United States


Securities and Exchange Commission


Washington, D.C. 20549


FORM 10-Q





 ̈ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011





OR





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission File No: 09081





GFR PHARMACEUTICALS, INC.


(Exact name of registrant as specified in its charter)





NEVADA

77-0517964(State or other jurisdiction of

(I.R.S. Employer ID No)incorporation or organization)





99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P.R. China 710054


(Address of principal executive office)    (Zip Code) n/a





Registrant's telephone number: (011) 86-29-8239-9676





N/A


Former name, former address and former fiscal year,


(if changed since last report)





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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  ̈     No  ̈





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 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

(Do not check if a smaller

reporting company)

Smaller 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  ̈





The number of shares of common stock, $0.001 par value per share, outstanding as of May 13, 2011 was 42,079,940.





GFR PHARMACEUTICALS, INC.





INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)





PageCondensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010

F-2Condensed Consolidated Statements of Operations And Comprehensive Income for The Three Months ended March 31, 2011 and 2010

F-3Condensed Consolidated Statements of Cash Flows for The Three Months ended March 31, 2011 and 2010

F-4Condensed Consolidated Statement of Stockholders’ Equity for The Three Months ended March 31, 2011

F-5Notes to Condensed Consolidated Financial Statements

F-6 to F-17


F-1


GFR PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


AS OF MARCH 31, 2011 AND DECEMBER 31, 2010


(Currency expressed in United States Dollars (“US$”), except for number of shares)





March 31, 2011


December 31, 2010(Unaudited)


(Audited)ASSETSCurrent assets:Cash and cash equivalents

$
599,208


$
300,716Accounts receivable, net


959,418



1,245,616Inventories, net


18,235



35,062Prepayments and other current assets


414,231



135,226Operating lease prepaid, current portion


7,570



7,499Total current assets


1,998,662



1,724,119Property, plant and equipment, net


6,903,737



6,957,273Operating lease prepaid, non-current portion


140,363



140,928TOTAL ASSETS

$
9,042,762


$
8,822,320LIABILITIES AND EQUITYCurrent liabilities:Accounts payable

$
42,701


$
27,903Amount due to stockholders


476,884



439,267Income tax payable


89,002



188,016Other payables and accrued liabilities


287,566



394,311Total current liabilities


896,153



1,049,497Long-term liabilities:Loss in excess of investment in an unconsolidated affiliate


819,200



811,555TOTAL LIABILITIES


1,715,353



1,861,052Commitments and contingenciesEquity:GFR Pharmaceuticals, Inc. stockholders’ equity:Common stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares issued and outstanding, respectively


42,080



42,080Additional paid-in capital


3,712,120



3,712,120Accumulated other comprehensive income


350,519



313,694Statutory reserve


800,309



800,309Accumulated deficits


1,808,193



1,490,065Total GFR Pharmaceuticals, Inc. stockholders’ equity


6,713,221



6,358,268Non-controlling interest


614,188



603,000Total equity


7,327,409



6,961,268TOTAL LIABILITIES AND EQUITY

$
9,042,762


$
8,822,320





See accompanying notes to condensed consolidated financial statements.


F-2


GFR PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


AND COMPREHENSIVE INCOME


FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010


(Currency expressed in United States Dollars (“US$”), except for number of shares)


(Unaudited)





Three months ended March 31,2011


2010Revenue, net:Service revenue

$
891,487


$
779,668Product sales


41,535



10,368Total revenues, net


933,022



790,036Cost of revenue:(inclusive of depreciation)Cost of service


175,860



140,063Cost of products


38,924



9,875Total cost of revenue


214,784



149,938Gross profit


718,238



640,098Operating expenses:Depreciation and amortization


53,737



50,105Recovery from uncollectible accounts


(88,234
)


-General and administrative


332,029



171,451Total operating expenses


297,532



221,556Income from operations


420,706



418,542Other income:Interest income


221



9Total other income


221



9Income before income taxes


420,927



418,551Income tax expense


(91,611
)


(133,165
)Net income


329,316



285,386Less: net income attributable to non-controlling interest


(11,188
)


(19,975
)Net income attributable to GFR Pharmaceuticals, Inc.


