GFR Pharmaceuticals 10-Q 2009 Q2 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

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)

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 o     No o

        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 ¨

        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, no par value per share, outstanding as of August 11, 2009 was 42,079,940

GFR PHARMACEUTICALS INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Page
Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2009		F-2
Condensed Consolidated Statements of Operations And Comprehensive Income for the six and three months ended June 30, 2009 and 2008		F-4
Condensed Consolidated Statements of Cash Flows for the six and three months ended June 30, 2009 and 2008		F-5
Condensed Consolidated Statement of Stockholders’ Equity for the six and three months ended June 30, 2009		F-7
Notes to Condensed Consolidated Financial Statements	F-9 to F-25

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	As of
	June 30,			December 31,
	2009			2008
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	18,326		$	552,398
Trade accounts receivable, net		606,007			659,329
Note receivable, net		-			-
Inventories, net		307,890			282,307
Prepayments and other receivables		143,370			243,242
Other receivable, net		-			-
Amount due from unconsolidated affiliate, net		-			-
Operating lease prepaid - current portion		7,258			7,255
Total current assets		1,082,851			1,744,531
Non-current assets:
Property, plant and equipment, net		6,506,365			6,862,609
Intangible asset, net		-			-
Operating lease prepaid – non-current portion		147,274			150,844
Long term prepayment		576,042			589,822
TOTAL ASSETS	$	8,312,532		$	9,347,806
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Amount due to a related party	$	1,951,993		$	1,951,203
Note payable, related parties		1,149,277			2,493,318
Trade accounts payable		50,580			124,700
Note payable		-			219,472
Tax payable		173,086			171,847
Other payables and accrued liabilities		502,856			456,641
Total current liabilities		3,827,792			5,417,181
Loss in excess of investment in unconsolidated affiliate		785,410			785,100
Total liabilities		4,613,202			6,202,281
COMMITMENTS AND CONTINGENCIES (Note 23)  (Note 23)
GFRP Company stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares issued and outstanding as of June 30, 2009 and December 31, 2008		42,080			42,080
Additional paid-in capital		3,712,120			3,712,120
Accumulated other comprehensive income		210,820			210,695
Statutory reserve		423,760			423,760
Accumulated deficits		(1,153,126	)		(1,675,728	)
Total GFRP shareholders’ equity		3,235,654			2,712,927
Non-controlling interest		463,676			432,598
Total equity		3,699,330			3,145,525
TOTAL LIABILITIES AND EQUITY	$	8,312,532		$	9,347,806

F-2

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

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

	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUE, NET
Service revenue	$	973,621		$	1,503,258		$	1,527,877		$	1,978,953
Product sales		9,379			36,055			19,165			242,767
Total revenue, net		983,000			1,539,313			1,547,042			2,221,720
COST OF REVENUE (exclusive of depreciation)
Cost of products		5,388			27,828			8,745			135,946
GROSS PROFIT		977,612			1,511,485			1,538,297			2,085,774
OPERATING EXPENSES:
Depreciation and amortization		189,324			182,666			362,537			356,825
General and administrative		171,254			341,992			386,453			542,354
Total operating expenses		360,578			524,658			748,990			899,179
INCOME FROM OPERATIONS		617,034			986,827			789,307			1,186,595
OTHER INCOME (EXPENSE):
Interest income		3,726			26			10,864			88
Interest expense		(3	)		-			(4,831	)		-
Others		(530	)		-			(574	)		-
Equity in net income of an unconsolidated affiliate		-			3,441			-			6,716
Total other income		3,193			3,467			5,459			6,804
INCOME BEFORE INCOME TAXES		620,227			990,294			794,766			1,193,399
Income tax expenses		(175,881	)		(237,491	)		(240,996	)		(283,915	)
NET INCOME		444,346			752,803		$	553,770		$	909,484
Net income attributable to non-controlling interest		(23,786	)		(36,896	)		(31,168	)		(44,599	)
NET INCOME ATTRIBUTABLE TO GFRP STOCKHOLDERS	$	420,560		$	715,907		$	522,602		$	864,885
Other comprehensive income:
- Foreign currency translation gain		40			184,849			125			484,502
COMPREHENSIVE INCOME	$	420,600		$	900,756		$	522,726		$	1,349,387
Net income per share attributable to GFRP stockholders – Basic and diluted	$	0.01		$	0.02		$	0.01		$	0.02
Weighted average number of GFRP shares outstanding – Basic and diluted		42,079,940			42,079,940			42,079,940			42,079,940

See accompanying notes to condensed consolidated financial statements.

