) 04-2, Accounting for Real Estate Time- Sharing
Transactions. This statement also amends FASB Statement No. 67, Accounting for
Costs and Initial Rental Operations of Real Estate Projects, to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP04-2.
This Statement is effective for financial statements for fiscal years beginning
after June 15, 2005. Management believes the adoption of this Statement will
have no impact on the financial statements of the Company.
In December 2004, the FASB issued SFAS No. 153, EXCHANGE OF NONMONETARY ASSETS.
This Statement addresses the measurement of exchanges of nonmonetary assets. The
guidance in APB Opinion NO. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
applications is permitted for nonmonetary assets exchanges incurred during
fiscal years beginning after the date of this statement is issued. Management
believes the adoption of this Statement will have not impact on the financial
statements fo the Company.
12
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company and supplementary data are included,
preceding the signature page to this report. See Item 13. for a list of the
financial statements and financial statement schedules included.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
There have been no disagreements with accountants on accounting and financial
disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
RESTATEMENT
On September 23, 2005, our independent auditors, Robison, Hill & Co., informed
us that they had discovered and error in our financial statements for the year
ended December 31, 2004.
The error relates to the translation of our financial statements from Canadian
dollars to U.S. dollars for reporting purposes. The error impacts the year ended
December 31, 2004, but has no effect on the financial statements issued in prior
fiscal years. The restatement corrects an error within the currency translation
adjustment, which should be reported in the equity section of the balance sheet,
but was reported in error in the income statement. The impact of the restatement
reduced net income by $311,113, net of tax and reduced earnings per share from
$0.38 to $0.10 for the year ended December 31, 2004.
Following our discussion with Robison, Hill & Co., we determined that the
December 31, 2004 financial statements should be restated to reflect the
correction of this error. We have restated our balance sheet at December 31,
2004, and statements of income, stockholders' equity and cash flows for the year
ended December 31, 2004.
In connection with the restatement, the principal executive officer and
principal financial officer of GFR Pharmaceuticals, Inc. have reevaluated GFR
Pharmaceuticals, Inc.'s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) and
identified the a material weakness in internal controls over financial reporting
with respect to a failure to ensure correct reporting of foreign currency
translation adjustments.
Solely as a result of this material weakness, we conclude that our disclosure
controls and procedures were not effective as of December 31, 2004, March 31,
2005, or June 30, 2005.
REMEDIATION OF MATERIAL WEAKNESS IN INTERNAL CONTROL
We are confident that, as of this filing, we have fully remediated the material
weakness in our internal control over financial reporting with respect to
accounting for foreign currency translation adjustments. The remedial actions
included changes to our software properly position the translation
13
adjustments in the equity section of the balance sheet, improved training,
education and accounting reviews designed to ensure that all relevant personnel
involved in foreign currency translation adjustments understand and apply proper
reporting of currency translation adjustments.
In connection with this amended Form 10-KSB, the principal executive officer and
principal financial officer of GFR Pharmaceuticals, Inc. have reevaluated our
disclosure controls and procedures as currently in effect, including the
remedial actions discussed above, and have concluded that, as of this date, our
disclosure controls and procedures are effective.
As previously reported, there were no significant changes in GFR
Pharmaceuticals, Inc. internal control over financial reporting during the
Company's fourth fiscal quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. However, subsequent to June 30, 2005, we took remedial
actions described above.
ITEM 8B. OTHER INFORMATION
None
14
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Business Experience Of Management
Richard Pierce, Age 44, President and CEO, Director, Chairman of the Board of
Directors.
Mr. Pierce is the President and Chief Executive Officer of GFR Pharmaceuticals,
Inc. In his role he oversees all aspects of operations, administration and
financing of GFR Pharmaceuticals, Inc.
Mr. Pierce has almost 16 years experience in the natural health industry. From
1997 to 1998, prior to founding GFR Nutritionals Ltd., Mr. Pierce worked as a
Business Development Coordinator for Integrated Equity Management. He was
involved in marketing bridge financing arrangements to private corporations. For
one year spanning 1996 and 1997, Mr. Pierce worked as an Industry Consultant for
Natraceuticals Inc. He specialized in the development and marketing of new
sports nutrition products.
For ten years prior to joining Natraceuticals Inc, Mr. Pierce founded and acted
as President and CEO of NHF (Nutrion Health and Fitness Inc.). This company
researched, designed, formulated, manufactured and marketed four sports
nutrition product lines throughout Canada.
In 1983, Mr. Pierce founded Natural Health Products and acted as President and
CEO. Natural Health Products designed, formulated, manufactured and marketed the
first sports nutrition line in Atlantic Canada.
Marc Casavant, Age 42, Chief Financial Officer
Mr. Casavant joined GFR Pharmaceuticals, Inc. as Chief Financial Officer in
April 2000 through April 2001 and from October 2002 to present. During his
absence he took a leave of abscence. From March 1998 to April 2000, he was Vice
President of Operations for Basic Sports Nutrition, Surrey, British Columbia.
During 1996 to March 1998 Mr. Casavant served as Plant Manager for Nu-Life
Nutrition, Maple Ridge, British Columbia. During 1995 through 1997 he was
Controller of Nutrion Health & Fitness, Maple Ridge, British Columbia. During
1993 to 1995, Mr. Casavant was Controller of Majestic Marketing Ltd., White
Rock, British Columbia. From 1989 to 1993, he was the Senior Accountant for Ebco
Industries, Ltd., in Richmond, British Columbia. Mr. Casavant obtained a
Business Administration Diploma in 1985 from Okanagan College, Kelowna, British
Columbia.
Rose Marie Pierce, Age 55, Director
Ms. Pierce has been owner operator of Sunstreams Health Foods in Calgary ALTA
since 1998, and from 1995 to 1998 worked as a pharmacist at various locations
for Coop Super Markets in Calgary ALTA.
15
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's board of directors does not have an "audit committee
financial expert," within the meaning of such phrase under applicable
regulations of the Securities and Exchange Commission, serving on its audit
committee. The board of directors believes that all members of its audit
committee are financially literate and experienced in business matters, and that
one or more members of the audit committee are capable of (i) understanding
generally accepted accounting principles ("GAAP") and financial statements, (ii)
assessing the general application of GAAP principles in connection with our
accounting for estimates, accruals and reserves, (iii) analyzing and evaluating
our financial statements, (iv) understanding our internal controls and
procedures for financial reporting; and (v) understanding audit committee
functions, all of which are attributes of an audit committee financial expert.
However, the board of directors believes that there is not any audit committee
member who has obtained these attributes through the experience specified in the
SEC's definition of "audit committee financial expert." Further, like many small
companies, it is difficult for the Company to attract and retain board members
who qualify as "audit committee financial experts," and competition for these
individuals is significant. The board believes that its current audit committee
is able to fulfill its role under SEC regulations despite not having a
designated "audit committee financial expert."
Code of Ethics
We do not currently have a Code of Ethics applicable to our principal executive,
financial and accounting officers, however; the senior financial officer Marc
Casavant carries out his function under the code of ethics and rules of
professional conduct as outlined by the Society of Certified General Accountants
of British Columbia.
ITEM 10. EXECUTIVE COMPENSATION.
Summary Compensation Table
For the year ended December 31, 2004 and 2003, the President and CEO received in
compensation $80,000 ($96,000Canadian) and $72,000 ($96,000 Canadian) and $8,000
($9,600 Canadian) and $7,200 ($9,600 Canadian) in automobile allowance pursuant
to an oral agreement.
GFR Pharmaceuticals, Inc. has not granted any options to Directors, Officers, or
Key Personnel.
Compensation Of Directors
The members of GFR Pharmaceuticals, Inc.'s Board of Directors are reimbursed for
actual expenses incurred in attending Board meetings.
16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Management and Certain Beneficial Owners holding five
percent or greater of the 1,079,940 shares of common stock outstanding as of
December 31, 2004.
Title of Name and Address Amount and Nature % of
Class of Beneficial Owner of Beneficial Ownership Class
- -------------------- ------------------------------ ----------------------------------- ------------------
Common Richard Pierce (1) 570,000 52.78%
President, CEO, Director
Lucretia Schanfarber (1) 63,333 5.86%
All officers and Directors 570,000 52.78%
as a Group (3 persons)
(1) c/o Suite 11405 - 201A Street, Maple Ridge, British Columbia V2X 0Y3
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As at December 31, 2004 and 2003, accounts payable include approximately
$253,409 ($305,003 Canadian) and $0 ($0 Canadian) owing to a major shareholder,
Richard Pierce, who is also the CEO and Chairman of the Board of GFR
Pharmaceuticals, Inc. Mr. Pierce personally borrowed and provided the funds to
GFR, a temporary cash injection required to pay for materials required to
manufacture inventory for a sales promotion with Costco Canada. The funds will
be repaid to Mr. Pierce by January 31, 2005 or at the time that Costco Canada
pays for the inventory.
Current liabilities include a $139,159 promissory note payable to a party
related to the major shareholder, which bears interest at 12% annually. These
funds are repayable on demand however, the request for repayment occurring at
this time is not expected. The major shareholder is Richard Pierce and the note
holders are Francina and George Pierce, Richard's mother and father. The funds
were borrowed in October 1998 and used to provide start up and operating capital
to the business.
GFR Pharmaceuticals, Inc.'s operations are located in a building that is owned
by a major shareholder, Richard Pierce, and his parents. The lease agreement is
for a two year term ending December 31, 2005. Under the terms of the lease
agreement, the yearly rent charge is approximately $50,000 ($60,000 Canadian)
per year. Paid monthly in twelve equal installments and GFR Pharmaceuticals,
Inc. is responsible for paying the property taxes, utility charges, and any
costs of repair and maintenance. Any repairs and maintenance expenses paid for
by the landlords are required to be reimbursed by GFR Pharmaceuticals, Inc. at
cost plus 15%. All other terms are consistent with those standard to lease
agreements.
GFR Pharmaceuticals, Inc. has also entered into a lease agreement for certain
manufacturing equipment with the Company's major shareholder and other parties.
The rental charges are approximately $36,276 ($43,531 Canadian) per year. The
equipment leased from major shareholder
17
Richard Pierce expires June 30, 2005, at which time the equipment will be owned
by GFR Pharmaceuticals, Inc. The equipment consisted of a tableting machine and
other various items as listed on the lease agreement, (See exhibit 10.4). The
cost of the equipment was approximately $126,000 Canadian. The A.P.R. on this
lease is 16% compared to a quote from a third party leasing company of 18%.
Richard Pierce, CEO of GFR Pharmaceuticals, Inc. and Lucretia Schanfarber,
former Vice President of Sales, hold contracts with GFR Health, Inc that
licenses their names and images to GFR Health for use on certain products. Each
are paid a quarterly bonus of 10% of GFR Health, Inc. profits before income
taxes, depreciation, and amortization are deducted as expenses. As of December
31,2004 and 2003, $59,783 and $105,192 in bonuses have been paid and $15,486 and
$30,743 have been accrued.
As of April 1, 2004, Ms. Schanfarber is no longer being paid this licence fee as
her name and image has been removed from all products.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report under Part II, Item 8:
Exhibits as required by Item 601 of Regulation S-B
Exhibit Number Description
3.1 Articles of Incorporation as amended (1)
3.2 Bylaws (1)
10.1 Office and production space building lease
10.2 Warehouse space lease
10.3 Additional warehouse space lease
10.4 Equipment Lease
10.5 Bonus Agreement
10.6 Loan Agreement/Promissory Note 1
10.7 Loan Agreement/Promissory Note 2
14.1 Code of Ethics
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(1) Incorporated by reference to GFR Pharmaceuticals, Inc.'s report on Form
10SB12G dated November 5, 1999
18
(b) Reports of Form 8-K
On November 2, 2003, the Company filed a Current Report, to announce
the removal of Mr. Lucretia Schanfarber as member of the board of
directors under Item 6.
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
The following is a summary of the fees billed to us by Robison, Hill &
Company for professional services rendered for the years ended December 31, 2003
and 2002:
Service 2004 2003
- -------------------------------- ------------------ -----------------
Audit Fees $ 12,600 $ 14,550
Audit Related Services - -
Tax Fees 300 300
All Other Fees - -
------------------ -----------------
Total $ 12,900 $ 14,850
================== =================
AUDIT FEES. Consists of fees billed for professional services rendered for the
audits of our financial statements, reviews of our interim consolidated
financial statements included in quarterly reports, services performed in
connection with filings with the Securities & Exchange Commission and related
comfort letters and other services that are normally provided by Robison, Hill &
Company in connection with statutory and regulatory filings or engagements.
TAX FEES. Consists of fees billed for professional services for tax compliance,
tax advice and tax planning. These services include assistance regarding
federal, state and local tax compliance and consultation in connection with
various transactions and acquisitions.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors The Audit Committee is to pre-approve all audit and
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services
as allowed by law or regulation. Pre-approval is generally provided for up to
one year and any pre-approval is detailed as to the particular service or
category of services and is generally subject to a specifically approved amount.
The independent auditors and management are required to periodically report to
the Audit Committee regarding the extent of services provided by the independent
auditors in accordance with this pre-approval and the fees incurred to date. The
Audit Committee may also pre-approve particular services on a case-by-case
basis.
The Audit Committee pre-approved 100% of the Company's 2003 audit fees,
audit-related fees, tax fees, and all other fees to the extent the services
occurred after May 6, 2003, the effective date of the Securities and Exchange
Commission's final pre-approval rules.
19
GFR PHARMACEUTICALS, INC.
AND SUBSIDIARIES
(FORMERLY LAREDO INVESTMENT CORP.)
-:-
INDEPENDENT AUDITOR'S REPORT
DECEMBER 31, 2004 AND 2003
CONTENTS
Page
Independent Auditor's Report.............................................F - 1
Consolidated Balance Sheets
December 31, 2004 and 2003.............................................F - 2
Consolidated Statements of Operations for the
Years Ended December 31, 2004 and 2003.................................F - 4
Consolidated Statement of Stockholders' Equity for the
Years Ended December 31, 2004 and 2003.................................F - 5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2004 and 2003.................................F - 6
Notes to Consolidated Financial Statements...............................F - 7
INDEPENDENT AUDITOR'S REPORT
GFR Pharmaceuticals, Inc. and Subsidiaries
(Formerly Laredo Investment Corp.)
We have audited the accompanying consolidated balance sheets of GFR
Pharmaceuticals, Inc. and Subsidiaries (Formerly Laredo Investment Corp.) as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, cash flows, and stockholders' equity for the two 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 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 financial statements referred to above present
fairly, in all material respects, the financial position of GFR Pharmaceuticals,
Inc. and Subsidiaries (Formerly Laredo Investment Corp.) as of December 31, 2004
and 2003, and the results of its operations and its cash flows for the two years
ended December 31, 2004 in conformity with accounting principles generally
accepted in the United States of America.
F - 1
As Discussed in Note 1 to the financial statements, the Company's 2004
Consolidated Statement of Income previously reported net income as $414,263
should have been $103,081. This discovery was made subsequent to the issuance of
the financial statements. The financial statements have been restated to reflect
this correction.
Respectfully Submitted,
/s/ Robison, Hill & Co.
Certified Public Accountants
Salt Lake City, Utah
April 5, 2005, except as to the restatement discussed in Note 1 to the
consolidated financial statements which is as of September 23, 2005
F - 2
GFR PHARMACEUTICALS, INC, AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
------------------ ------------------
(Restated)
ASSETS
Current Assets:
Cash and Cash Equivalents $ - $ -
Accounts Receivable 1,537,168 735,323
Inventory 1,502,719 1,030,190
Prepaid expense - 4,518
------------------ ------------------
Total Current Assets 3,039,887 1,770,031
------------------ ------------------
Fixed Assets:
Manufacturing Equipment 615,409 356,990
Office Equipment 262,320 222,503
Furniture & Fixtures 4,939 3,525
Leasehold improvements 67,682 51,443
Property Held Under Capital Lease 432,928 432,928
------------------ ------------------
1,383,278 1,067,389
Less Accumulated Depreciation (415,199) (244,503)
------------------ ------------------
968,079 822,886
------------------ ------------------
TOTAL ASSETS $ 4,007,966 $ 2,592,917
================== ==================
F - 3
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
CONSOLIDATED BALANCE SHEETS
(Continued)
December 31, December 31,
2004 2003
------------------ ------------------
(Restated)
LIABILITIES
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 1,093,235 $ 881,250
Bank Overdraft 24,306 54,463
Bank Line 643,902 30,800
Related Party Loans 139,159 114,416
Shareholder Payables 253,409 -
Current Portion of Obligations Under Capital Leases 57,721 62,333
Current Portion Long-Term Debt 34,468 24,275
------------------ ------------------
Total Current Liabilities 2,246,200 1,167,537
Long-Term Debt 29,653 32,180
Lease Obligations 114,636 159,737
Deferred Tax Liability 169,986 157,540
------------------ ------------------
Total Liabilities 2,560,475 1,516,994
------------------ ------------------
STOCKHOLDERS EQUITY
Common Stock - $0.001 par value, 100,000,000
shares authorized, 1,079,940 shares issued and
outstanding at December 31, 2004 and 2003 1,080 1,080
Additional Paid-in Capital 698,961 698,961
Currency Translation Adjustment 353,914 85,427
Retained Earnings (Deficit) 393,536 290,455
------------------ ------------------
Total Stockholders' Equity 1,447,491 1,075,923
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,007,966 $ 2,592,917
================== ==================
The accompanying notes are an integral part of these financial statements.
F - 4
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended
December 31,
--------------------------------------
2004 2003
------------------ ------------------
(Restated)
REVENUES
Sales $ 5,859,763 $ 5,042,189
Cost of Sales 4,207,405 3,712,178
------------------ ------------------
Gross Margin 1,652,358 1,330,011
------------------ ------------------
EXPENSES
Selling & Marketing 378,396 113,487
General & Administrative 276,934 291,879
Consulting 75,539 100,532
Depreciation Expense 170,696 95,356
Salaries & Wages 588,769 288,066
------------------ ------------------
1,490,334 889,320
------------------ ------------------
Net Income from Operations 162,024 440,691
Other Income (Expense)
Interest, Net (64,114) (45,863)
Currency Exchange, Net 34,419 1,483
------------------ ------------------
Net Income (Loss) Before Income Taxes 132,329 396,311
Income Tax (Expense) Benefit (29,248) (191,514)
------------------ ------------------
NET INCOME (LOSS) $ 103,081 $ 204,797
================== ==================
Basic Earnings (Loss) Per Share $ 0.10 $ 0.19
================== ==================
Weighted Average Shares Outstanding 1,079,940 1,079,940
================== ==================
The accompanying notes are an integral part of these financial statements.
F - 5
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004 AND 2003
Cumulative Retained
Common Stock Paid-In Translation Earnings /
Shares Par Value Capital Adjustment (Deficit) Total
------------- ----------- ---------- ----------------- ---------------- ------------
Balance at December 31, 2001 32,300,000 $ 32,300 $ 648,050 $ (4,683) $ 85,658 $ 761,325
February 28, 2003, Shares Issued
to retire note payable. 98,460 98 19,593 - - 19,691
Net Income - - - - 204,797 204,797
Currency Translation - - - 90,110 - 90,110
------------- ----------- ---------- ----------------- ---------------- ------------
Total Comprehensive Income - - - 90,110 204,797 294,907
------------- ----------- ---------- ----------------- ---------------- ------------
Balance at December 31, 2003 32,398,460 32,398 667,643 85,427 290,455 1,075,923
Retroactive Adjustment for 1:30
Reverse Stock Split August 9, 2004 (31,318,520) (31,318) 31,318 - - -
------------- ----------- ---------- ----------------- ---------------- ------------
Restated Balance at December 31, 2003 1,079,940 1,080 698,961 85,427 290,455 1,075,923
Net Income - - - - 103,081 103,081
Currency Translation - - - 268,487 - 268,487
------------- ----------- ---------- ----------------- ---------------- ------------
Total Comprehensive Income - - - 268,487 103,081 371,568
------------- ----------- ---------- ----------------- ---------------- ------------
Balance at December 31, 2004 (Restated) 1,079,940 $ 1,080 $ 698,961 $ 353,914 $ 393,536 $ 1,447,491
============= =========== ========== ================= ================ ============
The accompanying notes are an integral part of these financial statements.
F - 6
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended
December 31,
-------------------------------------
2004 2003
------------------ ------------------
(Restated)
Cash Flows From Operating Activities
Net income (loss) for the period $ 103,081 $ 204,797
Adjustments to reconcile net loss to net cash
Provided by operating activities
Currency Translation Adjustment 268,487 90,110
Depreciation and Amortization 170,696 95,356
Decrease (Increase) in Receivables (801,830) (52,336)
Decrease (Increase) in Inventory (472,545) (465,814)
Decrease (Increase) in Prepaid Expense 4,518 20,652
Increase in Accounts Payable & Accrued Liabilities 211,984 265,753
Increase (Decrease) in Bank Overdraft (30,157) (26,813)
Increase in Deferred Tax Liability 12,446 73,596
------------------ ------------------
Net Cash Provided by (Used in) Operating Activities (533,320) 205,301
------------------ ------------------
Cash Flows From Investing Activities
Purchase of Property and Equipment (315,889) (252,221)
------------------ ------------------
Net Cash Used by Investing Activities (315,889) (252,221)
------------------ ------------------
Cash Flows From Financing Activities
Proceeds/Payments on Bank Line 613,102 30,800
Proceeds (Payments) Shareholder Payables 253,409 (26,658)
Proceeds (Payments) Long-term Debt/Capital Lease Obligations (17,302) 42,778
------------------ ------------------
Net Cash Provided by (Used in) Financing Activities 849,209 46,920
------------------ ------------------
Increase (Decrease) in Cash - -
Cash at beginning of period - -
------------------ ------------------
Cash at End of Period $ - $ -
================== ==================
Supplemental Disclosure of Interest and Income Taxes Paid
Interest paid during the period $ 64,114 $ 29,058
================== ==================
Income taxes paid during the period $ 138,527 $ 28,651
================== ==================
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Equipment acquired through Capital Lease $ 23,220 $ 73,140
================== ==================
Stock issued as payment on short-term notes payable $ - $ 19,691
================== ==================
The accompanying notes are an integral part of these financial statements.
F - 7
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for GFR Pharmaceuticals, Inc. and
Subsidiaries (Formerly Laredo Investment Corp.) is presented to assist in
understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Restatment of Previously Issued Financial Statements for the Year Ended December
31, 2004
We have restated our balance sheet at December 31, 2004, and statements
of income, stockholders' equity and cash flows for the year ended December 31,
2004. The restatement impacts the year ended December 31, 2004, but has no
effect on the financial statements issued in prior fiscal years. The restatement
corrects an error within the currency translation adjustment, which was
erroneously expensed. The impact of the restatement reduced net income by
$311,113, net of tax and reduced earnings per share from $0.38 to $0.10 for the
year ended December 31, 2004.
Organization and Basis of Presentation
The Company was incorporated under the laws of the State of Nevada on
December 18, 1996. The Company ceased all operating activities during the period
from December 18, 1996 to July 9, 1999 and was considered dormant. On July 9,
1999, the Company obtained a Certificate of renewal from the State of Nevada.
From July 9, 1999 to January 21, 2000, the Company was in the development stage.
On January 21, 2000, Laredo entered into an Acquisition Agreement with
GFR Pharm, Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia
corporation, (GFR), Richard Pierce and Lucretia Schanfarber (the GFR Majority
Shareholders) to acquire their shares representing 100% of the outstanding
common stock of GFR in exchange for 19,000,000 newly issued shares of Laredo's
restricted common stock. The transaction was recorded as a reverse acquisition.
GFR was incorporated in March 1997 as Helm Developments Ltd. In June 1998, the
Company formally changed its name to GFR Nutritionals Ltd. GFR was 100% owned by
the President and CEO, Richard Pierce from inception until January 17, 2000,
when a 10% interest was acquired by Lucretia Schanfarber. Business operations
began in October 1998 after acquiring manufacturing equipment and arranging to
manufacture nutritional supplements under a private label contract.
On June 21, 2000, the Company entered into an Acquisition Agreement
with Nutritionals (USA) Direct.Com, a Washington corporation, (NDC), to acquire
100% of the outstanding common stock of NDC in exchange for $1,000. The
transaction has been recorded as a purchase. NDC operations were wound down in
October 2002 and the company became dormant.
F - 8
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
On November 1, 2000, the Company entered into an Acquisition Agreement
with GFR Health, Inc. (Formerly R&L Health, Inc., a British Columbia
corporation, R&L), to acquire 100% of the outstanding common stock of R&L in
exchange for $0.01. The transaction was recorded as a purchase.
On April 5, 2004, GFR Nutritionals, Ltd. and R&L Health, Inc. changed
its name to GFR Pharma, Inc. and GFR Health, Inc., respectively.
On August 9, 2004, Laredo Investment Corp. changed its name to GFR
Pharmaceuticals, Inc.
Principles of Consolidation
The consolidated financial statements for December 31, 2004 and the
year ended include the accounts of GFR Pharmaceuticals, Inc. and the following
wholly owned subsidiaries:
* GFR Pharma, Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia
corporation
* Nutritionals(USA) Direct.com, a Washington corporation
* GFR Health, Inc. (Formerly R&L Health, Inc.), a British Columbia
corporation
All significant inter-company accounts and transactions have been
eliminated.
Nature of Business
The Company specializes in formulating, blending,
encapsulating and packing nutritional products. The Company also distributes
products through its GFR Health Inc. subsidiary. The Company's operations are
located in the province of British Columbia, Canada.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
F - 9
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Inventories
Raw materials inventory is stated at a lower of weighted average cost
and replacement value. Inventories of work in progress is stated at the lower of
weighted average cost and net realizable value.
Depreciation
Fixed assets are stated at cost. Depreciation and amortization is
calculated on a straight-line basis over the estimated useful lives of the
assets as follows:
Asset Rate
- ------------------------------------------------ -----------------
Manufacturing equipment 10-20 years
Furniture and fixtures 5-7 years
Office equipment 3-5 years
Leasehold improvements Term of lease
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income.
The Company has adopted the Financial Accounting Standards Board SFAS
No., 121, "Accounting for the Impairment of Long-lived Assets." SFAS No. 121
addresses the accounting for (i) impairment of long-lived assets, certain
identified intangibles and goodwill related to assets to be held and used, and
(ii) long-live lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows from the
used of the asset and its eventual disposition (un-discounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is recognized.
Revenue recognition
Revenue is recognized from sales of products at the time of shipment to
customers.
F - 10
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Advertising Costs
Advertising is expensed as incurred.
Foreign currency translation
The Company's functional currency is the Canadian dollar and the
reporting currency is the U.S. Dollar. All elements of financial statements are
translated using a current exchange rate. For assets and liabilities, the
exchange rate at the balance sheet date is used. Stockholders' Equity is
translated using the historical rate. For revenues, expenses, gains and losses
the weighted average exchange rate for the period is used. Translation gains and
losses are included as a separate component of stockholders' equity. Gain and
losses resulting from foreign currency transactions are included in net income.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No.109 requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax basis of assets and liabilities.
F - 11
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Reclassifications
Certain reclassifications have been made in the 2003 financial
statements to conform with the 2004 presentation.
Earnings (Loss) per Share
Basic loss per share has been computed by dividing the loss for the
year applicable to the common stockholders by the weighted average number of
common shares outstanding during the years. There were no common equivalent
shares outstanding at December 31, 2004 and 2003.
Stock Compensation for Non-Employees
The Company accounts for the fair value of its stock compensation
grants for non-employees in accordance with FASB Statement 123. The fair value
of each grant is equal to the market price of the Company's stock on the date of
grant if an active market exists or at a value determined in an arms length
negotiation between the Company and the non-employee.