318,128



265,411Net income per share – Basic and diluted

$
0.01


$
0.01Weighted average common shares outstanding – Basic and diluted


42,079,940



42,079,940





See accompanying notes to condensed consolidated financial statements.


F-3


GFR PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





Three months ended March 31,2011


2010Cash flows from operating activities:Net income attributable to GFR Pharmaceuticals, Inc.

$
318,128


$
265,411Net income attributable to non-controlling interest


11,188



19,975Consolidated net income


329,316



285,386Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization


202,751



190,168Recovery from doubtful accounts


(30,435
)


-Recovery from allowance for obsolete stock


(3,957
)


-Change in operating assets and liabilities:Accounts receivable


327,405



(275,312
)Inventories


21,059



(487
)Prepayments and other current assets


(279,296
)


(81,613
)Accounts payable


14,488



(30,784
)Income tax payable


(100,460
)


(38,572
)Other payables and accrued liabilities


(110,104
)


84,733Net cash provided by operating activities


370,767



133,519Cash flows from investing activities:Purchase of plant and equipment


(82,176
)


-Net cash used in investing activities


(82,176
)


-Cash flows from financing activities:Advances from (repayment to) a related party


6,176



(883
)Net cash provided by (used in) financing activities


6,176



(883
)Effect on exchange rate change on cash and cash equivalents


3,725



5NET CHANGE IN CASH AND CASH EQUIVALENTS


298,492



132,641CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD


300,716



55,486CASH AND CASH EQUIVALENT, END OF PERIOD

$
599,208


$
188,127SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes

$
696,352


$
171,737Cash paid for interest

$
-


$
-





See accompanying notes to condensed consolidated financial statements.


F-4


GFR PHARMACEUTICALS, INC.


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”), except for number of shares)


(Unaudited)





GFR Pharmaceuticals, Inc. stockholders’ equityAccumulatedotherCommon stock

Additional

comprehensive

Statutory

Retained

Non-controlling

TotalNo. of shares

Amount

paid-in capital

income

reserve

earnings

interest

equityBalance as of January 1, 2011


42,079,940

$
42,080


$
3,712,120

$
313,694

$
800,309

$
1,490,065

$
603,000

$
6,961,268Foreign currency translation adjustment


-


-



-


36,825


-


-


-


36,825Net income for the period


-


-



-


-


-


318,128


11,188


329,316Balance as of March 31, 2011


42,079,940

$
42,080


$
3,712,120

$
350,519

$
800,309

$
1,808,193

$
614,188

$
7,327,409





See accompanying notes to condensed consolidated financial statements.


F-5


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





NOTE-1
BASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with both accounting principles generally accepted in the United States of America (“GAAP”), and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.





In the opinion of management, the consolidated balance sheet as of December 31, 2010 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2011 or for any future periods.





These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2010.





NOTE-2
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, also the research and development of extraction process and trading of pharmaceutical products in Xian City, Shanxi Province in the People’s Republic of China (the “PRC”).





GFRP and its subsidiaries are hereinafter referred to as (the “Company”).





NOTE-3
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The accompanying condensed consolidated financial statements reflect the application of certain significant accounting policies as described in this note and elsewhere in the accompanying condensed consolidated financial statements and notes.





·
Use of estimates





In preparing these condensed consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheets and revenues and expenses during the periods reported. Actual results may differ from these estimates.


F-6


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





·
Basis of consolidation





The condensed consolidated financial statements include the financial statements of GFRP and its subsidiaries. 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 condensed consolidated balance sheet as $819,200 and $811,555 respective liabilities as of March 31, 2011 and December 31, 2010.





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.





·
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 March 31, 2011 and December 31, 2010, the allowance for doubtful accounts was $532,376 and $557,657, 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 March 31, 2011 and December 31, 2010, the inventory allowance was $665,412 and $663,136, respectively.


F-7


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





·
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:





Expected useful life

Residual valueBuildings

20 years


5
%Plant and equipment

5 – 13 years


5
%Motor vehicles

8 – 8 years


5
%Furniture, fixture and equipment

5 years


5
%Leasehold improvement

5 years


-





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.





