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EX-31.2 - GFR PHARMACEUTICALS INC | v181112_ex31-2.htm |
EX-31.1 - GFR PHARMACEUTICALS INC | v181112_ex31-1.htm |
EX-32.2 - GFR PHARMACEUTICALS INC | v181112_ex32-2.htm |
EX-32.1 - GFR PHARMACEUTICALS INC | v181112_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the fiscal year ended December 31, 2009
OR
¨
|
TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the transition period from _________ to _________
GFR PHARMACEUTICALS,
INC.
(Name of
Small Business Issuer in Its Charter)
000-27959
(Commission
file number)
77-0517964
(I.R.S.
Employer Identification No.)
NEVADA
(State or
Other Jurisdiction of Incorporation or Organization)
99 Yan Xiang Road, Biosep
Building, Xi An, Shaan Xi Province, P.R. China 710054
(Address
of Principal Executive Office)
(86) 29-
8339-9676
(Issuer’s
Telephone Number, Including Area Code)
Securities
Registered Pursuant to Section 12(b) of the Exchange Act: NONE
Securities
Registered Pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.001 PAR
VALUE
(Title of
Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 406 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 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 þ No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not 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-K or any amendment
to this Form 10-K. ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes___.
No_____.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One)
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ Small reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
The
aggregate market value of the common stock held by non-affiliates
( 26,079,940 shares) was approximately $
1,303,997 , based an the average closing bid and ask price of
$ 0.05 for the Common Stock on June
30, 2009.
As of
April 14, 2010, there were 42,079,940 shares of common stock
outstanding.
Documents
incorporated by reference: NONE
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
The
discussion contained in this 10-K under the Securities Exchange Act of 1934, as
amended, (the “Exchange Act”) contains forward-looking statements that involve
risks and uncertainties. The issuer’s actual results could differ significantly
from those discussed herein. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“the Company believes,” “management believes” and similar language, including
those set forth in the discussion under “Description of Business,” including the
“Risk Factors” described in that section, and “Management’s Discussion and
Analysis or Plan of Operation” as well as those discussed elsewhere in this Form
10-k. We base our forward-looking statements on information currently available
to us, and we assume no obligation to update them. Statements contained in this
Form 10-k that are not historical facts are forward-looking statements that are
subject to the “safe harbor” created by the Private Securities Litigation Reform
Act of 1995.
TABLE OF
CONTENTS
PAGE
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PART
I
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Item
1.
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Business
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3
|
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Item
1A.
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Risk
Factors
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6
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Item
1B.
|
Unresolved
Staff Comments
|
8
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Item
2.
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Properties
|
8
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|
Item
3.
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Legal
Proceedings
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9
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Item
4.
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Reserved
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9 | |
PART
II
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|||
Item
5.
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Market
For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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9
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Item
6.
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Selected
Consolidated Financial Information
|
10
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Item
7.
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Management’s
Discussion And Analysis Of Financial Condition And Results Of
Operations
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10
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Item 7A.
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Quantitative
And Qualitative Disclosures About Market Risk
|
12
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Item
8.
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Financial
Statements And Supplementary Data
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12
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Item
9.
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Changes
In And Disagreements With Accountants Or Accounting And Financial
Disclosure
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13
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Item
9A.
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Controls
And Procedures
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13
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Item
9B.
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Other
Information
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14
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PART
III
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|||
Item
10.
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Directors
And Executive Officers Of The Registrant
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15
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Item
11.
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Executive
Compensation
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18
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Item
12.
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Security
Ownership Of Certain Beneficial Owners And Management And Related
Stockholder Matters
|
19
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Item
13.
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Certain
Relationships And Related Transactions, And Director
Independence
|
20
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Item
14.
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Principal
Accountant Fees And Services
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21
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PART
IV.
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|||
Item
15.
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Exhibits,
Financial Statement Schedules
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22
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2
PART
I
Item 1. Business
History
We were
incorporated under the laws of the State of Nevada on December 18, 1996 under
the name Laredo Investment Corp. (“Laredo”).
On
January 21, 2000, Laredo entered into an acquisition agreement with GFR Pharma,
Ltd. (“Pharma”) (formerly GFR Nutritionals, Ltd.), a British Columbia
corporation. The transaction was recorded as a reverse acquisition. In June 1998
Pharma changed its name to GFR Nutritionals Ltd. 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, we 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’s operations were wound down in October 2002 and we
became dormant.
On
November 1, 2000, we 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.
(“GFR”).
On June
26, 2006, we and our predecessor executed a Plan of Exchange with Shaan Xi New
Century Technology Investment Development Company, Ltd. (“New Century”), a
corporation organized and existing under the laws of the Peoples’ Republic of
China, with Richard Pierce, the former president and our former majority
shareholder and Mr. Guo Li An, the majority shareholder of New
Century.
On
October 15, 2006, we executed an acquisition agreement (the “Hua Long
Agreement”) with Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd., a corporation
organized and existing under the laws of the Peoples’ Republic of China (“Hua
Long”), Dong Jian Zhong and Guo Li Zheng, the shareholders of Hua
Long (collectively "Hua Long Shareholders").
Pursuant
to the Hua Long Agreement, we paid Hua Long Shareholders approximately $187,500
in cash to acquire 100% interest in the shares of registered capital of Hua
Long. Hua Long acts as the holding company of New Century. The acquisition of
Hua Long allowed us to complete the legal processing regarding the share
exchange with New Century in China. Upon completion of the acquisition, we owned
100% interest of Hua Long and 95% interest of New Century through Hua Long.
Consolidated financial statements are filed in this annual report for the year
ended December 31, 2009.
On
December 11, 2006, pursuant to the Plan of Exchange Agreement, Mr. Pierce
delivered 200,000 shares of our common stock to New Century and/or its nominee
in exchange for total payments of $325,000 in cash and we issued to the New
Century shareholders an amount equal to 40,000,000 new investment shares of our
common stock pursuant to Regulation S under the Securities Act of 1933, as
amended, representing approximately 95% of our then outstanding shares of common
stock, in exchange for a 95% interest in the shares of registered capital of New
Century. Upon completion of the exchange, New Century became our 95% owned
indirect subsidiary.
Recent
Developments
On
January 1, 2008, New Century entered into a stock purchase agreement with the
holders of all 60,000,000 shares of the capital stock of Xi’an Jiaoda Bao Sai
Bio-technology Co., Ltd (“Bao Sai”) to acquire 58,060,000 shares of its capital
stock of Bao Sai, or 96.77% of its capital stock. The purchase price
for Bao Sai will equal 96.77% of Bao Sai’s stockholders’ equity based
on Bao Sai’s audited financial statements for the fiscal year ended December 31,
2009 prepared in accordance with Generally Accepted Accounting
Principals.
On May
14, 2008, the Company completed the acquisition of Bao Sai for a consideration
of $4,500,211 (approximately RMB33,000,000) for 96.77% of its equity interest in
Bao Sai, based on the aggregate net book value of total assets and liabilities
of Bao Sai as of December 31, 2007. The closing date was January 1, 2008. Upon
the completion of the transaction, Bao Sai became a subsidiary of the
Company. Prior to the closing of the transaction, the Company and Bao
Sai were under common control and the principal owners of Bao Sai were
affiliated with the Company. Payment of the purchase price, was made
in two cash installments commencing in 2008, first to Xi’an Bio-sep Biological
Filling Engineering Technology Company, Ltd., the owner of 28 million shares, or
46.67% of Bao Sai, and the balance in 2009 to the other three selling
stockholders, in amounts equal to their respective percentage of share ownership
of Bao Sai.
3
Bao Sai
is engaged in research, development, manufacture and sale of biological
separation medium products, which is technological know-how and devices
engineered to separate and purify biological products and
medicines. Separation medium products are used in the production of
antibiotics, genetic recombinant medicine, bacterin production, the gene chip,
diagnostic reagents and other biochemical products. Bao Sai’s
principal office and manufacturing facility is located at 99 Yan Xiang Road,
Biosep Building, Xi An, Shaan Xi Province, P. R. China.
Mr. Wang
Li-An, one of the Company’s directors, is also a director of Bao
Sai. Xi’an Bio-sep Biological Filling Engineerings Technology
Company, Ltd., which holds 46.67% of Bao Sai’s common stock, is controlled by
Mr. Guo Li An, who owns 38.03% of the Company. Mr. Guo Li
Zheng, who is Guo Li An’s brother, owns 15.5% of the Bao Sai
common stock and no shares of the Company. Mr. Guo Li Zheng will be
selling 12.27% of Bao Sai and retaining 3.23%. Additionally, Mr. Zhao Yan Ding
and Ms. Zhong Ya Li, the Company’s Chief Executive Officer and Chief Financial
Officer, respectively, were officers of Bao Sai through the date of the
acquisition agreement.
Overview
of Business
GFR
Pharmaceuticals, Inc. is a holding company with two business
segments. The Company is involved in a Cancer Diagnosis and Treatment
Center, which is a joint operation of PET Scanner and Rotary Gamma Ray
Stereotactic Neurosurgery System imaging center in the PRC. The Company also
operates a biological extraction business that extracts raw materials to
medicine ingredients and distributes the extracted ingredients for medicine
manufacturing uses.
The
Company owns 100% of Hua Long’s outstanding common stock. Hua Long is approved
in China to, among other things, engage in industrial chromatography to separate
and purify chemical components for further use in agricultural and biotechnology
products and in medicines, as well as for the research, development, manufacture
and sale of biological separation medium products. However, Hua Long currently
has no operating business and serves as a holding company for the operating
subsidiary, New Century. Hua Long owns 95% of the outstanding stock of New
Century.
Cancer
Diagnosis and Treatment Center
New
Century owns radiology and oncology equipment and provides it to Tangdu Hospital
in Shaan Xi province, which is affiliated with the Fourth Military Medical
University. New Century currently owns three different devices used for
radiological imaging for the brain and body and cancer treatment. The Company’s
medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center
(the “Center”).
New
Century entered into its relationship with Tangdu Hospital on February 2, 2006,
when it accepted the rights and responsibilities previously held by Masep
Medical Science & Technology Development (Shenzhen) Co., Ltd. (“Masep”)
which Masep undertook pursuant to the “Cooperation Establishment of ‘Tangdu
Gamma Knife Therapeutic Center’ Agreement” by and between Masep and Tandgu
Hospital, dated May 18, 2001, as amended (the “Tangdu Agreement”). Pursuant to
the terms of the Tangdu Agreement, New Century presently receives seventy
percent (70%) of the profits generated by the Center. New Century’s profit
sharing percentage decreases over the term of the Tangdu Agreement, which is
sixteen years from the date that the Center opened in January 2002. The
respective profit sharing ratios and time periods are as follows:
|
1.
|
From January 2002 through
December 2003, 90% to Masep;
|
|
2.
|
From January 2004 through
December 2008, 80% to Masep (or to New Century, giving effect to the
assignment as of February
2006);
|
|
3.
|
From January 2009 through
December 2011, 70% to New
Century;
|
4
|
4.
|
From January 2012 through
December 2014, 60% to New
Century;
|
|
5.
|
From January 2015 through
December 2017, 50% to New
Century.
|
Pursuant
to the Tangdu Agreement, New Century has the power to appoint the Director of
the Gamma Knife Center. Upon the termination of the Tangdu Agreement, the Tangdu
Hospital has an option to purchase the equipment for fifty percent of its
residual value.
As of
December 31, 2009, New Century owned three different devices used in the medical
centers, and the profit sharing percentage to New Century was 70%. The cases
processed in Tangdu Gamma Knife Therapeutithec Center (the “Center”), averaged
254cases per month in 2009, and 218 cases per month in 2008. For
the year ended December 31, 2009, the Center accounted for $3,336,839, or 86%,
of the Company’s revenues.
Tangdu
Hospital is located in Xi’an, a city of over 8-million people and is the capital
of Shaan Xi province. With our competitive facilities, services, and reputation
of Tangdu Hospital in Northwest China including Shaan Xi province and four other
adjacent provinces, our medical center business has a good potential to grow. To
grasp this market opportunity, New Century intends to expand the operation by
investing in an additional tumor therapy center or hospital and a modernized
tumor institute
Biological Separation Medium
Product and Pharmaceutical Business
In 2008,
New Century acquired 96.77% equity in Jiaoda Bao Sai Bio-technology Co Ltd.
(“Bao Sai”). Bao Sai is engaged in research, development, manufacture and
distribution of biological separation medium products which are used to recover
and purify biosynthetic products, particularly pharmaceuticals, from natural
sources such as animal or plant tissue or fermentation broth, including the
recycling of salvageable components and the proper treatment and disposal of
waste. Biological separation medium products are integral to the production of
pharmaceuticals such as antibiotics, hormones (e.g. insulin and human growth
hormone), antibodies, and vaccines; antibodies and enzymes used in diagnostics;
industrial enzymes; and natural fragrance and flavor compounds.
The
operations of Bao Sai are in the development stage and most of its efforts are
focused on the research and development of new pharmaceutical and agricultural
medium products, and the networking and advertisement to market these products
in the future. In 2009, Bao Sai spent approximately $50,400 (2008:
$690,991) in research and development of new biological separation medium
products and new medicine. Most of the money was used to fund local medical
institutions in the development of new products.