F-3

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATION STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

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

	Six months ended June 30,
	2009			2008
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	522,602		$	864,885
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		362,537			356,825
Equity in net income of an unconsolidated affiliate		-			(6,716	)
Non-controlling interest		31,168			44,599
Change in operating assets and liabilities:
Trade accounts receivable, net		53,576			(264,322	)
Other receivable		6,804			-
Inventories		(25,468	)		(51	)
Prepayments and deposits		107,160			143,001
Trade accounts payable		(74,159	)		(887,603	)
Income tax payable		1,170			9,984
Other payables and accrued liabilities		46,029			(50,604	)
Net cash provided by operating activities		1,031,419			209,998
Cash flows from investing activities:
Partial payment in relation to the Bao Sai acquisition, net of cash acquired		-			(855,693	)
Repayment from an unconsolidated affiliate		-			174,851
Proceeds from repayment of note receivable		-			1,399,768
Repayment of notes payable – related to acquisition of Baosai – related parties		(1,344,846	)		-
Purchase of property, plant and equipment		-			(205,069	)
Net cash (used in) provided by investing activities		(1,344,846	)		513,857
Cash flows from financing activities:
Advances to related companies		-			(49,377	)
Contribution from stockholders		-			-
Repayment of notes payable		(219,529	)		-
Advance from stockholders		-			219,509
Repayment from stockholders		(1,244	)
Net cash provided by (used in) financing activities		(220,733	)		170,132
Foreign currency translation adjustment		128			26,383
NET CHANGE IN CASH AND CASH EQUIVALENTS		(534,072	)		920,370
CASH AND BANK BALANCE, BEGINNING OF PERIOD		552,398			9,951
CASH AND BANK BALANCE, END OF PERIOD	$	18,326		$	930,321
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	239,826		$	268,328
Cash paid for interest expenses	$	4,831		$	-

See accompanying notes to condensed consolidated financial statements. 

F-4

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

CONDENSED CONSOLDIATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2009

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

(Unaudited)

	GFRP Company Shareholder
	Common stock
	No. of shares		Amount		Additional paid-in capital		Accumulated other comprehensive income		Statutory reserve		Retained earnings (accumulated deficit)			Non-controlling interest			Total
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		-		-		-		125		-		-			-			125
Net income for the period		-		-		-		-		-		522,602			31,168			553,770
Total comprehensive income		-		-		-		-		-		-			-			553,895
Share of foreign currency translation adjustment by non-controlling interest		-		-		-		-		-					(90	)		(90	)
Balance as of June 30, 2009		42,079,940	$	42,080	$	3,712,120	$	210,820	$	423,760	$	(1,153,126	)	$	463,676		$	3,699,330

See accompanying notes to condensed consolidated financial statements. 

F-5

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 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 US$3,636,000). It jointly operates a PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center with Tong 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.

GFRP, Hua Long, New Century and Bao Sai are hereinafter referred to as (the “Company”).

NOTE 2 GOING CONCERN AND MANAGEMENT PLAN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of June 30, 2009, the Company had a net working capital deficiency of $2,744,941 that indicates the Company may need additional financing to meet cash requirements for its operations in order to continue as a going concern.

The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded amounts of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes the Company’s ability to continue as a going concern is depending upon its ability to maintain profitable operations and to obtain additional financing or refinancing as may be required. The Company has generated net income and positive cash inflows from operating activities during the periods ended June 30, 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 to meet its obligations on a timely basis in the foreseeable future.

NOTE 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

These interim condensed consolidated financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and do not include all information and footnotes necessary for a complete presentation of financial statements in conformity with accounting principles generally accepted in the United States. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

F-6

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

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 period reported. Actual results may differ from these estimates.

Equity Method of Accounting

Under Accounting Research Bulletin No. 51 “Consolidation of Financial Statements (as Amended)” (“ARB 51”), 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 Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” 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 and the application of the equity method under ARB 51, 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 an approximate $785,410 liability as of June 30, 2009. (See Note 14)

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. The reversal of the Company’s liability into income will occur when Medicine commences business and generates operating profit. GFRP will continue to evaluate the equity method investment in Medicine quarterly to review the reasonableness of the liability balance.