NOTE 2 - ACCOUNTS RECEIVABLE
As of December 31, 2004 and 2003, accounts receivable consisted of the
following:
2004 2003
------------------ -----------------
Accounts Receivable $ 1,630,830 $ 817,480
Less: Allowance for Doubtful Accounts (93,662) (82,157)
------------------ -----------------
Total Accounts Receivable $ 1,537,168 $ 735,323
================== =================
The allowance for doubtful accounts is based on management estimate of
75% of receivables over 120 days outstanding.
F - 12
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 3 - INVENTORY
Inventory is valued at lower of cost or market. As of December 31, 2004
and, 2003, inventory consists of the following:
2004 2003
------------------ ------------------
Raw materials $ 937,864 $ 861,276
Work in process 229,032 168,914
Finished Goods 335,823 -
------------------ ------------------
Total Inventory $ 1,502,719 $ 1,030,190
================== ==================
NOTE 4 - INCOME TAXES
The provision for income taxes consists of Canadian federal and
provincial and territorial income tax. The provision consists of the following:
Current: 2004 2003
----------------- ------------------
Canadian Income Tax $ 16,802 $ 117,918
Deferred Tax Liability 12,446 73,596
----------------- ------------------
Income tax expense $ 29,248 $ 191,514
================= ==================
Deferred taxes result from temporary differences in the recognition of
income and expenses for income tax reporting and financial statement reporting
purposes. The Company had deferred tax liability of $169,986 and $157,540 as of
December 31, 2004 and 2003. The deferred tax liability is the result of excess
depreciation for income tax purposes over the amount for financial reporting
purposes.
The difference between the effective income tax rate and the federal
statutory income tax rate on the income (loss) from continuing operations are
presented below:
2004 2003
------------------ ------------------
Expense at the federal statutory rate of 37.62% $ 49,782 $ 149,092
Deferred Tax Liability 12,446 73,596
Benefits from Temporary Differences in Depreciation and other (32,980) (31,174)
------------------ ------------------
Effective Tax Expense $ 29,248 $ 191,514
================== ==================
F - 13
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 5 - RELATED PARTY TRANSACTIONS
As at December 31, 2004 and 2003, shareholder payables include
approximately $253,409 ($305,000 Canadian) owing to a major shareholder.
Richard Pierce, CEO of GFR Pharmaceuticals, Inc. and Lucretia
Schanfarber, former Vice President of Sales, hold contracts with R&L Health Inc.
that licenses their names and images to R&L for use on certain products. He is
paid a quarterly bonus of 10% of R&L Health Inc. profits before income taxes,
depreciation, and amortization are deducted as expenses. As of December 31, 2004
and 2003, $59,783 and $105,192 in bonuses have been paid and $15,846 and $30,743
have been accrued.
As of April 1, 2004, Lucretia Schanfarber is no longer being paid this
licence fee as her name and image has been removed from all products.
NOTE 6 - SHORT-TERM OBLIGATIONS
December 31, December 31,
2004 2003
------------------ ------------------
Promissory note, repayable to related parties upon
demand, including interest at 12% $ 139,159 $ 114,416
------------------ ------------------
Total $ 139,159 $ 114,416
================== ==================
The Company has a line of credit with a bank with a total amount owing
of $643,902 and $30,800 as of December 31, 2004 and 2003, respectively. This
line carries an interest rate of prime plus 1.5 and a total available credit of
$706,350 ($850,000 Canadian) at December 31, 2004 and $192,500 ($250,000
Canadian) as of December 31, 2003. The line is secured by certain manufacturing
equipment of the Company.
F - 14
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 7 - LONG-TERM DEBT
December 31, December 31,
2004 2003
------------------ ------------------
TDBank Small Business loan, repayable in monthly instalments $2,515 ($3,973
Canadian), including interest at 10.15%, maturing September 15, 2005, secured
by certain
manufacturing equipment of the Company $ 26,959 $ 56,455
Business Development Bank of Canada Loan, repayable in
monthly installment $657 ($830 Canadian), including interest
at prime plus 1%, maturing August 23, 2009 37,162 -
Less current portion of long-term debt (34,468) (24,275)
------------------ ------------------
$ 29,653 $ 32,180
================== ==================
Principal payments due on long-term debt for each of the five years
subsequent to December 31, 2004 and thereafter are as follows:
Year ending: Amount
- --------------------------- ------------------
2005 $ 34,468
2006 7,936
2007 8,468
2008 9,035
2009 4,214
------------------
Thereafter
Total $ 64,121
==================
NOTE 8 - ECONOMIC DEPENDENCE
The Company sells a substantial portion of its product to one customer
Prairie Naturals, Inc. During 2004 and 2003, sales to that customer aggregated
41% and 45%, respectively. As of December 31, 2004 and 2003, amounts due from
that customer included in accounts receivable were 17% and 68%, respectively.
Future operations of the Company depend on continuation of the manufacturing
arrangement with that customer.
F - 15
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 9 - COMMITMENTS
The Company has entered into a lease agreements for its manufacturing
and office facilities and certain manufacturing equipment with the Company's
major shareholder and other parties. The rental charges are approximately
$86,250 ($115,000 Canadian) per year for real property and $81,675 ($108,900
Canadian) per year for equipment. The real property lease expires December 31,
2004, and the equipment lease expires June 2005 through December 2008.
The assets and liabilities under capital leases are recorded at the
fair value of the asset. The assets are depreciated over the lower of their
estimated productive lives. Depreciation of assets under capital leases is
included in depreciation expense for 2004 and 2003.
Following is a summary of property held under capital leases:
2004 2003
------------------ ------------------
Manufacturing Equipment $ 432,928 $ 432,928
Less: Accumulated Depreciation (57,640) (34,339)
------------------ ------------------
Net Assets Held Under Capital Lease $ 375,288 $ 398,589
================== ==================
The minimum future lease payments under these leases for the next five
years are:
Ending December 31: Real Property Equipment
- ---------------------------- ------------------ -----------------
2005 $ - $ 67,097
2006 - 50,338
2007 - 50,338
2008 - 19,508
2009 - -
------------------ -----------------
Net Minimum Lease Payments - 187,281
Less: Amount Representing Interest - (97,404)
------------------ -----------------
Present Value of Net Minimum Lease Payment $ - $ 89,877
================== =================
The leases generally provides that insurance, maintenance and tax
expenses are obligations of the Company. It is expected that in the normal
course of business, leases that expire will be renewed or replaced by leases on
other properties.
F - 16
GFR PHARMACEUTICALS, INC. AND SUBSIDIARIES
(Formerly Laredo Investment Corp.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Continued)
NOTE 9 - COMMITMENTS (Continued)
During 2002, the Company entered into a lease agreement for warehouse
spaces. The lease is month to month with a six month notice of termination
clause. Under the terms of the lease agreement, the monthly rent charge is
approximately $4,600 ($5,500 Canadian).
NOTE 10 - STOCK INCENTIVE PLAN
The Board of Directors has authorized and the Company has established
the 2000 Incentive and Non-qualified Stock Option Plan. Under the plan the
Company is authorized to issued up to 6,000,000 shares of the Company's common
stock with such exercise price and vesting periods as the Board of Directors
deems to be in the best interest of the Company. As of December 31, 2004, no
options have been granted.
NOTE 11 - COMMON STOCK TRANSACTIONS
On August 9, 2004, the Company changed its name from Laredo Investment
Corp. to GFR Pharmaceuticals, Inc. In addition, a retroactive 30:1 reverse stock
split was approved by shareholders. All references to stock in the accompanying
financial statements reflect this stock split.
NOTE 12 - GEOGRAPHIC INFORMATION
The Company's revenues were generated primarily from Canadian sources.
During 2004 99% of the Company's revenues were from customers inside Canada, and
only two orders, approximately 1%, were shipped to foreign countries. During
2003 all the Company's revenues were from Canadian customers and no orders were
shipped to foreign countries.
F - 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFR Pharmaceuticals, Inc.
Dated: November 18, 2005
/s/ RICHARD PIERCE
Richard Pierce, President and C.E.O., Director
(Principal Executive Officer)
/s/ MARC CASAVANT
Marc Casavant, Chief Financial Officer
(Principal Accounting Officer)
/s/ ROSEMARIE PIERCE
RoseMarie Pierce, Director
20
EXHIBIT 31.1
SECTION 302 CERTIFICATIONS
I, Richard Pierce, certify that:
1. I have reviewed this annual report on form 10-KSB of GFR
Pharmaceuticals, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report.
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e)
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report on such
evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 18, 2005
By: /s/ Richard Pierce
Richard Pierce, CEO, Director
(Principal Executive Officer)
21
EXHIBIT 31.2
SECTION 302 CERTIFICATIONS
I, Marc Casavant, certify that:
1. I have reviewed this annual report on form 10-KSB of GFR
Pharmaceuticals, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report.
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e)
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report on such
evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 18, 2005
By: /s/ Marc Casavant
Marc Casavant, CFO, Director
(Principal Accounting Officer)
22
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GFR Pharmaceuticals, Inc. on Form 10-KSB
for the year ending December 31, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Richard Pierce, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
By: /s/ Richard Pierce
Richard Pierce, CEO, Director
(Principal Executive Officer)
Date: November 18, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certifications are accompanying the Company's Form 10-KSB soley
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not
being filed as part of the Form 10-KSB or as a separate disclosure document.
23
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GFR Pharmaceuticals, Inc. on Form 10-KSB
for the year ending December 31, 2004, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Marc Casavant, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
By: /s/ Marc Casavant
Marc Casavant, CFO, Director
(Principal Accounting Officer)
Date: November 18, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certifications are accompanying the Company's Form 10-KSB soley
pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not
being filed as part of the Form 10-KSB or as a separate disclosure document.
24
Exhibit 10-1
THIS LEASE made as of the 1st day of January, 2004.
BETWEEN: RICHARD BRUCE PIERCE
3313 Rakana Place, Coquitlam, B.C., V3C 1X1
(hereinafter together called "Landlord")
OF THE FIRST PART
AND: GFR NUTRITIONALS LTD., of 11405-201A Street, Maple Ridge, B.C.
V2X OY3.
(hereinafter together called "Tenant")
OF THE SECOND PART
IN CONSIDERATION OF the rents, covenants and agreements hereinafter reserved and
contained on the part of the Tenant to be paid, observed and performed, the
Landlord hereby demises and leases unto the Tenant the premises hereinafter
described all upon the terms, conditions and covenants as hereinafter set forth.
ARTICLE 1 - CONSTRUCTION AND DEFINITIONS
Schedules
1.1 All schedules referred to herein and attached hereto shall form a part
of this Lease.
Covenants
1.2 All of the provisions of this Lease are to be construed as covenants
and agreements as though the words importing such covenants and
agreements were used in each separate paragraph hereof.
2
Definitions
1.3 In this Lease, unless otherwise defined or unless the context otherwise
requires, words, terms, phrases and expressions shall have attributed to them
the meanings hereinafter set forth:
(a) "Building" means the building located upon the Lands;
(b) "Business Day" means Monday to Friday, inclusive, in each
calendar week, save and except any such day which is a
statutory holiday;
(c) "Commencement Date" means the 1st day of January, 2000;
(d) "Hazardous Substance" means any substance or material defined
or designated as hazardous or toxic waste, hazardous or toxic
material, a hazardous or toxic substance, or other similar
term, by any federal, provincial or local environmental
statute, regulation or ordinance presently in effect or which
may be promulgated in the future, as such statutes,
regulations and/or ordinances may be supplemented or amended
from time to time.
(e) "Interest Rate" means the rate of 12% per annum, calculated
monthly, not in advance;
(f) "Lands" means Lot 26, DL280 Gp1 NWD Plan 86659, municipally
described as 11405-201A Street, Maple Ridge, B.C. V2X OY3.
(g) "Premises" means the Lands including the yard area (if any)
and the Building located on the Lands;
(h) "Rent" includes all amounts payable by the Tenant pursuant to
this Lease including without limitation Taxes and Utility
Charges;
(i) (Intentionally deleted)
(j) "Taxes" means the aggregate of all taxes, rates, charges and
licences assessed or levied upon or in respect of the Lands
and Building or any part thereof including without limitation
all local improvement charges or in respect of any business
conducted therein by any taxing authority at any time
including corporation capital taxes or any substitute
therefore but not including income or profits taxes upon the
income of the Landlord to the extent such taxes are not levied
in lieu of any of those included above;
3
(k) "Term" means the term of this Lease as set forth in Article
3.1 and renewals thereof, if any; and
(l) "Utility Charges" means all charges and rates for telephone,
electricity, gas, water and sewer and any other utilities
provided or supplied to the Premises.
ARTICLE 2 - THE PREMISES
The Premises
2.1 The Premises are more particularly described in Article 1.3(g).
ARTICLE 3 - TERM OF THE LEASE
The Term
3.1 Subject to any renewal of the Term as provided in Article 10.4, to have and
to hold the Premises for a term of two (2) years to be computed from the
Commencement Date.
ARTICLE 4 - PERMITTED USES
Permitted Uses
4.1 The Tenant shall use the Premises for the purposes of carrying on the
business of manufacturing, packaging and wholesale sale of health supplements
and for no other purpose without the prior written consent of the Landlord, and
shall not, subject to Article 12.1, permit any part of the Premises to be used
or occupied by any persons other than the Tenant, its agents, and employees.
ARTICLE 5 - RENT
Rent
5.1 Yielding and paying therefor unto the Landlord 1006 - 9623 Manchester Drive,
Burnaby, B.C. or such other places as the Landlord may direct in writing, during
the Term in lawful money of Canada the basic rent as follows:
4
- ---------------------------------------- ------------------------------------- -------------------------------------
Lease Year Yearly Basic Rent Monthly Basic Rent
- ---------------------------------------- ------------------------------------- -------------------------------------
Year 1 $60,000 $5,000
- ---------------------------------------- ------------------------------------- -------------------------------------
Year 2 $60,000 $5,000
- ---------------------------------------- ------------------------------------- -------------------------------------
payable in advance on the first day of each and every month during the Term.
5.2 DEPOSIT AND SECURITY - The Tenant has paid, and the Landlord hereby
acknowledges receipt of a deposit ("Deposit") in the sum of $5,350. The Deposit
will be held by the Landlord without liability for the payment of interest
thereon on account of the payment of basic rent for the last month of the Term
(including GST) or as security for the performance of the obligations of the
Tenant under this Lease. Notwithstanding the foregoing, if at any time base rent
or any other amount payable by the Tenant under this Lease is overdue and unpaid
or the Tenant fails to perform any of its obligations under this Lease, the
Landlord may apply the whole or any part of the Deposit on account of the
payment of such base rent or other amount or to partly or wholly compensate the
Landlord for any loss or expense incurred by the Landlord and any such
application will be without prejudice to the right of the Landlord to pursue any
other remedies it may have at law, in equity or under this Lease. If the basic
rent is increased during any renewal, the Tenant shall increase the Deposit by
the same amount plus GST. If the Landlord applies the Deposit for any purpose
other than payment of basic rent for the last month of the Term (or any renewal
as the case may be), the Tenant shall forthwith pay to the Landlord the amount
so applied so that at all times during the Term or any renewal, the Deposit will
be the amount stated above.
ARTICLE 6 - TENANT'S COVENANTS
The Tenant covenants with the Landlord as follows:
Rent and Taxes
6.1 (a) To pay Rent as provided in Article 5.1.
(b) To pay, from and after the Commencement Date, Taxes, as
invoiced to the Tenant by the Landlord. The Landlord will
provide a copy of the tax invoice or statement at the time
request is made to the Tenant for payment. The Taxes shall be
paid by the Tenant to the Landlord forthwith after invoice by
the Landlord, and if not so paid they shall be added to the
Rent due on the next succeeding payment date, and such amount,
in addition to the regular payment then due, shall constitute
Rent hereunder. The Landlord acting reasonably may estimate
the Tenant's obligations for Taxes and require the Tenant to
pay such estimated amount of Taxes on a monthly basis with
basic rent instead of annually or semi-annually and if the
Landlord does so, any adjustment in payment to the Landlord
for Taxes paid by the Landlord for the calendar year shall be
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made in July of each calendar year. The Landlord agrees to pay
real property taxes to the appropriate municipal authorities
when due and provide the Tenant with proof of payment on
request.
Utility Charges
6.2 To pay, when due, commencing on the Commencement Date, the Utility Charges
which are separately metered for the Premises and which are billed directly by
the supplier thereof to the Tenant or which are billed to the Landlord and are
allocated in a reasonable manner by the Landlord to the Tenant. If the Landlord
is billed for such Utility Charges, the Tenant agrees forthwith on receipt of a
copy of such invoice to pay it and provide evidence thereof to the Landlord.
Repair and Maintenance
6.3 To permit the Landlord, its agents or employees, to enter and review the
state of repair; to repair, subject to Article 9, according to notice in writing
and at the expiry of earlier termination of this Lease to leave the Premises in
good order and repair; all the repairs are subject to the prior written approval
of the Landlord. Throughout the Term, the Tenant shall be responsible for and
pay all costs for general repair and maintenance of the Lands and Buildings,
including, without limitation, maintaining and painting the interior and the
exterior of the Building, maintaining and repairing all parking areas and their
surfaces, maintaining, repairing and replacing, if necessary, the roof and roof
membrane, boilers and all other mechanical and electrical systems, landscaping,
snow and ice removal, and all other repairs, maintenance and replacements as
would be done by a prudent owner of lands and a building similar to the Lands
and the Building. The Landlord may, at its option and upon reasonable notice to
the Tenant, do all such repair, maintenance and replacement, and all of the
costs of same plus 15% shall be paid forthwith by the Tenant on invoice by the
Landlord and shall be included in the Rent.
Failure to Repair
6.4 If the Tenant shall fail to repair in accordance with the provisions hereof,
the Landlord, its agents or employees may forthwith enter the Premises and make
the required repairs and for that purpose the Landlord may bring and leave upon
the Premises all necessary tools, materials and equipment and the Landlord will
not be liable to the Tenant for any inconvenience, annoyance or loss of business
or any injury or damage suffered by the Tenant by reason of the Landlord
effecting such repairs unless caused by the gross negligence of the Landlord,
its agents or employees, and the expense of such repairs plus an administrative
charge of 15% of such expense will be borne by the Tenant who shall pay it to
the Landlord forthwith upon demand.
6
Damage to the Premises
6.5 If the Building or any part thereof, including the Premises, boilers,
engines, plates and other apparatus (or any of them) used for the purpose of
heating or air-conditioning the Building (if there is any air-conditioning), the
water-pipes, the drainage-pipes, electric lighting or other equipment of the
Building or the roof or outside walls, become damaged or destroyed in any manner
whatsoever through the negligence or carelessness of, or misuse by, the Tenant,
its servants, agents, employees or anyone permitted by the Tenant to be in the
Building or on the Lands, the reasonable expense of the necessary repairs,
replacements or alterations shall be borne by the Tenant plus an administration
charge of 15% of such expense who shall pay them to the Landlord forthwith upon
demand. The Tenant agrees to install forthwith following the Commencement Date
an air-conditioning system in the Building to the specifications agreed upon
prior to execution of this Lease by the Landlord and Tenant and to be solely
responsible for all maintenance costs of the said system throughout the Term. If
required by the Landlord, the Tenant shall obtain, at its sole cost, a
maintenance contract from a fully qualified maintenance company approved by the
Landlord for maintaining and servicing the said system on a regular basis. The
said system shall become the property of the Landlord on installation.
Invalidation of Insurance
6.6 The Tenant will not do or permit anything to be done whereby any policy of
insurance on the Building or any part thereof on the Lands or for any event
which may occur on the Lands may become void or voidable and if any policy of
insurance upon the Building or any part thereof shall be cancelled by the
insurer by reason of:
(a) any act or omission of;
(b) the occupation, whether actual or intended, of the Premises by; or
(c) the change in nature of the business carried on by the Tenant;
the Landlord may, at its option and in addition to any other remedies it may
have hereunder or at law, determine this Lease forthwith by leaving upon the
Premises notice in writing of its intention so to do and thereupon Rent and
other payments for which the Tenant is liable under this Lease shall be
apportioned and paid in full to the date of such determination and the Tenant
shall immediately deliver up possession of the Premises to the Landlord and the
Landlord may re-enter and take possession of the Premises.
7
Increase in Insurance Rates
6.7 The Tenant will not do anything or permit anything to be done whereby the
cost of any policy of insurance on the Building or any part thereof shall be
increased but if the costs of any policy of insurance on the Building or any
part thereof shall be increased by reason of:
(a) any act or omission of;
(b) the occupation, whether actual or intended, of the Premises by; or
(c) the change in nature of the business carried on by;
the Tenant or any assignee, sub-tenant, or anyone permitted by the Tenant to be
upon the Premises, either at the time of occupancy, during the Term, or any
renewal thereof, the Tenant shall pay to the Landlord the full amount of any
such increase on an annual basis as Rent.
Observance of Law
6.8 The Tenant shall abide by and comply with, at its own expense, all laws,
rules, and regulations of every municipal or other authority which in any manner
relates to or affects the business or profession of the Tenant or the occupancy
or use of the Premises by the Tenant and shall save harmless the Landlord from
all the costs, charges or damages to which the Landlord may be put or suffer by
reason of any breach by the Tenant, its agents, employees or invitees, or
licensees, of any such law, rule or regulation.
Rules and Regulations
6.9 The Tenant agrees that the Tenant and its agents and employees and all
persons visiting or doing business with the Tenant shall comply strictly with
such reasonable rules and regulations as the Landlord may from time to time
adopt, and of which written notice shall have been given to the Tenant.
Waste and Nuisance
6.10 The Tenant shall not suffer or permit any act or neglect which may in any
manner, directly or indirectly, cause injury or damage to the Premises or any
part thereof or to any fixtures or appurtenances thereof or which may be or
become a nuisance or interference to any of the occupants of the Building or
which may, in the opinion of the Landlord acting reasonably, render the Building
or any part thereof less desirable or injure the reputation thereof.
8
Notice of Fires and Other Dangers
6.11 The Tenant shall give the Landlord immediate notice of any fire or accident
or malfunctioning of the air-conditioning system, heating system or plumbing
system in the Premises or in the Building, of which the Tenant, its agents or
employees may be aware.
Builders' Liens
6.12 The Tenant shall not suffer or permit any builders' liens for work, labour,
services or material ordered by the Tenant or for the cost of which the Tenant
may in any way be obliged to attach to the Premises or to the Building or to the
Lands at any time during the Term and whenever any such lien shall attach or a
claim thereof shall be filed, within twenty (20) days after the Tenant has
notice of the claim of lien, to procure the discharge thereof by payment or by
giving security or in such other manner as is or may be required or permitted by
law; to allow the Landlord to post and keep posted on the Premises any notice
which the Landlord may wish to post under the provisions of the Builders' Lien
Act or any legislation which may replace such Act.
Overloading Floors
6.13 The Tenant shall not place on the Premises any safe, heavy business
machine, or other heavy thing without obtaining the prior written consent of the
Landlord. The Landlord acknowledges that the equipment now located in the
Premises (and any substitute equipment of no greater weight) may remain and be
used in the Premises, and in no circumstances shall such equipment or substitute
equipment be deemed to be in violation of this Section 6.13.
Condition of Premises
6.14.1 The Tenant accepts the Premises in "as is" condition.
6.14.2 The Tenant shall not permit the Premises to become untidy, unsightly or
hazardous, nor permit unreasonable quantities of waste refuse to accumulate
therein.
6.14.3 The Tenant agrees that neither it nor its servants, agents, employees or
invitees will bring onto or introduce to the Premises any Hazardous Substance
and the Tenant will remove any such Hazardous Substance forthwith upon demand by
the Landlord. The Tenant agrees to indemnify, protect, defend and hold the
Landlord and those for whom it is responsible in law harmless from and against
any and all claims, demands, losses, liabilities and penalties (including,
without limitation, reasonable lawyers' fees at all trial and appellate levels,
whether or not suit is brought) arising directly or indirectly from or out of,
or in any way connected with the presence of any Hazardous Substance on the
Lands or within the Building which is brought or introduced on or in the
Premises by the Tenant or those for whom the Tenant is legally responsible. The
obligations herein contained shall survive the expiry or earlier termination of
this Lease.
9
Glass
6.15 The Tenant shall restore forthwith, at the Tenant's expense, and with glass
of the same colour and quantity, any broken or damaged glass on the Premises.
Signs
6.16 The Tenant shall not paint, display, inscribe, place or fix any sign,
picture, advertisement, notice, lettering or direction on any part of the
outside of the Building or the Premises or which is visible from the outside
thereof, without obtaining the prior written consent of the Landlord, which
consent shall not be unreasonably withheld.
Insurance
6.17 The Landlord may insure its interest in the Premises during the whole of
the term against loss of rental income, loss or damage by fire, lightning,
explosion, sprinkler leakage, and standard supplementary perils in the amount of
the full insurable value of the Premises, including "by-law coverage", and may
fully insure the Premises and keep them insured against loss or damage by
explosion of any steam boilers and any closed circulation hot water heating
system and any pressure vessel which shall be operated on the Premises, and will
pay the premiums for all such insurance. All loss thereunder is to be payable to
the Landlord, or as the Landlord may direct and shall be the sole and absolute
property of the Landlord notwithstanding any contribution by the Tenant for
premiums as required herein. The insurance may, at the Landlord's option, be
replacement value insurance. The sum so expended for such insurance by the
Landlord shall be paid by the Tenant, when invoiced therefor by the Landlord,
and if not so paid shall be added to the Rent due on the next succeeding payment
date, and such amount, in addition to the regular payment then due, shall
constitute Rent hereunder. The Landlord may estimate insurance charges to the
Tenant and the Tenant shall pay same with monthly Rent. The Landlord and Tenant
acknowledge that it is in their mutual best interests to obtain insurance
coverage from qualified insurers which will best serve to protect both the
Landlord and the Tenant in the event of insured loss and agree to co-operate and
seek advice from a qualified broker of their mutual choice to advise on such
insurance at a reasonable commercial price. The Tenant shall pay for the costs
of all such advice and insurance placed pursuant to such advice and the Landlord
shall not withhold consent to changes in coverage so long as such coverage
provides the Landlord with equivalent coverage to that described in sections
6.17 and 6.18 with similar waivers of subrogation, loss payment and all other
essentials of coverage. Until the Landlord consents to changes in coverage, the
Tenant shall place and maintain and the Landlord may place and maintain (with
recoveries for cost as referred to herein) insurance as stated above. The
preceding two sentences shall apply notwithstanding any other provisions of this
Agreement.
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Public Liability Insurance
6.18 The insurance referred to in Article 6.17 may include public liability
insurance in the amount of Two Million Dollars ($2,000,000). The Tenant shall be
responsible for placing insurance to cover itself for liability and its property
as it sees fit provided that all policies of insurance taken out by the Tenant
or any person on its behalf with respect to the Premises, any use made by the
Tenant thereof, or any personal injury or damage to personal property, shall
contain a waiver of subrogation by the insurers against the Landlord, shall name
the Landlord as a co-insured with the Tenant and shall contain cross-liability
provisions satisfactory to the Landlord in favour of the Landlord.
Indemnity
6.19 The Tenant shall indemnify the Landlord against any claims, including all
claims for personal injury or property damage, arising out of the conduct of any
work or through any act or omission of the Tenant or any assignee, sub-tenant,
agent, contractor, servant, employee, invitee or licensee of the Tenant, and
against all costs, legal fees, expenses and liabilities incurred in respect of
any such claim or any action or proceedings brought thereon.
Interior Finishings
6.20 The Tenant shall install in the Premises only such window shades, drapes,
floor coverings and other improvements and shall apply only such wall coverings
and paints, as are first approved in writing by the Landlord acting reasonably
and to cause the same to be installed or applied by competent workmen.
Surrender of Possession
6.21 The Tenant shall surrender peaceably and give up possession of the Premises
without notice from the Landlord upon the expiration or sooner determination of
this Lease, any right to notice to quit or vacate being hereby expressly waived
by the Tenant, any law, usage or custom to the contrary notwithstanding.