Pursuant
to this effort, Bao Sai entered into a Research and Development Cooperation
Contract with XiAn Jiao Tong University R&D Center for Natural Chinese
Medicine and Engineering (“the University”) in 2005. According to the
Cooperation Contract, Bao Sai provides funds in the research on the use of
biological separation technology in the development of Xin Kang Ping medicine to
treat heart diseases. The University performs all the laboratory work
related to the general research project and toxic tests as the prerequisites of
the clinical trial process for the application of a new medicine. The
University presents the research result to Bao Sai, and Bao Sai has all the
right to the project report and possible patent right as a result of the
project. This contract expired on August 25, 2008 and was not renewed. However,
we have been able to continue the pharmacodynamics test and toxicology test as
the prerequisite to the commencement of clinical trials for the development of
Xin Kang Ping medicine. At present, these two tests are close to successful
completion. As the rules of State Food and Drug Administration of China (
“SFDA”), now, Xin Kang Ping was changed its name to Fu Fang Dan Chuan Jiao Nang
and we are in the process of applying for the clinical trial process with the
State Food and Drug Administration of China ( “SFDA”). Upon the approval by
SFDA, we will start clinical trials for Fu Fang Dan Chuan Jiao Nang . Less time
is generally required in China than in the United States to complete the
clinical trials for a new medicine, and the cost of clinical trials in China is
also generally lower than those held in the US. We therefore expect that we can
complete the clinical trials sooner than would be the case in the
United States and at lower cost. Should the tests be successful and we obtain
the approval of SFDA for the new medicine, we expect this new pharmaceutical
product will be marketed in the PRC.
5
In 2009,
Bao Sai’s operations consisted of research and development of new products. We
have not yet developed a distribution system for any products that may be
developed. We plan to commercialize new products in 2010 should development be
completed, however, we are still currently in the development
stage.
Environmental
Law Compliance
Our operation currently complies with
all the environmental law and regulations in China. Moreover, since China does
not have additional environmental regulations dealing with climate change that
apply to our operations, we have not planned material capital expenditures for
environmental control facilities or changes in our business practices specific
to climate change
Employees
We are
divided into five departments, including administration, marketing, facility
management, network and finance. As of December 31, 2009, we had 65 full-time
employees, with 32 in New Century and 33 in Bao Sai. We believe that
our relations with our employees are good.
Item
1A. Risk Factors.
You
should consider each of the following risk factors and any other information set
forth in this Form 10-K and our other reports that we have filed with the
Securities and Exchange Commission ("SEC"), including the Company's financial
statements and related notes, in evaluating the Company's business and
prospects. The risks and uncertainties described below are not the only ones
that impact on the Company's operations and business. Additional risks and
uncertainties not presently known to the Company, or that the Company
currently considers immaterial, may also impair its business or operations. If
any of the following risks actually occur, our business and financial condition,
results or prospects could be harmed.
Risks
Related to Our Business
Because
there is no assurance that we will maintain the acceptance of our existing
products and achieve success in our introduction of new business, any
significant failure of our sales will adversely affect our business
operations,.
Our
ability to increase sales depends on numerous factors, including market
acceptance of existing products, the successful introduction of new products,
growth of consumer discretionary spending, and the ability to recruit new
independent sales consultants. Business in all of our segments is driven by
consumer preferences. Accordingly, there can be no assurances that our current
or future products will maintain or achieve market acceptance. We can provide
investors with no assurance that revenues will increase to a level which will
reflect profitability. If we are unsuccessful in generating significant
revenues, our business will most likely fail and our investors could lose their
investment
Dependence
on key corporate management personnel.
Our
success depends in large part on the contributions of our key corporate
management. We do not maintain any key person life insurance policies. The loss
of our key corporate management personnel could have a material adverse effect
on us.
6
Our
Company and all of its assets are located in a jurisdiction that may not enforce
the judgment of a US court.
Although
we are incorporated in Nevada, the Company’s principal place of business and all
of its assets are located in the People’s Republic of China. In the
past, some U.S. plaintiffs and/or judgment creditors have found it difficult or
impossible to enforce U.S. court orders and/or judgments in the People’s
Republic of China. We can make no assurance that any shareholder or
Company creditor who obtains a judgment or order against the Company, in Nevada
or any other US jurisdiction, will be able to successfully enforce that judgment
or order against the Company.
One
customer accounts for a majority of our revenues and failure to maintain the
business relationship with this customer will adversely affect our business
operations.
Tangdu
Hospital accounts for over 90% of our revenues and all our gross
profit. In 2009, our extraction business operated at a significant
loss. In the event we lose Tangdu Hospital or the business suffers adverse
development, our financial condition will be materially and adversely
affected.
Bao
Sai’s efforts to develop and commercialize medical products may
fail.
Bao Sai
is attempting to develop new pharmaceutical and agricultural medium products,
and to then market any products that are successfully
developed. There can be no assurance that the clinical trials will be
successful, that the necessary government approvals will be obtained or that the
products, if any, can be successfully marketed or that Bao Sai will have
sufficient resources to complete the development and commercialization of any
products.
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As directed by Section 404 of the
Sarbanes-Oxley Act of 2002 or SOX 404, the SEC adopted rules requiring public
companies to include a report of management on the company’s internal controls
over financial reporting in their annual reports, including Form 10-K. We
have established disclosure controls and procedures effective for the purposes
set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of
December 31, 2009.
Commencing by the fiscal year ended December 31, 2010, the independent
registered public accounting firm auditing a company’s financial statements must
also attest to and report on management’s assessment of the effectiveness of the
company’s internal controls over financial reporting as well as the operating
effectiveness of the company’s internal controls. However, there can be no assurance that we will
receive a positive attestation from our independent auditors. In the event we
are unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements. Also projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree or compliance with the policies or procedures may
deteriorate.
We
may be affected by global climate change or by legal, regulatory, or market
responses to such change.
The
growing political and scientific sentiment is that increased concentrations of
carbon dioxide and other greenhouse gases in the atmosphere are influencing
global weather patterns. Changing weather patterns, along with the increased
frequency or duration of extreme weather conditions, could impact the
availability or increase the cost of key raw materials that we use to produce
our products. Additionally, the sale of our products can be impacted by weather
conditions.
Concern
over climate change, including global warming, has led to legislative and
regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For
example, proposals that would impose mandatory requirements on GHG emissions
continue to be considered by policy makers in the territories that we operate.
Laws enacted that directly or indirectly affect our production, distribution,
packaging, cost of raw materials, fuel, ingredients, and water could all impact
our business and financial results.
7
Risks
Related to Our Common Stock
Our
Common Stock has been relatively thinly traded and we cannot predict the extent
to which an active trading market will develop.
Our
Common Stock is currently traded on the Over the Counter Bulletin Board. Our
Common Stock is thinly traded compared to larger more widely known companies.
Thinly traded Common Stock can be more volatile than Common Stock trading in an
active public market. We cannot predict the extent to which an active public
market for our Common Stock will develop or be sustained.
We
may need to raise additional capital which may not be available on acceptable
terms or at all.
In the
future, we may be required to raise funds. There can be no assurance that
financing will be available in amounts or on terms acceptable to us. The
inability to obtain capital may reduce our ability to continue to conduct
business operations. If we are unable to obtain additional financing, we will
likely be required to curtail our development plans. Any equity financing may
involve substantial dilution to our then existing stockholders.
We
do not intend to pay dividends on any investment in the shares of our
stock.
We have
never paid any cash dividends and currently do not intend to pay any dividends
for the foreseeable future. To the extent that we require additional funding
currently not provided for in our financing plan, our funding sources may
prohibit the payment of a dividend. Because we do not intend to declare
dividends, any gain on an investment in us will need to come through an increase
in the stock’s price. This may never happen and investors may lose all of their
investment in us.
Because
our securities are subject to penny stock rules, you may have difficulty
reselling your shares.
Our
shares as penny stocks are covered by Section 15(g) of the Securities Exchange
Act of 1934 which imposes additional sales practice requirements on
broker/dealers who sell our securities including the delivery of a standardized
disclosure document; disclosure and confirmation of quotation prices; disclosure
of compensation the broker/dealer receives; and, furnishing monthly account
statements. These rules apply to companies whose shares are not traded on a
national stock exchange or on the NASDAQ system, trade at less than $5.00 per
share, or who do not meet certain other financial requirements specified by the
SEC. These rules require brokers who sell “penny stocks” to persons other than
established customers and “accredited investors” to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading in such penny stocks.
These rules may discourage or restrict the ability of brokers to sell our shares
of Common Stock and may affect the secondary market for our shares of Common
Stock. These rules could also hamper our ability to raise funds in the primary
market for our shares of Common Stock.
Item
1B. Unresolved Staff Comments
Not
Applicable.
Item 2. Properties
Our main
office is located at 99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi
Province, P.R. China 710054, and has a total area of 372 square meters. The
Company rents the office from Bao Sai for a term of one year, commencing January
1, 2009 and ending December 31, 2009 at an annual rent of $3,779. No
other businesses operate from this office.
We also
rent an operating office for New Century at Xi An Shi Gao Xin Qu Keji 2 Lu 68
Hao, Xi An Ruanjian Yuan C Zuo 2401 Shi at an annual rent of
$2,105. These two spaces are adequate for our present and planned
future operations.
8
There is
no private ownership of land in China. Land use rights are obtained
from the government for periods ranging from 50 to 70 years, and are typically
renewable. Land use rights can be transferred upon approval by the land
administrative authorities of China (State Land Administration Bureau) upon
payment of the required transfer fee.
We own
three different imaging and radiation oncology devices which we provide to
Tangdu Hospital for use in their Gamma Knife Center.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of
Security Holders
None.
PART
II
Item 5.
Market for Common Equity
and Related and Stockholder
Market
for Common Stock
Our
Common Stock is quoted on the OTC Electronic Bulletin Board, a service
maintained by The NASDAQ Stock Market, Inc., under the symbol “GFRP.OB”. Trading
in our Common Stock in the over-the-counter market has been limited and sporadic
and the quotations set forth below are not necessarily indicative of actual
market conditions. Further, these quotations reflect inter-dealer prices,
without retail mark-up, markdown, or commission, and do not necessarily reflect
actual transactions. Set forth below is the range high and low bid information
for our Common Stock for each quarter of the years ended December 31, 2009 and
2008.
High
|
Low
|
|||||||
2009
|
||||||||
Quarter
Ended March 31, 2009
|
$ | 0.49 | $ | 0.02 | ||||
Quarter
Ended June 30, 2009
|
$ | 0.47 | $ | 0.05 | ||||
Quarter
Ended September 30, 2009
|
$ | 0.15 | $ | 0.05 | ||||
Quarter
Ended December 31, 2009
|
$ | 0.15 | $ | 0.04 | ||||
2008
|
||||||||
Quarter
Ended March 31, 2008
|
$ | 0.34 | $ | 0.20 | ||||
Quarter
Ended June 30, 2008
|
$ | 0.25 | $ | 0.09 | ||||
Quarter
Ended September 30, 2008
|
$ | 0.40 | $ | 0.04 | ||||
Quarter
Ended December 31, 2008
|
$ | 0.05 | $ | 0.03 |
On April
14, 2010, the closing price of our Common Stock was $.0.40 per
share.
As of
April 14, 2010 there were approximately 3,764 stockholders of record of our
Common Stock. Our registrar and transfer agent is Securities Transfer
Corporation located at 2591 Dallas Parkway Suite 102, Frisco Texas 75034. Their
telephone number is (469) 633-0101.
9
Limited
Market for Common Stock
There is
currently a limited trading market for our shares of Common Stock, and there can
be no assurance that a more substantial market will ever develop or be
maintained. Any market price for our shares of Common Stock is likely to be very
volatile, and numerous factors beyond our control may have a significant adverse
effect. In addition, the stock markets generally have experienced, and continue
to experience, extreme price and volume fluctuations which have affected the
market price of many small capital companies and which have often been unrelated
to the operating performance of these companies. These broad market
fluctuations, as well as general economic and political conditions, may also
adversely affect the market price of our Common Stock. Further, there is no
correlation between the present limited market price of our Common Stock and our
revenues, book value, assets or other established criteria of value. The present
limited quotations of our Common Stock should not be considered indicative of
the actual value of our Common Stock.
Dividends
We have
not paid any cash dividends to date and does not anticipate or contemplate
paying cash dividends in the foreseeable future until earnings would generate
funds in excess of those required to provide for our growth needs. We currently
intend to retain any future earnings to fund the development and growth of its
business.
Recent Sales of Unregistered
Securities
On
January 16, 2007, the Company issued 1,000,000 shares of common stock to
Greentree Financial Group, Inc. in consideration for business advisory services,
pursuant to Section 4(2) of the Securities Act of 1933, as
amended. The fair value of this stock issuance was determined using
the fair value of the Company’s common stock on the date of issuance, at a price
of $0.30 per share.
Securities
Authorized for Issuance under Equity Compensation Plans.
The Board
of Directors has authorized and GFRP has established the 2002 Incentive and
Non-qualified Stock Option Plan (the “Plan”) under which GFRP may grant to
employees, officers, directors, attorneys, consultants or other advisers of the
Company or affiliated companies up to 10,000,000 shares of GFRP’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, 2009, no options or
shares have been granted under the Plan. A copy of the Plan is filed
as an exhibit to our Form S-8 filed with the Commission in June 19,
2002.