Shipping and handling costs

Shipping and handling costs were included in operating expenses. During the six months ended June 30, 2009 and 2008, shipping and handling costs were insignificant.

Advertising costs

Advertising costs are accounted for in accordance with SOP 93-7, “Reporting for Advertising Costs”. No advertising expense was incurred for the six months ended June 30, 2009 and 2008.

Research and development expenses

Research and development costs are charged to expense when incurred and are included in operating expenses.

F-7

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

During the six months ended June 30, 2009 and 2008, research and development costs expensed to operating expenses were approximately $10,155 and $Nil respectively.

Comprehensive income

SFAS No. 130, “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 the period from non-owner sources. Accumulated comprehensive income 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.

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, Hua Long, New Century and Bao Sai maintain their books and records in its 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 US$ are translated into US$, in accordance with SFAS No 52. “Foreign Currency Translation”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. 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$ has been made at the following exchange rates for the respective periods:

	June 30, 2009	December 31, 2008		June 30, 2008
Periods/year end RMB:US$ exchange rate	6.8319		6.8346	6.8718
Average daily RMB:US$ exchange rate	6.8328		7.0671	7.0726

Recently issued accounting standards

Effective January 1, 2009, the first day of fiscal 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position Financial Accounting Standard 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and Other Intangible Assets.” the Company will apply FSP FAS 142-3 prospectively to intangible assets acquired subsequent to the adoption date.  The adoption of FSP FAS 142-3 had no impact on the Company’s Condensed Consolidated Financial Statements.

Effective January 1, 2009, the Company adopted, Statement of Financial Accounting Standards No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities,” which amends and expands Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 161 requires tabular disclosure of the fair value of derivative instruments and their gains and losses.  This Statement also requires disclosure regarding the credit-risk related contingent features in derivative agreements, counterparty credit risk, and strategies and objectives for using derivative instruments. The adoption of SFAS 161 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

F-8

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

Recently issued accounting standards (continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, the Company adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year, which the Company adopted on January 1, 2009.

The fair value hierarchy distinguishes between assumptions based on market data (observable inputs) and an entity’s own assumptions (unobservable inputs). The hierarchy consists of three levels:

• Level one — Quoted market prices in active markets for identical assets or liabilities;

• Level two — Inputs other than level one inputs that are either directly or indirectly observable; and

• Level three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and reflect those assumptions that a market participant would use.

The adoption of SFAS 157 did not have a material effect on the Company’s financial position or results of operations. The book values of cash, accounts receivable, accounts and note payable approximate their respective fair values due to the short-term nature of these instruments.

The Company has no assets or liabilities that are measured at fair value on a recurring basis. There were no assets or liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2009.

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51." SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements" to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the Company’s Consolidated Financial Statements. Among other requirements, this Statement requires that the consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated income statement. SFAS 160 was effective beginning in our fiscal 2009. The provisions of SFAS 160 were applied prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented. As a result, upon the adoption of SFAS 160, we reclassified the “minority interest” balance previously included in other liabilities of our Consolidated Balance Sheet to a new component of equity. The adoption also impacted certain captions previously used on the consolidated statement of income, largely identifying net income including noncontrolling interest and net income attributable to GFRP. The adoption of SFAS 160 did not have a material impact on the Company’s consolidated financial position or results of operations.

Effective January 1, 2009, the Company adopted Statement of Financial Accounting Standards No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations." SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in an acquiree and the goodwill acquired. the Company will apply SFAS 141R to any business combinations subsequent to adoption. In addition, this Statement requires that any additional reversal of deferred tax asset valuation allowance established in connection with the Company’s fresh start reporting on January 7, 1998 be recorded as a component of income tax expense rather than as a reduction to the goodwill established in connection with the fresh start reporting.