Distress
6.22 The Tenant hereby waives and renounces the benefit of any present or future
statute taking away or eliminating the Landlord's right of distress, and
notwithstanding any such statute none of the goods and chattels of the Tenant on
the Premises at any time during the Term shall be exempt from levy by distress
for rent in arrears and if any such goods or chattels are removed from the
Premises, the Landlord may follow same for thirty (30) days.
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Alterations
6.23 The Tenant shall not make or erect any alterations, additions or
improvements in or to the Premises without obtaining the Landlord's prior
written consent, which consent shall not be unreasonably withheld, and all such
work shall be done only by contractors or tradesmen or mechanics approved in
writing by the Landlord and at the Tenant's own expense.
No Compensation for Alterations
6.24 The alterations, additions and improvements effected by the Tenant to the
Premises shall remain the property of the Landlord with no compensation to the
Tenant during or at the expiration or sooner termination of the Term of this
Lease.
Personal Property
6.25 All articles of personal property and all business and trade fixtures,
machinery and equipment and furniture owned by the Tenant shall remain the
property of the Tenant and may be removed by the Tenant at any time during the
Term, provided that the Tenant at its own expense shall repair any damage to the
Premises or the Building caused by such removal. The Landlord may require the
Tenant to remove all or any part of such property at the expiration of this
Lease and such removal shall be done at the Tenant's expense and the Tenant
shall at its own expense repair any damage to the Premises or the Building
caused by such removal. If the Tenant does not remove its property forthwith
after written notice by the Landlord to that effect, such property shall, if the
Landlord elects, be deemed to become the Landlord's property or the Landlord may
remove the same at the expense of the Tenant and the cost of such removal and
any necessary storage charges shall be paid by the Tenant forthwith to the
Landlord upon written demand. The Landlord shall not be responsible for any loss
or damage to such property because of such removal.
Interest
6.26 The Tenant shall pay to the Landlord interest at the Interest Rate on any
Rent unpaid as and when due hereunder, until paid.
Showing Premises
6.27 The Tenant shall permit the Landlord to show the Premises to any potential
tenant or purchaser of the Lands or part thereof upon the Landlord giving to the
Tenant not less than twenty-four (24) hours' notice of its intention to do so.
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Business Taxes
6.28 The Tenant shall pay all business taxes levied in respect of the Tenant's
activities on the Premises howsoever arising.
Net Lease
6.29 It is the intent of the parties to this Lease that the Rent shall be
absolutely net to the Landlord except as specifically provided herein and
accordingly all costs and expenses relating to the Premises shall be paid by the
Tenant alone, except:
(a) payments of principal and interest payable by the Landlord under
any mortgage of the Premises; and
(b) taxes payable by the Landlord levied on its income.
The Tenant covenants to pay to the federal, provincial or municipal authority
imposing the same, all service, business transfer, transaction value, ad
valorem, sales or other taxes by whatever name called, if any, assessed upon, or
as a direct result of the payment of Rent hereunder as often as such taxes
become due and whether or not such taxes are applicable on the date of the
execution of this Lease or become applicable thereafter. In the case of such
taxes, which are by statute, by-law or regulation imposed upon or payable by the
Landlord as recipient of the Rent, the Tenant shall reimburse the Landlord for
the full amount of such taxes, regardless of any tax credits available to the
Landlord or the Tenant, within thirty (30) days of such taxes become due.
Notwithstanding the foregoing, such taxes shall not include any federal or
provincial income taxes of the Landlord. If the Landlord receives a tax credit
for municipal taxes applicable to the taxes paid by the Tenant hereunder, the
Tenant shall have the benefit of the tax credit or actual reduction in taxes or
taxes refunded.
Snow and Ice Removal
6.30 The Tenant shall keep the sidewalks and driveways on and fronting the
Premises free and clear of ice and snow, and salted or sanded during periods of
freezing temperatures.
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ARTICLE 7 - LANDLORD'S COVENANTS
The Landlord covenants with the Tenant:
Quiet Enjoyment
7.1 For quiet enjoyment.
Repair
7.2 To repair, subject to Article 9, at the Landlord's cost, structural aspects
of exterior weather walls, structural portions of subfloors and roofs, structure
portions of bearing walls, structural columns and beams of the Building.
ARTICLE 8 - SERVICES AND DAMAGE
Interruption of Services
8.1 The Landlord does not warrant that any service, utility or facility provided
by it in accordance with the provisions of this Lease, will be free from
interruption caused or required by any cause which is beyond the Landlord's
reasonable care and control.
Damage to Property
8.2 The Landlord shall not be liable for any injury or damage to the Tenant, any
agent or employee of the Tenant, any person visiting or doing business with the
Tenant or to any other person, or to property belonging to the Tenant or to any
agent or employee of the Tenant or to any person visiting or doing business with
the Tenant or to any other person while such property is in the Premises or in
the Building, howsoever caused excluding negligence of the Landlord or to those
for whom it is in law responsible, and without limiting the generality of the
foregoing, the Landlord shall not be liable for any injury or damage resulting
from fire, explosion, falling plaster, steam, gas, electricity, water, rain or
snow or leaks from any part of the Building, or from pipes, appliances, drains
or plumbing works, or from the roof, street, sub-surface or from any other
place.
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ARTICLE 9 - DAMAGE TO THE PREMISES
Abatement of Rent
9.1 If the Premises shall be damaged by fire or other casualty then the Rent
shall abate in whole or in part according to the portion of the Premises which
is non-usable by the Tenant as determined by Landlord and Tenant, acting
reasonably, or by arbitration until such damage is repaired; provided that there
shall be no abatement for any time required for the replacement or repair of any
property of the Tenant or alterations, additions or improvements made by the
Tenant, which is in excess of the time required for the making of necessary
repairs or replacements for which the Landlord is responsible.
Repair of Damage
9.2 Subject to the provisions of Article 9.3, if the Premises shall be damaged
by fire or other casualty, the damage to the Premises shall be repaired by the
Landlord with reasonable diligence at its expense except that repairs to
alterations, additions or improvements made by the Tenant shall be performed by
the Landlord at the expense of the Tenant and the Tenant shall at its own
expense make all repairs and replacements of property which the Tenant is
entitled to remove under the provisions of Article 6.25 of this Lease.
Right to Determine Lease
9.3 If the Premises or the Building are rendered untenantable by a fire or other
casualty the Landlord, acting reasonably, shall select a qualified architect to
determine within 15 days of such event whether or not the damage can be repaired
within 90 days of such fire or casualty. If any of the following circumstances
occurs:
(a) the architect determines that the damage cannot be repaired
within the said 90 day period; or
(b) the architect determines that the damage can be repaired
within the said 90 day period, but the repairs are not
substantially effected by the Landlord within such 90 day
period;
then the Landlord or the Tenant, may within sixty (60) days if item (a) is
applicable or within one hundred and twenty (120 days) if item (b) is applicable
after such fire or casualty (provided at the time termination notice is given
repairs are substantially effected), give the other party notice in writing to
terminate this Lease and thereupon the Term shall expire forthwith and the
Tenant shall vacate the Premises and surrender the same to the Landlord. Upon
the termination of this Lease under the provisions of this Article 9.3 the
Tenant's liability for rent shall cease as of the day following the fire or
other casualty. If neither the Landlord nor the Tenant terminates the Lease
15
pursuant to their rights under this Article 9.3, the Landlord shall repair the
damage as soon as reasonably possible and the force majeure provisions of
Section 14.5 shall not apply to such obligations.
ARTICLE 10 - TERMINATION
Default
10.1 If and whenever the Rent hereby reserved or any part thereof is not paid
when due or in case of breach of non-performance or non-observance by the Tenant
of any of the covenants, agreements, provisos, conditions or rules and
regulations on the part of the Tenant to be kept, observed or performed
hereunder and upon such default on the part of the Tenant continuing for fifteen
(15) days after written notice thereof by the Landlord to the Tenant, or if the
Premises shall be vacated or remain unoccupied for thirty (30) days or if the
Term shall be taken in execution or attachment or for any cause whatever, then
and in every such case the Landlord, in addition to any other remedy now or
hereafter provided by law, may at its option cancel this Lease and re-enter and
take possession of the Premises or any part thereof, by force, if necessary,
without any previous notice of intention to re-enter and may remove all persons
and property therefrom and may use such force and assistance in making such
removal as the Landlord shall deem advisable and such re-entry shall not operate
as a waiver or satisfaction in whole or in part of any right, claim or demand
arising out of or connection with any breach or violation by the Tenant of any
covenant, agreement, proviso, condition, rule or regulation on the Tenant's part
to be kept, observed or performed hereunder.
Bankruptcy
10.2 If the Term or any of the goods or chattels of the Tenant shall at any time
be seized in execution or attachment by any creditor of the Tenant or if the
Tenant shall make any assignment for the benefit of creditors or any bulk sale
or become bankrupt or insolvent or take the benefit of any Act for bankrupt or
insolvent debtors or if the Tenant is a corporation and any order shall be made
for the winding-up of the Tenant or other termination of its corporate
existence, or if a receiver or receiver and manager of the undertaking of the
Tenant shall be appointed, whether pursuant to an instrument or by a court of
competent jurisdiction, then this Lease shall, at the option of the Landlord,
cease and determine and the Term shall immediately become forfeit and void and
the then current month's rent and the next ensuing three (3) months' Rent shall
immediately become due and payable and the Landlord may re-enter and take
possession of the Premises as though the Tenant or other occupant or occupants
of the Premises were holding over after the expiration of the Term without any
right whatever.
16
Vacating of the Premises
10.3 In case the Premises shall be vacated or remain unoccupied for in excess of
thirty (30) days or in excess of such longer period as shall have been
authorized under Article 10.1 and, if applicable, for which any increase in
insurance premiums shall have been paid by the Tenant, then, in addition to any
other remedy of the Landlord, all Rent reserved by this Lease shall immediately
become due and payable and shall forthwith be paid by the Tenant to the
Landlord.
Renewal
10.4 Provided that if the Tenant:
(a) at the time of renewal the Tenant is not in arrears of Rent or
in default of any other material provision of this Lease; and
(b) so requests in writing not later than six (6) months and not
earlier than twelve (12) months prior to the expiration of the
Term;
the Landlord will, at the expiration of the Term, grant to the Tenant a lease of
the Premises for a further term of two (2) years upon all the terms, covenants
and agreements of this Lease except for the periods of free rental (if any) set
out in Article 5.1, and except this Article 10.4 and except as to Rent which
shall be payable for each and every month of the renewal term and shall be
determined on or before the expiry of three (3) months prior to the expiration
of the original Term by reasonable negotiation between the Landlord and the
Tenant having regard to the then applicable market rental rates for premises of
the approximate size, advantage of location and use as the Premises. If the
Landlord and Tenant do not agree within the time period referred to herein on
the Rent to be paid for the renewal term, the amount of such Rent shall be
determined by arbitration by a single arbitrator pursuant to the Commercial
Arbitration Act of the Province of British Columbia and amendments thereto, who
shall be a member of the Appraisal Institute of Canada having at least ten (10)
years experience in commercial real estate in the B.C. Lower Mainland and whose
decision shall be binding on the Landlord and the Tenant. At the commencement of
the renewal Term, the Rent has not been determined, the Tenant shall pay monthly
the Rent which was payable as of the last month of the initial Term with an
adjustment to be made forthwith upon determination of Rent for the renewal Term.
The Tenant shall increase the deposit, if any, to accord with the new Rent for
the renewal Term.
17
ARTICLE 11 - OVERHOLDING
Overholding
11.1 If the Tenant shall continue to occupy the Premises after the expiration of
the Term or renewal term and the Landlord shall accept Rent, the new tenancy
thereby created shall be deemed to be a monthly tenancy and shall be subject to
the covenants and conditions contained in this Lease insofar as the same are
applicable to a monthly tenancy, save and except that the rental payable shall
be determined by the Landlord. During the overholding period, the Tenant shall
pay base monthly rent equal to 120% of the base monthly rental payable at the
expiration of the Term, or any renewal Term, as the case may be.
ARTICLE 12 - ASSIGNMENT AND SUBLETTING
No Assignment without Consent
12.1 The Tenant shall not sublet all or part of the Premises, assign this Lease,
part with possession of all or part of the Premises, or permit any person other
than the Tenant to occupy part or all of the Premises without the Landlord's
consent which consent may be arbitrarily withheld.
ARTICLE 13 - NOTICES
Notices
13.1 All notices which may or are required to be given pursuant to this Lease
shall be in writing and shall either be given personally by delivering the same
to the party to whom notice is to be given, or in the case of a corporate party
by delivery to an officer of that party, or given by mail by posting the same by
prepaid registered mail addressed to the landlord at the address stated in
Article 5.1 and the Tenant at the Premises, or such other address as the party
may notify the other in writing, and any such notice shall be effective as of
the day of personal delivery, or as of the fifth day following posting, as the
case may be. In the event of disruption of mail services, all notices shall be
delivered.
18
ARTICLE 14 - MISCELLANEOUS
Representations and Warranties
14.1 The Tenant acknowledges that the Premises are leased by the Tenant without
any representations or warranties by the Landlord (including without limiting
the generality of the foregoing the condition of the Premises or permitted uses
thereof) other than as contained in this Lease.
Modification and Amendment
14.2 Save as herein provided, this Lease shall not be deemed or construed to be
modified or amended except by a duly executed written instrument.
Whole Agreement
14.3 Subject to the provisions of any other duly executed written instrument
this Lease contains the entire agreement between the parties hereto who hereby
agree that they shall be estopped from making any assertion to the contrary.
Non-Waiver
14.4 The failure of the Landlord to insist on the strict observance or
performance of any covenant or condition contained in this Lease or to exercise
any right or option hereunder shall not be construed to operate as a waiver or
relinquishment for the future of any such covenant, condition, right or option
and no waiver shall be inferred from or implied by anything done or omitted to
be done by the Landlord save only by express waiver in writing.
Force Majeure
14.5 If either the Landlord or the Tenant is delayed, hindered or prevented from
the performance of any covenant or agreement required hereunder by reason of any
Unavoidable Delay, as hereinafter defined, then performance of such covenant or
agreement shall be excused for the period during which such performance is
delayed, hindered or prevented and the time for the performance thereof shall be
extended accordingly, but this shall not operate to excuse the Tenant from the
prompt payment of Rent or any other payments required under this Lease or
remedying any default referred to in Section 10.5. "Unavoidable Delay" means any
prevention or delay of the performance of any covenant or agreement of a party
hereto due to a condition or cause beyond the reasonable control of the party
obligated so to perform except insolvency, lack of funds or other financial
cause.
19
Registration
14.6 The Tenant may register this Lease in the relevant Land Title Office
provided that all expenses related to the filing and search charges and any
other registration expenses, including putting the Lease in registrable form and
obtaining and approving an explanatory plan, if necessary, shall be borne by the
Tenant. The Tenant shall give the Landlord notice of its intention to register
the Lease.
Subordination
14.7 (a) This Lease is subject and subordinate to any mortgage or other
encumbrance which may now or at any time hereafter affect the
Premises or any part thereof.
(b) On request at any time and from time to time by the Landlord
or any such mortgagee or encumbrancer of the Premises, the
Tenant will as set out in the request either:
(i) attorn to such mortgagee or encumbrancer and become
bound to it as its tenant of the Premises for the
then unexpired residue of the Term and upon the terms
herein contained (subject always to the respective
priorities, as between themselves, of mortgagees or
encumbrancers who from time to time request such
attornment); or
(ii) postpone and subordinate this Lease to such mortgage
or other encumbrance with the intent and effect that
this Lease and all the rights of the Tenant will be
subject to the rights of such mortgagee or
encumbrancer as fully as if such mortgage or other
encumbrance had been made and registered in the
appropriate Land Title Office and all monies had been
advanced thereunder before the making of this Lease.
(c) Whichever of the foregoing may be requested (and
notwithstanding that any previous attornment and subordination
to such mortgagee or encumbrancer shall have been given) the
Tenant shall execute and deliver promptly to the Landlord or
other party so requesting, any instruments of attornment,
postponement or subordination which may be so requested to
give effect to the foregoing.
The Landlord agrees that as a condition to the Tenant subordinating its rights
as required in this section, the Landlord shall obtain (either within the
subordination agreement or separately) a non-disturbance agreement in form
satisfactory to the Tenant acting reasonably from the party to whom the Tenant's
rights are subordinated.
20
Joint and Several Liability
14.8 If two or more individuals, corporations, partnerships or other business
associations, or any combination of two or more thereof sign this Lease as
Landlord or Tenant, the liability of each such individual, corporation,
partnership or other business association to perform all other obligations under
this Lease (and in the case of the Tenant, to pay Rent) will be joint and
several. If the Tenant named in this Lease is a partnership or other business
association, the members of which by law are subject to personal liability, the
liability of each such member shall be joint and several.
Counterpart Execution
14.9 This Agreement may be executed in any number of counterparts by any one or
more of the parties. Each executed counterpart shall be deemed to be an original
and such counterparts shall together constitute one and the same agreement and
be binding on all parties.
Time of Essence
14.10 Time shall be of the essence of this Lease.
Governing Law
14.11 This Lease shall be governed by and construed in accordance with the laws
of the Province of British Columbia.
Survival of Obligations
14.12 All obligations of the Tenant which by their nature survive the expiration
or earlier termination of this Lease shall survive including, without
limitation, tenants, indemnities and obligation to leave the Premises on
termination as set out herein and to remove Hazardous Substances and indemnify
the Landlord with respect thereto as set out in Section 6.14.2.
Enurement
14.13 This Lease and everything contained herein shall be binding upon and enure
to the benefit of the parties hereto and their respective successors and
permitted assigns, heirs, executors, administrators and approved successors and
assigns, as the case may be.
21
Cumulative Rights
14.14 The rights and remedies of the Landlord in this Lease are cumulative and
not alternative and are in addition to and not in substitution for any rights
and remedies the Landlord may have at common law or in equity.
IN WITNESS WHEREOF the parties hereto have executed these presents the day and
year first above written.
/s/
- ------------------------------
RICHARD BRUCE PIERCE
GFR NUTRITIONALS LTD.
Per: _/s/_________________________
Exhibit 10-2
INDUSTRIAL LEASE
LEASE SUMMARY
THIS LEASE SUMMARY is attached to and forms part of the Indenture of
Lease August 1, 2002.
BETWEEN:
648504 B.C. LTD. (Inc. No. 648504), a body corporate
under the laws of the Province of British Columbia,
having its registered and records office at 7984
River Road, Delta, British Columbia,
(the "Landlord")
AND:
GFR NUTRITIONALS LTD., a body corporate under the
laws of the Province of British Columbia, having its
registered and records office at 1450 - 1075 West
Georgia Street, Vancouver, British Columbia, V6E 3C9
and having a place of business situate at 11405- 201A
Street, Maple Ridge, British Columbia, V2X 0Y3
(the "Tenant")
ARTICLE OR CLAUSE
Schedule A Civic Address of the Premises:
11450 - 201A Street, Maple Ridge, B,C.
1.1 Area of the Premises:
5,343 square feet (situate on west side of
building). In addition 1,200 square feet of
loading dock area common space (loading dock
area), that space to be kept clear by all
parties at all times
1.1 and 3 Term:
Month to month tenancy but subject to six
(6) months' written Notice of termination
1.1 Commencement Date:
November 15, 2002
- 2 -
1.1 Expiry Date:
Upon six (6) months' written notice of
termination
4.1(a)
Annual Basic Rent Commencing: November 15,
2002 payable as follows:
(a) 5,343 square feet at $5.50 per foot = $29,386 + GST per annum =
$2,448.88 + GST per month (presently $2,620.30per month)
(b) 1,200 square feet loading dock area x $5.50 per foot x .25% = $1,650.00
+ GST per annum or $137.50 + GST per month (presently $147.12 per
month)
4.1(b)
Additional Rent commences November 15, 2002
and Tenant shall on a monthly basis pay
5,343 x 96(cent) per annum totaling
$5,129.98 per annum being paid monthly at a
cost of $427.50 + GST per month, (presently
$29.93 per month) being the estimated
monthly cost of municipal land taxes, they
being one of the items of additional rent
payable hereunder
7.1 Use of Premises:
Shall be for storage of inventory and
equipment utilized by Tenant in the normal
operation of its business
16.4 Landlord's Address for Rent Payments and Notices:
c/o 7984 River Road, Delta, British
Columbia, V4G 1E3
16.4 Tenant's Address for Notices:
11405 - 201A Street, Maple Ridge, British
Columbia, V2X 0Y3 or its registered office
16.19 Deposit: $6,449.70 (which amount includes GST) to be applied against
the first and last months' basic rent
Schedule B Renewal option:
None
Schedules:
Schedule A-Legal Description of Lands
- 3 -
The articles, clauses, or Schedules of this Lease identified above in
the margin are those articles, clauses, or Schedules where references
to particular Lease information initially appears. Each such references
shall Incorporate the applicable information from this Lease Summary.
648504 B.C. LTD.
/s/
----------------------------------------
Authorized Signatory
GFR NUTRITIONALS LTD.
/s/
----------------------------------------
Authorized Signatory
Exhibit 10-3
GFR Nutritionals Ltd. 11405 - 201A Street
Maple Ridge, B.C. V2X 0Y3
PH:604-460-8440
FAX:604-465-8050
February 26, 2003
648504 B.C. LTD.
7984 River Road
Delta, B.C. V4G 1E3
Dear Sir or Madam:
Subject: Amend lease agreement.
GFR NUTRITIONALS LTD. requests that the lease agreement it has with 648504 B.C.
LTD. be amended to add and additional 4,667 square feet of warehouse space at
the building located at 11450 - 201A STREET, MAPLE RIDGE, B.C.. The original
lease will be changed as follows;
Section 4.1(a) should now read:
(a) 10,010 square feet at $5.50 per foot = $55,055.00 + GST per annum =
$4,587.92 + GST per month ($4,909.07).
Section 4.1(b) should now read:
Additional Rent commences March 1, 2003 and Tenant shall on a monthly
basis pay 10,010 x $0.96 per annum totaling $9,609.60 per annum being
paid monthly at a cost of $800.80 + GST per month, (presently $856.86
per month) being the estimated monthly cost of municipal land taxes,
they being one of the items of additional rent payable hereunder.
Section 16.19 should read:
Deposit: $9,818.14 (which amount includes GST) to be applied against
the first and last months' basic rent.
GFR will take possession of the additional space March 1, 2003 and pay 1/2
months lease cost of the additional space (calculated below) and an additional
$1,895.31 deposit. The due date for the lease payments will then be on the 15th
of each month.
Additional Price Per Annum Per Annum Month 1/2 Month
Space Squ Foot plus GST plus GST plus GST
4667 $5.50 $25,668.50 $27,465.30 $2,288.77 $1,144.39
4667 $0.96 $4,480.32 $4,793.94 $399.50 $199.75
---------
$1,344.13
=========
If you are in agreement please sign and date this letter below.
/s/ /s/
- ------------------------------ -------------------------------------
Date:_________________________ Date:_________________________________
RICHARD PIERCE AUTHORIZED SIGNATORY
GFR NUTRITIONALS LTD. 648504 B.C. LTD.
PRESIDENT AND CEO
Exhibit 10-4
LESSOR
Name: 517255 BC LTD Customer No:
Address: 21528 124th Avenue Lease No:001-1
Maple Ridge, BC
Telephone No: (604) 467-7073
Fax No: (604)467-2115
LESSEE
Name: GFR Nutritionals Ltd. Telephone No: (604) 460-8440
Address: 11405 201 A Street
Maple Ridge BC Postal Code: V2X 0Y3
Equipment Supplier Name: 517255 BC LTD
Address: 21528 124th Avenue,
Maple Ridge BC
Name and Title of Telephone No: (604) 467-7073
Person to Contact:
Leah Zavaglia, Sales Sales Representative: Leah Zavaglia
Name, Address and Telephone No. Equipment Location (if
of Landlord if Equipment is to different from Lessee's
be placed in Rental Premises: address above):
Richard Pierce Same as Above
21528 124th Avenue Maple Ridge
EQUIPMENT:
1-New Induction Capsealing System
2kW UniFoiler Series, Waterless System, CE, ETL Approved Model U2P170200000
Serial #AB10093-31 Machine is sold complete and in excellent condition
1-used Kailish Capper
Model
Serial #
LEASE CONDITIONS
Commencement Term No. of Payments Rental to Begin
Date (No. of Months)
months payments
Payments will be Amount P.S.T. G.S.T.
made in advance
(Monthly)
Total Lease Payment + taxes (monthly 16%)
TERMS AND CONDITIONS OF LEASE
The Lessee leases from the Lessor and the Lessor leases to the Lessee
the property described above and in (the "Lease") together with any parts,
accessories or attachments relating thereto or affixed thereon (the "Equipment")
upon the terms and conditions set forth in this Lease.
1. TERM
This Lease shall be effective from the date of acceptance by an
authorized representative of the Lessor. The Lease term commences on the
commencement date indicated above and, unless terminated earlier as provided for
in this Lease, shall end upon payment to the Lessor of the number of payments
specified under the terms of payment above, provided that all terms and
conditions of this Lease shall apply until the Equipment has been physically
returned to the Lessor. This Lease cannot be cancelled or terminated except as
expressly provided.
2. RENTAL
The Lessee agrees to pay the Lessor the number of payments in the
amounts specified together with all applicable provincial sales taxes and
federal goods and services taxes and any other sums as may become payable under
this Lease. Such rental payments shall be payable as follows: the first rental
payment shall be due upon execution of this Lease by the Lessee and subsequent
rental payments shall be due on the first of every calendar month or other
calendar period specified following the date of delivery of the Equipment. Such
payments shall be payable without demand or invoice, unless otherwise specified
by the Lessor, at the address of the Lessor shown above or as otherwise directed
by the Lessor. The Lessee shall pay or reimburse the Lessor for all expenses,
fees, charges, claims and demands incurred or arising in connection with the
registration, licensing or possession, use or operation of the Equipment and all
taxes and duties on or relating to the Equipment, and all other consequential or
ancillary expenses relating to the Equipment on this transaction shall be borne
by the Lessee. The rental and any other amounts payable under this Lease are
payable unconditionally and absolutely net to the Lessor without abatement,
set-off, diminution, compensation or other deduction whatsoever even if the
Equipment does not operate as intended by the Lessee or at all or the Equipment
is or becomes unacceptable for any other reason whatsoever.
3. ENTIRE AGREEMENT, REPRESENTATIONS AND WARRANTIES
This Agreement constitutes the entire agreement between the Lessor and
Lessee and the Lessee acknowledges that there are no promises, inducements,
representations, collateral warranties, warranties, conditions, options or
terms, oral or written, express or implied or otherwise, made by or on behalf of
the Lessor or operating in favour of the Lessee with respect to any aspect of
the Equipment (including, without limitation, its condition, design,
capabilities, operation, use, suitability, fitness, durability, quality,
merchantability or history (E.G., new, used, reconditioned)) or with respect to
the appropriate treatment of this Agreement or payments to be made pursuant
thereto for the Lessee's accounting or tax purposes, other than as may be
expressly stated in this Agreement. The Lessee acknowledges that it alone has
selected the Equipment and the supplier and that the Lessor has or will have
purchased the Equipment at the specific request of the Lessee. The Lessee
acknowledges and agrees that the sole functional obligation of the Lessor in
respect of the Equipment is to permit quiet possession of such Equipment on an
"as is" basis as long as the Lessee is not in default. In the event of an action
by the Lessor for failure to pay any amount owing, the Lessee waives all
defences predicated on any failure of the Equipment to function or perform as
intended by the Lessee or at all. The Lessor shall not be liable to the Lessee
for any loss, cost, expense or damage of any kind or nature whatever caused
directly or indirectly by the Equipment or the use, operation, ownership, or
maintenance of it, or for any loss of business or other damages whatsoever and
howsoever caused. In the event of any failure of the Equipment, it is the
Lessee's express intention that any exclusion of liability operating in favour
of the Lessor shall continue to bind the Lessee. The Lessee acknowledges that
neither an equipment supplier nor any salesperson is an agent of the Lessor. No
salesperson or agent or supplier is authorized to waive or alter any term or
condition of this Lease or to add any provision to it. Without limiting the
generality of the foregoing, any representation as to the Equipment or any other
matter by the supplier shall in no way affect the Lessee's duty to pay the rent
and perform its other obligations as set forth in the Lease. The Lessor hereby
assigns to the Lessee, to the extent permitted by law, all warranties, if any,
resulting from the sale of the Equipment by the supplier to the Lessor. Upon the
prior written request of the Lessee, and at the Lessor's expense, the Lessor
will co-operate with the Lessee, as may be reasonably necessary, in the
enforcement of any warranty, guarantee or other obligation made by the supplier
or manufacturer in respect of the Equipment.