Depreciation expense for the three months ended March 31, 2011 and 2010 were $200,862 and $188,355 respectively, of which $149,062 and $140,063 were included in cost of revenue.





·
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.





The lease expense on prepaid operating lease for the three months ended March 31, 2011 and 2010 was $1,886 and $1,813, respectively. As of March 31, 2011, the estimated amortization of the prepaid operating lease for the next five years and thereafter is as follows:





Year ending March 31:2012

$
7,5702013


7,5702014


7,5702015


7,5702016


7,570Thereafter


110,083Total:

$
147,933





·
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 charge for the periods presented.


F-8


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





·
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 ASC Topic 605-45, “Principal Agent Considerations.”





(b)
Sale of products





The Company recognizes revenue from the sale and trading of pharmaceutical products 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 three months ended March 31, 2011 and 2010.





(c)
Technical service income





The Company provides technical service based upon the customer’s specifications in a term of three years on the basis of a monthly fixed-rate. The Company recognizes its monthly service fee over the service period.





(d)
Interest income





Interest income is recognized on a time apportionment basis, taking into account the principal amounts outstanding and the interest rates applicable.





·
Income taxes





Income taxes is determined in accordance with the provisions of ASC Topic 740, “ Income Taxes ” (“ASC 740”). Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


F-9


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





ASC 740 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under ASC 740, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts.





For the three months ended March 31, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of March 31, 2011, 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.





·
Net income per share





The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income 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, “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 condensed consolidated statement of 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.





Three months ended March 31,2011


2010Net income

$
329,316


$
285,386Other comprehensive income:- Foreign currency translation gain


36,825



339Comprehensive income

$
366,141


$
285,725





·
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 condensed consolidated statement of operations.


F-10


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





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 period:


March 31, 2011


March 31, 2010Period-end RMB:US$1 exchange rate


6.5501



6.8361Period-average RMB:US$1 exchange rate


6.5713



6.8360





·
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.





·
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 three months ended March 31, 2011 and 2010, the Company operates in two reportable segments: Medical Business and Extraction Business in PRC.





·
Fair value of financial instruments





The carrying value of the Company’s financial instruments include cash and cash equivalents, accounts receivable, prepayments and other current assets, accounts payable, amount due to a related party, income tax payable, other payables and accrued liabilities. 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.





The Company also follows the guidance of ASC Topic 820-10, “Fair Value Measurements and Disclosures” ("ASC 820-10"), with respect to financial assets and liabilities that are measured at fair value. ASC 820-10 establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:





 ̈
Level 1 : Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;





 ̈
Level 2 : Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and; and





 ̈
Level 3 : Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.


F-11




GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.





·
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.





In April 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for purposes of measuring the impairment of receivables and evaluating whether a troubled debt restructuring has occurred. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under ASC Topic 450-20,“Contingencies–Loss Contingencies”. Currently, this guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations, cash flows, or disclosures.





In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other (ASC Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. The ASU does not prescribe a specific method of calculating the carrying value of a reporting unit in the performance of step 1 of the goodwill impairment test (i.e. equity-value-based method or enterprise-value-based method). However, it requires entities with a zero or negative carrying value to assess, considering qualitative factors such as those used to determine whether a triggering event would require an interim goodwill impairment test (listed in ASC Topic 350-20-35-30, “Intangibles – Goodwill and Other – Subsequent Measurement”), whether it is more likely than not that a goodwill impairment exists and perform step 2 of the goodwill impairment test if so concluded. ASU 2010-28 is effective for the Company beginning January 1, 2011 and early adoption is not permitted. The Company does not expect the adoption of ASU 2010-28 to have a material impact on its consolidated financial position or results of operations.





NOTE-4
PREPAYMENTS AND OTHER CURRENT ASSETS





Prepayments and other current assets consisted of the following:





March 31, 2011


December 31, 2010VAT receivable

$
578


$
1,601Advances to employees


12,484



79,843Prepaid operating expenses


38,976



53,782Prepayments to equipment vendors


362,193



-$
414,231


$
135,226


F-12





GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





NOTE-5
AMOUNT DUE TO A RELATED PARTY





As of March 31, 2011, amount due to a stockholder, Mr. Lian Guo, represented temporary advances to the Company, which were unsecured, interest-free and repayable on demand.