F-9

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

Recently issued accounting standards (continued)

In April 2009, the FASB issued FASB Staff Position Financial Accounting Standard 141R-1 ("FSP FAS 141R-1"), "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies." FSP FAS 141R-1 amends SFAS 141R to require that an acquirer recognize at fair value, at the acquisition date, an asset acquired or a liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value of such an asset acquired or liability assumed cannot be determined, the acquirer should apply the provisions of SFAS 5, " Accounting for Contingencies" , to determine whether the contingency should be recognized at the acquisition date or after such date. FSP FAS 141R-1 is effective for business combinations whose acquisition date is on or after the first reporting period beginning after December 15, 2008. Accordingly, the Company adopted this FSP during the first quarter of 2009. The adoption of FSP FAS 141R-1 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1 ("FSP FAS 107-1 and APB 28-1"), "Interim Disclosures about Fair Value of Financial Instruments." The FSP amends SFAS 107, "Disclosure about Fair Value of Financial Instruments," and Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP FAS 107-1 and APB 28-1 is effective in the second quarter of 2009. The adoption of the FSP did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In April 2009, the FASB issued FASB Staff Position No. FSP FAS 115-2 and FAS 124-2 ("FSP FAS 115-2 and FAS 124-2"), "Recognition and Presentation of Other-Than-Temporary Impairments." The FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 are effective in the second quarter of 2009.  The adoption of the FSP did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 157-4 ("FSP FAS 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 FSP provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, "Fair Value Measurements" , when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 are effective in the second quarter of 2009. The adoption of the FSP did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 (“FSP FAS 132(R)-1”), “ Employers’ Disclosures about Postretirement Benefit Plan Assets.” The FSP expands the disclosure requirements about plan assets for defined benefit pension plans and postretirement plans. The Company is required to adopt FSP FAS 132(R)-1 in the fourth quarter of 2009. The Company is currently in the process of assessing the impact that this FSP may have on the disclosures in the Company’s Consolidated Financial Statements.

 In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 167, Amendments to FASB Interpretation No. 46(R) (“FAS 167”).  FAS 167 improves financial reporting by enterprises involved with variable interest entities by addressing (1) the effects on certain provisions of FASB Interpretation No. 46 (R), Consolidation of Variable Interest Entities (“FIN 46(R)”) , as a result of eliminating the qualifying special-purpose entity (“SPE”) concept in FAS No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (“FAS 166”), and (2) constituent concerns about the application of certain key provisions of FIN 46(R), including those in which the accounting and disclosures do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. FAS 167 shall be effective as of January 1, 2010, our first annual reporting period beginning after November 15, 2009.  Earlier application is prohibited.  The adoption of FAS 167 is not currently expected to have a material effect on the Company’s Consolidated Financial Statements.

F-10

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

Recently issued accounting standards (continued)

        In June 2009, the FASB issued FAS 166, improving the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.   The FASB undertook this project to address (1) practices that have developed since the issuance of FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors.  FAS 166 must be applied as of January 1, 2010, the beginning of our first annual reporting period after November 15, 2009. Earlier application is prohibited.   FAS 166 must be applied to transfers occurring on or after the effective date.  Additionally, on and after the effective date, the concept of a qualifying SPE is no longer relevant for accounting purposes.  Therefore, a formerly qualifying SPE should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance.   If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation.  The disclosure provisions of FAS 166 should be applied to transfers that occurred both before and after the effective date of this statement.  The adoption of FAS 166 is not currently expected to have a material effect on the Company’s Consolidated Financial Statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s Consolidated Financial Statements upon adoption.

NOTE 4 ACQUISITION OF INTEREST IN BAO SAI

On January 1, 2008, the Company acquired 96.77% equity interest in Bao Sai in exchange for notes payable aggregating $4,500,211 as described below. 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, bacteria production, the gene chip, diagnostic reagents and other biochemical products.

Upon the completion of the transaction, Bao Sai became a subsidiary of the Company. As the Company and Boa Sai were under common control before the acquisition, the acquisition was accounted for under the purchase method of accounting with initial measurement of assets and liabilities recognized at book value. The following table summarizes the historical value of the assets acquired and liabilities assumed at the date of acquisition.