4. TITLE
The Lessee acknowledges that ownership and title to the Equipment shall
remain vested in the Lessor. The Lessee shall have no right, title or interest
in the Equipment other than, conditional upon the Lessee's compliance with the
fulfilment of the terms and conditions of this Agreement, the right to maintain
possession and use of the Equipment for the Lease term. Such right to possession
and use shall be exercised only by the Lessee and/or competent employees of the
Lessee. The Lessor may require plates or markings to be affixed to or placed on
the Equipment indicating the Lessor is the owner. The Lessor and Lessee confirm
their intent that the Equipment shall always remain and be deemed personal or
movable property, even though the Equipment may become attached or affixed to
realty and regardless of the manner in which it may become affixed or attached.
The Lessee shall be responsible for any damage done to any real estate,
immovable property, building or structure by removal of the Equipment (whether
removal be effected by the Lessee, Lessor or any third party) and shall
indemnify and save harmless the Lessor from any and all claims, actions, suits,
proceedings, costs, expenses, damage and liabilities whatsoever arising out of,
connected with or resulting from the removal of the Equipment. The Lessee shall
obtain any landlord or mortgagee waiver as the Lessor may require.
5. LOCATION AND USE
The Equipment shall be maintained and used at the place designated and
not elsewhere without the prior written consent of the Lessor, which consent may
be arbitrarily withheld. The Lessee shall, at its own cost and expense, cause
the Equipment to be installed, maintained and operated prudently at all times
and, in compliance with the manufacturer's recommendation and the terms and
conditions of this Lease and all applicable laws and regulations, by competent
and qualified personnel only and for business purposes only. If the Equipment is
computer equipment, the Lessee shall, as part of its repair obligation, enter
into a written maintenance agreement with a maintenance supplier approved in
writing by the Lessor. No maintenance shall be performed on any of the Equipment
by other than a maintenance supplier approved in writing by the Lessor. The
Lessee agrees to readily accept any and all engineering changes made by any
manufacturer of any Equipment or by a maintenance supplier who services such
Equipment.
6. COMPLIANCE WITH LAWS
The Lessee, at its own cost and expense, shall comply with and conform
to all applicable laws, ordinances, regulations and legislation in any way
relating to the ownership, installation, testing, possession, use, operation,
repair, maintenance, servicing, transportation, storage or bailment of the
Equipment throughout the term of this Agreement and to the complete exoneration
of the Lessor from liability. The Lessee, at its own cost and expense, shall
keep the Equipment free of levies, liens and encumbrances and shall pay when due
all licence fees, registration fees, assessments, charges and taxes (municipal,
provincial and federal) which may be levied or assessed directly or indirectly
against or on account of the Equipment or any interest therein or use thereof.
If the Lessee shall fail to pay such items when due, the Lessor may pay such
licence fees, assessments, registration fees, charges or taxes, as the case may
be, in which event the cost thereof shall constitute so much additional rent
which shall be immediately due and payable and the Lessor shall be entitled to
all the rights and remedies provided in this Lease or otherwise in the event of
default of payment of rent.
7. MAINTENANCE AND INSPECTION
The Lessee shall at its own expense maintain the Equipment in a state
of good repair, condition and working order and shall furnish the Lessee with
all such parts or mechanisms required to keep the Equipment in the aforesaid
conditions in the event that it be repossessed by the Lessor. The Lessee shall
not without the prior written consent of the Lessor makes any alterations,
additions or improvements to the Equipment. All such alterations, additions or
improvements so made shall belong to and remain the property of the Lessor. No
loss or damage to the Equipment or any part of it shall affect or impair the
obligations of the Lessee which shall continue in full force and effect. The
Equipment shall be at the risk of the Lessee and the Lessee assumes the risk of
liability and shall pay for any loss or damage arising from or pertaining to the
possession, operation or use of the Equipment or from any cause whatever and,
without limiting the generality of the foregoing, liability or loss arising from
fire, theft, loss, confiscation or expropriation. The Lessor, its employees and
specifically authorized agents shall at all reasonable times have access to the
Equipment for the purpose of inspecting or testing it. The Lessee agrees that
the Lessor may substitute for the Equipment or any item of Equipment other
substantially similar Equipment in comparable condition to that of the
Equipment.
8. INSURANCE
The Lessee shall obtain and maintain for the entire term of this Lease,
at its own expense, property damage and liability insurance and insurance
against loss or damage to the Equipment including, without limitation, loss by
fire (including so-called extended coverage), theft, collision and such other
risks of loss as are customarily insured by "all risks" policies on the type of
Equipment leased and by businesses in which the Lessee is engaged, in such
amounts, in such form and with such insurers as shall be satisfactory to the
Lessor, provided however that the amount of insurance covering damage to or loss
of the Equipment shall not be less than the full replacement value of the
Equipment. Each insurance policy will name the Lessee as an insured and the
Lessor and its Assignees as an additional insured, and loss payee thereof, and
shall contain a clause requiring the insurer to give the Lessor at least
[thirty] days' prior written notice of any alteration in the terms of such
policy or of the cancellation of it. At the Lessor's request, the Lessee shall
furnish to the Lessor a certificate of insurance or other evidence satisfactory
to the Lessor that such insurance coverage is in effect, provided however that
the Lessor shall be under no duty either to ascertain the existence of or to
examine such insurance policy or to advise the Lessee in the event such
insurance coverage shall not comply with the requirements of this Lease. Upon
failure of the Lessee to provide evidence of insurance satisfactory to the
Lessor, the Lessor may purchase or otherwise provide such insurance and the cost
of it to the Lessor shall be deemed additional rent and shall be payable by the
Lessee on demand. The Lessee appoints the Lessor or its agent and attorney to
make claims and receive payment in accordance with the provisions of such
policies. The Lessee further agrees to give the Lessor prompt notice of any
damage to, or loss of, the Equipment or any part of it.
9. ASSIGNMENT
Without the prior written consent of the Lessor, the Lessee will not
assign any of its rights or sublet any Equipment or permit any Equipment to be
in the possession of anyone but the Lessee. The Lessor may assign or sell all or
any portion of its right, title and interest in and/or grant a security interest
in and to the Equipment on this Lease to any person or corporation or to lenders
or other parties providing funding (the "Assignees"). The Lessee consents to
such assignments and/or grants, agrees to promptly execute and deliver such
further acknowledgement, agreements and other instruments as may be reasonably
requested by the Assignee to effect such assignments and/or grants, from time to
time, and agrees to comply fully with the terms of any such assignments and/or
grants. In the event of any assignment, the Lessor shall notify the Lessee of
such assignment and thereafter all references to the Lessor shall include the
Assignee, provided however that the Lessor's failure to give such notice shall
not affect the validity of the assignment or the right of the Lessee, Lessor or
Assignee, and that the Assignee shall not be obligated to perform the
obligations of the Lessor unless the Assignee expressly agrees to do so in
writing.
10. STATEMENTS
Within [120] days of the close of each fiscal year, the Lessee agrees
to furnish the Lessor with financial statements (which financial statements
shall be audited if the Lessee has auditors or is required by law to appoint
auditors) prepared in accordance with generally accepted accounting principles
and in conformity with those of previous years and such other financial
information relating to the Lessee as the Lessor may reasonably request.
11. EVENTS OF DEFAULT
The occurrence or happening of any one or more of the following events
shall constitute an Event of Default:
(a) default and continuance thereof for [five] days in the payment
of rent or other charge payable by the Lessee under this
Lease;
(b) default in the observation or performance of any other term,
covenant or condition of this Lease or any other Lease or
other agreement between the Lessor and the Lessee whether
before or hereafter made;
(c) any representation or warranty made by the Lessee, or any
report, notice or other writing furnished by the Lessee to the
Lessor in connection therewith, being untrue in any material
respect;
(d) the Lessee suspending business or professional practice;
(e) if all or any part of the Equipment is, or may be in imminent
danger of being confiscated, sequestered or seized under
process of law;
(f) any act by the Lessee reducing the value or usefulness of the
Equipment, including failure to maintain or repair the
Equipment as required;
(g) the subjection of the Equipment to any lien, levy, charge or
encumbrance;
(h) the Lessee making a sale in bulk of its assets or becoming
insolvent or bankrupt or unable to pay its debts as they fall
due or any bankruptcy, reorganization, debt arrangement or
other proceeding under any bankruptcy or insolvency law or any
dissolution or liquidation proceeding being instituted by or
against the Lessee and, if instituted against the Lessee and
defended by the Lessee, remaining undismissed for [thirty]
days;
(i) the private or court appointment of a receiver or receiver and
manager or officer with similar powers over any part of the
Lessee's property;
(j) if any insurance placed or maintained pursuant to the terms of
this Lease shall lapse or be cancelled and shall not be
replaced by another policy within [ten] days after notice from
the Lessor to the Lessee;
(k) the Lessee parting with the Equipment;
(l) the Lessee, not having duly exercised for the time being the
option to renew this Agreement pursuant to Section 17, shall
fail to return all of the Equipment to the Lessor at the end
of the initial term [OR the end of the renewal term] in the
state of repair, condition and working order required by
Section 7, at the Lessee's cost, expense and risk.
12. REPUDIATION
If the Lessee shall fail to make any rental payment or other payment
required when due and such failure shall continue unremedied for a period of
[five] days after written notice by the Lessor, or the Lessee disposes of,
abandons, conceals or encumbers, or attempts or purports to dispose of, conceal
or encumber, any item of Equipment, it shall be conclusively presumed and deemed
that the Lessee has repudiated this Lease. The Lessee may, at its option, choose
to accept or ignore such repudiation or any other repudiation by the Lessee.
13. REMEDIES OF DEFAULT
Upon the happening of an Event of Default or in response to any
repudiation, whether deemed or otherwise, the Lessor may at its sole option:
(a) enter upon the premises where such Equipment is located and
take immediate possession thereof, whether it is affixed to
realty or not, and remove the same, without order of the court
and without liability to the Lessor for or by reason of such
entry and taking of possession, whether for damage to property
or otherwise, and sell, lease or otherwise dispose of the same
for such consideration and upon such terms and conditions as
the Lessor may reasonably deem fit;
(b) in the name of and as the irrevocably appointed agent and
attorney for the Lessee and without terminating or being
deemed to have terminated this Lease take possession of the
Equipment and proceed to lease the Equipment to any other
person, firm or corporation on such terms and conditions, for
such rental and for such period of time as the Lessor may deem
fit and receive such rental and hold the same and apply the
same against any moneys expressed to be payable from time to
time by the Lessee;
(c) terminate the Lease and, by written notice to the Lessee
specifying a payment date not earlier than [five] days from
the date of such notice, require the Lessee to pay to the
Lessor on the date specified in such notice,
(i) arrears of periodic rental payments as of the date of Lease
termination;
(ii) as a genuine pre-estimate of liquidated damage for
loss of a bargain and not as a penalty, the present
worth of the aggregate of all unpaid amounts yet to
become due as rental or otherwise to the expiration
of the term calculated by discounting such amounts at
[6%] per annum;
(iii) the amount of any residual interest which the Lessor
may have in the Equipment;
(iv) the Lessor's actual and/or estimated cost and
expenses (as applicable) of retaking, holding,
repairing, reconditioning, reconfiguring, processing,
preparing for disposition and disposing of the
Equipment including the Lessor's legal disbursements
and fees on a solicitor-and-his-own-client basis, as
specified in the Lessor's written notice to the
Lessee; and
(v) the interest charges provided for in Section 16.
14. REMEDIES CUMULATIVE
All rights and remedies provided are cumulative and are not intended to
be exclusive and in addition to any other right or remedy previously referred to
or otherwise available to the Lessor at law or in equity, and any one or more of
the Lessor's rights and remedies may from time to time be exercised
independently or in combination and without prejudice to any other right or
remedy the Lessor may have or may have exercised. The Lessee also expressly
agrees that the remedies contained in this Lease are commercially reasonable in
the circumstances. The amount received by the Lessor on any sale, lease or other
disposition of the Equipment will be applied: first, against the Lessor's costs
and expenses (as applicable) of retaking, holding, repairing, reconditioning,
reconfiguring, processing, preparing for disposition and disposing of the
Equipment including the Lessor's legal disbursements and fees on a
solicitor-and-his-own-client basis, bailiff's fees and charges, and sales or
leasing commission or brokerage charges paid by the Lessor; second, against
interest accrued on sums past due; third, against arrears of periodic rental
payments and/or other payments which arose prior to the date of Lease
termination, applied in the order in which such arrears arose; fourth, against
the genuine pre-estimate of the Lessor's damages for loss of bargain; and,
fifth, the balance, if any, shall belong absolutely to the Lessor.
15. WAIVER BY THE LESSOR
No covenant or condition of the Lease can be waived except by the
written consent of the Lessor and the forbearance or indulgence by the Lessor in
any regard whatever shall not constitute a waiver of the covenant or condition
to be performed by the Lessee to which the same may apply. Until complete
performance by the Lessee of said covenant or condition, the Lessor shall not be
entitled to invoke any remedy available to the Lessor under this lease or by
law, despite said forbearance or indulgence.
16. INTEREST ON OVERDUE PAYMENTS
Should the Lessee fail to pay any part of the rent provided for or any
other sum required to be paid to the Lessor by the Lessee on the due date
thereof, the Lessee shall pay to the Lessor, on demand, interest at the rate of
19% per annum compounded [monthly] upon such moneys due and unpaid until such
payments are paid.
17. RENEWAL
If the Lessee shall regularly pay the rent herein provided for and
perform the covenants and conditions on the Lessee's part contained in this
Lease, the Lessor at the expiration of the term and upon the written request of
the Lessee not less than [sixty] days before the expiration of the original term
will renew the lease on and subject to the same terms, covenants and conditions
including the covenants for renewal and payment of rentals, except that the
rental for each such renewal term shall be in an amount stipulated in writing
between the parties.
18. OPTION TO PURCHASE
The Lessee may purchase the Equipment at the expiry of the term of the
within Lease for 1.00% paid by the Lessor to the supplier plus relevant sales
taxes and other ancillary charges, the Equipment being provided on an "as is"
basis without any representations or warranties whatever as to any matter
relating to the Equipment, except that the Lessor has the right to sell the
Equipment and has done no act to encumber the same.
19. FURTHER ASSURANCES
The Lessee agrees, at its expense, promptly upon the Lessor's written
request, to execute and deliver such instruments and to take such other actions
as may reasonably be necessary in the opinion of the Lessor to perfect and keep
perfected as against third parties the property, title and interest of the
Lessor in the Equipment. The Lessee authorizes the Lessor to record or register
such documents at such times and at such places as the Lessor may consider
appropriate and agrees to pay all costs in connection therewith. Without
limiting the generality of the foregoing, the Lessee appoints the Lessor as its
attorney to register a financing statement or other security interest in the
Equipment in the favour of the Lessor or such other similar legislation in any
other province. The Lessee further agrees that the Lessor may insert the model
numbers and serial numbers of the Equipment leased under this Lease on a date
subsequent to its execution and the Lessee designates the Lessor as the Lessee's
attorney to insert such numbers and other identifying references to the
Equipment, as well as the commencement date of the initial term, the
commencement date of subsequent rental payments and the consequential
adjustments of rental amounts as provided for in Section 2. The lessee is
responsible for all legal costs pertaining to this agreement.
20. CREDIT INVESTIGATION
The Lessee hereby consents to the Lessor conducting a personal
investigation or credit check on the Lessee subject to applicable legislation.
21. HEADINGS
The insertion of headings in this Lease is for convenience of reference
only and shall not affect the interpretation.
22. PROVISIONS SEVERABLE
If any term, covenant or condition of this Lease or its application to
any person or circumstance shall to any extent be invalid or unenforceable, the
remainder of this Lease, or the application of such term, covenant or condition
to persons or circumstances other than those to which it is held invalid or
unenforceable, shall not be affected thereby and each term, covenant or
condition of this Lease shall be valid and enforced to the fullest extent
permitted by law.
23. INTERPRETATION
It is agreed by and between the parties that, whenever the context of
this Lease so requires, the singular number shall include the plural and vice
versa and that words importing the masculine gender shall include the feminine
and neuter genders and that, in case more than one Lessee is named as Lessee,
the liability of such Lessees shall be joint and several.
24. NOTICES
Any notice required or permitted to be given under this Lease must be
in writing and may be given by delivering or mailing the notice to the party to
receive the same at the address set forth in the Lease or such address as such
party may notify the other of in writing. Such notice shall be deemed to have
been given on the day of delivery if delivered or on the second business day
following the mailing if mailed.
25. MISCELLANEOUS
This Lease shall be binding on and enure to the benefit of the parties
and their respective heirs, executors, successors and permitted assigns and
Sub-Lessees. Time is of the essence with respect to this Lease and each and all
of its provisions. This Lease shall be governed according to the laws of the
province in which the Equipment is situate. The Lessee acknowledges having
received a true copy of this Lease. Both parties have required that this Lease
be drawn up in English. No variation or modification of this Lease shall in any
way be valid unless signed by authorized officers of the Lessor and the Lessee.
If more than one Lessee is named in this Lease, the liability of each shall be
joint and several.
THE UNDERSIGNED ACKNOWLEDGES having read the entire Lease Agreement and
accepts the terms and conditions hereof.
EXECUTED this fourteenth day of June, 2001.
The undersigned affirms that he or she is duly authorized to execute
this Lease Agreement
Lessor Lessee
517255 BC LTD GFR Nutritionals LTD
21528 124th Avenue 11405 - 201A Street
Maple Ridge BC Maple Ridge BC
BY:_____/s/__________________ By:___/s/_____________________
Leah Zavaglia Richard Pierce
Sales President
LESSEE ACKNOWLEDGES HAVING RECEIVED A TRUE COPY OF THIS LEASE.
Exhibit 10-5
THIS AGREEMENT dated for reference and effective on the 1st day of April, 2003.
BETWEEN:
R & L HEALTH INC., a company incorporated under the laws of
British Columbia having a business office at 11405-201A
Street, Maple Ridge, British Columbia, V2X 0Y3
(the "Licensee")
OF THE FIRST PART
AND: GFR NUTRITIONALS LTD., a company incorporated under the laws
of British Columbia having a business office at 11405-201A
Street, Maple Ridge, British Columbia, V2X OY3.
("GFR")
OF THE SECOND PART
AND: RICHARD PIERCE of 11405-201A Street, Maple Ridge, British
Columbia, V2X OY3.
("Personality")
OF THE THIRD PART
WHEREAS:
A: The Licensee is in the business of wholesale distribution and marketing of
natural health supplements and published literature and other similar products.
B: The Licensee wishes to use the name and image of Pierce (the "Personality")
on certain products which the Licensee intends to sell and R & L Health Products
which is related to the personality as set out in schedule A. Schedule A cab be
changed from time to time with both parties written consent.
C. GFR is a principal shareholder of the Licensee and manufactures certain
products for the Licensee.
In consideration for the mutual covenants and agreements herein contained, the
parties agree as follows:
1. GRANT OF RIGHTS USE - The Personality grants to the Licensee the right, for
the duration of this agreement, to use their name,initials and photographic
images or other likenesses of the Personality in such manner as both the
Licensee and the Personality consider appropriate in relation solely to certain
products to be distributed by the Licensee as agreed upon by the Licensee and
the Personality and subsequently listed on Schedule A to be attached hereto
("Products") on packaging of such Products and, when agreed, in relation to and
for the promotion, distribution and/or sale of Products.
In order for the Licensee to use the name or image of the Personality, the
Licensee shall first obtain the consent in writing of the Personality and shall
follow all of the requirements contained in such consent. The Personality shall
have the right to revoke or alter the consent from time to time, but so long as
the Licensee acts in accordance with such consent and this Agreement (but
subject to Section 11 hereof), the Licensee shall have the right to continue to
sell and distribute Products then in stock or irrevocably ordered and under
manufacture for the Licensee prior to the revocation of the consent which have
the name and/or image of the Personality on them. The Licensee will in no way
infer the support or endorsement by the Personality of products or use the names
or images of the Personality on products for which the Personality has not given
written consent.
2. ADVERTISING The Personality will have the right to review all advertising and
promotion materials regarding the Products or containing reference to her or
containing her photograph or likeness, including but not limited to labels on
bottles or packages, ("Advertising Materials"), prior to their release to the
general public and the Licensee shall not use any Advertising Materials unless
same have the prior written approval of the Personality.
3. BONUS - The Licensee agrees to pay the Personality the following Bonus on all
products listed in schedule A and calculated in the following manner:
3.1 In this agreement, the phrase "EBITDA" means the profit of the Licensee
determined in accordance with generally accepted accounting principles applied
on a basis consistent with prior years but without deducting income taxes,
depreciation or amortization as an expense.
3.2 From April 1, 2003 until this Agreement is terminated, the Licensee will pay
the Personality 10% ("Bonus").of its EBITD.
3.3 Within 60 days after the end of each fiscal quarter (except for the last
quarter of a fiscal year), beginning with the quarter ending June 30, 2003, the
Licensee will:
(a) estimate its EBITDA for that quarter; and
(b) give the Personality a cheque representing 10% (bonus) of the
estimated EBITDA for the quarter and a statement setting out the
calculation thereof.
3.4 Within 60 days after the end of each fiscal year, the Licensee will cause
its accountants:
(a) to prepare an income statement for the year;
(b) based on that statement and the definition of EBITDA, determine
the EBITDA for the year; and
(c) to prepare a statement ("Reconciliation") setting out the amounts
the Licensee has paid to the Personality on account of her Bonus
for the year and either the additional amount which the Licensee
owes the Personality on account of the Bonus for that year or the
amount the Licensee has overpaid the Personality.
3.5 Unless the Personality agrees in writing that the accountants may prepare
such an income statement without audit, the Licensee's accountants will, before
they produce the said income statement, audit the Licensee's financial records
for the year in question.
3.6 Within the said 60-day period, the Licensee will give the Personality copies
of the said income statement and, if the Reconciliation shows that the Licensee
owes the Personality money on account of the year's Bonus, a cheque for the
balance will be paid within 10 days.
3.7 If the Reconciliation shows that the Personality has been overpaid, the
Personality will pay the Licensee the excess amount within 10 days after the
Licensee gives her the income statement and the Reconciliation or, at the option
of the Licensee, the Licensee may deduct the excess from the next quarterly
payment(s) due to the Personality.
4. INTEREST - The Licensee agrees to pay to the Personality interest on any late
payments at a rate equal to the Royal Bank of Canada's prime rate plus 2%,
unless otherwise waived by the Personality.
5. AUDIT - The Personality has the right to audit the Licensee's relevant
financial books and records in order to confirm the accuracy of any Bonus
payments due to the Personality under the terms of this Agreement. In the event
the audit reveals a discrepancy between the amount of EBITDA reported by the
Licensee to the Personality and the actual amount of EBITDA realized, meaning
that the Personality received less than the full amount of the Bonus to which
the Personality was entitled, the Licensee will immediately pay to the
Personality the difference owing plus interest at the rate set out above.
6. TRADEMARK - The Licensee agrees to take all steps required by the Personality
from time to time to protect the intellectual property of the Personality in and
to her name and/or image and will apply for or obtain any trademarks or other
registered intellectual property protection only with the prior written
instruction and/or consent of the Personality. All such protection shall be at
the sole cost and expense of the Licensee.
7. PROMOTION - The Licensee will promote each Product to the extent the Licensee
considers reasonable having regard to the nature of such Product and other
relevant market considerations. The Licensee shall not be required to promote
Products that it does not consider to have viable economic potential. If the
Licensee does not consider a Product to have viable economic potential, the
Personality will be at liberty to develop and promote it independently.
8. DISPUTES - If either the Licensee or the Personality has any dispute
regarding this Agreement or its interpretation, the dispute shall be resolved by
arbitration under the Commercial Arbitration Act of British Columbia. This
Agreement shall be governed by and construed in accordance with the laws of
British Columbia.
9. INDEMNIFICATION The Licensee will indemnify and save the Personality harmless
from any and all liabilities, damages, costs, judgments, penalties and expenses
of any kind (including reasonable legal fees and disbursements) which the
Personality may incur or suffer by reason of breach by the Licensee of any
provision of this Agreement or that arises in connection with or in respect of
the promotion, sale and/or use of the Products including without limiting the
generality of the foregoing, any and all claims made or actions taken against
the Personality by third parties for products liability or improper marketing
with respect to the advertising, promotion, marketing, sale or use of any of the
Products. GFR, as the principal shareholder of the Licensee, covenants and
agrees that it is jointly and severally liable with the Licensee for all
obligations of the Licensee hereunder including, without limitation, the
foregoing indemnity.
10. ASSIGNMENT The Licensee may assign this Agreement only with the
Personality's written consent.
11. DEFAULT If the Licensee or the Personality makes any material default in the
terms of this Agreement, the non-defaulting person may give notice to the
defaulting person to remedy the default. The defaulting person shall remedy the
default within thirty (30) days or if thirty (30) days is insufficient to remedy
default, the defaulting person shall commence remedying the default within
thirty (30) days and shall continue expeditiously to remedy such default until
the default is fully remedied. This extension provision shall not apply to
financial obligations of the Licensee which the Licensee shall fulfill forthwith
when due. In the event the defaulting person does not remedy the default within
such period of time (or in the case of financial obligations of the Licensee
such obligations are not fulfilled by the Licensee when due), the non-defaulting
person has the right to terminate this Agreement on seven (7) days further
notice provided the default has not been remedied by the date of termination
specified in the notice. The notice of default shall state the specifics of the
default in reasonably precise terms so that the defaulting person is made aware
of the nature and circumstances of the default. All notices shall be in writing
and delivered to the recipient by courier or register mail to the addresses set
forth above.
12. QUALITY CONTROL The Licensee will use all reasonable commercial efforts to
test all Products for quality control and to meet all appropriate Good
Manufacturing Practices, standards, specifications and guidelines applicable for
such Products. The Licensee will conduct quality control testing of all Products
and such tests shall be comparable to those used elsewhere in the industry. The
Licensee will supply the Personality with copies of quality control test results
on request. The Personality also has the right to obtain a specimen or sample of
any of the products.
The Licensee expressly agrees not to offer for sale or sell, advertise, promote,
distribute or use for any purpose any Products that any person working in the
same industry would reasonably know to be damaged, defective or otherwise below
the quality requirements of this Agreement or as required by law.
13. TERM - This Agreement shall terminate three (3) months following the
termination of a Services Agreement made between the Personality and GFR
pursuant to which the Personality has agreed to provide services to GFR.
Termination of this Agreement shall not give rise to any claim by the
Personality against the Licensee or GFR regardless of the reason for termination
of the Services Agreement. Likewise, nor shall termination of this agreement
give rise to any claim by the licensee and GFR against the Personality
regardless of the reason for termination of the services agreement The
obligation of the Licensee to pay the Bonus ceases on termination, except for
unpaid Bonus arising from EBITDA prior to termination and the sale of all
products listed in schedule A which are manufactured and sold by the Licensee
and GFR subsequent to the termination of this agreement. The Licensee has the
right and obligation to continue to use all best efforts to sell products listed
in schedule A and in stock at the date of termination and until all products are
sold.. After twelve (12) months the Licensee will cease to use the Personality's
name or likeness for any purpose whatsoever.
14. REPRESENTATIONS AND WARRANTIES - The Licensee represents and warrants to the
Personality that:
(a) The Licensee has all necessary power, authority and capacity to enter
into this Agreement and to perform its obligations under this
Agreement.