Item
6. Selected Financial Information
Not
Applicable
Item
7. Management’s Discussion and Analysis of Financial Conditions and Results
of Operations
The
following discussion should be read in conjunction with, and is qualified in its
entirety by, the financial statements and related notes thereto and other
financial information included in this Annual Report on Form 10-K. Certain
statements in this “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” are forward-looking.
Results
of Operations
We are a
high-tech company in China chartered and authorized by the Chinese government
for involvement in researching and inventing, manufacturing and sales of
biological separation medium products, which refers to the separation and
purification of biological products and natural medicines. Such technology has
been widely used in the producing of antibiotic products, Genetic Recombinant
Medicine, the Gene Chip, bacteria production, diagnoses reagent, and biochemical
products.
New
Century’s strategic purchase of Bao Sai will provides us with key technology in
the biotech purification field and an experienced R&D team. We
feel that the acquisition will put us in a strong position for increasing our
market share and revenue in 2009.
10
The
Company believes that it has strong prospects of increasing our market share and
revenues because our diagnostic imaging and radiation oncology treatments and
equipment are all covered by the Chinese national medical insurance system.
Additionally, the acquisition of Bao Sai provides us with vital technology and
experience in the field of chromatography. We experience little, if any,
seasonality in our business.
The
Company is focused on strengthening its market share and improving its business
performance. We have no plans to purchase or sell any plants or
equipment.
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net
revenue increased from$3,677,072 for the year ended December 31, 2008 to
$3,884,097 for the year ended December 31, 2009, with, an increase of 5.6%. This
increase was principally the result of decreased rate of profit sharing with
Tangdu Center under the co-operation agreement and increased in product sales.
There are 3 sets of medical equipments which are operated by Tangdu Centre but
owned by New Century. Besides, the operations of Bao Sai, the newly acquired
business, are still in the development stage of development of new
pharmaceutical products. We expect that as soon as we complete the government
approval process for the new products, we will be able to find another means to
increase our revenues.
Our
operating expenses incurred a substantial decrease from $5,795,407 in 2008
to $1,081,383 in 2009. The decrease is mainly attributable to the
significant allowance for doubtful accounts made in 2008 from $3,826,074 to a
recovery of doubtful accounts of $93,986 in 2009. General and administrative
expenses decreased from $1,969,333 in 2008 to $1,175,369 in 2009. Such decrease
was mainly attributable to reduction in R&D expenses of $690,991 from 2008
to $50,400 in 2009.
Net
income attributable to GFR Pharmaceuticals, Inc. was increased from net loss of
$3,041,287 for the year ended December 31, 2008 to net income of $1,096,632 for
the year ended December 31, 2009..
Our
business operates entirely in Chinese Renminbi, but we report our results in our
SEC filings in U.S. Dollars. The conversion of our accounts from RMB
to Dollars results in translation adjustments. While our net income
is added to the retained earnings on our balance sheet; the translation
adjustments are added to a line item on our balance sheet labeled “other
comprehensive income,” since it is more reflective of changes in the relative
values of U.S. and Chinese currencies than of the success of our
business.
Liquidity and
Capital Resources
Stockholder’s
equity decreased from $3,145,525 as of December 31, 2008 to $4,322,122 as of
December 31, 2009. In connection with our acquisition of Bao Sai on January 1,
2008, we incurred a payment obligation in the amount of $4,500,211 payable to
the former owners. As of December 31, 2009, we had a note payable in
the amount of $2,493,318 which was due on December 31, 2009 and was fully paid
during 2009 fiscal year. In addition, our principal shareholder, Mr. Lian Guo
made a loan to fund our operations. As of December 31, 2009, the balance of the
loan was $1,960,874 which was unsecured, interest-free and repayable on
demand. Also included in the current liability as of December 31,
2008 is a note payable to Shanxi Ze Hua Nuan Tong Zhileng Gongcheng Co., Ltd,
secured by our building with the value of $ 1,753,706. Interest on this note
accrued 10.46% per annum, payable monthly, with the total amount due on December
20, 2008. This note was re-paid in full in February 2009, and the
property was released accordingly.
We also
had a loan payable to Xi’an Bao Sai Medicine Co., Ltd (“Medicine”) in the
principal amount of $980,575 as of December 31, 2009 which was unsecured
and interest-free. The loan is repayable in four installments with the total
amount due no later than 2012. We have a 75% equity interest in
Medicine but Medicine is no longer consolidated.
11
We have
two business segments – the Cancer Diagnosis and Treatment Center at Tangdu
Hospital and the biological extraction business that extracts raw materials
to medicine ingredients and distributes the extracted ingredients for medicine
manufacturing uses. We are dependent on the continued success of the
operations at the cancer diagnostic and treatment business to continue our
operations. In 2009, the cancer treatment business accounted for $3,336,858
(86%) of our revenue and generated $1,767,050 of net income. The
extraction business generated $547,258 of revenue in 2009 as compared to
$223,063 in 2008.
In
addition, as of December 31, 2009 and 2008, allowance for doubtful accounts
receivable was $552,118 and $515,026 respectively The inability to
collect more outstanding receivables can aversely affect our
operations. Tangdu Hospital accounted for all of the
revenues from the cancer diagnosis and treatment center and $502,907 of
accounts receivable as of December 31, 2009.
Based on
the financial resources available, management believes the Company’s ability to
continue as a going concern depends upon its ability to maintain profitable
operations in its medical business and to obtain additional financing
or refinancing as may be required. The Company has generated positive cash
inflows from operating activities during the years of 2008 and 2009. The Company
will devote more resources on marketing in order to increase the market share
and improve the operating performance. Management believes the Company will
generate sufficient cash flow and either obtain additional financing or
refinancing to meet its obligations on a timely basis for the foreseeable
future.
Liquidity
Analysis
December 31,
2009
|
December 31,
2008
|
|||||||
Working
Capital
|
$ | (1,760,129 | ) | $ | (3,672,650 | ) | ||
Stockholders’
Equity
|
$ | 4,322,122 | $ | 3,145,525 | ||||
Total
Liabilities
|
$ | 3,436,619 | $ | 6,202,281 |
Critical
Accounting Policies and Estimates
In
preparing our financial statements we are required to formulate working policies
regarding valuation of our assets and liabilities and to develop estimates of
those values. In our preparation of the financial statements for
2009, there were no estimates made which were (a) subject to a high degree of
uncertainty and (b) material to our results.
We made
no material changes to our critical accounting policies in connection with the
preparation of financial statements for 2009.
Impact
of Accounting Pronouncements
There
were no recent accounting pronouncements that have had a material effect on the
Company’s financial position or results of operations.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
Not
Applicable.
12
Item 8. Financial
Statements
GFR
PHARMACEUTICALS, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
||
Report
of Independent Registered Public Accounting Firm, ZYCPA Company
Limited
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm, AGCA, Inc. Certified
Public Accountants
|
F-3
|
|
Consolidated
Balance Sheets
|
F-4
|
|
Consolidated
Statements of Operations And Comprehensive Income (Loss)
|
F-5
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8 to F-26
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders
GFR
Pharmaceuticals, Inc.
We have
audited the accompanying consolidated balance sheet of GFR Pharmaceuticals, Inc.
and its subsidiaries (“the Company”) as of December 31, 2009 and the related
consolidated statements of operations and comprehensive income, cash flows and
stockholders’ equity for the year ended December 31, 2009. 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 audit.
We
conducted our audit 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2009, and the results of operations and cash flows for the year ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
/s/ ZYCPA Company
Limited
ZYCPA
Company Limited
Certified
Public Accountants
Hong
Kong, China
April 14,
2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
GFR
Pharmaceuticals, Inc.
Xi’an
China
We have
audited the accompanying consolidated balance sheet of GFR Pharmaceuticals, Inc.
and subsidiaries as of December 31, 2008 and the related consolidated statements
of operations and comprehensive income, stockholders’ equity, and cash flows for
the year then ended. GFR Pharmaceuticals, Inc.’s management is responsible for
these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits. The Consolidated financial statements
of GFR Pharmaceuticals, Inc. and subsidiaries for the year ended December 31,
2007 were audited by other auditors whose report dated April 7, 2008 expressed
an unqualified opinion on those statements.
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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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 as of December 31, 2008 and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, as discussed in Note 2 to the
consolidated financial statements. Management’s plans regarding those matters
are also described in the said note. The consolidated financial statements do
not include any adjustment that might result from the outcome of this
uncertainty.
As
disclosed in note 4, the Company acquired 96.77% of Xi’an Jiaoda Bao Sai
Bio-Technology Co., Ltd. for $4,500,211 from mostly related parties. $3,884,029
of the consideration was paid or payable to the related parties.
/s/ AGCA,
Inc.
Arcadia,
California
April 3,
2009
Member:
|
Registered:
|
American
Institute of Certified Public Accountants
|
Public
Company Accounting Oversight Board
|
California
Society of Certified Public Accountants
|
F-3
GFR
PHARMACEUTICALS, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 55,486 | $ | 552,398 | ||||
Trade
accounts receivable, net
|
541,206 | 659,329 | ||||||
Inventories,
net
|
10,289 | 282,307 | ||||||
Note
receivable, net
|
- | - | ||||||
Other
receivable, net
|
- | - | ||||||
Amount
due from unconsolidated affiliate, net
|
- | - | ||||||
Prepayments
and other current assets
|
277,455 | 243,242 | ||||||
Operating
lease prepaid, current portion
|
7,252 | 7,255 | ||||||
Total
current assets
|
891,688 | 1,744,531 | ||||||
Property,
plant and equipment, net
|
6,723,519 | 6,862,609 | ||||||
Intangible
asset, net
|
- | - | ||||||
Operating
lease prepaid, non-current portion
|
143,534 | 150,844 | ||||||
Long
term prepayment
|
- | 589,822 | ||||||
TOTAL
ASSETS
|
$ | 7,758,741 | $ | 9,347,806 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Trade
accounts payable
|
$ | 90,682 | $ | 124,700 | ||||
Amount
due to a related party
|
1,960,874 | 1,951,203 | ||||||
Note
payable
|
- | 219,472 | ||||||
Note
payable, related parties
|
- | 2,493,318 | ||||||
Income
tax payable
|
171,708 | 171,847 | ||||||
Other
payables and accrued liabilities
|
428,553 | 456,641 | ||||||
Total
current liabilities
|
2,651,817 | 5,417,181 | ||||||
Long-term
liabilities:
|
||||||||
Loss
in excess of investment in unconsolidated affiliate
|
784,802 | 785,100 | ||||||
TOTAL
LIABILITIES
|
3,436,619 | 6,202,281 | ||||||
Commitments
and contingencies
|
||||||||
Equity:
|
||||||||
GFR
Pharmaceutical, Inc. stockholders’ equity:
|
||||||||
Common
stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 and
42,079,940 shares issued and outstanding as of December 31, 2009 and
2008
|
42,080 | 42,080 | ||||||
Additional
paid-in capital
|
3,712,120 | 3,712,120 | ||||||
Accumulated
other comprehensive income
|
210,882 | 210,695 | ||||||
Statutory
reserve
|
595,253 | 423,760 | ||||||
Accumulated
deficits
|
(750,589 | ) | (1,675,728 | ) | ||||
Total
GFR Pharmaceutical, Inc. stockholders’ equity
|
3,809,746 | 2,712,927 | ||||||
Non-controlling
interest
|
512,376 | 432,598 | ||||||
Total
equity
|
4,322,122 | 3,145,525 | ||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 7,758,741 | $ | 9,347,806 |
See
accompanying notes to consolidated financial statements.
F-4
GFR
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
AND
COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenue,
net:
|
||||||||
Service
revenue
|
$ | 3,336,839 | $ | 3,454,009 | ||||
Product
sales
|
547,258 | 223,063 | ||||||
Total
revenues, net
|
3,884,097 | 3,677,072 | ||||||
Cost
of revenue:
|
||||||||
Depreciation
|
596,988 | 579,592 | ||||||
Cost
of products
|
474,724 | 268,278 | ||||||
Total
cost of revenue
|
1,071,712 | 847,870 | ||||||
GROSS
PROFIT
|
2,812,385 | 2,829,202 | ||||||
Operating
expenses:
|
||||||||
(Recovery
from) allowance for doubtful accounts
|
(93,986 | ) | 3,826,074 | |||||
General
and administrative
|
1,175,369 | 1,969,333 | ||||||
Total
operating expenses
|
1,081,383 | 5,795,407 | ||||||
Income
(loss) from operations
|
1,731,002 | (2,966,205 | ) | |||||
Other
income (expense):
|
||||||||
Rental
income
|
- | 556,098 | ||||||
Interest
income
|
17,051 | 47,263 | ||||||
Interest
expense
|
- | (121,433 | ) | |||||
Other
expense
|
- | (212 | ) | |||||
Total
other income
|
17,051 | 481,716 | ||||||
Income
(loss) before income taxes
|
1,748,053 | (2,484,489 | ) | |||||
Income
tax expense
|
(571,643 | ) | (628,747 | ) | ||||
NET
INCOME (LOSS)
|
1,176,410 | (3,113,236 | ) | |||||
Net
(income) loss attributable to non-controlling interest
|
(79,778 | ) | 71,949 | |||||
Net
income attributable to GFR Pharmaceuticals, Inc.
|
$ | 1,096,632 | $ | (3,041,287 | ) | |||
Net
income (loss) per share – Basic and diluted
|
||||||||
Net
income (loss) attributable to GFR Pharmaceuticals, Inc
|
$ | 0.03 | $ | (0.07 | ) | |||
Weighted
average shares outstanding during the year – Basic and
diluted
|
42,079,940 | 42,079,940 |
See
accompanying notes to consolidated financial statements.