NOTE-6
OTHER PAYABLES AND ACCRUED LIABILITIES





Other payables and accrued liabilities consisted of the following:





March 31, 2011


December 31, 2010Business tax payable

$
17,052


$
102,054Government levy payable


18,940



8,085Salaries and welfare payable


89,557



91,890Advances from employees


22,832



22,862Customer deposits


40,992



-Other tax payable


476



-Accrued operating expenses


97,717



169,420$
287,566


$
394,311





NOTE-7
INCOME TAXES





For the three months ended March 31, 2011 and 2010, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:





Three months ended March 31,2011


2010Tax jurisdiction from:– Local

$
-


$
-– Foreign


420,927



418,551Income before income taxes

$
420,927


$
418,551





The provision for income taxes consisted of the following:





Three months ended March 31,2011


2010Current:– Local

$
-


$
-– Foreign


91,611



133,165Deferred:– Local


-



-– Foreign


-



-Income tax expense

$
91,611


$
133,165


F-13





GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





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 of America.





The PRC





Under the Corporate Income Tax Law of the People’s Republic of China, 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 three months ended March 31, 2011 and 2010 is as follows:





Three months ended March 31,2011


2010Income before income taxes from PRC operation

$
420,927


$
418,551Statutory income tax rate


25
%


25
%Income tax expense at statutory rate


105,232



104,638Net operating loss not recognized as deferred tax assets


5,579



26,462Non-deductible expenses


(5,661
)


2,065Recovery from doubtful accounts not recognized as deferred taxes


(13,539
)


-Income tax expense

$
91,611


$
133,165





The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of March 31, 2011 and December 31, 2010:





March 31, 2011


December 31, 2010Deferred tax assets:Net operating loss carryforwards

$
422,828


$
388,689Allowance for doubtful accounts


780,762



779,103Total deferred tax assets


1,203,590



1,167,792Less: valuation allowance


(1,203,590
)


(1,167,792
)Deferred tax assets

$
-


$
-





As of March 31, 2011, the Company incurred $1,691,310 of aggregate cumulative operating losses carryforwards available to offset its taxable income for PRC income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $1,203,590 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 three months ended March 31, 2011, the valuation allowance increased by $35,798, primarily relating to the recovery from allowance for doubtful accounts and increase in net operating loss carryforwards.


F-14


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





NOTE-8
SEGMENT INFORMATION





The Company’s business units have been aggregated into two reportable segments, as defined by ASC Topic 280:





l
Medical Business – joint operation of PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center in the PRC; and





l
Extraction Business – provision of extraction service and distribution of extracted ingredients for medicine manufacturing uses.





The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the three months ended March 31, 2011 and 2010. 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 three months ended March 31, 2011 and 2010:





Three months ended March 31, 2011Medical Business


Extraction Business


TotalOperating revenue, net:

$
639,398


$
293,624


$
933,022Cost of revenue


(151,927
)


(62,857
)


(214,784
)Gross profit

$
487,471


$
230,767


$
718,238Depreciation and amortization

$
149,582


$
53,169


$
202,751Net income


223,762



105,555



329,317Expenditure for long-lived assets

$
-


$
82,176


$
82,176





Three months ended March 31, 2010Medical Business


Extraction Business


TotalOperating revenue

$
779,668


$
10,368


$
790,036Cost of revenue


(140,063
)


(9,875
)


(149,938
)Gross profit

$
639,605


$
493


$
640,098Depreciation and amortization

$
140,063


$
50,105


$
190,168Net income (loss)


359,473



(74,087
)


285,386Expenditure for long-lived assets

$
-


$
-


$
-


F-15


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)


NOTE-9
CONCENTRATIONS OF RISK
 
 The Company is exposed to the following concentrations of risk:





(a)         Major customers





For the three months ended March 31, 2011, the customers who account for 10% or more of revenues of the Company are presented as follows:




Three months ended March 31, 2011


March 31, 2011Revenues


Percentage

of revenues


Trade accounts

receivableCustomer A

$
452,503



49
%

$
882,732Customer B


252,089



27
%


76,335Total:

$
704,592



76
%

$
959,067




For the three months ended March 31, 2010 there was a single customer who represented 10% or more than 10% of the Company’s revenue. This customer accounted for 99% of the Company’s revenues amounting to $825,050, with $812,819 of accounts receivable.