(b) the execution and delivery of this Agreement and consummation of the
transactions contemplated under it have been duly authorized by all
necessary action on the part of the Licensee, and
(c) this Agreement constitutes a valid and binding obligation of the
Licensee, enforceable against it in accordance with its terms.
15. RELATIONSHIP OF PARTIES - The Personality's status under this Agreement
shall be that of an independent contractor. This Agreement is not intended to
create an agency or employment relationships between the Personality and the
Licensee.
16. COMPLIANCE WITH LAW - The Licensee will ensure that all activities related
to developing, promoting and selling the products as described in this
Agreement, shall comply with all applicable laws, regulations, orders and
ordinances.
17. TIME - Time is of the essence of this Agreement.
18. SCHEDULES - Any schedules to this Agreement are intended to be incorporated
into and form part of this Agreement; however, the section headings contained
herein are for the convenience of the parties only and shall not for any
purposes be deemed to be a part of this Agreement.
19. ENUREMENT - This Agreement shall enure to the benefit of and shall be
binding upon the Licensee's successors and permitted assigns and shall enure to
the benefit of and shall be binding upon the Personality heirs, executors,
personal administrators and permitted assigns.
20. NOTICE - All notices, demands or directions by one party to this Agreement
to the other party shall be in writing and delivered or sent by facsimile to
such party as follows:
(a) if to R & L HEALTH INC. and/or GFR NUTRITIONALS LTD.: 11405-201A
Street, Maple Ridge, B.C. V2X OY3 Attention: President Facsimile:
604-648-8052 Email: r_pierce@gfrnutritionals.com
(b) if to Richard Pierce: c/o R&L Health Inc, 11405 - 201 A Street, Maple
Ridge, BC V2X 0Y3 Facsimile 604-648-8052 Email:
r_Pierce@gfrnutritionals.com
or to such other address as may be specified by one party to the other in a
notice given in the same manner. Any notice, demand or direction given in such
manner shall be deemed to have been received by the party to whom it is given on
the date of delivery, if delivered, and on the business day following the
transmittal thereof, if sent by facsimile.
If normal telecommunication services is interrupted by strike, slowdown, force
majeure or by other cause, a notice, demand or direction sent by the impaired
means of communication will not be deemed to be received until actually received
and the party sending the notice, demand or direction shall utilize any other
such service which has not so been interrupted or shall deliver such notice,
demand or direction in order to ensure prompt receipt thereof.
21. PRIOR AGREEMENT - This Agreement supercedes an agreement made as of the 1st
day of April, 2003 between the parties hereto and Richard Pierce pursuant to
which the Personality was paid royalties based on Gross Sales.
R & L HEALTH INC.
Per:__/s/_________________________
Richard Pierce
GFR NUTRITIONALS LTD
Per:___/s/__________________________
Richard Pierce
/s/ /s/
- ------------------------------- -----------------------------------
RICHARD PIERCE WITNESS
------------------------------------
Address
------------------------------------
Schedule A
Product Name
1. ALL R&L HEALTHTM BRAND PRODUCTS INCLUDING 2. RECLEANSETM 3. R&L HEALTHTM
BRAND WHEY PROTEIN POWDER 4. R&L HEALTHHTM BRAND LEANFITTM 5. ALL SOYFERMTM RAW
MATERIAL
R & L HEALTH INC.
Per:____/s/_______________________ Date ____________________
Richard Pierce
____/s/ _______________________ Date ____________________
RICHARD PIERCE
Exhibit 10-6
Loan Agreement/Promissory Note between:
Borrower: GFR Nutritionals Ltd. of 11405 201A Street, Maple Ridge, BC V2X 0Y3
("Borrower")
Lender: George and Francia Pierce of 3313 Rakana Place, Coquitlam, B.C., V3C 1X1
(Lender")
Principal Amount: $80,000.00 CAD
1) FOR VALUE RECEIVED, GFR Nutritionals Ltd. (borrower) of 11405 201A
Street, Maple Ridge, BC V2X 0Y3 promises to pay George and Francia
Pierce (lender) of 3313 Rakana Place, Coquitlam, B.C., V3C 1X1, the
principal sum of $80,000.00 CAD with interest payable on the unpaid
principal at a rate of 12% per annum, calculated daily in advance.
2) This Note will be repaid at with written notice of demand and the
balance owing under this Note will be paid within 30 days of any such
notice of demand.
3) At any time while not in default under this NOTE, Borrower may pay the
outstanding balance then owing under this NOTE to Lender without
further bonus or penalty.
4) This Note will be construed in accordance with and governed by the laws
of the Province of British Columbia.
5) All costs, expenses and expenditures including, and without limitation,
the complete legal costs incurred by Lender in enforcing this Note as a
result of any default by borrower, will be added to the principal then
outstanding and will immediately be paid by Borrower.
6) This Note will enure to the benefit of and be binding upon the
respective heirs, executors, administrators, successors and assigns of
borrower and lender. Borrower waives presentment for payment, notice of
non-payment, protest and notice of protest.
I accept the terms of this promissory note.
/s/
--------------------------------------- -----------------------
Richard Pierce Date
President, GFR Nutritionals Ltd.
Witnessed by:
/s/
--------------------------------------- -----------------------
Signature Date
Exhibit 10-7
Loan Agreement/Promissory Note between:
Borrower: GFR Pharma Ltd. of 11405 201A Street, Maple Ridge, BC V2X 0Y3
("Borrower")
Lender: 517255 BC. Ltd. of 12310 201 Street, Maple Ridge, BC V2X 6A7
("Lender")
Principal Amount: up to $375,000.00 CAD
1. FOR VALUE RECEIVED, GFR Pharma Ltd. (borrower) of 11405 201A Street
Maple Ridge, BC promises to pay to 517255 BC Ltd. (lender) of 12310 201
Street, Maple Ridge, BC, the principal sum of up to three hundred and
seventy five thousand ($375,000.00) CAD, with interest payable on the
unpaid principal at the rate of prime plus 4% per annum, calculated
daily in advance.
2. This Note will be repaid in consecutive weekly installments until
Lender has provided Borrower with written notice of demand and the
balance owing under this Note will be paid within 30 days of any such
notice of demand.
3. At any time while not in default under this Note, Borrower may pay the
outstanding balance then owing under this Note to Lender without
further bonus or penalty.
4. This Note will be construed in accordance with and governed by the laws
of the Province of British Columbia.
5. All costs, expenses and expenditures including, and without limitation,
the complete legal costs incurred by Lender in enforcing this Note as a
result of any default by borrower, will be added to the principal then
outstanding and will immediately be paid by borrower.
6. This Note will enure to the benefit of and be binding upon the
respective heirs, executors, administrators, successors and assigns of
borrower and lender. Borrower waives presentment for payment, notice of
non-payment, protest and notice of protest.
I accept the terms of this promissory note.
/s/
- ----------------------------- ------------------------
Richard Pierce Date
President, GFR Pharma Ltd.
Witnessed by:
/s/
- ----------------------------- ------------------------
Signature Date
Exhibit 14
CODE OF ETHICAL PRINCIPLES AND RULES OF CONDUCT
INDEX
RULE PAGE
NO. NO.
PREAMBLE
ETHICAL PRINCIPLES
1. Responsibilities To Society 2. Trust and Duties 3. Due Care and
Professional Judgment 4. Deceptive Information 5. Professional Practice 6.
Responsibilities to the Profession
RULES OF CONDUCT
RESPONSIBILITIES TO SOCIETY
Discredit R101
Unlawful Activity R102
Discrimination R103
Breach of Rules R104
Member Advisor R104.1
Practice Review Committee R104.2
Criticism of a Professional Colleague R105
Notice Waived R105.1
Professional Colleagues R105.2
Reporting of Acts Detrimental to the Profession R106
Compatible Activities R107
Professional Practice other than Public Accounting R107.1
Constraints on a Professional Practice other than
Public Accounting R107.2
Referral for a Commission R107.3
TRUST AND DUTIES
Confidentiality R201
Mandatory Disclosure R201.1
Discretionary Disclosure R201.2
Conflict of Interest in Audit and Review Engagements R202
Audit and Review Engagements R202.1
Compilation Engagements R202.2
Participation in Management R202.3
Not-for-Profit Organizations R202.4
Deemed Conflicts of Interest R202.5
Deemed Freedom from Conflict of Interest R202.6
Members' Relationships with Others R202.7
Resolution of Conflict of Interest R203
Resolution of Other Conflicts of Interest R204
Fees, Commissions and Profits in the Normal Course
of Business R204.1
Disclosure of Services Provided to Other Clients R204.2
Information Used for Personal Advantage R205
Trusteeship R206
Money Held in Trust R206.1
DUE CARE AND PROFESSIONAL JUDGMENT
Competence R301
Professional Development R302
Responsibility and Control R303
Adherence to Acknowledged Principles and Standards
Of Professional Practice R304
Terms of Engagement R305
Sufficient Information R306
DECEPTIVE INFORMATION
Communication Issued in Connection with Financial
Information R401
Association with Financial Information R402
Employer/Employee Conflicts R402.1
Known Omission R403
Material Discrepancy R404
PROFESSIONAL PRACTICE
Bidding R501
Impairment of Incumbent Accountant R502
Services Provided on Referral R503
Replacement R504
Takeover R505
Fees R506
Commissions R507
Contingent Fee R508
Advertising and Other Forms of Solicitation R509
Misleading Name of Firm or Style of Practice R509.1
Preferred Areas of Practice R509.2
Restricted Practice R509.3
Advertising Format R509.4
Name of Practice R510
Specialization R511
Disclosure of Services Provided R511.1
Personal Practice when an Employee R512
Non-Member Partners R513
Representation of Firm R514
Marketing of Goods and Services R515
Registration R516
Practice Review Requirements R517
Professional Liability Insurance R518
Service by an Employee R519
Relations with Clients or Employers R520
Right to Take Cognizance R521
Students in Public Practice R522
Employment Offer R523
RESPONSIBILITIES TO THE PROFESSION
Compliance R601
Disciplinary Action R602
Jurisdiction of Disciplinary Action R602.1
Membership Obtained Fraudulently R603
Admittance to Membership R604
Responsibility for Firm R605
Use of Normal Business Methods R605.1
Detrimental Actions R606
Evidence of Professional Misconduct R607
Criminal and Similar Offences R607.1
Bankruptcy R608
Public Statements R609
Requirement to Reply in Writing R610
Assistance to the Board R611
Person Expelled or Suspended R612
Legal Action Against a Member R613
Use of CGA Reference by Students R614
DEFINITIONS
CODE OF ETHICAL PRINCIPLES
AND RULES OF CONDUCT
PREAMBLE
The Certified General Accountants' Associations in Canada have adopted a uniform
Code of Ethical Principles and Rules of Conduct developed by CGA-Canada. The
CGA-Canada Code of Ethics provides uniform rules and principles of professional
conduct and ethics by which members will conduct themselves in discharging their
professional duties and responsibilities.
The Certified General Accountants Association of British Columbia has
established additional rules in accordance with the Association's Bylaws. These
rules apply to members and students of the Certified General Accountants
Association of British Columbia. Any member or student who contravenes any of
these rules and/or principles shall be accountable to the Ethics Committee and
the Board of Governors of the Association.
Certified General Accountants shall always be mindful of their responsibilities
as members of the accounting profession, and shall carry on their work with
fidelity to clients or employers, with fairness to employees and with loyalty to
the Association, in a manner worthy of a Professional Accountant. It is expected
that a member shall encourage and assist students in their professional
development and in obtaining experience and proficiency required for membership.
A professional organization and its members are granted the legal right by
society to organize themselves, to control entrance into the profession, and to
formulate standards of behaviour governing its members. In return for this
right, members of the profession are to act in the interest of society and its
members. Provincial and Federal Acts, and the CODE OF ETHICAL PRINCIPLES AND
RULES OF CONDUCT formalize this arrangement. In order to fulfil this
responsibility, professionals must have a number of important character traits,
as well as the skill to make expert technical and moral judgments which serve
the interest of society.
Certified General Accountants thus have an important role to play in society. In
the performance of that role, many of a professional's actions have an effect on
the welfare of other people. Because of their social responsibilities, members
of a profession are obligated to act in the interest of these other parties, who
have a stake in the nature and quality of professional activities. These
stakeholders include employers, clients, various identifiable third parties, and
the public at large. Therefore, the professional organization and its members
have a stake in the performance of individual members. The CODE OF ETHICAL
PRINCIPLES AND RULES OF CONDUCT applies to the behaviour of members of the
Association when they either perform the role of a professional accountant or
represent themselves as members of the Association.
The role of a CGA is broad and general. It is defined in two ways: first, by
specifying the tasks which accountants characteristically perform and second, by
specifying the parties who are to benefit from the performance of those tasks
and how professional accountants should act in order to benefit them.
The characteristic tasks performed by Certified General Accountants include the
production, analysis, and distribution of information, in addition, the
provision of ancillary services related to the core expertise in accounting. The
CODE OF ETHICAL PRINCIPLES AND RULES OF CONDUCT governs the CGA's actions in the
performance of these tasks.
Certified General Accountants are committed to providing professional services
competently and with duecare. This requires extensive knowledge and experience,
and the ability to make appropriate judgments. Competence and due care imply the
necessity and ability to make ethical judgments. In addition, CGAs are committed
to improving the quality of professional services and the profession itself.
Certified General Accountants are committed to the public interest. Normally,
acting in the public interest is achieved by acting in the interest of one's
client or employer. However, whenever there is a conflict between these
interests, the professional's first obligation is to the public at large. Acting
appropriately in such situations may require the courage of one's convictions.
By virtue of their commitment to the public interest, Certified General
Accountants owe an obligation to other parties. In order to satisfy that
obligation, two elements of character are crucial to members of the CGA
profession. They must act with integrity and be trustworthy. Acting with
integrity means that they are committed to a high standard of behaviour and
strive to achieve it in their work. It implies the highest standard of
behaviour, and thus exceeds the minimum allowable under laws, regulations, or
specific professional pronouncements. Trustworthiness means that others may
safely put themselves in a position in which a CGA is expected to help them.
Integrity and trustworthiness imply the possession of other character traits,
including honesty, prudence, competence, loyalty to the proper beneficiaries of
their actions and objectivity. Objectivity in turn requires that Certified
General Accountants should be truthful and impartial, and should act fairly with
regard to the interests of themselves and others.
Certified General Accountants are also committed to avoiding conflicts of
interest. When a situation arises in which a conflict either cannot be avoided,
or it is undesirable to avoid from the beneficiaries' point of view, disclosure
of the conflict (and consent of the beneficiaries) is necessary. Furthermore,
CGAs are committed to protecting the confidentiality of information about their
client or employer which they obtain or produce in the course of performing
their role. This protection, however, is not absolute.
Certified General Accountants are committed to acting in accordance with all
applicable legal and professional standards. In situations where violation of
some standard occurs, the burden of proof is on the CGA to show why such an
action is justifiable.
The standards of conduct contained in the CODE OF ETHICAL PRINCIPLES AND RULES
OF CONDUCT provide standards of acceptable behaviour of Association members.
They apply to all members of the Association, and extend to students (except
where the wording of any Rule makes it clear that it specifically relates to
members only). These standards take the form of Ethical Principles and Rules.
Some of the basic principles apply to all CGAs; others relate specifically to
the role which members play when they provide professional services. They
provide a positive guide to members of the Association in their professional
activities to help them make judgments about how they ought to act. They also
provide a basis for enforcing a minimum level of acceptable behaviour.
The most important part of this document is the CODE OF ETHICAL PRINCIPLES. They
provide the ethical standards in accordance with which accountants are to make
their professional judgments. The RULES OF CONDUCT provide clear statements of
required or prohibited behaviour in specific situations. They are appropriate in
areas in which the standard of acceptable behaviour is either vague or
sufficiently important to formulate a written standard.
This CODE OF ETHICAL PRINCIPLES AND RULES OF CONDUCT is structured so that the
ETHICAL PRINCIPLES are relatively general and only rarely subject to revision.
As the profession and its environment change, it is anticipated that the RULES
OF CONDUCT will be amended occasionally by addition, modification, and deletion,
as warranted.
CODE OF ETHICAL PRINCIPLES AND RULES OF CONDUCT
ETHICAL PRINCIPLES
1. RESPONSIBILITIES TO SOCIETY
Members have a fundamental responsibility to safeguard and advance the
interests of society. This implies acting with trustworthiness,
integrity and objectivity. This responsibility extends beyond a
member's own behaviour to the behaviour of colleagues and to the
standards of the Association and the profession.
2. TRUST AND DUTIES
Members shall act in the interest of their clients, employers and
interested third parties, and shall be prepared to sacrifice their
self-interest to do so. Members shall honour the trust bestowed on them
by others, and shall not use their privileged position without their
principal's knowledge and consent. Members shall avoid conflicts of
interest.
3. DUE CARE AND PROFESSIONAL JUDGMENT
Members shall strive to continually upgrade and develop their technical
knowledge and skills in the areas in which they practice as
professionals. This technical expertise shall be employed with due
professional care and judgment.
4. DECEPTIVE INFORMATION
Members shall not be associated with information which the member
knows, or ought to know, to be false or misleading, whether by
statement or omission.
5. PROFESSIONAL PRACTICE
Members shall act openly and fairly towards others in the practice of
their profession.
6. RESPONSIBILITIES TO THE PROFESSION
Members shall always act in accordance with the duties and
responsibilities associated with being members of the profession, and
shall carry on work in a manner which will enhance the image of the
profession and the Association.
RULES OF CONDUCT
The RULES OF CONDUCT provide specific statements of the minimum standards of
acceptable professional behaviour. They provide clear statements about specific
ethical issues, but do not exhaust the range of enforceable ethical standards.
They are organized under the headings of the ETHICAL PRINCIPLES to which they
apply. The RULES OF CONDUCT also provide guidance concerning the application of
the rules to certain specific situations.
RESPONSIBILITIES TO SOCIETY
Members have a fundamental responsibility to safeguard and advance the interests
of society. This implies acting with trustworthiness, integrity and objectivity.
This responsibility extends beyond a member's own behaviour to the behaviour of
colleagues and to the standards of the Association and the profession.
R101 DISCREDIT
A member shall not permit the member's firm name or the member's name
to be used with, participate in, or knowingly provide services to any
practice, pronouncement or act which the member knows, or which a
reasonably prudent person would believe, would be of a nature likely to
discredit the profession.
R102 UNLAWFUL ACTIVITY
A member shall not permit the member's firm name or the member's name
to be used with, participate in, or provide services to, any activity
which the member knows, or which a reasonably prudent person would
believe, to be unlawful.
R103 DISCRIMINATION
A member shall not discriminate against a person for any reason,
including but not limited to the race, colour, sex, sexual orientation,
age, religion, national extraction or social origin of such person.
R104 BREACH OF RULES
Except as described in Rules R104.1 and R104.2, a member shall, subject
to Rule R105 and Rule R201, notify the Association of any breach of the
Code by another member, or any other situation of which the member has
sufficient knowledge which appears to put in doubt the competence,
reputation or integrity of members.
R104.1 MEMBER ADVISOR
A member or other person appointed by the Association as a member
advisor, or to a similar position, shall be exempt and prohibited from
reporting under these rules any matter of which the member becomes
aware in the course of the duties incumbent in such a position.
R104.2 PRACTICE REVIEW COMMITTEE
A member shall, when appointed by the Association to a Practice Review
Committee, or engaged by such a Committee to conduct a practice review,
be exempt and prohibited from reporting under these Rules any matter of
which the member becomes aware in the course of Association-related
duties except when:
(a) the Practice Review Committee files a complaint relating to a
breach of these Rules; or (b) he practice review was made on request of
a Panel of an Ethics Committee.
R105 CRITICISM OF A PROFESSIONAL COLLEAGUE
A member shall not criticize another professional colleague without
first submitting this criticism to that colleague for explanation.
Where the criticism may result in a complaint against the colleague
being lodged with the Ethics Committee, the member must, where
required, first submit that criticism in writing to the colleague for
explanation. The member thereafter shall inform that colleague as to
the action the member has taken concerning the criticism.
R105.1 NOTICE WAIVED
Notwithstanding Rule R105, a member may first submit a criticism of
another professional colleague to the Association should the matter be
considered of such a nature that prior written notice to that colleague
is not appropriate.
R105.2 PROFESSIONAL COLLEAGUES
"Professional Colleagues" includes any professional accountant, whether
or not that accountant is a member of the Association. The lodging of
an ethics complaint against a colleague is considered a criticism under
Rule R105.
R106 REPORTING OF ACTS DETRIMENTAL TO THE PROFESSION
A member shall report to the Association any situation of which the
member has sufficient personal knowledge and which the member thinks
may be detrimental to the profession.
R107 COMPATIBLE ACTIVITIES
A member may engage in any profession, trade, industry, office, or duty
except where these undertakings are detrimental to the public good or
to the standards of the profession.
R107.1 PROFESSIONAL PRACTICE OTHER THAN PUBLIC ACCOUNTING
A member engaged in the practice of public accounting may carry on a
business or practice in a related function through an organization
separate and distinct from such public accounting practice, either as a
proprietor or partner, or as a director, officer, or shareholder of a
corporation, and may associate with non-members for this purpose, in
accordance with the policy of the Association and subject to the
following provisions:
(a) the business or practice shall not be designated "Certified General
Accountant(s)"; and (b) no reference to any such business or practice
may be made in the letterheads, name plates,
professional cards or announcements of the public accounting
practice, nor may reference be made to the public accounting
practice in the letterheads, name plates, professional cards
or announcements of any such business or practice.
R107.2 CONSTRAINTS ON A PROFESSIONAL PRACTICE OTHER THAN PUBLIC ACCOUNTING
A member engaged in a professional practice other than public
accounting but not also engaged in the practice of public accounting
may, in carrying on such a practice, conduct these affairs (or the
firm's or corporation's affairs) free of the constraints imposed upon
members engaged in the practice of public accounting, but not in such a
fashion as to bring disrepute on the profession or the Association.
R107.3 REFERRAL FOR A COMMISSION
A member practising as described in Rule R107.2 shall not refer a
client for services to another member or firm engaged in the practice
of public accounting for a commission or other compensation.
TRUST AND DUTIES
Members shall act in the interest of their clients, employers and
interested third parties, and shall be prepared to sacrifice their
self-interest to do so. Members shall honour the trust bestowed on them
by others, and shall not use their privileged position without their
principal's knowledge and consent. Members shall avoid conflicts of
interest.
R201 CONFIDENTIALITY
A member shall not disclose or use any confidential information
concerning the affairs of any client, former client, employer or former
employer except as described in Rules R201.1 and R201.2.
R201.1 MANDATORY DISCLOSURE
A member shall disclose the employer's or client's affairs:
(a) where disclosure is compelled by a process of law or by a
statute; or
(b) where such information is required to be disclosed by the
Board or any Committees of the Association in the proper
exercise of their duties.
R201.2 DISCRETIONARY DISCLOSURE
A member is not prohibited from disclosing the employer's or client's
affairs:
(a) where properly acting in the course of the duties incumbent on
a member; or
(b) where a member becomes aware of apparent or suspected criminal
activity. Before making such a disclosure, a member should
obtain advice from a member of the appropriate Provincial or
Territorial Law Society as to the member's duties and
obligations as a citizen in the context of the member's
professional activities. A member so doing shall not be in
violation of this Rule regarding confidentiality by reason
only of the seeking or following of such legal advice or
reporting.
R202 CONFLICT OF INTEREST IN AUDIT AND REVIEW ENGAGEMENTS
A member shall, when engaged to audit or review financial statements or
other information, be free of any influence, interest or relationship
in respect of the client's affairs which impairs the member's
professional judgement or objectivity, or which, in the view of a
reasonable observer, may have that effect.
R202.1 AUDIT AND REVIEW ENGAGEMENTS
A member shall not issue a communication on financial information of an
organization unless the member is free of conflict of interest with
regard to that organization.
R202.2 COMPILATION ENGAGEMENTS
A member may issue a compilation engagement report as long as
appropriate disclosure of any relationship between the member and the
client is made in the Compilation Engagement Report.
R202.3 PARTICIPATION IN MANAGEMENT
When providing consulting services to an audit or review engagement
client, a member may only participate in the decision-making function
of the client in an advisory capacity.
R202.4 NOT-FOR-PROFIT ORGANIZATIONS
A member providing audit or review services to a not-for-profit
organization may accept an honorary or advisory position other than as
an officer or director with such not-for-profit organization as long as
the member does not assume administrative or financial responsibilities
or make decisions affecting the management of the organization.
R202.5 DEEMED CONFLICTS OF INTEREST
If the member or the member's partners in a public accounting practice
are engaged to provide audit or review services for a client, and any
of the following circumstances are present or were present during the
period being reported upon, a member is deemed to be not free of
conflict of interest:
(a) the member, any of the member's partners, or any employee of
the member assigned to the engagement is a director, officer
or employee of the client, or a person in the member's, the
partners' or the employees' immediate families is a director
or officer of the client;
(b) the member, any of the member's partners, any employee of the
member assigned to the engagement, or a person in the
member's, the partners' or the employee's immediate families:
(i) is indebted to the client, other than indebtedness
obtained or granted in the normal course of business;
(ii) owns or controls, directly or indirectly, any
interest in a share or debt obligation of the client,
other than that obtained or granted in the normal
course of business and which is material to the
individual and the member;
(iii) is appointed a trustee in bankruptcy, liquidator,
receiver or receiver-manager. This Rule shall not
apply to a solvent company provided that all the
shareholders agree to the appointment; or
(iv) is an executor, administrator or trustee of the
client estate, trust, charitable foundation, pension
or profit-sharing plan.
(c) any of the member's close relatives:
(i) holds an interest in the client that is material to
the holder or is a director, officer or employee of
the client and has the right or responsibility to
make decisions significantly affecting the affairs of
the client;
(ii) is an executor, administrator or trustee of the
client estate, trust, charitable foundation, pension
or profit-sharing plan; or
(iii) is an executor, administrator or trustee of an
estate, trust or charitable foundation which holds a
material interest in the client.
(d) the member, any of the member's partners or any employee of
the member assigned to the engagement, or a person in the
member's, the partners' or the employee's immediate families
is a member of a group of investors such as a private mutual
fund or an investment club which holds any shares, bonds,
debentures, mortgages, notes, advances or other instruments of
investment in a client. A member would not be considered in
breach of this Rule by reason only of the fact that the member
is engaged to report on the financial statement of a client
with whom the member or any of the member's partners, or a
person in the member's or the partners' immediate families,
carried out a commercial transaction, provided that the
transaction was on the same terms and conditions as are
normally allowed to other customers. This would include
receiving the client's normal terms for payment of accounts.
The member or any of the member's partners, or a person in the
member's or the partners' immediate families, should not
receive any special treatment or preference over and above
that granted to other customers.
R202.6 DEEMED FREEDOM FROM CONFLICT OF INTEREST A member is deemed to be free
of conflict of interest if:
(a) a trust, estate, custodianship or guardianship in which the
member or any of the member's partners, or the member's or the
partners' immediate families, has a beneficial interest held
in market lots, or investments, in an audit or review
engagement client or any associate thereof, provided that the
member or any of the member's partners, or the member's or the
partners' immediate families, did not have direct or indirect
control over the trust, estate, custodianship or guardianship;
or
(b) the member or any of the member's partners are making payments
to a retired partner who holds a direct or indirect financial
interest in, or a position or an appointment with, a client,
provided such payments to the retired partner were determined
as of the date of retirement in accordance with the terms of
the partnership agreement, and were not affected by subsequent
events.
R202.7 MEMBERS' RELATIONSHIPS WITH OTHERS For the purposes of this Rule R202:
(a) "immediate family" includes a member's spouse or spousal
equivalent, whether or not dependent, and persons, whether or
not related, who are dependent on the member or the member's
spouse or spousal equivalent;
(b) "close relative" includes a member's non-dependent children,
step-children, brothers, brothers-in-law, sisters,
sisters-in-law, grandparents, grandchildren, parents,
parents-in-law and their respective spouses or spousal
equivalents; and
(c) "partner" includes any person with whom the member carries on,
or during the period being reported upon, carried on, the
profession of public accounting in the form of a partnership,
including a limited liability partnership, as defined in
Section 6 of the B.C. Partnership Act. Partners also include
other shareholders in a professional corporation, where
allowed.