F-5
GFR
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”))
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | 1,176,410 | $ | (3,113,236 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities
|
||||||||
Depreciation
and amortization
|
734,972 | 660,743 | ||||||
(Recovery
from) allowance for doubtful accounts
|
(93,492 | ) | 3,826,074 | |||||
Inventory
allowance
|
322,122 | - | ||||||
Change
in operating assets and liabilities:
|
||||||||
Trade
accounts receivable
|
80,542 | (248,866 | ) | |||||
Inventories
|
(50,359 | ) | (5,628 | ) | ||||
Other
receivable
|
- | 175,958 | ||||||
Prepayments
and other current assets
|
(30,968 | ) | 173,997 | |||||
Operating
lease prepaid
|
- | 7,017 | ||||||
Trade
accounts payable
|
(33,953 | ) | (795,258 | ) | ||||
Income
tax payable
|
(2,856 | ) | (34,459 | ) | ||||
Other
payables and accrued liabilities
|
(28,430 | ) | (92,355 | ) | ||||
Net
cash provided by operating activities
|
2,073,988 | 553,987 | ||||||
Cash
flows from investing activities:
|
||||||||
Acquisition
of a subsidiary, net of cash acquired
|
- | (1,687,382 | ) | |||||
Repayment
from an unconsolidated affiliate
|
130,759 | 188,507 | ||||||
Proceeds
from disposal of plant and equipment
|
- | 1,400,857 | ||||||
Purchase
of property, plant and equipment
|
(2,039 | ) | (39,829 | ) | ||||
Net
cash provided by (used in) investing activities
|
128,720 | (137,847 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Advances
to related companies
|
- | (304,983 | ) | |||||
Repayment
of notes payable
|
(219,269 | ) | (212,251 | ) | ||||
Repayment
of notes payable to related parties
|
(2,490,997 | ) | - | |||||
Advances
from a stockholder
|
11,622 | 686,901 | ||||||
Repayment
to stockholders
|
- | (63,283 | ) | |||||
Net
cash (used in) provided by financing activities
|
(2,698,644 | ) | 106,384 | |||||
Effect
on exchange rate change on cash and cash equivalents
|
(976 | ) | 19,923 | |||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(496,912 | ) | 542,447 | |||||
CASH
AND CASH EQUIVALENT, BEGINNING OF YEAR
|
552,398 | 9,951 | ||||||
CASH
AND CASH EQUIVALENT, END OF YEAR
|
$ | 55,486 | $ | 552,398 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for income taxes
|
$ | 574,499 | $ | 681,927 | ||||
Cash
paid for interest
|
$ | - | $ | 44,538 |
See
accompanying notes to consolidated financial statements.
F-6
GFR
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
GFR
Pharmaceuticals, Inc. stockholders’ equity
|
||||||||||||||||||||||||||||||||
Common
stock
|
Additional
|
Accumulated
other
comprehensive
|
Statutory
|
Retained
earnings
(accumulated
|
Non-controlling
|
Total
|
||||||||||||||||||||||||||
No.
of shares
|
Amount
|
paid-in
capital
|
income
|
reserve
|
deficit)
|
interest
|
equity
|
|||||||||||||||||||||||||
Balance
as of January 1, 2008
|
42,079,940 | $ | 42,080 | $ | 3,712,120 | $ | 134,797 | $ | 236,818 | $ | 1,552,501 | $ | 328,605 | $ | 6,006,921 | |||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 75,898 | - | - | - | 75,898 | ||||||||||||||||||||||||
Net
loss for the year
|
- | - | - | - | - | (3,041,287 | ) | - | (3,041,287 | ) | ||||||||||||||||||||||
Appropriation
to statutory reserve
|
- | - | - | - | 186,942 | (186,942 | ) | - | - | |||||||||||||||||||||||
Non-controlling
interest
|
- | - | - | - | - | - | 103,993 | 103,993 | ||||||||||||||||||||||||
Balance
as of December 31, 2008
|
42,079,940 | 42,080 | 3,712,120 | 210,695 | 423,760 | (1,675,728 | ) | 432,598 | 3,145,525 | |||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | 187 | - | - | - | 187 | ||||||||||||||||||||||||
Net
income for the year
|
- | - | - | - | - | 1,096,632 | 79,778 | 1,176,410 | ||||||||||||||||||||||||
Appropriation
to statutory reserve
|
- | - | - | - | 171,493 | (171,493 | ) | - | - | |||||||||||||||||||||||
Balance
as of December 31, 2009
|
42,079,940 | $ | 42,080 | $ | 3,712,120 | $ | 210,882 | $ | 595,253 | $ | (750,589 | ) | $ | 512,376 | $ | 4,322,122 |
See
accompanying notes to consolidated financial statements.
F-7
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
1.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
GFR
Pharmaceuticals, Inc. (the “Company” or “GFRP”) was incorporated in the State of
Nevada on December 18, 1996 as Laredo Investment Corp. On August 9, 2004, Laredo
Investment Corp. changed its name to GFR Pharmaceuticals, Inc.
The
Company, through its subsidiaries, mainly engages in a joint operation of a
Positive Emission Tomography (“PET”) Scanner and Rotary Gamma Ray Stereotactic
Neurosurgery System imaging center in Xian City, Shaanxi Province, the People’s
Republic of China (the “PRC”).
Xi'an Hua
Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua Long”) is a
wholly-owned subsidiary of the Company, which was incorporated as a limited
liability company in the PRC on December 23, 1999. Its principal activity is an
investment holding of 95% equity interest in New Century Scientific Investment
Ltd. (“New Century”).
New
Century was incorporated as a limited liability company in the PRC on November
23, 2001 with a registered capital of RMB30, 000,000 (equivalent to $3,636,000).
It jointly operates a PET scanner and Rotary Gamma Ray Stereotactic Neurosurgery
System imaging center with Tang Du Hospital ("the Hospital") in Xian City,
Shaanxi Province, the PRC. The duration of the operation was 11 years and it
will expire in 2017.
On May
14, 2008, the Company completed the acquisition of Xi’an Jiaoda Bao Sai
Bio-Technology Co., Ltd ("Bao Sai") pursuant to the terms of a Stock Purchase
Agreement (“the Agreement”) dated January 1, 2008, between GFRP and Bao Sai for
a consideration of $4,500,211 (approximately RMB33,000,000) for 96.77% of its
equity interest in Bao Sai, based on the aggregate net book value of total
assets and liabilities of Bao Sai as of December 31, 2007. The closing date was
January 1, 2008. Upon the completion of the transaction, Bao Sai became a
subsidiary of the Company.
Description of
subsidiaries
Name
|
Place
of incorporation
and
kind of
legal
entity
|
Principal
activities
and
place of operation
|
Particulars
of
registered
share
capital
|
Effective
interest
held
|
||||
Xi'an
Hua Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua
Long”)
|
The
PRC, a limited liability company
|
Investing
holding
|
RMB1,500,000
|
100%
|
||||
New
Century Scientific Investment Ltd. (“New Century”)
|
The
PRC, a limited liability company
|
Operator
of medical clinic in the PRC
|
RMB30,000,000
|
95%
|
||||
Xi’an
Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)
|
The
PRC, a limited liability company
|
Research
and development of extraction process and trading of pharmaceutical
materials in the PRC
|
RMB60,000,000
|
96.77%
|
GFRP, Hua
Long, New Century and Bao Sai are hereinafter referred to as (the
“Company”).
F-8
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
·
|
Basis
of presentation
|
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
·
|
Use
of estimates
|
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenues and expenses during the years reported. Actual
results may differ from these estimates.
·
|
Basis
of consolidation
|
The
consolidated financial statements include the financial statements of GFRP and
its subsidiaries, Hua Long, New Century and Bao Sai. All significant
inter-company balances and transactions within the Company have been eliminated
upon consolidation.
·
|
Equity
method of accounting
|
Under
Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC 810”),
consolidation of a majority-owned subsidiary is precluded where control does not
rest with the majority owner. From May 1, 2007, GFRP’s subsidiary Medicine
ceased business and leased out its business license. Accordingly, GFRP
deconsolidated Medicine and accounted Medicine for under the equity method of
accounting.
Generally
accepted accounting principles require that the investment in the investee be
reported using the equity method under the provision of ASC Topic 323 “Investments - Equity Method and Joint Ventures” (“ASC
323”) when an investor corporation can exercise significant influence over the
operations and financial policies of an investee corporation. When the equity
method of accounting is used, the investor initially records the investment in
the stock of an investee at cost. The investment account is then adjusted to
recognize the investor’s share of the income or losses of the investee when
it is earned by the investee. Such amounts are included when determining the net
income of the investor in the period they are reported by the
investee.
As a
result of deconsolidation under ASC 810 and the application of the equity method
under ASC 323, GFRP had a negative basis in its investment in Medicine, the
Equity Investee, because the subsidiary generated significant losses and
intercompany liabilities in excess of its asset balances. This negative
investment, “Loss in excess of investment in Equity Investee,” is reflected as a
single amount on the Company’s consolidated balance sheet as
approximately $784,802 and $785,100 liability as of December 31, 2009 and
2008.
Since
Medicine’s results are no longer consolidated and GFRP believes that it is not
obligated to fund future operating losses at Medicine, any adjustments reflected
in Medicine’s financial statements subsequent to May 1, 2007 are not expected to
affect the results of operations of GFRP.
·
|
Cash
and cash equivalents
|
Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
F-9
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
·
|
Accounts
receivable and allowance for doubtful
accounts
|
Accounts
receivable are recorded at the invoiced amount and do not bear interest.
Management reviews the adequacy of the allowance for doubtful accounts on an
ongoing basis, using historical collection trends and aging of receivables.
Management also periodically evaluates individual customer’s financial
condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance-sheet credit exposure related to its customers. As of
December 31, 2009 and 2008, the allowance for doubtful accounts was $552,118 and
$515,026, respectively.
·
|
Inventories
|
Inventories
are stated at the lower of cost or market value (net realizable value), cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company quarterly reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of December 31, 2009 and 2008, the
inventory allowance was $688,153 and $367,390, respectively.
·
|
Property,
plant and equipment
|
Property,
plant and equipment are stated at cost less accumulated depreciation and
accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on
which they become fully operational and after taking into account their
estimated residual values:
Depreciable life
|
Residual value
|
|||||
Buildings
|
20 – 40
years
|
5 | % | |||
Plant
and equipment
|
5 –
16 years
|
5 | % | |||
Motor
vehicles
|
8
–12 years
|
5 | % | |||
Furniture,
fixture and equipment
|
5 –
8 years
|
5 | % |
Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
·
|
Intangible
asset
|
Intangible
asset includes technical know-how acquired from a business combination.
Technical know-how is carried at cost less accumulated amortization and
impairment charge and is amortized on a straight-line basis over its estimated
useful lives of 10 years beginning at the time it is granted.
As of
December 31, 2009 and 2008, the carrying value of the technical know-how was
stated as zero. During the year ended December 31, 2008, the Company recognized
a full impairment charge before the acquisition of Bao Sai for recoverability
test.
·
|
Operating
lease prepaid
|
All lands
in the PRC are owned by the PRC government. The government in the PRC, according
to the relevant PRC law, may grant the right to use the land for a specified
period of time. Thus, all of the Company’s lands in the PRC are considered
operating lease prepaid. Operating lease prepaid is amortized on a straight-line
basis over the lease term of 50 years.
F-10
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
·
|
Impairment
of long-lived assets
|
In
accordance with the provisions of the provision of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived
Assets”, all long-lived assets such as property, plant and equipment and
intangible assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
evaluated by a comparison of the carrying amount of assets to estimated
discounted net cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair value of
the assets. There has been no impairment as of December 31, 2009.
·
|
Revenue
recognition
|
In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.
(a)
|
Service
revenue
|
Pursuant
to the agreements entered into between the Company and Tang Du Hospital (“the
Hospital”) dated February 2, 2006; the Company and the Hospital would jointly
operate the medical center in the provision of diagnostic imaging services to
the patients. In return, the Company and the Hospital would share net revenues
from services rendered, on a monthly basis, when earned, at their net realizable
amounts from patients for services rendered at contractually established billing
rates, after deducting the total operating cost of the centers. The Company
recognizes net revenues based on the total amount received from the patients
during the month, less the monthly operating costs incurred at the
center.
The
Company records the revenue, net of business tax, from the customers through the
Hospital, on a net basis in compliance with EITF 99-19, “Reporting Revenues Gross as a
Principal versus Net as an Agent.”
(b)
|
Sale
of products
|
The
Company recognizes revenue from the sale and trading of pharmaceutical materials
upon delivery to the customers, whereas the title and risk of loss are fully
transferred to the customers. The Company records its revenues, net of value
added taxes (“VAT”) under the PRC tax law which is levied on the majority of the
products at the rate of 17% on the invoiced value of sales. The Company
experienced no product returns and has recorded no reserve for sales returns for
the years ended December 31, 2009 and 2008.