(b)         Major vendors





For the three months ended March 31, 2011 and 2010, there was no single vendor who represented more than 10% of the Company’s purchases.





(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.


F-16


GFR PHARMACEUTICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE MONTHS ENDED MARCH 31, 2011


(Currency expressed in United States Dollars (“US$”))


(Unaudited)





NOTE-10
COMMITMENTS AND CONTINGENCIES





The Company is committed to an office space under a non-cancelable operating lease agreement with a term of 2 years with fixed monthly rentals, expiry in June 2011. Total rent expenses for the three months ended March 31, 2011 and 2010 was $548 and $2,124, respectively.





As of December 31, 2010, the Company has $489 of future minimum rental payments due under a non-cancelable operating lease agreement in the next twelve months.





NOTE-11
SUBSEQUENT EVENTS





In accordance with ASC Topic 855, “ Subsequent Events ”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after March 31, 2011 up through the date was the Company issued the audited consolidated financial statements. During the period, the Company did not have any material recognizable subsequent events.


F-17


Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations





As used herein the terms "we", "us", "our," the “Registrant,” “GFRP” and the "Company" means, GFR Pharmaceuticals Inc., a Nevada corporation, formerly known as Laredo Investment Corp. These terms also refer to our subsidiary corporations, Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd. (“Hua Long") and New Century Scientific Investment Ltd. ("New Century") and Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd ("Bao Sai"), all of which are organized and existing under the laws of the Peoples’ Republic of China.





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 Quarterly Report on Form 10- Q. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking.





FORWARD LOOKING STATEMENTS





Certain statements in this report, including statements of our expectations, intentions, plans and beliefs, including those contained in or implied by "Management's Discussion and Analysis" and the Notes to Consolidated Financial Statements, are "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are subject to certain events, risks and uncertainties outside our control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update or revise any forward-looking statements. These forward-looking statements include statements of management's plans and objectives for our future operations and statements of future economic performance, information regarding our expansion and possible results from expansion, our expected growth, our capital budget and future capital requirements, the availability of funds and our ability to meet future capital needs, the realization of our deferred tax assets, and the assumptions described in this report underlying such forward-looking statements. Actual results and developments could differ materially from those expressed in or implied by such statements due to a number of factors, including, without limitation, those described in the context of such forward-looking statements, our expansion and acquisition strategy, our ability to achieve operating efficiencies, our dependence on network infrastructure, capacity, telecommunications carriers and other suppliers, industry pricing and technology trends, evolving industry standards, domestic and international regulatory matters, general economic and business conditions, the strength and financial resources of our competitors, our ability to find and retain skilled personnel, the political and economic climate in which we conduct operations and the risk factors described from time to time in our other documents and reports filed with the Securities and Exchange Commission (the "Commission"). Additional factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to: 1) our ability to successfully develop and deliver our services on a timely basis and in the prescribed condition; 2) our ability to compete effectively with other companies in the same industry; 3) our ability to raise sufficient capital in order to effectuate our business plan; and 4) our ability to retain our key executives.





Overview




GFR Pharmaceuticals, Inc. was incorporated under the laws of the State of Nevada on December 18, 1996 under the name Laredo Investment Corp.  (“Laredo”). Its subsidiary companies currently are involved in bio-extraction, researching and inventing, manufacturing and sales of biological separation medium products, radiology and oncology equipment and cancer treatment equipment. The Company’s principal place of business and all of its assets are located in the People’s Republic of China.




On October 15, 2006, we executed an acquisition agreement with Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd. and owned 100% interest of Hua Long.




On December 11, 2006, pursuant to the Plan of Exchange Agreement, New Century became our 95% owned indirect subsidiary.