R203 RESOLUTION OF CONFLICT OF INTEREST
A member shall, within ninety (90) days of becoming aware that an
appointment contravenes Rule R202, either: (a) eliminate the
circumstances that cause the member to be in contravention, or (b)
resign from the engagement.
R204 RESOLUTION OF OTHER CONFLICTS OF INTEREST Subject to Rules R515 and
R520:
(a) A member shall inform a client or employer of any business
connections, affiliations and interests of which the client or
employer might reasonably expect to be informed.
(b) When recommending a service or product, a member shall clearly
disclose in writing to the client any conflict of interest the
member may have, or any fees or commissions the member may
receive regarding the service or product recommended.
(c) When selling a service or product, a member shall clearly
disclose in writing to the client any conflict of interest the
member may have, or any fees, commissions or profit the member
may receive regarding the service or product sold.
(d) A member shall, when rendering advice to two or more clients
who are parties to the same transaction, inform each of the
clients in writing that the member's services have been
retained by other parties to the transaction and that the
member may derive fees from such parties. Each party to the
transaction must also be advised in writing that confidential
information obtained may be disclosed to other parties to the
transaction. In addition, each party to the transaction must
provide written consent to the member acknowledging these
terms.
R204.1 FEES, COMMISSIONS AND PROFITS IN THE NORMAL COURSE OF BUSINESS
With regard to Rule R204(b) and (c), where it is normal industry
practice for the member to receive a fee, commission or profit, no
disclosure is required.
R204.2 DISCLOSURE OF SERVICES PROVIDED TO OTHER CLIENTS
For members engaged in the practice of public accounting, it may not be
necessary to disclose professional services that the member may be
rendering or proposing to render to other clients.
R205 INFORMATION USED FOR PERSONAL ADVANTAGE
A member shall not, without an employer's or client's consent, use
confidential information relating to the business of the member's
employer or client to directly or indirectly obtain a personal
advantage. Without limiting the foregoing, members shall not make
unauthorized use of confidential information relating to an employer's
or client's affairs obtained in the course of the member's duties by
taking any action, such as directly or indirectly acquiring any
interest, property or benefit.
R206 TRUSTEESHIP
Members who handle money or other property in trust shall do so in
accordance with the terms of the trust and the general law relating to
trusts. These members shall maintain such records as are necessary to
account properly for the money or other property.
R206.1 MONEY HELD IN TRUST
Money held in trust shall be kept in a separate trust account or
accounts in any bank, credit union or trust company. All income earned
by the trust is the property of the trust. All trust records shall be
reconciled on a monthly basis.
DUE CARE AND PROFESSIONAL JUDGMENT
Members shall strive to continually upgrade and develop their technical
knowledge and skills in the areas in which they practice as professionals. This
technical expertise shall be employed with due professional care and judgment.
R301 COMPETENCE
A member shall sustain professional competence by keeping informed of,
and complying with, developments in the acknowledged standards of the
profession in all areas in which the member practises or is relied upon
because of the member's profession.
R302 PROFESSIONAL DEVELOPMENT
A member shall undertake continuing education and professional
development activities in accordance with the standards and policies
established by the Association.
R303 RESPONSIBILITY AND CONTROL
(a) A member shall personally undertake or delegate to one or more
certificated members of the Association or a professional
colleague who is an accountant recognized by statutory
authority in British Columbia, the management of each public
practice office maintained by the member or the member's firm.
Such members or colleagues shall normally be in attendance at
such offices.
(b) A member engaged in the practice of public accounting who is
associated with nonmembers in such practice shall be
responsible to the Association for any failure of such
associates to abide by the Code of the Association.
(c) The practice of each office of any firm engaged in the
practice of public accounting in which one or more members
sharing proprietary interest with other public accountants who
are not certificated members shall be conducted under a style
such as "public accountants" or "professional accountants" and
shall be under the personal charge and management of a member
or other public accountant who shall be normally in attendance
in such office. No member or other public accountant in such
firm shall have the personal charge of more than one such
office, except for a part-time office.
R304 ADHERENCE TO ACKNOWLEDGED PRINCIPLES AND STANDARDS OF PROFESSIONAL PRACTICE
Members shall adhere to acknowledged principles and standards of
professional practice. This phrase expresses a wide meaning, namely
that body of principles and practices which have been generally adopted
by the profession and which are applied in the preparation of financial
statements, taken together with the requirements of any governing
statutes, subject to (f) below. That is, a member shall adhere to:
(a) generally accepted accounting principles in financial reporting
unless departure from these principles is fully disclosed;
(b) generally accepted auditing standards or general review standards
in an attest engagement; (c) accounting and auditing practices
recommended by the Association, including those found in:
(i) the courses of studies; (ii) seminars offered by the
Association; (iii) the CGA-Canada PUBLIC PRACTICE MANUAL; and
(iv) the CICA HANDBOOK;
(d) accounting and auditing practices that differ from those
recommended by the Association, provided that there is
substantial authoritative support for alternative treatment
and the departure from the Association's recommendations is
disclosed;
(e) accounting and auditing practices not specifically dealt with
by the Association but which are otherwise generally accepted;
and
(f) requirements of any governing act or regulation, providing,
however, in the event that there is a conflict between the
accounting and auditing standards of the profession and a
specific statutory or regulatory requirement, the member shall
make appropriate qualification in the report.
R305 TERMS OF ENGAGEMENT
(a) A member shall state clearly in writing to a client the nature
and scope of services to be rendered under the terms of the
engagement.
(b) Rule 305(a) does not apply if the engagement is solely to
prepare and/or file a persons tax return.
R306 SUFFICIENT INFORMATION
A member shall not permit the firm name or the member's name to be used
with any communication or recommendation concerning financial
information unless the member has considered all the information
required to support such communication or recommendation.
DECEPTIVE INFORMATION
Members shall not be associated with information which the member knows, or
ought to know, to be false or misleading, whether by statement or omission.
R401 COMMUNICATION ISSUED IN CONNECTION WITH FINANCIAL INFORMATION
A member shall not issue a communication on any financial information,
whether for publication or not, when the information is prepared in a
manner which might tend to be misleading.
R402 ASSOCIATION WITH FINANCIAL INFORMATION
A member shall not sign or be associated with any letter, report,
statement, representation or financial statement which the member
knows, or ought to know, is false or misleading, regardless of any
disclaimer of responsibility.
R402.1 EMPLOYER/EMPLOYEE CONFLICTS
It is recognized that, under exceptional circumstances, compliance with
Rule R402 may place a member in a difficult position vis-a-vis the
member's employer. Nevertheless, it is a breach of professional duty if
the member becomes associated with any letter, report, statement,
representation or financial statement which the member knows, or ought
to know, is false or misleading.
R403 KNOWN OMISSION
A member shall disclose any fact or information known to the member
which is not disclosed in the financial information, the omission of
which would make that information misleading.
R404 MATERIAL DISCREPANCY
A member shall immediately disclose any material discrepancy that
becomes known to the member concerning financial information on which
the member has issued a communication, or with which the member is
associated.
PROFESSIONAL PRACTICE
Members shall act openly and fairly towards others in the practice of their
profession.
R501 BIDDING
A member shall not engage in bidding practices for professional
services which use unfair methods of competition.
R502 IMPAIRMENT OF INCUMBENT ACCOUNTANT
(a) A member engaged in the practice of public accounting, when
not limited or restricted in writing by the terms of the
assignment, shall, before commencing any special assignment
for a client of another public accountant, first notify such
accountant of the assignment.
(b) A member shall not, when accepting a special assignment (whether
by referral or otherwise) from a client of an accountant who is
continuing in the relationship with that client, take any action
which would tend to impair the position of the other accountant in
the ongoing work with that client.
R503 SERVICES PROVIDED ON REFERRAL
A member shall not, when receiving a special assignment for services by
referral from another accountant, provide or offer to provide any
different services to the referring accountant's client without the
consent of the referring accountant. The referring accountant, if a
member, shall not unreasonably withhold such consent.
R504 REPLACEMENT
(a) A member engaged in the practice of public accounting shall,
before accepting an appointment to replace another
professional accountant or firm, inquire from such other
professional accountant or firm in writing whether there is
any professional reason why such appointment should not be
accepted.
(b) When a member who is a sole proprietor engaged in the practice of
public accounting dies, other members should, for a reasonable
period of time, continue to consider the clientele as being served
by an accountant. It is recognized that some time may be necessary
for the estate of the deceased member to arrange for a proper sale
of the practice. It is also recognized that, in some cases,
clients may require immediate service and may not be able to await
the orderly disposal of the practice. Any member who is approached
to take over the account of a prospective client who had been
served by a deceased member, shall communicate with the
Association before agreeing to assume the account.
R505 TAKEOVER
A member engaged in the practice of public accounting shall respond
promptly to takeover letters received from other professional
accountants. There must be readiness to co-operate with the successor,
recognizing that the client's interests are paramount. Provided all
outstanding billings have been paid, the member shall supply reasonable
information to the successor accountant about the work being assumed.
R506 FEES
A member engaged in the practice of public accounting shall establish a
fee structure for services rendered. A member engaged in the practice
of public accounting shall not profess that any professional services
are performed without charging a fee, except for the provision of
services to a charitable or not-for-profit organization.
R507 COMMISSIONS
A member engaged in the practice of public accounting shall not,
directly or indirectly, accept a commission as a fee for work turned
over to another person. This does not pertain to the sale of an
accounting practice or part thereof.
R508 CONTINGENT FEE
A member shall not undertake an audit, review, compilation engagement
or original tax return preparation for a fee which is contingent on the
results of such services.
R509 ADVERTISING AND OTHER FORMS OF SOLICITATION
A member shall not seek to obtain clients by advertising or other form
of solicitation that: (a) is false or deceptive; (b) includes the use
of harassing conduct; (c) creates an unjustified expectation of
favourable results; or (d) contains self-laudatory statements that are
not verifiable.
R509.1 MISLEADING NAME OF FIRM OR STYLE OF PRACTICE
(a) A member shall not engage in the practice of public accounting
under a non-personal title or name either as a principal or
partner or as a director, officer or shareholder where the
member has control of the ownership or management of a
corporation or firm which is engaged in the practice of public
accounting.
(b) A member shall not engage in the practice of public accounting
or in the public practice of any function consistent
therewith, under a name or style which is misleading as to the
nature of the organization (proprietorship, partnership or,
where permitted, corporation) or the nature of the functions
performed.
R509.2 PREFERRED AREAS OF PRACTICE
A member shall be permitted to refer to preferred or restricted areas
of practice in advertising, on business cards or on letterhead.
R509.3 RESTRICTED PRACTICE
A member whose practice is restricted to T1 (personal tax returns)
preparation services only is required to indicate this restriction in
all telephone directory or media advertising, unless the advertisement
is placed under a heading which specifies this restriction.
R509.4 ADVERTISING FORMAT
(a) A member shall be permitted to advertise only in an objective,
informative, tasteful and professionally dignified manner in
any medium that is generally available to all members and in
which such placement does not, in the opinion of the
Association, tend to lower public respect for the profession.
(b) The stationery and advertising of a member engaged in the
practice of public accounting should be dignified in form and
may include the official shield and logo of the Association.
R510 NAME OF PRACTICE
(a) Proprietorship or Sole Corporation:
(i) A member shall, when engaged in the practice of public
accounting as a Certified General Accountant as a sole
proprietor, or as a sole corporation, ensure that the firm
name consists of the member's own name or the name of the
predecessor who had practised as a Certified General
Accountant, with or without the addition of "& Co." or a
similar term after the name. The member shall make it clearly
understood to the public that the practice is not a
partnership with one or more persons. In addition, the firm
shall be described only as "Certified General Accountant".
(ii) A member whose name is legally changed may be permitted
to use the former name without being considered in breach of
this Rule. (iii) A member shall, when practising as a sole
corporation, make it clearly understood to the public that the
member is practising as a professional corporation. (iv) A
member shall, when practising as a sole corporation, ensure
that the corporate name consists of a name allowed for the
member's firm name under subsection (a)(i) of this Rule, and
the corporate identification as allowed by the B.C. Business
Corporations Act.
(b) Partnership or Multiple Member Corporation:
(i) A member shall, when engaged in the practice of public
accounting as a Certified General Accountant and when
practising the profession as Certified General Accountants in
a partnership of members or professional corporations or any
combination of members and professional corporations, or in a
professional corporation with more than one member holding
voting shares, ensure that the firm name consists of one or
more names of the partners, former partners, voting
shareholders or predecessors who had practised as Certified
General Accountants with or without the addition of "& Co." or
a similar term after the name. In addition, the firm shall be
described only as "Certified General Accountants".
(ii) A member whose name is legally changed may continue to use the
former name in the partnership name without being considered
in breach of this Rule.
(iii) A member shall, when practising as a partnership, clearly
identify to the public those partners of the firm, if any,
practising as professional corporations.
(iv) A member shall, when practising as a professional corporation
with more than one member holding voting shares, clearly make
it understood to the public that the firm is incorporated.
(v) A member shall, when practising as a multiple member
corporation, ensure that the corporate name consists of one or
more names of the voting shareholders, former voting
shareholders or predecessors who had practised as Certified
General Accountants, with or without the addition of "& Co.",
and with the addition of the corporate identification as
allowed by the B.C. Business Corporations Act.
(vi) A member shall, when practising as a limited liability
partnership, ensure that the firm name consists of the names
of the limited liability partners or predecessors who had
practised as Certified General Accountants, in accordance with
the identification as allowed by Section 6 of the B.C.
Partnership Act.
R511 SPECIALIZATION
A member shall only use the title of "Specialist" in conjunction with
their designation, "Certified General Accountant " or "CGA", if all the
requirements established by the Association have been satisfied.
R511.1 DISCLOSURE OF SERVICES PROVIDED
A member engaged in the practice of public accounting may, in
conjunction with the designation "Certified General Accountant " or
"CGA", use the title or titles describing the particular type of
services the member provides, but without holding out that the member
is a specialist.
R512 PERSONAL PRACTICE WHEN AN EMPLOYEE
A member shall not undertake professional services for the member's own
benefit without first advising, in writing, the member's employer.
R513 NON-MEMBER PARTNERS
(a) A member shall practise in a partnership including a limited
liability partnership, described as a firm of "Certified
General Accountants" only if all the partners, including those
practising as a professional corporation, where allowed, are
certificated members in good standing with the Association and
are registered in public practice.
(b) A member shall not associate in any way with any firm
practising as Certified General Accountants in British
Columbia unless: (i) all partners resident in British Columbia
are members of the Association or corporations holding a valid
"incorporation permit" from the Association; and (ii) at least
one partner is a member of the Association or a corporation
holding a valid "incorporation permit" from the Association.
R514 REPRESENTATION OF FIRM
A member engaged in the practice of public accounting shall not
represent or imply that the member or the member's firm: (a) has an
office in an area where the member or the firm is only represented by
another
member, where that latter member in addition to representing
the first member carries on a practice under a different firm
name; or
(b) maintains an office of another firm of public accountants where
the member or the member's firm only represents that other firm of
public accountants.
R515 MARKETING OF GOODS AND SERVICES
A member shall not engage in the marketing of goods and services other
than professional services for a profit through the member's public
practice firm.
R516 REGISTRATION
A member shall, if engaged in the practice of public accounting part
time or full time, register in accordance with the requirements
prescribed by the Association. This rule shall also apply to members
who own, operate or control a professional corporation or a limited
liability partnership engaged in the practice of public accounting.
R517 PRACTICE REVIEW REQUIREMENTS
A member shall comply with, and adhere to, the practice review
requirements of the Association and the standards contained therein.
R518 PROFESSIONAL LIABILITY INSURANCE
A member engaged in the practice of public accounting shall maintain
professional liability insurance as specified, and provide evidence of
such insurance as required, by the Association. Upon withdrawing from
the practice of public accounting as a proprietor, partner, limited
liability partner or professional corporation, a member shall provide
evidence to the Association that the member has acquired professional
liability insurance described as "insurance in perpetuity" having the
minimum policy amount and requirements specified by the Board.
R519 SERVICE BY AN EMPLOYEE
A member shall not permit an employee to perform professional services
which the member is not permitted to perform unless the employee has
been granted a licence to perform such professional services.
R520 RELATIONS WITH CLIENTS OR EMPLOYERS
Subject to Rule R204.1:
(a) A member shall not, when acting on behalf of a client or
employer, bargain for the member's own use any fee,
remuneration, or benefit from a third party without the
client's or employer's written consent.
(b) A member shall not accept commission or other remuneration
from investment dealers or insurance brokers for the trading
of securities or placement of insurance for clients.
R521 RIGHT TO TAKE COGNIZANCE
A member shall respect the right of any client, providing that the
member's professional fees have been paid, to have reasonable access to
the documents in any financial record made by the member concerning the
client, and to obtain copies of those documents.
R522 STUDENTS IN PUBLIC PRACTICE
A student shall not engage in the practice of public accounting
independently or in association with others. This Rule shall not
restrict a student from being an employee of a public practice firm.
R523 EMPLOYMENT OFFER
A member shall inform another member of the member's intention to offer
employment to an employee of that member. This restriction does not
apply if employees approach a member on their own initiative or in
response to a public advertisement.
RESPONSIBILITIES TO THE PROFESSION
Members shall always act in accordance with the duties and responsibilities
associated with being members of the profession, and shall carry on work in a
manner which will enhance the image of the profession and the Association.
R601 COMPLIANCE
A member shall comply with the Bylaws and the Code of the Association
as amended from time to time, and with any order or resolution of the
Board or its committees under the Bylaws.
R602 DISCIPLINARY ACTION
A member shall be subject to disciplinary action for any offence which
constitutes a breach of professional conduct.
R602.1 JURISDICTION OF DISCIPLINARY ACTION
A member shall be subject to disciplinary action only through the
member's Provincial Association or Ordre Professional. In circumstances
where no Provincial Association or Ordre Professional has jurisdiction,
the member shall be subject to disciplinary action by the Board of
Directors of CGA Canada as provided by its Bylaws.
R603 MEMBERSHIP OBTAINED FRAUDULENTLY
(a) A member shall not obtain admission to membership by means of fraud
or other irregularity. (b) A member shall notify the Association
immediately regarding a person who has obtained
membership by means of fraud or other irregularity.
R604 ADMITTANCE TO MEMBERSHIP
(a) A member shall report to the Association a fact known to that
member sufficient to affect the admittance as a member of any person
whose admission may be detrimental to the Association.
(b) An individual shall, when applying to become a student or a member,
not sign or be associated with any related letter, report, statement or
representation which the applicant knew, or ought to have known, was
false or misleading.
(c) A member shall comply at all times with the principles, obligations
and responsibilities in t he Oath of Obligation, as follows:
I as a member of THE CERTIFIED GENERAL ACCOUNTANTS ASSOCIATION
OF BRITISH COLUMBIA acknowledge that as such I have an
obligation to the science and art of accountancy. I therefore
do most sincerely promise and solemnly swear to discharge
actively this obligation and more specifically -
To uphold the standards of my profession and continually
search for new truths and disseminate my findings.
To keep myself fully informed of developments in the field of
accountancy and to co-operate with others in the use of our
common knowledge.
To guard the interests of my principals and employers, whose
trust I hold, and to advise them wisely and honestly.
To do all in my power to assure the progress and contentment
of my fellow workers and at all times to deal with them fairly
and openly, sharing of my acquired knowledge and experience
freely.
To recognize my dual obligation to society, arising through my
personal and professional relations in the social and economic
life of our nation.
To recognize my continuing obligation to my country and to the
chosen way of life of my fellow citizens.
To conduct myself and my actions in accordance with the spirit
and the letter of the law, regulations and CODE OF ETHICAL
PRINCIPLES AND RULES OF CONDUCT.
All this I do swear without any equivocation, mental evasion
or secret reservation.
So help me God.
R605 RESPONSIBILITY FOR FIRM
A member engaged in the practice of public accounting who:
(a) is associated with a firm or corporation carrying on a
business or practice as described in Rule R107.1, whether as
principal, partner, director, officer or shareholder; and
(b) has a significant influence on the ownership or management of
such firm or corporation, shall be responsible to the
Association for any failure of such firm or corporation to
abide by the Code of the Association.
R605.1 USE OF NORMAL BUSINESS METHODS
A firm or corporation carrying on a business or practice as described
in Rule R107.1 may use normal business methods to solicit business for
its own functions, but such methods may not be used, or appear to be
used, for the solicitation of clients for the public practice with
which the member is associated.
R606 DETRIMENTAL ACTIONS
(a) A member shall not participate in any action which is
detrimental to the Association or the profession.
(b) A member shall, subject to Rules R201 and R514, report to the
Association any situation of which the member has sufficient
personal knowledge and which the member thinks may be
detrimental to the Association or the profession.
R607 EVIDENCE OF PROFESSIONAL MISCONDUCT
A member who has been found guilty or granted an absolute or
conditional discharge of any criminal or similar offence which may cast
doubt as to that member's honesty, integrity or professional
competence, shall promptly inform the Association in writing of the
conviction, finding of guilt or discharge, as the case may be, when the
right of appeal has been exhausted or expired. In such cases, the
member may be charged with professional misconduct by the Ethics
Committee. In such cases, satisfactory evidence of the conviction,
finding of guilt or discharge issued by any competent court shall be
sufficient evidence of the conviction and the perpetration of the
offence.
R607.1 CRIMINAL AND SIMILAR OFFENCES
Criminal or similar offences include, but are not limited to, the
following offences:
(a) fraud, theft, forgery or income tax evasion;
(b) violation of the provisions of any securities legislation; or
(c) any criminal or similar offence for conduct in, or related to,
the member's professional capacity, or for conduct in
circumstances where there was reliance on the member's
membership in, or association with, the Association.
R608 BANKRUPTCY
A member shall immediately notify the Association if the member becomes
bankrupt.
R609 PUBLIC STATEMENTS
A member shall not make public statements or comments which may be
interpreted as representing the Association or its views, except when
authorized to act as an "official spokesperson" for the Association.
R610 REQUIREMENT TO REPLY IN WRITING
A member shall promptly reply in writing to any request from the
Association in which a written reply is specifically required.
R611 ASSISTANCE TO THE BOARD A member shall, when required:
(a) comply with the request of the Board or its committees in the
exercise of their duties in matters of the appropriate CGA
Act, the Bylaws or the Code; and
(b) produce any documents in the member's possession, custody or
control, subject to Rules R201 and R104.2.
R612 PERSON EXPELLED OR SUSPENDED
A member shall, before knowingly employing a person who has been
expelled or who is under suspension from any accounting body, obtain
through the Association the facts concerning the expulsion or
suspension.
R613 LEGAL ACTION AGAINST A MEMBER
A member shall, before entering into a legal action against another
member which might discredit the profession, give the Association as
much notice as is possible of such an intention, outlining the basis of
the proposed action.
R614 USE OF CGA REFERENCE BY STUDENTS
Students shall not make any reference to the Association, its name or
its designation on stationery, business cards, business announcements,
business directories, office signs or advertising.
DEFINITIONS
"ASSOCIATION"
The Certified General Accountants Association of British Columbia.
"BOARD"
The Board of Governors of the Certified General Accountants Association
of British Columbia.
"CLIENT"
The person or entity engaging a member as an independent contractor for
the performance of professional services.
"CODE"
The CODE OF ETHICAL PRINCIPLES AND RULES OF CONDUCT of the Association,
as amended from time to time.
"COMMUNICATION"
Refers to one of three reports prepared for the client:
(a) AUDITOR'S REPORT:
The report which accompanies financial statements on which the
member has performed an audit, and which expresses an opinion
on the fairness of those financial statements.
(b) REVIEW ENGAGEMENT REPORT:
The report accompanying unaudited financial statements in
which the member provides a limited degree of assurance about
those financial statements.
(c) COMPILATION ENGAGEMENT REPORT:
A disclaimer signed by or identified with the member clearly
stating that neither an audit nor a review has been performed,
and that no other attempts to verify the accuracy or
completeness of the financial statements have been made.
"FINANCIAL STATEMENTS OR INFORMATION"
Statements, reports and footnotes related thereto that purport to show
an entity's financial position, or results of operations or changes in
financial position. This term includes balance sheets, income
statements, cash flow statements and statements of retained earnings or
statements of changes in owners' equity. In the case of not-for-profit
organizations, this term includes statements of financial position,
statements of operations, statements of changes in net assets and
statements of cash flows. This term does not include incidental
financial data included in management advisory or similar reports to
support recommendations to a client.
"FIRM"
A proprietorship, partnership, or professional corporation engaged in
the practice of public accounting.
"MEMBER"
An individual who holds a Certified General Accountants Association of
British Columbia designation, and is in good standing. Where
applicable, the term includes duly registered students.
"MEMBER ADVISOR"
A person or persons appointed by the Association for the specific
purpose of providing professional assistance to members, including
members engaged in or entering the practice of public accounting. In
British Columbia this position is designated to be the Public Practice
Advisor.
"PRACTICE OF PUBLIC ACCOUNTING"
(a) Offering to perform or performing for a client one or more
types of professional services involving the use of accounting
or auditing skills or the furnishing of tax services. A member
who is "employed" in the practice of public accounting is not
considered to be "engaged" in the practice of public
accounting.
(b) A member would not be considered to be engaged in the practice of
public accounting for the purpose of Rules R516, R517 and R518 if
the member is solely providing bookkeeping services that do not
involve the preparation of financial statements or the member is
solely providing tax preparation services without a fee.
(c)
"PROFESSION"
The profession of accountancy.
"PROFESSIONAL PRACTICE"
The provision of professional services, as defined.
"PROFESSIONAL SERVICES"
Any services performed or offered to be performed by a member for a
client or employer, where the public or the member's employer is
entitled to rely on the member's membership in the Association as
giving particular competence.
"PUBLIC ACCOUNTANT"
Unless otherwise specified by legislation, any person engaged in the
practice of public accounting.
"STUDENT"
An individual who is enrolled in the Association's program of
professional studies. A student must observe these Rules except where
the wording of any Rule makes it clear that it specifically relates to
members or there is a specific exception made in a particular Rule.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2005
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from ______________to ____________
Commission file number 000-27959
----------
GFR Pharmaceuticals Corp.
---------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 77-0517964
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 11405 - 201A Street, Maple Ridge, British Columbia V2X 0Y3
(Address of principal executive offices)
(604) 460-8440
Issuer's telephone number
(Former name, former address and former fiscal year, if changed
since last report.)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: March 31, 2005 1,079,940
Transitional Small Business Disclosure Format (check one).
Yes ; No X
---- ----
1
Explanatory Note
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-QSB for
the three months ended March 31, 2005 to respond to certain comments received by
us from the Staff of the Securities and Exchange Commission ("SEC"). We have
restated our balance sheet at March 31, 2005, and statements of income,
stockholders' equity and cash flows for the three months ended March 31, 2005.
The restatement impacts the three months ended March 31, 2005 and the year ended
December 31, 2004, but has no effect on the financial statements issued in prior
fiscal years. The restatement corrects an error within the currency translation
adjustment, which was erroneously expensed. The impact of the restatement
reduced net income by $109,806, net of tax and reduced earnings per share from
$0.13 to $0.03 for the three months ended March 31, 2005.
For convenience and ease of reference we are filing this Quarterly Report in its
entirety with the applicable changes. Unless otherwise stated, all information
contained in this amendment is as of May 16, 2005, the filing date of our
Quarterly Report on Form 10-QSB for the three months ended March 31, 2005.