F-11

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

	January 1, 2008
Acquired assets:
Cash and cash equivalents	$	539,790
Accounts receivable, net of reserve for bad debts of $15,222		518,786
Inventories, net		258,365
Amount due from related parties		743,887
Notes receivables, net		2,368,745
Prepayment and other receivables, net		399,712
Plant and equipment, net		1,978,200
Intangible assets, net		154,515
Investment in an unconsolidated affiliate		478,795
Total assets acquired	$	7,440,795
Less: Liabilities assumed
Accounts payable, trade		(884,939	)
Note payable		(410,172	)
Amount due to related parties		(1,039,606	)
Other payables and accrued liabilities		(455,658	)
Total liabilities assumed		(2,790,375	)
Less: Non-controlling interest		(150,209	)
Purchase price	$	4,500,211
Satisfied by:
Net cash to be paid to acquire Bao Sai	$	4,500,211

The sellers of Bao Sai and consideration are as follows:

A non-related party $ 616,182

Related parties
Xi’an 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

(a) This is a company owned mostly by the major shareholder of the Company.

(b) This is former director of the Company and a director of Bao Sai.

(c) This is the brother of the major shareholder of the Company.

F-12

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 4 ACQUISITION OF INTEREST IN BAO SAI (Continued)

The purchase price is scheduled to be paid by the Company in two installments for a term of over 2 years due December 31, 2009. The first installment has been paid to Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd., the former owner of 28 million shares, or 46.67% of Bao Sai. The second installment will be paid to the other three former owners, in amounts equal to their respective percentage of equity ownership in Bao Sai, during the year ending December 31, 2009.

As of June 30, 2009, the purchase price consideration is payable are as follows:

Repayable on or before Year ending December 31,	Approximately
2009	$	1,149,277

Consideration of the acquisition was in RMB and as payment made during the period was accounted for at exchange rate as on the date of payment and amount outstanding as of June 30, 2009 was accounted for at exchange rate at period end, there is a reconciliation difference of $96,594 represented by exchange difference as follows:

Amount paid	$	3,254,340
Amounts still outstanding		1,149,277
Exchange difference		(96,594	)
Total consideration	$	4,500,211

For the six months ended June 30, 2009, the Company made a payment of purchase price consideration totaling $1,344,846 (equivalent to RMB9,189,085).

NOTE 5 TRADE ACCOUNTS RECEIVABLE, NET

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. Based upon the aforementioned criteria, management has determined that no allowance for doubtful accounts was required.

	June 30, 2009			December 31, 2008
	(unaudited)			(unaudited)
Accounts receivable, cost	$	1,121,237		$	1,174,355
Less: allowance for doubtful accounts		(515,230	)		(515,026	)
Accounts receivable, net	$	606,007		$	659,329

F-13

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 6 NOTE RECEIVABLE, NET

	June 30, 2009			December 31, 2008
	(unaudited)			(unaudited)
Note receivable, cost	$	1,097,358		$	1,097,358
Less: allowance for doubtful accounts		(1,097,358	)		(1,097,358	)
Note receivable, net	$	-		$	-

On September 3, 2007, the Company’s newly acquired subsidiary, Bao Sai, disposed of its investment in 75% of HuaYang for a cash consideration of $1,097,358 (equivalent to RMB7,500,000). The balance was unsecured and interest-free and repayable in 4 installments due in full, by December 31, 2008. However, the balance was overdue as of December 31, 2008, and additional agreement was entered into by both parties to extend the payment term up to December 31, 2009. As collectibility has been considered doubtful, an allowance of doubtful debt was made fully on the notes receivable.

NOTE 7 INVENTORIES, NET

Inventories consisted of the followings:

	(unaudited)			December 31, 2008
	June 30, 2009			(unaudited)
Raw materials	$	22,155		$	74,270
Work in process		10,873			7,109
Finished goods		641,001			568,318
		674,029			649,697
Less: inventory allowances		(366,139	)		(367,390	)
Inventories, net	$	307,890		$	282,307

F-14

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 8 OTHER RECEIVABLE

	June 30, 2009			December 31, 2008
	(unaudited)			(audited)
Other receivable	$	1,122,650		$	1,122,650
Less: allowance for doubtful accounts		(1,122,650	)		(1,122,650	)
Other receivable , net	$	-		$	-

As of June 30, 2009, the balance of $1,122,650 due from a former subsidiary of the Company, represented temporary advance from the Company which was unsecured, interest-free, with a with a fixed repayment term of 5 installments and is due in full, no later than 2013. As of June 30, 2009, the future installments to be received are as follows:

Years ending December 31,
2009	$	73,157
2010		131,683
2011		219,472
2012		424,312
2013		274,026
Total:	$	1,122,650

NOTE 9 AMOUNT DUE FROM (TO) RELATED PARTIES

(a) Amount due to a stockholder

	June 30, 2009		December 31, 2008
	(unaudited)		(audited)
Due to:
Mr. Lian Guo	$	1,951,993	$	1,951,203

The amount represented temporary advance to the Company which was unsecured, interest-free and repayable on demand.