(c)
|
Interest
income
|
Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
·
|
Cost
of products
|
Cost of
products consists primarily of purchase cost of extractions, direct labor and
other overheads, which are directly attributable to the extraction and trading
of pharmaceutical materials. Shipping and handling cost, associated with the
distribution of finished products to the customers, are borne by the
customers.
·
|
Advertising
expense
|
Advertising
costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. The
Company incurred no advertising cost for the years ended December 31, 2009 and
2008.
F-11
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
·
|
Research
and development expense
|
Research
and development costs are expensed when incurred in the development of new
processes including significant improvements and refinements of existing
products. Such costs mainly relate to labor and material cost. The Company
incurred $50,400 and $690,991 of such costs for the years ended December 31,
2009 and 2008.
·
|
Income
taxes
|
The
Company adopts the ASC Topic 740, “Income Taxes” regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.
For the
years ended December 31, 2009 and 2008, the Company did not have any interest
and penalties associated with tax positions. As of December 31, 2009 and 2008,
the Company did not have any significant unrecognized uncertain tax
positions.
The
Company conducts major businesses in the PRC and is subject to tax in this
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax authority. For the
year ended December 31, 2009, the Company filed and cleared 2008 PRC tax return
by the tax authority.
·
|
Net
income (loss) per share
|
The
Company calculates net income (loss) per share in accordance with ASC Topic
260, “Earnings per
Share.” Basic income (loss) per share is computed by dividing the net
income by the weighted-average number of common shares outstanding during the
period. Diluted income (loss) per share is computed similar to basic income
(loss) per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential
common stock equivalents had been issued and if the additional common shares
were dilutive.
·
|
Comprehensive
income
|
ASC Topic
220, “Reporting Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
statement of changes in stockholders’ equity, consists of changes in unrealized
gains and losses on foreign currency translation. This comprehensive income is
not included in the computation of income tax expense or benefit.
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
income (loss)
|
$ | 1,176,410 | $ | (3,113,236 | ) | |||
Other
comprehensive income (loss) income:
|
||||||||
-
Foreign currency translation (loss) gain
|
187 | 75,898 | ||||||
Comprehensive
income (loss)
|
$ | 1,176,597 | $ | (3,037,338 | ) |
F-12
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
·
|
Foreign
currencies translation
|
Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting
exchange differences are recorded in the consolidated statement of
operations.
The
reporting currency of the Company is United States Dollar ("US$"). The Company's
subsidiaries in the PRC maintain their books and records in their local
currency, Renminbi Yuan ("RMB"), which is functional currency as being the
primary currency of the economic environment in which these entities
operate.
In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “Translation of Financial
Statement”, using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the year. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.
Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective year:
2009
|
2008
|
|||||||
Year-end
RMB:US$1 exchange rate
|
6.8372 | 6.8542 | ||||||
Annual
average RMB:US$1 exchange rate
|
6.8409 | 6.9623 |
·
|
Related
parties
|
Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.
·
|
Retirement
plan costs
|
Contributions
to retirement schemes (which are defined contribution plans) are charged to
general and administrative expenses in the accompanying consolidated statements
of operation and comprehensive income as the related employee service is
provided.
·
|
Segment
reporting
|
ASC Topic
280, “Segment Reporting” establishes standards for
reporting information about operating segments on a basis consistent with the
Company’s internal organization structure as well as information about
geographical areas, business segments and major customers in financial
statements. For the years ended December 31, 2009 and 2008, the Company operates
in two reportable segments: Medical Business and Extraction Business in
PRC.
F-13
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
·
|
Fair
value measurement
|
ASC Topic
820-10, “Fair Value
Measurements and Disclosures” ("ASC 820-10") establishes a new framework
for measuring fair value and expands related disclosures. Broadly, ASC 820-10
framework requires fair value to be determined based on the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. ASC 820-10 establishes a
three-level valuation hierarchy based upon observable and non-observable
inputs. These tiers include: Level 1, defined as observable inputs such as
quoted prices in active markets; Level 2, defined as inputs other than quoted
prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own
assumptions.
For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.
·
|
Fair
value of financial
instruments
|
The
carrying value of the Company’s financial instruments include cash and cash
equivalents, trade accounts receivable, prepayments and other receivables, trade
accounts payable, amounts due to related parties, income tax payable, accrued
liabilities and other payable. Fair values were assumed to approximate carrying
values for these financial instruments because they are short term in nature and
their carrying amounts approximate fair values.
·
|
Reclassifications
|
Certain
prior year amounts have been reclassified to confirm to the current period
presentation. These reclassifications have no impact on previously reported
financial position, results of operations or cash flows.
·
|
Recent
accounting pronouncements
|
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and does not believe the future adoption of any such
pronouncements may be expected to cause a material impact on its financial
condition or the results of its operations.
During
2009, Accounting Standards Codification (“ASC”) became the source of
authoritative U.S. GAAP recognized by the Financial Accounting Standards Board
(“FASB”) for nongovernmental entities, except for certain FASB Statements not
yet incorporated into ASC. Rules and interpretive releases of the SEC under
federal securities laws are also sources of authoritative U.S. GAAP for
registrants. The discussion below includes the applicable ASC
reference.
The
Company adopted ASC Topic 810-10, “Consolidation” (formerly SFAS
No. 160, “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51”) effective January 2, 2009. Topic 810-10 changes the manner of
presentation and related disclosures for the noncontrolling interest in a
subsidiary (formerly referred to as a minority interest) and for the
deconsolidation of a subsidiary. The adoption of these sections did not have a
material impact on the Company’s consolidated financial
statements.
F-14
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
ASC Topic
815-10, “Derivatives and
Hedging” (formerly SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”) was adopted by the Company effective
January 2, 2009. The guidance under ASC Topic 815-10 changes the manner of
presentation and related disclosures of the fair values of derivative
instruments and their gains and losses.
In April
2009, the FASB issued an update to ASC Topic 820-10, “Fair Value Measurements and
Disclosures” (“ASC 820-10) (formerly FASB Staff Position No. SFAS 157-4,
“Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”). The
standard provides additional guidance on estimating fair value in accordance
with ASC 820-10 when the volume and level of transaction activity for an asset
or liability have significantly decreased in relation to normal market activity
for the asset or liability have significantly decreased and includes guidance on
identifying circumstances that indicate if a transaction is not orderly. The
Company adopted this pronouncement effective April 1, 2009 with no impact on its
consolidated financial statements.
In April
2009, the FASB issued FSP SFAS No. 107-1, “Disclosures about Fair Value of
Financial Instruments” (“ASC 825-10”). ASC 825-10 requires fair value of
financial instruments disclosure for interim reporting periods of publicly
traded companies as well as in annual financial statements. ASC 825-10 is
effective for interim periods ending after June 15, 2009 and was adopted by the
Company in the second quarter of 2009. There was no material impact to the
Company’s consolidated financial statements as a result of the adoption of ASC
825-10.
In April
2009, the FASB issued FSP APB No. 28-1, “Interim Financial Reporting”
(“ASC 825-10”). ASC 825-10 requires the fair value of financial instruments
disclosure in summarized financial information at interim reporting periods. ASC
825-10 is effective for interim periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. There was no material
impact to the Company’s consolidated financial statements as a result of the
adoption of ASC 825-10.
In June
2009, the FASB finalized SFAS No. 167, “Amending FASB interpretation No.
46(R)”, which was included in ASC Topic 810-10-05 “Variable Interest Entities”.
The provisions of ASC Topic 810-10-05 amend the definition of the primary
beneficiary of a variable interest entity and will require the Company to make
an assessment each reporting period of its variable interests. The provisions of
this pronouncement are effective January 1, 2010. The Company is evaluating the
impact of the statement on its consolidated financial statements.
In July
2009, the FASB issued SFAS No. 168, “The Hierarchy of Generally Accepted
Accounting Principles”. SFAS 168 codified all previously issued
accounting pronouncements, eliminating the prior hierarchy of accounting
literature, in a single source for authoritative U.S. GAAP recognized by the
FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10
“Generally Accepted Accounting
Principles”, is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of this
pronouncement did not have an effect on the Company’s consolidated financial
statements.
In August
2009, the FASB issued an update of ASC Topic 820, “Measuring Liabilities at Fair Value
”. The new guidance provides clarification that in circumstances in which
a quoted price in an active market for the identical liability is not available,
a reporting entity is required to measure fair value using prescribed
techniques. The Company adopted the new guidance in the third quarter of 2009
and it did not materially affect the Company’s financial position and results of
operations.
F-15
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
In
October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13,
“Revenue Recognition (Topic
605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB
Emerging Issues Task Force)” which amends ASC 605-25, “Revenue Recognition:
Multiple-Element Arrangements.” ASU No. 2009-13 addresses how to
determine whether an arrangement involving multiple deliverables contains more
than one unit of accounting and how to allocate consideration to each unit of
accounting in the arrangement. This ASU replaces all references to fair value as
the measurement criteria with the term selling price and establishes a hierarchy
for determining the selling price of a deliverable. ASU No. 2009-13 also
eliminates the use of the residual value method for determining the allocation
of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded
disclosures. This ASU will become effective for us for revenue arrangements
entered into or materially modified on or after April 1, 2011. Earlier
application is permitted with required transition disclosures based on the
period of adoption. The Company is currently evaluating the application date and
the impact of this standard on its consolidated financial
statements.
In
September 2009, the FASB issued certain amendments as codified in ASC 605-25,
“Revenue Recognition; Multiple-Element
Arrangements.” These amendments provide clarification on whether
multiple deliverables exist, how the arrangement should be separated, and the
consideration allocated. An entity is required to allocate revenue in an
arrangement using estimated selling prices of deliverables in the absence of
vendor-specific objective evidence or third-party evidence of selling price.
These amendments also eliminate the use of the residual method and require an
entity to allocate revenue using the relative selling price
method. The amendments significantly expand the disclosure requirements for
multiple-deliverable revenue arrangements. These provisions are to be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. The Company is currently evaluating the
impact of these amendments to its consolidated financial
statements.
In
November 2009, the FASB issued ASU 2009-16, “Transfers and Servicing
(Topic 860) – Accounting
for Transfers of Financial Assets,” which formally codifies FASB
Statement No. 166, “Accounting
for Transfers of Financial Assets.” ASU 2009-16 is a revision to SFAS No.
140, “Accounting for Transfers
and Servicing of
Financial Assets and Extinguishments of Liabilities,” and requires more
information about transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the risks related
to transfer of financial assets. It eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures. The provisions are effective
January 1, 2010, for a calendar year-end entity, with early application not
being permitted. Adoption of these provisions is not expected to have a
material impact on the Company’s consolidated financial statements.
3.
|
ACCOUNTS
RECEIVABLE
|
The
majority of the Company’s sales are on open credit terms and in accordance with
terms specified in the contracts governing the relevant transactions. The
Company evaluates the need of an allowance for doubtful accounts based on
specifically identified amounts that management believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required.
Accounts
receivable consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Accounts
receivable, gross
|
$ | 1,093,324 | $ | 1,174,355 | ||||
Less:
allowance for doubtful accounts
|
(552,118 | ) | (515,026 | ) | ||||
Accounts
receivable, net
|
$ | 541,206 | $ | 659,329 |
For the
year ended December 31, 2009 and 2008, the Company provided for $37,267 and
$515,026 of the allowance for doubtful accounts, respectively.
F-16
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
4.
|
INVENTORIES,
NET
|
Inventories
consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 17,876 | $ | 74,270 | ||||
Work-in-process
|
- | 7,109 | ||||||
Finished
goods
|
680,566 | 568,318 | ||||||
698,442 | 649,697 | |||||||
Less:
inventory allowance
|
(688,153 | ) | (367,390 | ) | ||||
Inventories,
net
|
$ | 10,289 | $ | 282,307 |
For the
years ended December 31, 2009 and 2008, the Company recorded inventory allowance
of $322,122 and $367,390, respectively.
5.
|
NOTE
RECEIVABLE, NET
|
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Note
receivable, at cost
|
$ | 1,096,940 | $ | 1,097,358 | ||||
Less:
allowance for doubtful accounts
|
(1,096,940 | ) | (1,097,358 | ) | ||||
Note
receivable, net
|
$ | - | $ | - |
On
September 3, 2007, the Company’s subsidiary, Bao Sai, disposed of its investment
in 75% of HuaYang for a cash consideration of $1,096,940 (equivalent to
RMB7,500,000). The balance was unsecured and interest-free and repayable in 4
installments due in full, by December 31, 2008. Repayment was not made in full
as of December 31, 2009, so an agreement was entered into by both parties to
extend the maturity to December 31, 2011. Accordingly, allowance of doubtful
accounts was fully made on the note receivable during the fiscal year
2008.
6.
|
OTHER
RECEIVABLE, NET
|
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Other
receivable, gross
|
$ | 1,119,298 | $ | 1,122,650 | ||||
Less:
allowance for doubtful accounts
|
(1,119,298 | ) | (1,122,650 | ) | ||||
Other
receivable, net
|
$ | - | $ | - |
As of
December 31, 2009, the balance of $1,119,298 due from a former subsidiary of the
Company, a represented temporary advance from the Company which was unsecured,
interest-free, with a fixed repayment term of 4 installments and which is due in
full no later than December 2013. As of December 31, 2009, the future
installments to be received are as follows:
F-17
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
Years
ending December 31,
|
||||
2010
|
$ | 201,488 | ||
2011
|
219,472 | |||
2012
|
424,312 | |||
2013
|
274,026 | |||
Total
|
$ | 1,119,298 |
For the
year ended December 31, 2008, the Company fully provided for $1,122,650 of the
allowance for doubtful accounts.