Accordingly, this Amendment No. 1 to the Quarterly Report on Form 10-QSB/A
should be read in conjunction with our subsequent filings with the SEC.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Restated)
(Unaudited)
March 31, December 31,
2005 2004
------------------ ------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ - $ -
Accounts Receivable, Net 1,178,248 1,537,168
Inventory 1,720,776 1,502,719
Prepaid expense 8,181 -
------------------ ------------------
Total Current Assets 2,907,205 3,039,887
------------------ ------------------
Fixed Assets:
Manufacturing Equipment 615,569 615,409
Office Equipment 261,018 262,320
Furniture & Fixtures 4,915 4,939
Leasehold improvements 67,347 67,682
Property Held Under Capital Lease 432,928 432,928
------------------ ------------------
1,381,777 1,383,278
Less Accumulated Depreciation (444,512) (415,199)
------------------ ------------------
Total Fixed Assets 937,265 968,079
------------------ ------------------
Deferred Tax Asset 5,714 -
------------------ ------------------
TOTAL ASSETS $ 3,850,184 $ 4,007,966
================== ==================
3
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Restated)
(Unaudited)
March 31, December 31,
2005 2004
------------------ ------------------
LIABILITIES
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 1,122,752 $ 1,093,235
Bank Overdraft 111,089 24,306
Bank Line 491,898 643,902
Related Party Loans 142,633 139,159
Shareholder Payables 167,447 253,409
Current Portion of Obligations Under Capital Leases 51,247 57,721
Current Portion Long-Term Debt 24,453 34,468
------------------ ------------------
Total Current Liabilities 2,111,519 2,246,200
------------------ ------------------
Non-Current Liabilities:
Long-Term Debt 27,968 29,653
Lease Obligations 103,354 114,636
Deferred Tax Liability - 169,986
------------------ ------------------
Total Non-Current Liabilities 131,322 314,275
------------------ ------------------
Total Liabilities 2,242,841 2,560,475
------------------ ------------------
STOCKHOLDERS EQUITY
Common Stock - $0.001 par value, 100,000,000
shares authorized, 1,079,940 issued and outstanding
at March 31, 2005 and December 31, 2004 1,080 1,080
Additional Paid-in Capital 698,961 698,961
Currency Translation Adjustment 484,209 353,914
Retained Earnings (Deficit) 423,093 393,536
------------------ ------------------
Total Stockholders' Equity 1,607,343 1,447,491
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,850,184 $ 4,007,966
================== ==================
The accompanying notes are an integral part of these financial statements.
4
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
March 31,
-------------------------------------------
2005 2004
---------------------- --------------------
(Restated)
REVENUES
Sales $ 1,374,801 $ 1,200,654
Cost of Sales 917,163 907,280
---------------------- --------------------
Gross Margin 457,638 293,374
---------------------- --------------------
EXPENSES
Selling & Marketing 48,992 82,051
General & Administrative 95,547 100,849
Consulting 18,145 41,643
Depreciation Expense 29,313 27,068
Salaries & Wages 191,261 104,605
---------------------- --------------------
383,258 356,216
---------------------- --------------------
Net Income (Loss) from Operations 74,380 (62,842)
Other Income (Expense)
Interest, Net (23,237) (12,358)
Currency Exchange, Net 367 13,514
---------------------- --------------------
Net Income (Loss) Before Income Taxes 51,510 (61,686)
Income Tax (Expense) Benefit (21,953) (38,676)
---------------------- --------------------
NET INCOME (LOSS) $ 29,557 $ (100,362)
====================== ====================
Basic & Diluted Earnings Per Share $ 0.03 $ (0.09)
====================== ====================
Weighted Average Shares Outstanding 1,079,940 1,079,940
====================== ====================
The accompanying notes are an integral part of these financial statements.
5
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Three Months Ended
March 31,
-------------------------------------
2005 2004
----------------- ------------------
(Restated)
Cash Flows From Operating Activities
Net income (loss) for the period $ 29,557 $ (100,362)
Adjustments to reconcile net loss to net cash
Provided by operating activities
Currency Translation Adjustment 109,806 (56,172)
Depreciation and Amortization 29,313 27,068
Decrease (Increase) in Receivables 358,995 (43,881)
Decrease (Increase) in Inventory (218,057) (130,397)
Decrease (Increase) in Prepaid Expense (8,181) 117
Increase in Accounts Payable & Accrued Liabilities 37,520 299,284
Increase (Decrease) in Bank Overdraft 86,783 (1,431)
Increase (Decrease) in Deferred Tax Liability - (4,092)
----------------- ------------------
Net Cash Provided by (Used in) Operating Activities 425,736 (9,866)
----------------- ------------------
Cash Flows From Investing Activities
Purchase of Property and Equipment 1,502 (23,841)
----------------- ------------------
Net Cash Used by Investing Activities 1,502 (23,841)
----------------- ------------------
Cash Flows From Financing Activities
Proceeds/Payments on Bank Line (152,003) 62,950
Proceeds (Payments) Shareholder Payables (247,788) -
Proceeds (Payments) Long-term Debt/Capital Lease Obligations (27,447) (29,243)
----------------- ------------------
Net Cash Provided by (Used in) Financing Activities (427,238) 33,707
----------------- ------------------
Increase (Decrease) in Cash - -
Cash at beginning of period - -
----------------- ------------------
Cash at End of Period $ - $ -
================= ==================
Supplemental Disclosure of Interest and Income Taxes Paid
Interest paid during the period $ 23,237 $ 12,358
================= ==================
Income taxes paid during the period $ - $ -
================= ==================
Supplemental Disclosure of Non-cash Investing and Financing Activities
Equipment acquired through Capital Lease $ - $ -
================= ==================
Stock issued as payment on short-term notes payable $ - $ -
================= ==================
The accompanying notes are an integral part of these financial statements.
6
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for GFR Pharmaceuticals, Inc. and
Subsidiaries (Formerly Laredo Investment Corp.) is presented to assist in
understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Restatment of Previously Issued Financial Statements for the Three Months Ended
March 31, 2005
We have restated our balance sheet at March 31, 2005, and statements of
income, stockholders' equity and cash flows for the three months ended March 31,
2005. The restatement impacts the three months ended March 31, 2005 and the year
ended December 31, 2004, but has no effect on the financial statements issued in
prior fiscal years. The restatement corrects an error within the currency
translation adjustment, which was erroneously expensed. The impact of the
restatement reduced net income by $109,806, net of tax and reduced earnings per
share from $0.13 to $0.03 for the three months ended March 31, 2005.
Interim Reporting
The unaudited financial statements as of March 31, 2005, in the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to fairly state the financial position and results of operations for
the three months. Operating results for interim periods are not necessarily
indicative of the results which can be expected for full years.
Organization and Basis of Presentation
The Company was incorporated under the laws of the State of Nevada on
December 18, 1996. The Company ceased all operating activities during the period
from December 18, 1996 to July 9, 1999 and was considered dormant. On July 9,
1999, the Company obtained a Certificate of renewal from the State of Nevada.
From July 9, 1999 to January 21, 2000, the Company was in the development stage.
On January 21, 2000, Laredo entered into an Acquisition Agreement with
GFR Pharma, Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia
corporation, (GFR), Richard Pierce and Lucretia Schanfarber (the GFR Majority
Shareholders) to acquire their shares representing 100% of the outstanding
common stock of GFR in exchange for 19,000,000 newly issued shares of Laredo's
restricted common stock. The transaction was recorded as a reverse acquisition.
GFR was incorporated in March 1997 as Helm Developments Ltd. In June 1998, the
Company formally changed its name to GFR Nutritionals Ltd. GFR was 100% owned by
the President and CEO, Richard Pierce from inception until January 17, 2000,
when a 10% interest was acquired by Lucretia Schanfarber. Business operations
began in October 1998 after acquiring manufacturing equipment and arranging to
manufacture nutritional supplements under a private label contract.
7
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
On June 21, 2000, the Company entered into an Acquisition Agreement
with Nutritionals (USA) Direct.Com, a Washington corporation, (NDC), to acquire
100% of the outstanding common stock of NDC in exchange for $1,000. The
transaction has been recorded as a purchase. NDC operations were wound down in
October 2002 and the company became dormant.
On November 1, 2000, the Company entered into an Acquisition Agreement
with GFR Health, Inc. (Formerly R & L Health, Inc.), a British Columbia
corporation, to acquire 100% of the outstanding common stock of GFR Health, Inc.
in exchange for $0.01. The transaction was recorded as a purchase.
On April 5, 2004, GFR Nutritionals Ltd. and R&L Health Inc changed
their names to GFR Pharma Ltd. and GFR Health Inc. respectively.
On August 9, 2004, Laredo Investment Corp. changed its name to GFR
Pharmaceuticals, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of GFR
Pharmaceuticals, Inc. (Formerly Laredo Investment Corp.) and the following
wholly owned subsidiaries:
* GFR Pharma Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia
corporation
* Nutritionals(USA) Direct.com, a Washington corporation
* GFR Health, Inc. (Formerly R & L Health, Inc.), a British Columbia
corporation
All significant inter-company accounts and transactions have been
eliminated.
Nature of Business
The Company specializes in formulating, blending, encapsulating and
packing nutritional products. The Company also distributes products through its
GFR Health Inc. subsidiary. The Company's operations are located in the province
of British Columbia, Canada.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
8
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Inventories
Raw materials inventory is stated at a lower of weighted average cost
and replacement value. Inventories of work in progress is stated at the lower of
weighted average cost and net realizable value.
Revenue Recognition
Revenue is recognized from sales of product at the time of shipment to
customers.
Advertising Costs
Advertising is expensed as incurred.
Depreciation
Fixed assets are stated at cost. Depreciation and amortization is
calculated on a straight-line basis over the estimated useful lives of the
assets as follows:
Asset Rate
- ------------------------------------------------ -----------------
Manufacturing equipment 10-20 years
Furniture and fixtures 5-7 years
Office equipment 3-5 years
Computer Software 4 years
Leasehold improvements Term of lease
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income.
The Company has adopted the Financial Accounting Standards Board SFAS
No., 121, "Accounting for the Impairment of Long-lived Assets." SFAS No. 121
addresses the accounting for (i) impairment of long-lived assets, certain
identified intangibles and goodwill related to assets to be held and used, and
(ii) long-live lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate
9
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows from the use of the asset and its eventual
disposition (un-discounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized.
Foreign Currency Translation
The Company's functional currency is the Canadian dollar and the
reporting currency is the U.S. Dollar. All elements of financial statements are
translated using a current exchange rate. For assets and liabilities, the
exchange rate at the balance sheet date is used. Stockholders' Equity is
translated using the historical rate. For revenues, expenses, gains and losses
the weighted average exchange rate for the period is used. Translation gains and
losses are included as a separate component of stockholders' equity. Gains and
losses resulting from foreign currency transactions are included in net income.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No.109 requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
Reclassifications
Certain reclassifications have been made in the 2004 financial
statements to conform with the 2005 presentation.
10
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings (Loss) per Share
Basic earnings (loss) per share has been computed by dividing the
income (loss) for the year applicable to the common stockholders by the weighted
average number of common shares outstanding during the years. There were no
common equivalent shares outstanding at March 31, 2005 and 2004.
Stock Compensation for Non-Employees
The Company accounts for the fair value of its stock compensation
grants for non-employees in accordance with FASB Statement 123. The fair value
of each grant is equal to the market price of the Company's stock on the date of
grant if an active market exists or at a value determined in an arms length
negotiation between the Company and the non-employee.
NOTE 2 - ACCOUNTS RECEIVABLE
As of March 31, 2005 and December 31, 2004, accounts receivable
consisted of the following:
March 31, December 31,
2005 2004
------------------ -----------------
Accounts Receivable $ 1,262,423 $ 1,630,830
Less: Allowance for Doubtful Accounts (84,175) (93,662)
------------------ -----------------
Total Accounts Receivable $ 1,178,248 $ 1,537,168
================== =================
The allowance for doubtful accounts is based on management estimate of
75% of receivables over 120 days outstanding.
11
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - INVENTORY
Inventory is valued at lower of cost or market. As of March 31, 2005
and December 31, 2003, inventory consists of the following:
March 31, December 31
2005 2004
------------------ ------------------
Raw Materials $ 1,058,050 $ 937,864
Work in Process 332,300 229,032
Finished Goods 330,426 335,823
------------------ ------------------
Total Inventory $ 1,720,776 $ 1,502,719
================== ==================
NOTE 4 - INCOME TAXES
The provision for income taxes consists of Canadian federal and
provincial and territorial income tax. For the three months ended March 31,
2005, income tax expense has been estimated as $21,953. For the same period in
2004, it was estimated as $38,676.
Deferred taxes result from temporary differences in the recognition of
income and expenses for income tax reporting and financial statement reporting
purposes. The Company had deferred tax liability (asset) of $(5,714 and $169,986
as of March 31, 2005 and December 31, 2004. The deferred tax liability (asset)
is the result of excess depreciation for income tax purposes over the amount for
financial reporting purposes.
NOTE 5 - RELATED PARTY TRANSACTIONS
As of March 31, 2005, a major shareholder of the Company gave the
Company an unsecured line of credit of up to $310,125 (375,000 Canadian). As of
March 31, 2005, the Company owes $167,447 (202,544) Canadian) against this line
of credit.
Richard Pierce, CEO of Laredo and Lucretia Schanfarber, former Vice
President of Sales, hold contracts with GFR Health, Inc. (Formerly R&L Health
Inc.) that licenses their names and images for use on certain products. Each are
paid a quarterly bonus of 10% of GFR Health, Inc. profits before income taxes,
depreciation, and amortization are deducted as expenses. As of March 31, 2005
and 2004, $8,184 and $23,855 were accrued or paid.
As of April 1, 2004, Ms. Schanfarber is no longer being paid this
license fee as her name and image has been removed from all products.
12
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - SHORT-TERM OBLIGATIONS
March 31, December 31,
2005 2004
------------------ ------------------
Promissory note, repayable to related parties upon
demand, including interest at 12% $ 142,633 $ 139,159
================== ==================
The Company has a line of credit with a bank with a total amount owing
of $491,898 and $643,902 as of March 31, 2005 and December 31, 2004,
respectively. This line carries an interest rate of prime plus 1.5 and a total
available credit of $706,350 ($850,000 Canadian) as of December 31, 2004. The
line is secured by certain manufacturing equipment of the Company.
NOTE 7 - LONG-TERM DEBT
March 31, December 31,
2005 2004
------------------ ------------------
TDBank Small Business loan, repayable in monthly installments $2,515 ($3,973
Canadian), including interest at 10.15%, maturing September 15, 2005, secured by
certain manufacturing equipment of the Company $ 24,453 $ 26,959
Business Development Bank of Canada Loan, repayable in
monthly installments $657 ($830 Canadian), including interest
at prime plus 1%, maturing August 23, 2009 27,968 37,162
Less current portion of long-term debt (24,453) (34,468)
------------------ ------------------
$ 27,968 $ 29,653
================== ==================
Principal payments due on long-term debt for each of the five years
subsequent to December 31, 2004 and thereafter are as follows:
Year ending: Amount
- --------------------------- ------------------
2005 $ 34,468
2006 7,936
2007 8,468
2008 9,035
2009 4,214
------------------
Thereafter
Total $ 64,121
==================
13
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - ECONOMIC DEPENDENCE
The Company sells a substantial portion of its product to one customer,
Prairie Naturals, Inc. During the first quarter of 2005 and 2004, sales to that
customer aggregated 53% and 50%, respectively. As of March 31, 2005 and December
31, 2004, amounts due from that customer included in accounts receivable were
41% and 17%, respectively. Future operations of the Company depend on
continuation of the manufacturing arrangement with that customer.
NOTE 9 - COMMITMENTS
The Company has entered into a lease agreements for its manufacturing
and office facilities and certain manufacturing equipment with the Company's
major shareholder and other parties. The rental charges are approximately
$86,250 ($115,000 Canadian) per year for real property and $81,675 ($108,900
Canadian) per year for equipment. The real property lease expired December 31,
2004, and the equipment lease expires June 2005 through December 2008.
The assets and liabilities under capital leases are recorded at the
fair value of the asset. The assets are depreciated over the lower of their
estimated productive lives. Depreciation of assets under capital leases is
included in depreciation expense for 2005 and 2004.
Following is a summary of property held under capital leases:
March 31, December 31,
2005 2004
------------------ ------------------
Manufacturing Equipment $ 432,928 $ 432,928
Less: Accumulated Depreciation (63,052) (57,640)
------------------ ------------------
Net Assets Held Under Capital Lease $ 369,876 $ 375,288
================== ==================
The minimum future lease payments under these leases for the next five
years are:
Ending December 31: Real Property Equipment
- ---------------------------- ------------------ -----------------
2005 $ - $ 67,097
2006 - 50,338
2007 - 50,338
2008 - 19,508
2009 - -
------------------ -----------------
Net Minimum Lease Payments - 187,281
Less: Amount Representing Interest - (97,404)
------------------ -----------------
Present Value of Net Minimum Lease Payment $ - $ 89,877
================== =================
14
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - COMMITMENTS (Continued)
The leases generally provides that insurance, maintenance and tax
expenses are obligations of the Company. It is expected that in the normal
course of business, leases that expire will be renewed or replaced by leases on
other properties.
During 2002, the Company entered into a lease agreement for warehouse
space. The lease is month to month with a six month notice of termination
clause. Under the terms of the lease agreement, the monthly rent charge is
approximately $4,600 ($5,500 Canadian).
NOTE 10 - STOCK INCENTIVE PLAN
The Board of Directors has authorized and the Company has established
the 2000 Incentive and Non-qualified Stock Option Plan. Under the plan the
Company is authorized to issue up to 6,000,000 shares of the Company's common
stock with such exercise price and vesting periods as the Board of Directors
deems to be in the best interest of the Company. As of March 31, 2005, no
options have been granted.
NOTE 11 - STOCK SPLIT
On August 9, 2004, the Company changed its name from Laredo Investment
Corp. To GFR Pharmaceuticals, Inc. In addition, a retroactive 30:1 reverse stock
split was approved by shareholders. All references to stock in the accompanying
financial statements reflect this stock split.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
We have restated our balance sheet at March 31, 2005, and statements of income,
stockholders' equity and cash flows for the three months ended March 31, 2005.
The restatement impacts the three months ended March 31, 2005 and the year ended
December 31, 2004, but has no effect on the financial statements issued in prior
fiscal years. The restatement corrects an error within the currency translation
adjustment, which was erroneously expensed. The impact of the restatement
reduced net income by $109,806, net of tax and reduced earnings per share from
$0.13 to $0.03 for the three months ended March 31, 2005.
Plan of Operations
The Company is currently working on securing additional private label
manufacturing contracts. The key target for private label sales are wholesale
distributors of health food nutrition products. GFR is also pursuing
opportunities for direct sales to consumers through the Internet. GFR has
entered into the OTC (Over the Counter) drug market with the introduction of
Acetaminophen and A.S.A. products but has no signed contracts at this time.
Liquidity and Capital Resources
GFR's working capital ratio was 1.50 at March 31, 2005 compared to 1.35 at
December 31, 2004. Current liabilities include a $142,633 promissory note
payable to a party related to the major shareholder, which bears interest at 12%
annually. These funds are repayable on demand, however the request for repayment
occurring at this time is not expected.
GFR has a small business loan outstanding with a balance of $24,453 as at March
31, 2005. This loan bears interest at 10.15% and matures on September 15, 2005.
The Company has a second business loan with an outstanding balance of $27,968 as
of March 31, 2005. This loan bears interest at prime plus 1 percent, maturing
August 23, 2009.
GFR acquired an additional $160 of manufacturing equipment in the first quarter
of 2005. An additional $125,000 of manufacturing equipment is expected to be
purchased in 2005 in order to meet demands for new private label sales.
Results of Operations
For the Three Months Ended
March 31,
------------------------------------
2005 2004
----------------- -----------------
Sales 1,374,801 1,200,654
Cost of Sales 917,163 907,280
----------------- -----------------
Gross Margin 457,638 293,374
Gross Profit Percentage 33.29% 24.43%
16
For the Three Months Ended
Selling and Marketing Expenses 48,992 82,051
Selling Expense as a % of Sales 3.56% 6.83%
Admin. and Other Expenses 334,266 274,165
Admin Expenses as a % of Sales 24.31% 22.83%
For the three months ended March 31, 2005, sales were $174,147 higher than 2004
and are expected to continue to grow during 2005.
During the first quarter of 2005 and 2004 sales to Prairie Naturals Inc. were
53% and 50% respectively. GFR has a verbal arrangement to manufacture, on an
as-ordered basis, private label products that Prairie Naturals Inc. and
distributes under the Prairie Naturals Inc. name. GFR also has an exclusive
written contract to manufacture one product that Prairie Naturals Inc.
distributes for a third party private label.
Operating margins for the three months ending March 31, 2005 and 2004 were
33.29% and 24.43% of sales revenue. Cost of Sales includes the cost of raw
materials used in manufacturing, production labor costs and an applicable share
of overhead expenses. Operating margins for the quarter are higher than the same
period for 2004 in part because of the decrease in costs associated with initial
runs of new products and the completion of jobs with lower margins in general.
General and administrative expenses for the three months ended March 31, 2005
and 2004 were 24.31% and 22.83% of sales. GFR anticipates realizing economies of
scale as production volumes increase. This will be reflected favorably in the
future by decreasing the percentage of sales for these expenses.
Foreign Currency Gains and Loses
Foreign currency gains and losses are the result of fluctuations in the exchange
rate between Canada and our Foreign customers and vendors. Our foreign currency
gains and losses result primarily due to the our purchasing of raw materials in
foreign currencies from both inside and outside Canada. During March 31, 2005 we
purchased approximately 53% of our raw materials in U.S. dollars compared to 43%
for December 31, 2004. We also have sales to foreign countries amounting to
approximately 1% of our total sales for 2005 and 2004. Foreign currency gains
decreased by $13,147 to $367 for the three months ended March 31, 2005 and from
$13,514 for the three months ended March 31, 2004. We expect or purchases and
sales in foreign currencies to remain relatively constant over the next twelve
months. Because exchange rates are outside our control, however, exchange gains
and losses are unpredictable.
17
Effect of Inflation
GFR does not anticipate any financial impact, whether beneficial or detrimental,
as a result of inflation.
ITEM 3. CONTROLS AND PROCEDURES
RESTATEMENT
On September 23, 2005, our independent auditors, Robison, Hill & Co., informed
us that they had discovered an error in our financial statements for the year
ended December 31, 2004.
The error relates to the translation of our financial statements from Canadian
dollars to U.S. dollars for reporting purposes. The error impacts the three
months ended March 31, 2005 and the six months ended June 30, 2005 and the year
ended December 31, 2004, but has no effect on the financial statements issued in
prior fiscal years. The restatement corrects an error within the currency
translation adjustment, which should be reported in the equity section of the
balance sheet, but was reported in error in the income statement. The impact of
the restatement reduced net income by $109,806, net of tax and reduced earnings
per share from $0.13 to $0.0310 for the three months ended March 31, 2005.
Following our discussion with Robison, Hill & Co., we determined that the March
31, 2005 and June 30, 2005 financial statements should be restated to reflect
the correction of this error. We have restated our balance sheet at March 31,
2005 and June 30, 2005, and statements of income, stockholders' equity and cash
flows for the three months ended March 31, 2005 and the six months ended June
30, 2005.
In connection with the restatement, the principal executive officer and
principal financial officer of GFR Pharmaceuticals, Inc. have reevaluated GFR
Pharmaceuticals, Inc.'s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) and
identified the a material weakness in internal controls over financial reporting
with respect to a failure to ensure correct reporting of foreign currency
translation adjustments.
Solely as a result of this material weakness, we conclude that our disclosure
controls and procedures were not effective as of December 31, 2004, March 31,
2005, or June 30, 2005.
REMEDIATION OF MATERIAL WEAKNESS IN INTERNAL CONTROL
We are confident that, as of this filing, we have fully remediated the material
weakness in our internal control over financial reporting with respect to
accounting for foreign currency translation adjustments. The remedial actions
included changes to our software properly position the translation adjustments
in the equity section of the balance sheet, improved training, education and
accounting
18
reviews designed to ensure that all relevant personnel involved in foreign
currency translation adjustments understand and apply proper reporting of
currency translation adjustments.
In connection with this amended Form 10-QSB, the principal executive officer and
principal financial officer of GFR Pharmaceuticals, Inc. have reevaluated our
disclosure controls and procedures as currently in effect, including the
remedial actions discussed above, and have concluded that, as of this date, our
disclosure controls and procedures are effective.
As previously reported, there were no significant changes in GFR
Pharmaceuticals, Inc. internal control over financial reporting during the
Company's fourth fiscal quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. However, subsequent to June 30, 2005, we took remedial
actions described above.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the past quarter.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFR Pharmaceuticals, Inc.
(Registrant)
DATE: November 18, 2005 By: /s/ Richard Pierce
----------------- --------------------------------
Richard Pierce
President, C.E.O., Director
(Principal Executive Officer)
DATE: November 18, 2005 By: /s/ Marc Casavant
----------------- --------------------------------
Marc Casavant
C.F.O., Director
(Principal Accounting Officer)
20
EXHIBIT 31.1
SECTION 302 CERTIFICATIONS
I, Richard Pierce, certify that:
1. I have reviewed this quarterly report on form 10-QSB of GFR
Pharmaceuticals, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report.
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e)
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report on such
evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date November 18, 2005
By: /s/ Richard Pierce
Richard Pierce
CEO, Director
(Principal Executive Officer)
21
EXHIBIT 31.2
SECTION 302 CERTIFICATIONS
I, Marc Casavant, certify that:
1. I have reviewed this quarterly report on form 10-QSB of GFR
Pharmaceuticals, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report.
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e)
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report on such
evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 18, 2005
By: /s/ Marc Casavant
Marc Casavant
CFO, Director
(Principal Accounting Officer)
22
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GFR Pharmaceuticals, Inc. on Form
10-QSB for the period ending March 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard Pierce, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
By: /s/ Richard Pierce
Richard Pierce
CEO, Director
(Principal Executive Officer)
Date: November 18, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
23
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GFR Pharmaceuticals, Inc. on Form
10-QSB for the period ending March 31, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Marc Casavant, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
By: /s/ Marc Casavant
Marc Casavant
CFO, Director
(Principal Accounting Officer)
Date: November 18, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
24
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2005
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from ______________to ____________
Commission file number 000-27959
GFR Pharmaceuticals Corp.
---------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 77-0517964
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Suite 11405 - 201A Street, Maple Ridge, British Columbia V2X 0Y3
(Address of principal executive offices)
(604) 460-8440
Issuer's telephone number
(Former name, former address and former fiscal year, if changed since
last report.)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: August 11, 2005 1,079,940
Transitional Small Business Disclosure Format (check one).
Yes ; No X
---- ----
1
Explanatory Note
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-QSB for
the three and six months ended June 30, 2005 to respond to certain comments
received by us from the Staff of the Securities and Exchange Commission ("SEC").
We have restated our balance sheet at June 30, 2005, and statements of income,
stockholders' equity and cash flows for the three and six months ended June 30,
2005. The restatement impacts the three and six months ended June 30, 2005 and
the year ended December 31, 2004, but has no effect on the financial statements
issued in prior fiscal years. The restatement corrects an error within the
currency translation adjustment, which was erroneously expensed. The impact of
the restatement reduced net income by $93,104, net of tax and reduced earnings
per share from $0.12 to $0.03 for the three and six months ended June 30, 2005.