On January 1, 2008, New Century entered into a stock purchase agreement of the capital stock of Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”) to acquire 96.77% of its capital stock.


2




As a result of the consolidation, GFR Pharmaceuticals, Inc. is a holding company with two business segments. The Company is involved in bio-extraction, researching and inventing, manufacturing and sales of biological separation medium products operated by Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”). The Company also operates a Cancer Diagnosis and Treatment Center with a professional team of doctors operated by Shaan Xi New Century Scientific Investment Development Ltd. (“New Century”) in the PRC.





New Century





New Century is a medical equipment investment management company, which mainly engages in investment and management of cancer treatment equipment and provides comprehensive services for customers with advanced radiology and oncology equipment. New Century 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.
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 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.




With its advanced, professional and scientific management, New Century has established an outstanding marketing team and a well known cancer treatment center with a team of experts since it took over Gamma Knife Center on February 2, 2002. New Century has also successfully established a large integrated medical professional website - Medical Sina (www.120md.com), which provides extensive publicity and online integrated counseling services for patients. We extended our business to neighboring provinces of Shanxi Province and other provinces of the country. The Center is a well known cancer treatment center in the five northwestern provinces of China as well as other parts of the country. The company’s operating revenue and profit have been increasing steadily.




The cases processed in the Center averaged 185 cases per month in the first quarter of 2011 as compared to195 cases per month in the same period of 2010.  For the year ended March 31, 2011, the Center accounted for $676,612, or 75%, of the Company’s revenues.




The Center currently runs at full capacity of business and shows an increasing latent capacity so that the existing equipment capacity cannot meet the requirements of patients. The Company may invest in the construction and management of cancer treatment equipment in the next few years. In such event, the Company believes it will seize market opportunities, gradually expand the treatment capacity and improve profitability by the addition of cancer treatment centers or hospitals to build a leading integrated service center with prevention, screening, treatment and rehabilitation capabilities in the Northwest of China and even across the country.


3




The Company needs additional capital to finance its expansion plans.  The Company presently does not have a commitment for such additional capital and there is no assurance such capital can be obtained on terms acceptable to the Company.




Bao Sai




Bao Sai is 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. It has the technology and facilities for the separation and purification of biological products and natural medicines and manufactures the agarose products of separation media.




Biological separation medium refers to the separation and purification of biological products and natural medicines, which is the core technology of biotechnology Industry. 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. In addition to the biotechnology industry, the technology also has the wide applications and can be used for environmental protection industry, chemical and pharmaceutical industry and modernization of Chinese medicine.




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 2010, Bao Sai spent approximately $25,225 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 prerequisites to the commencement of clinical trials for the development of Xin Kang Ping medicine. As required by the rules of State Food and Drug Administration of China (“SFDA”), Xin Kang Ping changed its name to Fu Fang Dan Chuan Jiao Nang and is in the process of applying for the clinical trial process with the SFDA. Upon the approval of SFDA, we will start clinical trials for Fu Fang Dan Chuan Jiao Nang. Less time is generally required in China as opposed to in the United States in order to complete the clinical trials for new medicine, and the cost of administering 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 costs. 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.




Until 2009, Bao Sai’s operations had consisted of bio-extraction, biological separation medium production and development of new products.




In 2010, based on the separation media, our new products expanded from traditional biochemical products to media derivatives—civil products. With the absorption media, civil products will be removed including harmful substances such as bacteria, viruses, organic pesticides and tobacco tar. We have conducted research in areas of anti-virus masks and submitted the required information to Chinese government.




In January, 2011, the patent of our new anti-virus mask was approved, and other relevant procedures are in the process of government approval, such as the Products Registration Certificate.  Should we obtain all the approvals, we expect that this new product will be marketed in the PRC. We also hope to make additional progress on our other projects on which we are conducting research, so that we can produce additional products which we hope will create more revenues and profits for the Company.