7.
|
AMOUNT
DUE FROM (TO) RELATED PARTIES
|
(a)
|
Amount
due from (to) a stockholder
|
As of
December 31, 2009, a balance of $1,960,874 due from a stockholder, Mr. Lian Guo
represented a temporary advance from the Company which was unsecured,
interest-free and repayable on demand.
As of
December 31, 2008, a balance of $1,951,203 due to a stockholder, Mr. Lian Guo
represented a temporary advance to the Company which was unsecured,
interest-free and repayable on demand.
(b)
|
Note
payable to related parties
|
As of
December 31, 2008, note payable of $2,493,318 due to related parties represented
payable to ex-shareholders of Xi'an Jiaoda Bao Sai Bio-Technology Co., Ltd for
the transfer of their shares to New Century. The amount was fully paid to
ex-shareholders during the 2009 fiscal year.
8.
|
INVESTMENT
IN AN UNCONSOLIDATED AFFILIATE
|
The
Company has a 75% equity interest in Xi’an Bao Sai Medicine Co., Ltd
(“Medicine”), through Bao Sai, which is registered as a limited liability
company in the PRC. Medicine ceased business in 2007 and leased out its business
license. Thus, the Company does not have control on the policy decisions in
Medicine; and accordingly, investment in Medicine is accounted for under the
equity method.
As of
December 31, 2009 and 2008, the investment in an unconsolidated affiliate is
presented as follows:-
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Investment
in Medicine at the date of acquisition
|
$ | 106,804 | $ | 106,804 | ||||
Share
of accumulated losses in Medicine
|
(870,823 | ) | (870,823 | ) | ||||
Foreign
translation difference
|
(20,783 | ) | (21,081 | ) | ||||
Amount
due from Medicine
|
980,575 | 1,111,828 | ||||||
Less:
allowance for doubtful accounts
|
(980,575 | ) | (1,111,828 | ) | ||||
Loss
in excess of investment in unconsolidated affiliate
|
$ | (784,802 | ) | $ | (785,100 | ) |
F-18
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
During
the year ended December 31, 2009, the Company recovered $130,759 from the amount
due from Medicine and its allowance for doubtful account was reversed
accordingly.
9.
|
PREPAYMENTS
AND OTHER CURRENT ASSETS
|
Prepayments
and other current assets consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Deposits
|
$ | - | $ | 77,617 | ||||
Advances
to employees
|
151,720 | 25,334 | ||||||
Prepayments
to equipment vendors
|
41,169 | - | ||||||
Prepaid
operating expenses
|
84,566 | 140,291 | ||||||
$ | 277,455 | $ | 243,242 |
10.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Buildings
|
$ | 2,293,130 | $ | 2,293,130 | ||||
Plant
and equipment
|
6,323,428 | 6,322,678 | ||||||
Motor
vehicles
|
246,806 | 246,806 | ||||||
Furniture,
fixture and equipment
|
152,645 | 151,356 | ||||||
Foreign
translation difference
|
619,423 | 33,264 | ||||||
9,635,432 | 9,047,234 | |||||||
Less:
accumulated depreciation
|
(2,795,337 | ) | (2,067,613 | ) | ||||
Less:
foreign translation difference
|
(116,576 | ) | (117,012 | ) | ||||
Property,
plant and equipment, net
|
$ | 6,723,519 | $ | 6,862,609 |
The
buildings were pledged as security for banking facilities of note payable and
fully released on March 11, 2009.
Depreciation
expenses for the years ended December 31, 2009 and 2008 were $727,724 and
$660,743 respectively, of which $596,988 and $579,592 were include in cost
of revenue.
11.
|
PREPAID
OPERATING LEASE
|
The
Company has recorded as operating lease prepaid for the costs paid to acquire a
long-term interest to utilize the land underlying the building and production
facility for its business. This type of arrangement is common for the use of
land in the PRC. The operating lease prepaid is amortized on the
straight-line method over the term of the operating lease prepaid of 50
years.
F-19
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
The lease
expense on prepaid operating lease for the years ended December 31, 2009 and
2008 was $7,248 and $7,255, respectively.
As of
December 31, 2009, the estimated amortization of the prepaid operating lease for
the next five years and thereafter is as follows:
Years
ending December 31:
|
||||
2010
|
$ | 7,252 | ||
2011
|
7,252 | |||
2012
|
7,252 | |||
2013
|
7,252 | |||
2014
|
7,252 | |||
Thereafter
|
114,526 | |||
Total
|
$ | 150,786 |
12.
|
NOTE
PAYABLE
|
As of
December 31, 2008, a balance of $219,472 represented a temporary advance from
Shaanxi Ze Hua Nuan Tong Zhileng Gongcheng Co., Ltd to the Company. The note
payable was secured by the Company’s building (Note 10) with the amount of
$1,753,706 (equal to RMB11, 985,882). Interest on this note is charged at 10.46%
per annum, payable monthly, with principal and accrued interest due on December
20, 2008. The note payable was repaid in February 2009 and the security over the
building property was released accordingly.
13.
|
OTHER
PAYABLES AND ACCRUED LIABILITIES
|
Other
payables and accrued liabilities consisted of the following:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Business
tax payable
|
$ | 81,174 | $ | 82,554 | ||||
Government
levy payable
|
34,435 | 20,321 | ||||||
Salaries
and welfare payable
|
97,724 | 100,405 | ||||||
Advances
to employees
|
50,411 | 161,491 | ||||||
Customer
deposits
|
- | 8,457 | ||||||
Accrued
operating expenses
|
164,809 | 83,413 | ||||||
$ | 428,553 | $ | 456,641 |
14.
|
INCOME
TAXES
|
For the
years ended December 31, 2009 and 2008, the local (“United States of America”)
and foreign components of income before income taxes were comprised of the
following:
F-20
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Tax
jurisdiction from:
|
||||||||
–
Local
|
$ | - | $ | - | ||||
–
Foreign
|
1,748,053 | (2,484,489 | ) | |||||
Income
before income taxes
|
$ | 1,748,053 | $ | (2,484,489 | ) |
The
provision for income taxes consisted of the following:
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Current:
|
||||||||
–
Local
|
$ | - | $ | - | ||||
–
Foreign
|
571,643 | 628,747 | ||||||
Deferred:
|
||||||||
–
Local
|
- | - | ||||||
–
Foreign
|
- | - | ||||||
Income
tax expense
|
$ | 571,643 | $ | 628,747 |
The
effective tax rate in the years presented is the result of the mix of income
earned in various tax jurisdictions that apply a broad range of income tax
rates. The Company has subsidiary and VIE that operate in various countries:
United States and the PRC that are subject to tax in the jurisdictions in which
they operate, as follows:
United
States of America
GFRP is
registered in the State of Nevada and is subject to the tax laws of the United
States of America. The Company has no operation in the United
States.
The
PRC
Effective
as of January 1, 2008, the Corporate Income Tax Law of the People’s Republic of
China (the “New CIT Law”) is imposed. Under the New CIT Law, the Company’s
subsidiaries in the PRC are subject to the unified statutory income tax rate of
25%.
The
reconciliation of income tax rate to the effective income tax rate for the years
ended December 31, 2009 and 2008 is as follows:
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Income
before income taxes from PRC operation
|
$ | 1,748,053 | $ | (2,484,489 | ) | |||
Statutory
income tax rate
|
25 | % | 25 | % | ||||
Income
tax expense at statutory rate
|
437,013 | (621,122 | ) | |||||
Net
operating loss not recognized as deferred tax assets
|
171,533 | 214,776 | ||||||
(Recovery
from) allowance of doubtful accounts not recognized as deferred
taxes
|
(36,903 | ) | 956,519 | |||||
Non-deductible
expenses
|
- | 78,574 | ||||||
Income
tax expense
|
$ | 571,643 | $ | 628,747 |
F-21
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
The
following table sets forth the significant components of the aggregate net
deferred tax assets of the Company as of December 31, 2009 and
2008:
As
of December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carryforwards from:
|
||||||||
–
United States
|
$ | - | $ | - | ||||
–
The PRC
|
386,309 | 214,776 | ||||||
Allowance
for doubtful accounts
|
919,616 | 956,519 | ||||||
Total
deferred tax assets
|
1,305,925 | 1,171,295 | ||||||
Less:
valuation allowance
|
(1,305,925 | ) | (1,171,295 | ) | ||||
Deferred
tax assets
|
$ | - | $ | - |
As of
December 31, 2009, the Company incurred $1,545,236 of aggregate net operating
loss carryforwards available to offset its taxable income for income tax
purposes. The Company has provided for a full valuation allowance against the
deferred tax assets of $1,305,925 on the expected future tax benefits from the
net operating loss carryforwards and allowance for doubtful accounts as the
management believes it is more likely than not that these assets will not be
realized in the future. For the year ended December 31, 2009, the valuation
allowance increased by $134,630, primarily relating to net operating loss
carryforward from the foreign tax regime.
15.
|
NET
INCOME PER SHARE
|
Basic net
income (loss) per share is computed using the weighted average number of the
ordinary shares outstanding during the year. Diluted net income (loss) per share
is computed using the weighted average number of ordinary shares and ordinary
share equivalents outstanding during the year. The following table sets forth
the computation of basic and diluted net income (loss) per share for the years
ended December 31, 2009 and 2008:
Years
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Basis
and diluted net income (loss) per share calculation
|
||||||||
Numerator:
|
||||||||
Net
income (loss) attributable to GFR Pharmaceuticals, Inc.
|
$ | 1,096,632 | $ | (3,041,287 | ) | |||
Denominator:
|
||||||||
-
Weighted average ordinary shares outstanding
|
42,079,940 | 42,079,940 | ||||||
Net
income (loss) per share attributable to GFR Pharmaceuticals, Inc. – Basic
and diluted
|
$ | 0.03 | $ | (0.07 | ) |
16.
|
SEGMENT
INFORMATION
|
The
Company’s business units have been aggregated into two reportable segments, as
defined by ASC Topic 280:
F-22
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
l
|
Medical
Business – joint operation of PET Scanner and Rotary Gamma Ray
Stereotactic Neurosurgery System imaging center in the PRC;
and
|
l
|
Extraction
Business – extraction of raw materials to medicine ingredients and
distribution of extracted ingredients for medicine manufacturing
uses.
|
The
Company operates these segments in the PRC and all of the identifiable assets of
the Company are located in the PRC during the years presented.
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2). The Company had no
inter-segment sales for the years ended December 31, 2009 and 2008. The
Company’s reportable segments are strategic business units that offer different
products and services. They are managed separately based on the different
technology and marketing strategies of each business unit for making internal
operating decisions.
Summary
of financial information concerning the Company’s reportable segments is shown
in the following table for the years ended December 31, 2009 and
2008:
Year
ended December 31, 2009
|
||||||||||||
Medical
Business
|
Extraction
Business
|
Total
|
||||||||||
Operating
revenue, net
|
$ | 3,336,839 | $ | 547,258 | $ | 3,884,097 | ||||||
Cost
of revenue
|
(555,397 | ) | (516,315 | ) | (1,071,712 | ) | ||||||
Gross
profit
|
$ | 2,781,442 | $ | 30,943 | $ | 2,812,385 | ||||||
Depreciation
and amortization
|
$ | 596,988 | $ | 137,984 | $ | 734,972 | ||||||
Net
income (loss)
|
1,767,050 | (590,640 | ) | 1,176,410 | ||||||||
Total
assets
|
5,520,607 | 2,238,134 | 7,758,741 | |||||||||
Expenditure
for long-lived assets
|
$ | 2,039 | $ | - | $ | 2,039 |
Year
ended December 31, 2008
|
||||||||||||
Medical
Business
|
Extraction
Business
|
Total
|
||||||||||
Operating
revenue, net:
|
$ | 3,454,009 | $ | 223,063 | $ | 3,677,072 | ||||||
Cost
of revenue
|
- | (268,278 | ) | (268,278 | ) | |||||||
Gross
profit
|
$ | 3,454,009 | $ | (45,215 | ) | $ | 3,408,794 | |||||
Depreciation
and amortization
|
$ | 483,753 | $ | 176,990 | $ | 660,743 | ||||||
Net
income (loss)
|
1,577,548 | (4,690,784 | ) | (3,113,236 | ) | |||||||
Total
assets
|
6,487,743 | 2,860,063 | 9,347,806 | |||||||||
Expenditure
for long-lived assets
|
$ | 20,617 | $ | 19,212 | $ | 39,829 |
For the
year ended December 31, 2009, 100% of the Company’s assets were located in the
PRC and 100% of the Company’s revenues and purchases were derived from customers
and vendors located in the PRC.