For convenience and ease of reference we are filing this Quarterly Report in its
entirety with the applicable changes. Unless otherwise stated, all information
contained in this amendment is as of August 22, 2005, the filing date of our
Quarterly Report on Form 10-QSB for the three and six months ended June 30,
2005. Accordingly, this Amendment No. 1 to the Quarterly Report on Form 10-QSB/A
should be read in conjunction with our subsequent filings with the SEC.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Restated)
(Unaudited)
June 30, December 31,
2005 2004
------------------ ------------------
ASSETS
Current Assets:
Cash and Cash Equivalents $ - $ -
Accounts Receivable, Net 1,275,470 1,537,168
Inventory 1,640,250 1,502,719
Prepaid expense 18,993 -
------------------ ------------------
Total Current Assets 2,934,713 3,039,887
------------------ ------------------
Fixed Assets:
Manufacturing Equipment 676,342 615,409
Office Equipment 257,634 262,320
Furniture & Fixtures 4,851 4,939
Leasehold improvements 66,474 67,682
Property Held Under Capital Lease 353,269 432,928
------------------ ------------------
1,358,570 1,383,278
Less Accumulated Depreciation (469,483) (415,199)
------------------ ------------------
Total Fixed Assets 889,087 968,079
------------------ ------------------
TOTAL ASSETS $ 3,823,800 $ 4,007,966
================== ==================
3
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Restated)
(Unaudited)
June 30, December 31,
2005 2004
------------------ ------------------
LIABILITIES
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 1,092,306 $ 1,093,235
Bank Overdraft 106,910 24,306
Bank Line 330,480 643,902
Related Party Loans 146,431 139,159
Shareholder Payables 275,245 253,409
Current Portion of Obligations Under Capital Leases 38,136 57,721
Current Portion Long-Term Debt 11,780 34,468
------------------ ------------------
Total Current Liabilities 2,001,288 2,246,200
------------------ ------------------
Non-Current Liabilities:
Long-Term Debt 25,737 29,653
Lease Obligations 94,843 114,636
Deferred Tax Liability 58,143 169,986
------------------ ------------------
Total Non-Current Liabilities 178,723 314,275
------------------ ------------------
Total Liabilities 2,180,011 2,560,475
------------------ ------------------
STOCKHOLDERS EQUITY
Common Stock - $0.001 par value, 100,000,000
shares authorized, 1,079,940 issued and outstanding
at June 30, 2005 and December 31, 2004 1,080 1,080
Additional Paid-in Capital 698,961 698,961
Currency Translation Adjustment 517,832 353,914
Retained Earnings (Deficit) 425,916 393,536
------------------ ------------------
Total Stockholders' Equity 1,643,789 1,447,491
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,823,800 $ 4,007,966
================== ==================
The accompanying notes are an integral part of these financial statements.
4
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
2005 2004 2005 2004
----------------- --------------- ---------------- ---------------
(Restated) (Restated)
REVENUES
Sales $ 1,561,874 $ 1,643,059 $ 2,936,675 $ 2,843,713
Cost of Sales 812,209 1,084,225 1,729,372 1,991,505
----------------- --------------- ---------------- ---------------
Gross Margin 749,665 558,834 1,207,303 852,208
----------------- --------------- ---------------- ---------------
EXPENSES
Selling & Marketing 66,171 47,145 115,163 129,196
General & Administrative 445,154 140,302 540,701 241,151
Consulting 20,111 38,551 38,256 80,194
Depreciation Expense 31,353 30,732 60,666 57,800
Salaries & Wages 167,529 94,603 358,790 199,208
----------------- --------------- ---------------- ---------------
730,318 351,333 1,113,576 707,549
----------------- --------------- ---------------- ---------------
Net Income (Loss) from Operations 19,347 207,501 93,727 144,659
----------------- --------------- ---------------- ---------------
Other Income (Expense)
Interest, Net (23,192) (14,965) (46,429) (27,323)
Currency Exchange, Net (6) (13,367) 361 147
----------------- --------------- ---------------- ---------------
Net Income (Loss) Before Income Taxes (3,851) 179,169 47,659 117,483
Income Tax (Expense) Benefit 6,674 (23,542) (15,279) (62,218)
----------------- --------------- ---------------- ---------------
NET INCOME (LOSS) $ 2,823 $ 155,627 $ 32,380 $ 55,265
================= =============== ================ ===============
Basic & Diluted Earnings Per Share $ (0.10) $ 0.14 $ 0.03 $ 0.05
================= =============== ================ ===============
Weighted Average Shares Outstanding 1,079,940 1,079,940 1,079,940 1,079,940
================= =============== ================ ===============
The accompanying notes are an integral part of these financial statements.
5
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Six Months Ended
June 30,
-------------------------------------
2005 2004
----------------- ------------------
(Restated)
Cash Flows From Operating Activities
Net income (loss) for the period $ 32,380 $ 55,265
Adjustments to reconcile net loss to net cash
Provided by operating activities
Currency Translation Adjustment 50,129 69,363
Depreciation and Amortization 54,266 72,798
Decrease (Increase) in Receivables 334,569 (357,937)
Decrease (Increase) in Inventory (137,384) (162,591)
Decrease (Increase) in Prepaid Expense (18,991) (5,607)
Increase in Accounts Payable & Accrued Liabilities (68,692) 266,036
Increase (Decrease) in Bank Overdraft 82,597 69,241
Increase (Decrease) in Deferred Tax Liability - (4,901)
----------------- ------------------
Net Cash Provided by (Used in) Operating Activities 328,874 1,667
----------------- ------------------
Cash Flows From Investing Activities
Purchase of Property and Equipment 24,830 (137,850)
----------------- ------------------
Net Cash Used by Investing Activities 24,830 (137,850)
----------------- ------------------
Cash Flows From Financing Activities
Proceeds/Payments on Bank Line (313,452) 189,284
Proceeds (Payments) Shareholder Payables 21,811 -
Proceeds (Payments) Long-term Debt/Capital Lease Obligations (62,063) (53,101)
----------------- ------------------
Net Cash Provided by (Used in) Financing Activities (353,704) 136,183
----------------- ------------------
Increase (Decrease) in Cash - -
Cash at beginning of period - -
----------------- ------------------
Cash at End of Period $ - $ -
================= ==================
Supplemental Disclosure of Interest and Income Taxes Paid
Interest paid during the period $ 38,683 $ 27,323
================= ==================
Income taxes paid during the period $ - $ 15,200
================= ==================
Supplemental Disclosure of Non-cash Investing and Financing Activities
None
The accompanying notes are an integral part of these financial statements.
6
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of accounting policies for GFR Pharmaceuticals, Inc. and
Subsidiaries (Formerly Laredo Investment Corp.) is presented to assist in
understanding the Company's financial statements. The accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Restatment of Previously Issued Financial Statements for the Three and Six
Months Ended June 30, 2005
We have restated our balance sheet at June 30, 2005, and statements of
income, stockholders' equity and cash flows for the three and six months ended
June 30, 2005. The restatement impacts the three and six months ended June 30,
2005 and the year ended December 31, 2004, but has no effect on the financial
statements issued in prior fiscal years. The restatement corrects an error
within the currency translation adjustment, which was erroneously expensed. The
impact of the restatement reduced net income by $93,104, net of tax and reduced
earnings per share from $0.12 to $0.03 for the three and six months ended June
30, 2005.
Interim Reporting
The unaudited financial statements as of June 30, 2005,and for the
three and six months then ended, reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly state the financial position and results of operations for the three and
six months. Operating results for interim periods are not necessarily indicative
of the results which can be expected for full years.
Organization and Basis of Presentation
The Company was incorporated under the laws of the State of Nevada on
December 18, 1996. The Company ceased all operating activities during the period
from December 18, 1996 to July 9, 1999 and was considered dormant. On July 9,
1999, the Company obtained a Certificate of renewal from the State of Nevada.
From July 9, 1999 to January 21, 2000, the Company was in the development stage.
On January 21, 2000, Laredo entered into an Acquisition Agreement with
GFR Pharma, Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia
corporation, (GFR), Richard Pierce and Lucretia Schanfarber (the GFR Majority
Shareholders) to acquire their shares representing 100% of the outstanding
common stock of GFR in exchange for 19,000,000 newly issued shares of Laredo's
restricted common stock. The transaction was recorded as a reverse acquisition.
GFR was incorporated in March 1997 as Helm Developments Ltd. In June 1998, the
Company formally
7
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
changed its name to GFR Nutritionals Ltd. GFR was 100% owned by the President
and CEO, Richard Pierce from inception until January 17, 2000, when a 10%
interest was acquired by Lucretia Schanfarber. Business operations began in
October 1998 after acquiring manufacturing equipment and arranging to
manufacture nutritional supplements under a private label contract.
On June 21, 2000, the Company entered into an Acquisition Agreement
with Nutritionals (USA) Direct.Com, a Washington corporation, (NDC), to acquire
100% of the outstanding common stock of NDC in exchange for $1,000. The
transaction has been recorded as a purchase. NDC operations were wound down in
October 2002 and the company became dormant.
On November 1, 2000, the Company entered into an Acquisition Agreement
with GFR Health, Inc. (Formerly R & L Health, Inc.), a British Columbia
corporation, to acquire 100% of the outstanding common stock of GFR Health, Inc.
in exchange for $0.01. The transaction was recorded as a purchase.
On April 5, 2004, GFR Nutritionals Ltd. and R&L Health Inc changed
their names to GFR Pharma Ltd. and GFR Health Inc. respectively.
On August 9, 2004, Laredo Investment Corp. changed its name to GFR
Pharmaceuticals, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of GFR
Pharmaceuticals, Inc. (Formerly Laredo Investment Corp.) and the following
wholly owned subsidiaries:
* GFR Pharma Ltd. (Formerly GFR Nutritionals, Ltd.), a British Columbia
corporation
* Nutritionals(USA) Direct.com, a Washington corporation
* GFR Health, Inc. (Formerly R & L Health, Inc.), a British Columbia
corporation
The results of subsidiaries acquired or sold during the year are
consolidated from their effective dates of acquisition through their effective
dates of disposition.
All significant inter-company accounts and transactions have been
eliminated.
8
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Nature of Business
The Company specializes in formulating, blending, encapsulating and
packing nutritional products. The Company also distributes products through its
GFR Health Inc. subsidiary. The Company's operations are located in the province
of British Columbia, Canada.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Inventories
Raw materials inventory is stated at a lower of weighted average cost
and replacement value. Inventories of work in progress is stated at the lower of
weighted average cost and net realizable value.
Revenue Recognition
Revenue is recognized from sales of product at the time of shipment to
customers.
Advertising Costs
Advertising is expensed as incurred.
9
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Depreciation
Fixed assets are stated at cost. Depreciation and amortization is
calculated on a straight-line basis over the estimated useful lives of the
assets as follows:
Asset Rate
- ------------------------------------------------ -----------------
Manufacturing equipment 10-20 years
Furniture and fixtures 5-7 years
Office equipment 3-5 years
Computer Software 4 years
Leasehold improvements Term of lease
Maintenance and repairs are charged to operations; betterments are
capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation thereon are eliminated from the property and related
accumulated depreciation accounts, and any resulting gain or loss is credited or
charged to income.
The Company has adopted the Financial Accounting Standards Board SFAS
No., 121, "Accounting for the Impairment of Long-lived Assets." SFAS No. 121
addresses the accounting for (i) impairment of long-lived assets, certain
identified intangibles and goodwill related to assets to be held and used, and
(ii) long-live lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows from the
use of the asset and its eventual disposition (un-discounted and without
interest charges) is less than the carrying amount of the asset, an impairment
loss is recognized.
Foreign Currency Translation
The Company's functional currency is the Canadian dollar and the
reporting currency is the U.S. Dollar. All elements of financial statements are
translated using a current exchange rate. For assets and liabilities, the
exchange rate at the balance sheet date is used. Stockholders' Equity is
translated using the historical rate. For revenues, expenses, gains and losses
the weighted average exchange rate for the period is used. Translation gains and
losses are included as a separate component of stockholders' equity. Gains and
losses resulting from foreign currency transactions are included in net income.
10
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of
credit risk such as foreign exchange contracts, options contracts or other
foreign hedging arrangements.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No.109 requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
Reclassifications
Certain reclassifications have been made in the 2004 financial
statements to conform with the 2005 presentation.
Earnings (Loss) per Share
Basic earnings (loss) per share has been computed by dividing the
income (loss) for the year applicable to the common stockholders by the weighted
average number of common shares outstanding during the years. There were no
common equivalent shares outstanding at June 30, 2005 and 2004.
Stock Compensation for Non-Employees
The Company accounts for the fair value of its stock compensation
grants for non-employees in accordance with FASB Statement 123. The fair value
of each grant is equal to the market price of the Company's stock on the date of
grant if an active market exists or at a value determined in an arms length
negotiation between the Company and the non-employee.
11
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACCOUNTS RECEIVABLE
As of June 30, 2005 and December 31, 2004, accounts receivable
consisted of the following:
June 30, December 31,
2005 2004
------------------ -----------------
Accounts Receivable $ 1,355,261 $ 1,630,830
Less: Allowance for Doubtful Accounts (79,791) (93,662)
------------------ -----------------
Total Accounts Receivable $ 1,275,470 $ 1,537,168
================== =================
The allowance for doubtful accounts is based on management estimate of
75% of receivables over 120 days outstanding.
NOTE 3 - INVENTORY
Inventory is valued at lower of cost or market. As of June 30, 2005 and
December 31, 2004, inventory consists of the following:
June 30, December 31
2005 2004
------------------ ------------------
Raw materials $ 1,034,811 $ 937,864
Work in process 312,408 229,032
Finished Goods 293,031 335,823
------------------ ------------------
Total Inventory $ 1,640,250 $ 1,502,719
================== ==================
NOTE 4 - INCOME TAXES
The provision for income taxes consists of Canadian federal and
provincial and territorial income tax. For the three and six months ended June
30, 2005, income tax benefit (expense) has been estimated as $6,674 and
($15,279), respectively. For the same periods in 2004, it was estimated as
($23,542) and ($62,218).
Deferred taxes result from temporary differences in the recognition of
income and expenses for income tax reporting and financial statement reporting
purposes. The Company had deferred tax liability of $58,143 and $169,986 as of
June 30, 2005 and December 31, 2004. The deferred tax liability is the result of
excess depreciation for income tax purposes over the amount for financial
reporting purposes.
12
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 - RELATED PARTY TRANSACTIONS
As of June 30, 2005, a major shareholder of the Company gave the
Company an unsecured line of credit of up to $310,125 (375,000 Canadian). As of
June 30, 2005, the Company owes $275,220 (337,310 Canadian) against this line of
credit.
Richard Pierce, CEO of Laredo and Lucretia Schanfarber, former Vice
President of Sales, hold contracts with GFR Health, Inc. (Formerly R&L Health
Inc.) that licenses their names and images for use on certain products. Each are
paid a quarterly bonus of 10% of GFR Health, Inc. profits before income taxes,
depreciation, and amortization are deducted as expenses. As of June 30, 2005 and
2004, $8,184 and $23,855 were accrued or paid.
As of April 1, 2004, Ms. Schanfarber is no longer being paid this
license fee as her name and image has been removed from all products.
NOTE 6 - SHORT-TERM OBLIGATIONS
June 30, December 31,
2005 2004
------------------ ------------------
Promissory note, repayable to related parties upon
demand, including interest at 12% $ 146,431 $ 139,159
================== ==================
The Company has a line of credit with a bank with a total amount owing
of $330,480 and $643,902 as of June 30, 2005 and December 31, 2004,
respectively. This line carries an interest rate of prime plus 1.5 and a total
available credit of $693,600 ($850,000 Canadian) as of December 31, 2004. The
line is secured by certain manufacturing equipment of the Company.
13
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - LONG-TERM DEBT
June 30, December 31,
2005 2004
------------------ ------------------
TDBank Small Business loan, repayable in monthly installments $2,515 ($3,973
Canadian), including interest at 10.15%, maturing September 15, 2005, secured by
certain manufacturing equipment of the Company $ 11,780 $ 26,959
Business Development Bank of Canada Loan, repayable in
monthly installments $657 ($830 Canadian), including interest
at prime plus 1%, maturing August 23, 2009 25,737 37,162
Less current portion of long-term debt (11,780) (34,468)
------------------ ------------------
$ 25,737 $ 29,653
================== ==================
Principal payments due on long-term debt for each of the five years
subsequent to December 31, 2004 and thereafter are as follows:
Year ending: Amount
- --------------------------- ------------------
2005 $ 6,945
2006 7,551
2007 8,117
2008 8,726
2009 6,178
------------------
Thereafter
Total $ 37,517
==================
NOTE 8 - ECONOMIC DEPENDENCE
The Company sells a substantial portion of its product to one customer,
Prairie Naturals, Inc. During the first quarter of 2005 and 2004, sales to that
customer aggregated 49% and 52%, respectively. As of June 30, 2005 and December
31, 2004, amounts due from that customer included in accounts receivable were
41% and 17%, respectively. Future operations of the Company depend on
continuation of the manufacturing arrangement with that customer.
14
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - COMMITMENTS
The Company has entered into lease agreements for its manufacturing and
office facilities and certain manufacturing equipment with the Company's major
shareholder and other parties. The rental charges are approximately $83,840
($115,000 Canadian) per year for real property and $88,862 ($108,900 Canadian)
per year for equipment. The real property lease expired December 31, 2004, and
the equipment lease expires June 2005 through December 2008.
The assets and liabilities under capital leases are recorded at the
fair value of the asset. The assets are depreciated over the lower of their
estimated productive lives. Depreciation of assets under capital leases is
included in depreciation expense for 2005 and 2004.
Following is a summary of property held under capital leases:
June 30, December 31,
2005 2004
------------------ ------------------
Manufacturing Equipment $ 353,269 $ 432,928
Less: Accumulated Depreciation (55,867) (57,640)
------------------ ------------------
Net Assets Held Under Capital Lease $ 297,402 $ 375,288
================== ==================
The minimum future lease payments under these leases for the next five
years are:
Ending December 31: Real Property Equipment
- ---------------------------- ------------------ -----------------
2005 $ - $ 67,097
2006 - 50,338
2007 - 50,338
2008 - 19,508
2009 - -
------------------ -----------------
Net Minimum Lease Payments - 187,281
Less: Amount Representing Interest - (97,404)
------------------ -----------------
Present Value of Net Minimum Lease Payment $ - $ 89,877
================== =================
The leases generally provides that insurance, maintenance and tax
expenses are obligations of the Company. It is expected that in the normal
course of business, leases that expire will be renewed or replaced by leases on
other properties.
15
GFR PHARMACEUTICALS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - COMMITMENTS (Continued)
During 2002, the Company entered into a lease agreement for warehouse
space. The lease is month to month with a six month notice of termination
clause. Under the terms of the lease agreement, the monthly rent charge is
approximately $4,488 ($5,500 Canadian).
NOTE 10 - STOCK INCENTIVE PLAN
The Board of Directors has authorized and the Company has established
the 2000 Incentive and Non-qualified Stock Option Plan. Under the plan the
Company is authorized to issue up to 6,000,000 shares of the Company's common
stock with such exercise price and vesting periods as the Board of Directors
deems to be in the best interest of the Company. As of June 30, 2005, no options
have been granted.
NOTE 11 - STOCK SPLIT
On August 9, 2004, the Company changed its name from Laredo Investment
Corp. to GFR Pharmaceuticals, Inc. In addition, a retroactive 30:1 reverse stock
split was approved by shareholders. All references to stock in the accompanying
financial statements reflect this stock split.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
We have restated our balance sheet at June 30, 2005, and statements of income,
stockholders' equity and cash flows for the three and six months ended June 30,
2005. The restatement impacts the three and six months ended June 30, 2005 and
the year ended December 31, 2004, but has no effect on the financial statements
issued in prior fiscal years. The restatement corrects an error within the
currency translation adjustment, which was erroneously expensed. The impact of
the restatement reduced net income by $93,104, net of tax and reduced earnings
per share from $0.12 to $0.03 for the three and six months ended June 30, 2005.
Plan of Operations
The Company is currently working on securing additional private label
manufacturing contracts. The key target for private label sales are wholesale
distributors of health food nutrition products. GFR is also pursuing
opportunities for direct sales to consumers through the Internet. GFR has
entered into the OTC (Over the Counter) drug market with the introduction of
Acetaminophen and A.S.A. products but has no signed contracts at this time.
Liquidity and Capital Resources
GFR's working capital ratio was 1.47 at June 30, 2005 compared to 1.35 at
December 31, 2004. Current liabilities include a $146,431 promissory note
payable to a party related to the major shareholder, which bears interest at 12%
annually. These funds are repayable on demand, however the request for repayment
occurring at this time is not expected.
GFR has a small business loan outstanding with a balance of $11,780 as of June
30, 2005. This loan bears interest at 10.15% and matures on September 15, 2005.
The Company has a second business loan with an outstanding balance of $25,737 as
of June 30, 2005. This loan bears interest at prime plus 1 percent, maturing
August 23, 2009.
GFR did not acquired any manufacturing equipment in the second quarter of 2005.
An additional $125,000 of manufacturing equipment is expected to be purchased in
2005 in order to meet demands for new private label sales.
Results of Operations
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2005 2004 2005 2004
------------------ ---------------- ----------------- ----------------
Sales $ 1,561,874 $ 1,643,059 $ 2,936,675 $ 2,843,713
Cost of Sales 812,209 1,084,225 1,729,372 1,991,505
------------------ ---------------- ----------------- ----------------
Gross Margin 749,665 558,834 1,207,303 852,208
Gross Profit Percentage 48.00% 34.02% 41.12% 29.97%
17
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2005 2004 2005 2004
------------------ ---------------- ----------------- ----------------
Selling and Marketing Expenses 66,171 47,145 115,163 129,196
Selling Expense as a % of Sales 4.24% 2.87% 3.93% 4.55%
Admin. and Other Expenses 664,147 304,188 998,413 578,353
Admin Expenses as a % of Sales 42.53% 18.52% 34.00% 20.34%
For the six months ended June 30, 2005, sales were $92,962 higher than 2004 and
are expected to continue to grow during 2005.
During the second quarter of 2005 and 2004 sales to Prairie Naturals Inc. were
49% and 52% respectively. GFR has a verbal arrangement to manufacture, on an
as-ordered basis, private label products that Prairie Naturals Inc. and
distributes under the Prairie Naturals Inc. name. GFR also has an exclusive
written contract to manufacture one product that Prairie Naturals Inc.
distributes for a third party private label.
Operating margins for the three and six months ending June 30, 2005 were 48.00%
and 41.12% and for the same periods in 2004 34.02% and 29.97% of sales revenue.
Cost of Sales includes the cost of raw materials used in manufacturing,
production labor costs and an applicable share of overhead expenses. Operating
margins for the quarter are higher than the same period for 2004 in part because
of the decrease in costs associated with initial runs of new products and the
completion of jobs with higher margins in general.
General and administrative expenses for the three and six months ended June 30,
2005 were 42.53% and 34.00% of sales and for the same periods in 2004 were
18.52% and 20.34%. GFR anticipates realizing economies of scale as production
volumes increase. This will be reflected favorably in the future by decreasing
the percentage of sales for these expenses.
Foreign Currency Gains and Loses
Foreign currency gains and losses are the result of fluctuations in the exchange
rate between Canada and our Foreign customers and vendors. Our foreign currency
gains and losses result primarily due to the our purchasing of raw materials in
foreign currencies from both inside and outside Canada. During the three months
ended June 30, 2005, we purchased approximately 56% of our raw materials in U.S.
dollars compared to 43% for the three months ended June 30, 2004. We also have
sales to foreign countries amounting to approximately 1% of our total sales for
the three months ended June 30, 2005 and none for the three months ended June
30, 2005. Foreign currency gains increased by $214 to $361 for the six months
ended June 30, 2005 from $147 for the six months ended June 30, 2004. We expect
or purchases and sales in foreign currencies to remain relatively constant over
the next twelve months. Because exchange rates are outside our control, however,
exchange gains and losses are unpredictable.
18
Effect of Inflation
GFR does not anticipate any financial impact, whether beneficial or detrimental,
as a result of inflation.
ITEM 3. CONTROLS AND PROCEDURES
RESTATEMENT
On September 23, 2005, our independent auditors, Robison, Hill & Co., informed
us that they had discovered an error in our financial statements for the year
ended December 31, 2004.
The error relates to the translation of our financial statements from Canadian
dollars to U.S. dollars for reporting purposes. The error impacts the three and
six months ended June 30, 2005 and the year ended December 31, 2004, but has no
effect on the financial statements issued in prior fiscal years. The restatement
corrects an error within the currency translation adjustment, which should be
reported in the equity section of the balance sheet, but was reported in error
in the income statement. The impact of the restatement reduced net income by
$93,104, net of tax and reduced earnings per share from $0.12 to $0.03 for the
three and six months ended June 30, 2005.
Following our discussion with Robison, Hill & Co., we determined that the March
31, 2005 and June 30, 2005 financial statements should be restated to reflect
the correction of this error. We have restated our balance sheet at March 31,
2005 and June 30, 2005, and statements of income, stockholders' equity and cash
flows for the three months ended March 31, 2005 and six months ended June 30,
2005.
In connection with the restatement, the principal executive officer and
principal financial officer of GFR Pharmaceuticals, Inc. have reevaluated GFR
Pharmaceuticals, Inc.'s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) and
identified the a material weakness in internal controls over financial reporting
with respect to a failure to ensure correct reporting of foreign currency
translation adjustments.
Solely as a result of this material weakness, we conclude that our disclosure
controls and procedures were not effective as of December 31, 2004, March 31,
2005, or June 30, 2005.
19
REMEDIATION OF MATERIAL WEAKNESS IN INTERNAL CONTROL
We are confident that, as of this filing, we have fully remediated the material
weakness in our internal control over financial reporting with respect to
accounting for foreign currency translation adjustments. The remedial actions
included changes to our software properly position the translation adjustments
in the equity section of the balance sheet, improved training, education and
accounting reviews designed to ensure that all relevant personnel involved in
foreign currency translation adjustments understand and apply proper reporting
of currency translation adjustments.
In connection with this amended Form 10-QSB, the principal
executive officer and principal
financial officer of GFR Pharmaceuticals, Inc. have reevaluated our disclosure
controls and procedures as currently in effect, including the remedial actions
discussed above, and have concluded that, as of this date, our disclosure
controls and procedures are effective.
As previously reported, there were no significant changes in GFR
Pharmaceuticals, Inc. internal
control over financial reporting during the Company's fourth fiscal quarter of
2004 that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting. However, subsequent to
June 30, 2005, we took remedial actions described above.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file a report on Form 8-K during the past quarter.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFR Pharmaceuticals, Inc.
(Registrant)
DATE: November 18, 2005 By: /s/ Richard Pierce
----------------- -----------------------------------
Richard Pierce
President, C.E.O., Director
(Principal Executive Officer)
DATE: November 18, 2005 By: /s/ Marc Casavant
----------------- -----------------------------------
Marc Casavant
C.F.O., Director
(Principal Accounting Officer)
21
EXHIBIT 31.1
SECTION 302 CERTIFICATIONS
I, Richard Pierce, certify that:
1. I have reviewed this quarterly report on form 10-QSB of GFR
Pharmaceuticals, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report.
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e)
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report on such
evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date November 18, 2005
By: /s/ Richard Pierce
Richard Pierce
CEO, Director
(Principal Executive Officer)
22
EXHIBIT 31.2
SECTION 302 CERTIFICATIONS
I, Marc Casavant, certify that:
1. I have reviewed this quarterly report on form 10-QSB of GFR
Pharmaceuticals, Inc.
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report.
4. The small business issuer's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in exchange act rules 13a-15(e) and 15d-15(e)
for the small business issuer and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report on such
evaluation; and
c) disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect,
the small business issuer's internal control over financial reporting;
and
5. The small business issuer's other certifying officers and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of small business issuer's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: November 18, 2005
By: /s/ Marc Casavant
Marc Casavant
CFO, Director
(Principal Accounting Officer)
23
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GFR Pharmaceuticals, Inc. on Form
10-QSB for the period ending June 30, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard Pierce, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
By: /s/ Richard Pierce
Richard Pierce
CEO, Director
(Principal Executive Officer)
Date: November 18, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
24
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of GFR Pharmaceuticals, Inc. on Form
10-QSB for the period ending June 30, 2005, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Marc Casavant, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to
the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
By: /s/ Marc Casavant
Marc Casavant
CFO, Director
(Principal Accounting Officer)
Date: November 18, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
25