4




RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2011





Revenues





Our overall revenues for the three months ended March 31, 2011 increased from $790,036 for the t hree months ended March 31, 2010 to $933,022 for the same period of 2010, an increase of $142,986 or 18.10%. The product sales generated $41,535 of revenue in the three months ended March 31, 2011 as compared to $10,368 in the same period of 2010, an increase of $31,167 or300.61%. The revenue from service increased from $779,668 for the three months ended March 31, 2010 to $891,487 for the same period of 2011, an increase of $111,819 or 14.34%. During the three months ended March 31, 2011, the cancer treatment business accounted for $676,612 and Bao Sai’s technology service accounted for $214,875 of our revenue. The increase was attributed primarily to the increased technology service and product sales revenue from Bao Sai.





Expenses





Operating expenses for the three months ended March 31, 2011 were $297,532 as compared to $221.556 for the same period of 2010, an increase of $75,976 or 34.29%.   This increase was attributable to the increased general and administrative costs for three months ended March 31, 2011.




Net Income





Our net income during the three months ended March 31. 2010 was $285,386, compared to $329,316 during the three months ended March 31, 2011.  This increase was primarily due to our increased revenue from Bao Sai for the three months ended March 31, 2011.





We hope to remain profitable in 2011 through the implementation of our marketing strategies.





Impact of Inflation





We believe that inflation has had a negligible effect on operations during this period. We believe that we can offset inflationary increases in the cost of sales by increasing sales and improving operating efficiencies.





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





Liquidity Analysis





March 31 ,

2011


March 31,

2010Working Capital

$
1,096,831


$
674,622Stockholders’ Equity

$
6,713,220


$
6,358,268Total Liabilities

$
1,715,353


$
1,861,052


5




Our working capital was increased from $674,622 as of December 31, 2010 to $1,096,831 as of March 31, 2011, which was mainly attributable to the increase in cash and cash equivalents generated from operating activities.





Stockholders’ equity increased from $6,358,268 as of December 31, 2010 to $6,713,220 as of March 31, 2011, an increase of $354,952 or 5.58%.





Total liabilities decreased from $1,861,052 as of December 31, 2010 to $1,715,353 as of March 31, 2011, a decrease of $145,699 or 7.83%. In addition, our principal shareholder, Mr. Guo Li’an, made a loan to fund our operations during the first quarter of 2008. As of March 31, 2011, the balance of the loan was $476,884, which was unsecured, interest-free and repayable on demand.





As of March 31, 2011, cash and cash equivalents increased to $599,208 from $300,716 as of December 31, 2010, an increase of $298,492 or 99.26%. The increase of cash and cash equivalents was mainly due to the cash flows provided from operating activities by $370,767 for the three months ended March 31, 2011. We hope this trend will continue for the coming quarter. Management believes that the Company’s profitability and increases in available cash and cash equivalents will help ensure our continued operations for the next 12 months, but there can be no assurance that our profitability will continue.


6


ITEM 3                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





Foreign Exchange Risk





While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.





Inflation





Inflationary factors such as increases in the costs of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase to cope with these increased costs.





ITEM 4CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures.





Under the supervision and with the participation of our management, including our Chief Executive Officer, Zhao Yan Ding, and Principal Financial Officer, Zhong Ya Li, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report.





Under Rule 13a-15(e) and 15d-15(e), the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.





Changes in Internal Controls over Financial Reporting.





During the three months ended March 31, 2011, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


7





Under Rule 13a-15(e) and 15d-15(e), the term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, 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 and includes those policies and procedures that:





·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;


·
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 of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and


·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer's assets that could have a material effect on the financial statements.





PART II. OTHER INFORMATION





Item 1. Legal Proceedings





None





Item 1A.  Risk Factors





A smaller reporting company is not required to provide the information required by this Item.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





Item 3. Defaults Upon Senior Securities.





None.





Item 4.   Removed and Reserved.





Item 5. Other Information





None





Item 6. Exhibits





31.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


8





SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.





GFR PHARMACEUTICALS, INC.DATE:  May 13, 2011
By:
/s/Zhao Yan DingZhao Yan Ding, Chief Executive Officer(Principal executive officer)





DATE:  May 13, 2011
By:
/s/ Zhong Ya LiZhong Ya Li, Chief Financial Officer(Principal financial officer)


9