17.
|
CHINA
CONTRIBUTION PLAN
|
Under the
PRC Law, full-time employees of its subsidiaries in the PRC, Hua Long, New
Century and Bao Sai are entitled to staff welfare benefits including medical
care, welfare subsidies, unemployment insurance and pension benefits through a
China government-mandated multi-employer defined contribution plan. Hua Long and
New Century are required to accrue for these benefits based on certain
percentages of the employees’ salaries. The total contributions made for such
employee benefits were $12,148 and $9,685 for the years ended December 31, 2009
and 2008, respectively.
F-23
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
18.
|
STATUTORY
RESERVES
|
Under the
PRC Law the Company’s subsidiaries, Hua Long, New Century and Bao Sai are
required to make appropriation to the statutory reserve based on after-tax net
earnings and determined in accordance with generally accepted accounting
principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to
the statutory reserve should be at least 10% of the after-tax net income until
the reserve is equal to 50% of the registered capital. The statutory reserve is
established for the purpose of providing employee facilities and other
collective benefits to the employees and is non-distributable other than in
liquidation.
For the
years ended December 31, 2009 and 2008, the Company’s PRC subsidiaries made
appropriation of $171,493 and $186,942 to statutory reserve,
respectively.
19.
|
CONCENTRATIONS
OF RISK
|
The
Company is exposed to the following concentrations of risk:
(a) Major
customers
For the
year ended December 31, 2009, the customer who accounted for 10% or more of the
Company’s revenues and its outstanding balances as at year-end dates, are
presented as follows:
Year
ended December 31, 2009
|
December
31, 2009
|
|||||||||||||
Customers
|
Revenues
|
Percentage
of
revenues
|
Accounts
receivable,
trade
|
|||||||||||
Customer
A
|
$ | 3,336,858 | 86 | % | $ | 502,907 | ||||||||
Customer
B
|
526,400 | 13 | % | 731 | ||||||||||
|
Total:
|
$ | 3,863,258 | 99 | % |
Total:
|
$ | 503,638 |
For the year ended December 31, 2008, one customer represented more than 10% of the Company’s revenue and accounts receivable, respectively. As of December 31, 2008, this customer accounted for $3,655,036 of the Company’s revenues 94% and $360,043 of accounts receivable.
(b) Major
vendors
For the year ended December 31,
2009, the vendor who accounted for 10% or more of the Company’s purchases and
their outstanding balances as at year-end dates, are presented as follows:
Year
ended December 31, 2009
|
December
31, 2009
|
|||||||||||||
Vendors
|
Purchases
|
Percentage
of
purchase
|
Accounts
payable,
trade
|
|||||||||||
Vendor
A
|
$ | 468,580 | 82 | % | $ | - | ||||||||
Vendor
B
|
72,067 | 13 | % | 35,541 | ||||||||||
Total:
|
$ | 540,647 | 95 | % |
Total:
|
$ | 35,541 |
F-24
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
For the
year ended December 31, 2008, two vendors represented more than 10% of the
Company’s purchases and one of which represented more than 10% of the Company’s
accounts payable.
(c) Credit
risk
Financial
instruments that are potentially subject to credit risk consist principally of
trade accounts receivables. The Company believes the concentration of credit
risk in its trade receivables is substantially mitigated by its ongoing credit
evaluation process and relatively short collection terms. The Company does not
generally require collateral from customers. The Company evaluates the need for
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other
information.
(d) Exchange
rate risk
The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates
against US$, the value of RMB revenues and assets as expressed in US$ financial
statements will decline. The Company does not hold any derivative or other
financial instruments that expose to substantial market risk.
(e) Economic
and political risks
The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.
20.
|
COMMITMENTS
AND CONTINGENCIES
|
The
Company leased certain office space under a non-cancelable operating lease
agreement with a term of 2 years with fixed monthly rentals. This lease
agreement expires in June 2011. Total rent expenses for the years
ended December 31, 2009 and 2008 was $2,105 and $2,038,
respectively.
As of
December, 31, 2009, future minimum rental payments due under the non-cancelable
operating lease agreement are as follows:
Years
ending December 31:
|
||||
2010
|
$ | 2,106 | ||
2011
|
1,053 | |||
Total
|
$ | 3,159 |
F-25
GFR
PHARMACEUTICALS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
21.
|
COMPARATIVE
FIGURES
|
Certain
amounts in the prior periods presented have been reclassified to conform to the
current period financial statement presentation.
F-26
Item
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On
January 25, 2010, the Company’s former independent accountants, AGCA, Inc.
Certified Public Accountants (“AGCA”), advised the Company that it would not
seek re-election as the Company’s independent accountants and
resigned as independent accountants effective January 25,
2010. The choice of new independent accountants was
approved by the Board of Directors of the Company.
The
former independent accountant’s report on the Company’s financial statements for
the fiscal year ended December 31, 2008 did not contain any adverse opinions or
disclaimer opinions, nor were the reports qualified or modified as to
uncertainty, audit scope or accounting principles. Furthermore, the accountant’s
report did not include any disclosure of uncertainty regarding the Company’s
ability to continue as a going concern. AGCA did not serve as the Company’s
independent accountants for the fiscal year ended December 31,
2007.
During
the Company’s last two fiscal years ended December 31, 2008 and December 31,
2009 and through January 25, 2010, the date of resignation and declination,
there were no disagreements between the Company and AGCA, its former independent
accountants, on any matters relating to accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of the former independent accountants, would have
caused them to make reference to the subject matter of the disagreement in their
report.
A letter
addressed to the Securities and Exchange Commission stating whether or not AGCA
agrees with the above statements was filed as an exhibit to the Company’s
Current Report on Form 8-K that was filed with the Securities and Exchange
Commission on January 29, 2010
On
January 27, 2010, the Company engaged ZYCPA Company Limited, Certified Public
Accountants (“ZYCPA”), as Company’s new independent accountants. During the two
most recent years ended December 31, 2009 and 2008, and any subsequent interim
period through January 27, 2009, the Company did not consult with ZYCPA, the
newly engaged accountant, regarding any matter described in Item 304(a)(2) of
Regulation SK, including any issue related to Company’s financial statements or
the type of audit opinion that might be rendered for the Company. ZYCPA served
as the Company’s independent accountants for the fiscal year ended December 31,
2007.
ITEM
9A(T).
|
Controls and
Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on
their evaluation as of December 31, 2009, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) were effective to ensure that the information required to be
disclosed by us in this Annual Report on Form 10-K was recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
instructions for Form 10-K.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended). Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009.
13
Our
internal control over financial reporting is a process designed by or under the
supervision of our principal executive and principal financial officers to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Our internal control over
financial reporting includes policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of assets; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on our financial statements.
In making
this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in ‘Internal
Control – Integrated Framework’. Our management has concluded that, as of
December 31, 2009, our internal control over financial reporting is effective
based on these criteria.
This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report.
There
were no changes in our internal controls over financial reporting during the
year ended December 31, 2009 that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within GFR Pharmaceuticals Inc. have been
detected.
Item 9B. Other Information
Not
Applicable.
14
PART
III
Item 10. Directors and Executive Officers of
the Registrant and Corporate Governance
Identification
of Directors and Executive Officers
The
following table sets forth the names and ages of our directors and executive
officers, the positions and offices held with us, and the period during which
each served in such positions and offices. Each director and executive officer
serves for a term of one (1) year and until his successor is duly elected and
qualified. . Directors are elected annually by our stockholders at the annual
meeting. Each director holds his office until his successor is elected and
qualified or his earlier resignation or removal
DIRECTORS
AND OFFICERS
Name
|
Age
|
Position
|
Period
In Office
|
|||
Zhao
Yan Ding
|
36
|
Chief
Executive Officer &
|
January
2008 - Present
|
|||
Director
|
||||||
Zhong
Ya Li
|
30
|
Chief
Financial Officer &
|
January
2008 - Present
|
|||
Director
|
||||||
Wang
Li An
|
46
|
Director
|
September
2006 -
Present
|
The
following is a summary of the business experience and other biographical
information with respect to each of the Company’s officers and directors listed
in the above-referenced table.
Zhao
Yan Ding – Chief Executive Officer and Director
Mr. Zhao
Yan Ding, our Chief Executive Officer and Director is 36 year old. He
holds a university degree as a senior engineer. He worked for Xi'an Herbal
Medicine Company in the Administration and Marketing Department from 1997 to
2001, and gained the honor of advanced staff within two years. In 2001, he took
a position with Xi'an Rising Bio-sep Bio-technique Co., Ltd. in the
Researches & Production Department. He also worked for Zhejiang
Haikang Bio-Products Co., Ltd, to set up their bio research department within
company. From 2003 to the present, he has worked in Xi'an Bio-sep Bio-technique
Co., Ltd. as their chief of research and the supervisor of the company. The
Board believes that Mr. Zhao has the experience, qualifications, attributes and
skills necessary to serve on the Board because of his extensive academic
knowledge of the biotech industry and research accomplishments, the leadership
and strategic direction he showed in Zhejiang Haikang Bio-Products Co., Ltd, and
his unparalleled knowledge of the Company and its business by serving
the Company for 7 years. Mr. Zhao is not a member of the Board of any other
public company or any investment company, neither has he been a member of the
boards of directors of such companies for the past five years.
Zhong
Ya Li – Chief Financial Officer and Director
Ms. Zhong
Ya Li, our new Chief Financial Officer and Director is 30 years
old. She holds a university degree in accounting. Ms.
Zhong Ya Li previously worked at Xi'an Rising Building Management Co., Ltd as a
cashier and the chief accountant from 1999 to 2003. Then she worked for the
Xi'an Bio-sep Bio-technique Co., Ltd as their Chief Accountant. In 2006, she was
promoted to Vice Chief Financial Officer of Xi'an Bio-sep Bio-technique Co.,
Ltd. The Board believes that Ms. Zhong has the experience, qualifications,
attributes and skills necessary to serve on the Board because of her relevant
experience in finance and accounting. Ms. Zhong is not a member of the Board of
any other public company or any investment company, neither has she been a
member of the boards of directors of such companies for the past five
years.
15
Wang
Li An - Director
Mr. Wang
Li An has been a director of the Company since September 2006 and the Chairman
of the Board of Director of New Century since March 2006. Mr. Wang is also the
Vice General Manager and Director of Bao Sai since June 2005. From July 2002 to
May 2005, Mr. Wang was the Secretary of the Board of Bao Sai and was responsible
for corporate finance, taxation, capital restructure, operational management,
and government relations. From October 1997 to June 2002, Mr. Wang was the dean
of Security Investment Department of Shaanxi Rising Group Corp. and was
responsible for the initial set up of the subsidiaries and capital investment.
Mr. Wang graduated from Xia Men University in 1987 with a bachelor degree in
Mathematics. The Board believes that Mr. Wang has the experience,
qualifications, attributes and skills necessary to serve on the Board because of
his 9 years of experience with the Company and his knowledge of our business.
Mr. Wang is not a member of the Board of any other public company or any
investment company, neither has he been a member of the boards of directors of
such companies for the past five years.
Board
Committees
Our board
of directors is currently composed of three directors: Mr. Zhao Yan Ding, Ms.
Zhong Ya Li, and Mr. Wang Li An. All board action requires the approval of
a majority of directors in attendance at a meeting at which a quorum is
present. We currently do not have standing audit, nominating or
compensation committees. Our entire board of directors handles the
functions that would otherwise be handled by each of the
committees.
Audit
Committee Financial Expert
We do not
have a separately designated standing audit committee. The entire Board of
Directors acts as an audit committee for the purpose of overseeing the
accounting and financial reporting processes, and audits of our financial
statements. The Commission recently adopted new regulations relating to audit
committee composition and functions, including disclosure requirements relating
to the presence of an “audit committee financial expert” serving on its audit
committee. In connection with these new requirements, our Board of Directors
examined the Commission’s definition of “audit committee financial expert” and
concluded that Zhong Ya Li qualifies as
such an expert. Presently, there are three directors serving on our Board,
Each of our directors, by virtue of his past employment experience, has
considerable knowledge of financial statements, finance, and accounting, and has
significant employment experience involving financial oversight
responsibilities. Accordingly, we believe that our current directors capably
fulfill the duties and responsibilities of an audit committee in the absence of
such an expert.
Involvement
in Certain Legal Proceedings
None of
our directors, executive officers, or control persons have been involved in any
of the following events during the past ten years:
|
l
|
Any bankruptcy petition filed by
or against any business of which such person was a general partner or
executive officer either at the time of bankruptcy or within two years
prior to that time; or
|
|
l
|
Any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses);
or
|
|
l
|
Being subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities;
or
|
16
|
l
|
Being found by a court of
competent jurisdiction (in a civil violation), the SEC or the Commodity
Future Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended, or
vacated; or
|
|
l
|
Being
the subject of, or a party to, any Federal or State judicial or
administrative order, judgment, decree, or finding, not subsequently
reversed, suspended or vacated, relating to an alleged violation of: any
Federal or State securities or commodities law or regulation; or any law
or regulation respecting financial institutions or insurance companies
including, but not limited to, a temporary or permanent injunction, order
of disgorgement or restitution, civil money penalty or temporary or
permanent cease-and-desist order, or removal or prohibition order; or any
law or regulation prohibiting mail or wire fraud or fraud in connection
with any business entity. This violation does not apply to any settlement
of a civil proceeding among private litigants;
or
|
|
l
|
Being
the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))),
any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange,
association, entity or organization that has disciplinary authority over
its members or persons associated with a
member.
|
Code
of Ethics
We have
adopted a code of ethics that applies to our principal chief executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions (the “Code of Ethics”). The Code of Ethics
is designed to deter wrongdoing, and to promote the following:
|
·
|
Honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest
between personal and professional
relationships.
|
|
·
|
Full, fair, accurate, timely and
understandable disclosure in reports and documents that a small business
issuer files with, or submits to, the Commission and in other public
communications made by the small business
issuer.
|
|
·
|
Compliance with applicable
governmental laws, rules and
regulations.
|
|
·
|
The prompt internal reporting of
violations of the code to an appropriate person or persons identified in
the code.
|
|
·
|
Accountability for adherence to
the code.
|
Additionally, the
Chief Financial Officer, Zhong Ya Li, carries out her functions under the
code of ethics and rules of professional conduct as outlined by the Peoples
Republic of China.
Section
16(a) Beneficial Ownership Reporting Compliance
Under
Section 16(a) of the Exchange Act, all executive officers, directors, and each
person who is the beneficial owner of more than 10% of the common stock of a
company that files reports pursuant to Section 12 of the Exchange Act, are
required to report the ownership of such common stock, options, and stock
appreciation rights (other than certain cash-only rights) and any changes in
that ownership with the Commission. Specific due dates for these reports have
been established, and we are required to report, in this Form 10-k, any failure
to comply therewith during the fiscal year ended December 2008. We believe that
all of the officers and directors satisfied the filing requirements of Section
16(a) in 2008.
17
Item 11. Executive
Compensation
Compensation
Philosophy
Our board
of directors have historically determined the compensation to be paid to our
executive officers based on our financial and operating performance and
prospects, and contributions made by the officers’ to our
success. Each of the named officers will be measured by a series of
performance criteria by the board of directors, on a yearly
basis. Such criteria will be based on certain objective parameters
such as job characteristics, required professionalism, management skills,
interpersonal skills, related experience, personal performance and overall
corporate performance.
Our board
of directors have not adopted or established a formal policy or procedure for
determining the amount of compensation paid to our executive
officers. As our executive leadership and board of directors grow,
our board of directors may decide to form a compensation committee charged with
the oversight of executive compensation plans, policies and
programs.
Our
compensation program for our executive officers and all other employees is
designed such that it will not incentivize unnecessary risk-taking. We provide
our executive officers solely with a base salary to compensate them for services
rendered during the year. Our policy of compensating our executives
with a cash salary has served us well. To date, we have not believed
it necessary to provide our executives discretionary bonuses, equity incentives,
or other benefits in order for us to continue to be successful. While we
have established an incentive stock option plan, the Company has made no awards
under the plan. Senior executives do not have the incentive to take unnecessary
risks in order to receive a bonus. However, as the
Company grows and the operations become more complex, the Board of Directors may
deem it in the best interest of the Company to provide such additional
compensation to existing executives and in order to attract new
executives.
Summary Compensation
Table
The
following table sets forth compensation earned by the executive officers during
the three years preceding December 31, 2009. -
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Zhao
Yan Ding
|
2009
|
4,811
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Chief
Executive
|
2008
|
4,753
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Officer
|
2007
|
4,445
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Zhong
Ya Li,
|
2009
|
0-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Chief
Financial
|
2008
|
3,734
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Officer
|
2007
|
3,492
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Jie
Su, former
|
2009
|
0-
|
||||||||||||||||||||||||||||||||
Director, former
|
2008
|
15,867
|
||||||||||||||||||||||||||||||||
CEO
& former
|
2007
|
15,000
|
||||||||||||||||||||||||||||||||
President
|
||||||||||||||||||||||||||||||||||
Zhi
Dong Wang,
|
2009
|
4,590
|
||||||||||||||||||||||||||||||||
former
director,
|
2008
|
4,244
|
||||||||||||||||||||||||||||||||
former
CFO &
|
2007
|
3,698
|
||||||||||||||||||||||||||||||||
former
VP
|
18
Stock
Option Plan
The
Company has established the 2002 Incentive and Non-qualified Stock Option Plan
(“the Plan”) under which we may grant to employees, officers, directors,
attorneys, consultants or other advisers of the Company or affiliated companies
up to 10,000,000 shares of 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, 2009 and 2008, no options or shares have been
granted under the Plan.
Compensation
of Independent Directors
No
compensation had been paid to any director solely in connection with their role
as a director.
Employment
Agreements
There are
no written employment agreements with any of the Company's
officers.
Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of April 14, 2010 (i) each person known to us
to be the beneficial owner of more than 5% of its Common Stock, (ii) each of our
directors and executive officers, and (iii) all directors and executive officers
as a group.
Name and Address of
Beneficial Owner (1)
|
Amount
and Nature
of Beneficial
Ownership (2)(3)
|
|
Percentage
of Class (3)
|
|||||
Guo
Li An
|
16,000,000
|
38.0
|
%
|
|||||
XinChengQuChangLeXiLu169Hao
Xi’An
ShaanXi Province, P.R. China 710054
|
||||||||
Mr.
Wang Li An
c/o
GFR Pharmaceuticals, Inc.
99
Yan Xiang Road, Biosep Building
Xi
An, Shaan Xi Province, P.R. China 710054
|
0
|
0
|
||||||
Ms.
Zhong Ya Li
c/o
GFR Pharmaceuticals, Inc.
99
Yan Xiang Road, Biosep Building
Xi
An, Shaan Xi Province, P.R. China 710054
|
0
|
0
|
||||||
Mr.
Zhao Ya Ding
c/o
GFR Pharmaceuticals, Inc.
99
Yan Xiang Road, Biosep Building
Xi
An, Shaan Xi Province, P.R. China 710054
|
0
|
0
|
||||||
Officers
and directors as a group (3 persons)
|
0
|
0
|
(1) As
used herein, a person is deemed to be the “beneficial owner” of a security if he
or she has or shares voting or investment power with respect to such security,
or has the right to acquire such ownership within sixty (60) days. As used
herein, “voting power” includes the power to vote or to direct the voting of
shares, and “investment power” includes the power to dispose or to direct the
disposition of shares, irrespective of any economic interest
therein.
19
(2) Except
as otherwise indicated by footnote, the persons named in the table have sole
voting and investment power with respect to all Common Stock beneficially owned
by them.
(3) Percentage
ownership for a given individual or group is calculated on the basis of (i) the
amount of outstanding shares owned as of April 7, 2009 plus, (ii) the number of
shares that such individual or group has the right to acquire within sixty (60)
days pursuant to options, warrants, conversion privileges or other
rights.
Item 13. Certain Relationships and Related
Transactions and Director Independence
Certain
Relationships
On
January 1, 2008, New Century entered into a stock purchase agreement with the
holders of all 60,000,000 shares of the capital stock of Xi’an Jiaoda Bao Sai
Bio-technology Co., Ltd (“Bao Sai”) to acquire 58,060,000 shares of its capital
stock of Bao Sai, or 96.77% of its capital stock. In connection with
our acquisition of Bao Sai operation on January 1, 2008, we incurred a payment
obligation in the amount of $4,500,211 payable to the former owners, including
Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd. (“Xi’an
Bio-sep”) the former owner of 46.67%. Our chairman, Mr. Wang Li-An, was the
director of Xi’an Bio-sep; and our Chief Executive Officer and Chief Financial
Officer, Mr. Zhao Yan Ding and Ms. Zhong Ya Li,were also officers of Bao Sai
prior to the date of acquisition. Payment of the purchase price was made in two
cash installments commencing in 2008, first to Xi’an Bio-sep, the owner of 28
million shares, or 46.67% of Bao Sai, and the balance in 2009 to the other three
selling stockholders, in amounts equal to their respective percentage of share
ownership of Bao Sai.
The
purchase price is payable as follows. For the year ended December 31, 2008, the
Company made a payment of purchase price consideration totaling $2,322,436. The
balance due of $2,493,318 was paid on December 31, 2009. The portion of the
purchase price payable to related parties is:
X’ian
Bio-sep Biological Filler Engineering Technology Co., Ltd.
(a)
|
$
|
2,170,350
|
||
Wang
Zhidong (b)
|
1,143,073
|
|||
Guo
Lizheng (c)
|
570,606
|
|||
$
|
3,884,029
|
The
Company rents an office from Bao Sai at an annual rent of $3,779 on a monthly
basis. Mr. Guo Li An, who owns 38.03% of the Company, beneficially owns
46.67% of Bao Sai.
In
addition, our shareholder, Mr. Lian Guo contributed a loan to fund our
operations. As of December 31, 2009, the balance of the loan was $1,960,874
which was unsecured, interest-free and repayable on demand.
We also
had a loan payable to our affiliate Medicine in the principal amount of $980,575
as of December 31, 2009 which was unsecured and interest-free. The loan is
repayable in four installments with the total amount due no later than
2012. We have a 75% equity interest in Medicine but Medicine is no
longer consolidated. We expect to collect this amount according to the schedule
agreed.
Director
Independence
None of
the members of the Company’s Board of Directors is an independent director,
pursuant to the definition of “independent director” under the Rules of
FINRA.
20
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Our
auditor is ZYCPA Company Limited.
Audit
Fees
ZYCPA
Company Limited billed $35,500 to the Company for professional serices rendered
for the audit of our 2009 financial statements and our former independent
accountants,
AGCA, Inc
billed $ 38,000 to the Company for professional services rendered for the audit
of our 2008 financial statements. AGCA, Inc. billed $ 6,000 to the
Company for the review of the financial statements included in fiscal 2009
10-QSB filings.
Audit-Related
Fees
The
former independent accountants, AGCA, Inc. and current independent accountants
ZYCPA Company, Limited billed $0 to the Company during 2009 for
assurance and related services that are reasonably related to the performance of
the 2009 audit or review of the quarterly financial statements.
Tax
Fees
The
current independent accountants billed $0 to the Company during 2009 for
professional services rendered for tax compliance, tax advice and tax
planning. AGCA, Inc. billed $0 to the Company during 2009 for
professional services rendered for tax compliance, tax advice and tax
planning.
All
Other Fees
The
former independent accountants, AGCA Inc. and current
accountants, ZYCPA Company Limited billed $0 to the Company in 2009
and 2008 for services not described above.
It
is the policy of the Company that all services other than audit, review or
attest services must be pre-approved by the Board of Directors. No
such services have been performed by either the former independent accountants
or current independent accountants.
21
PART
IV
Item 15. Exhibits and Financial Statement
Schedules
(a) Exhibits.
Exhibit
Number
|
Description
|
|
2.1
|
Purchase
Agreement for Bao Sai, dated January 1, 2008 (1)
|
|
3.1
|
Articles
of Incorporation as Amended (2)
|
|
3.2
|
Bylaws(2)
|
|
4.1
|
See
Exhibits 3.1 and 3.2 for the provisions of our Articles of Incorporation
and Bylaws that define the rights of holders of our Common
Stock
|
|
4.2
|
Specimen
of Common Stock Certificate (3)
|
|
4.3
|
2002
Non-Qualified Stock Incentive Plan(4)
|
|
10.1
|
Cooperation
Agreement with Tangdu Hospital, as last amended on February 2, 2006
(English & Chinese versions)
|
|
10.2
|
Bao
Sai Purchase Agreement, dated January 1, 2008
|
|
16.1
|
Letter
on Change in Certifying Accountant (5)
|
|
17.1
|
Plan
of Exchange and Letter of Intent (6)
|
|
14.1
|
Code
of Ethics (7)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certifications of Zhao Yan Ding, Chief Executive
Officer
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certifications of Zhong Ya Li, Chief Financial
Officer
|
|
32.1
|
Section
1350 Certifications of Zhao Yan Ding, Chief Executive
Officer
|
|
32.2
|
|
Section
1350 Certifications of Zhong Ya Li, Chief
Financial Officer
|
(1)
|
Filed
as an Exhibit to our Form 8-K filed with the Commission on March 23,
2008
|
(2)
|
Filed
as an Exhibit to our Form 10-SB12G, as filed with the Commission on
November 5, 1999.
|
(3)
|
Filed
as an Exhibit to the Company’s Annual Report on Form 10-k, as filed with
the Commission on April 21, 2006.
|
(4)
|
Filed
as Exhibit 4.1 to our Form S-8 filed June 19, 2002
|
(5)
|
Filed
as an Exhibit to the Company’s Current Report on Form 8-K, as filed with
the Commission on February 2, 2007
|
(6)
|
Contained
in Form 8-K, as filed with the Commission on July 3,
2006.
|
(7)
|
Filed
as an Exhibit to our Form 10-k filed with the commission April 13,
2007
|
22
SIGNATURES
In
accordance with the 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.
Date:
April 14, 2010
GFR
PHARMACEUTICALS, INC.
|
|||
By:
|
/s/
Zhao Yan Ding
|
||
Zhao Yan Ding, Chief
Executive Officer
|
By:
|
/s/
Zhong Ya Li
|
||
Zhong Ya Li, Chief
Financial Officer
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature
|
Title
|
Date
|
||
/s/Zhao
Yan Ding
|
Director
|
April
15, 2010
|
||
Zhao
Yan Ding
|
||||
/s/
Zhong Ya Li
|
Director
|
April 15,
2010
|
||
Zhong
Ya Li
|
||||
/s/ Wang
Li-An
|
Director
|
April 15,
2010
|
||
Wang
Li-An
|
23