(b) Note payable

As of June 30, 2009, note payable to related parties represented payable to ex-shareholder of Xi'an Jiaoda Bao Sai Bio-Technology Co., Ltd for the transfer of their shares to New Century. The amount will be paid to these ex-shareholders preceding December 31, 2009. (Note 4)

F-15

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 10 PREPAYMENTS AND OTHER RECEIVABLES

Prepayments and other receivables consisted of the following:

	June 30, 2009			December 31, 2008
	(unaudited)			(audited)
Deposits		$	68,069		$	77,617
Advances to employees			28,116			25,334
Prepaid expenses for operating purpose			47,185			140,291
		$	143,370		$	243,242

NOTE 11 PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net, consisted of the following:

	June 30, 2009			December 31, 2008
	(unaudited)			(audited)
Buildings	$	2,293,130		$	2,293,130
Plant and equipment		6,322,678			6,322,678
Motor vehicles		246,806			246,806
Furniture, fixture and office equipment		151,356			151,356
Foreign translation difference		36,840			33,264
		9,050,810			9,047,234
Less: accumulated depreciation		(2,426,521	)		(2,067,613	)
Less: foreign translation difference		(117,924	)		(117,012	)
Property, plant and equipment, net	$	6,506,365		$	6,862,609

The buildings were pledged as security for banking facilities related to the note payable as of December 31, 2008. See also Note 15.

Depreciation expense for the six months ended June 30, 2009 and 2008 were $358,908 and $353,320, respectively.

F-16

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 12 INTANGIBLE ASSETS, NET

	June 30, 2009				December 31, 2008
	(unaudited)				(audited)
Technical know-how		$	1,131,064			$	1,131,064
Less: accumulated impairment charge			(1,131,064	)			(1,131,064	)
Net book value		$	-			$	-

As of June 30, 2009, the carrying value of the technical know-how was stated as zero. The Company recognized a full impairment charge before the acquisition of Bao Sai for recoverability test.

NOTE 13 OPERATING LEASE PREPAID

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.

The lease expenses on operating lease prepaid for the six months ended June 30, 2009 and 2008 was $3,629 and $3,505, respectively. The estimated amount to be expensed on operating lease prepaid over each of the next five years and thereafter is $7,258 per annum.

NOTE 14 INVESTMENT IN AN UNCONSOLIDATED AFFILIATE

The Company has a 75% equity interest in Xi’an Bao Sai Medicine Co., Ltd (“Medicine”), which is registered as a limited liability company in the PRC. The Company ceased operations of Medicine in 2007 and leased out its business license for a fixed return annually. Thus, the Company does not control policy decisions in ordinary course of business of Medicine; and accordingly, investment in Medicine is accounted for under the equity method.

As of June 30, 2009, the investment in an unconsolidated affiliate is presented as follows:-

Investment in Medicine at the date of acquisition	$	106,804
Amount due from Medicine		1,103,046
Less: allowance for doubtful accounts		(1,103,046	)
Share of accumulated losses in Medicine at date of loss of control		(870,823	)
Foreign translation difference		(21,391	)
Loss in excess of investment in unconsolidated affiliate	$	(785,410	)

The balance of $1,103,046 due from Medicine represented a temporary advance from the Company which was unsecured and interest-free with a fixed repayment term of 4 installments and is due in full, no later than 2012. As of June 30, 2009, the future installments to be received are as follows:

F-17

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

Years ending December 31,
2009	$	235,407
2010		292,573
2011		292,573
2012		282,493
Total:	$	1,103,046

NOTE 15 NOTE PAYABLE

The notes payable was repaid in February 2009 and the related charge on the property secured (Note 11) was released accordingly.

NOTE 16 OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the followings:

	June 30, 2009		December 31, 2008
	(unaudited)		(audited)
Business tax payable	$	82,587	$	82,554
Government levy payable		14,945		20,321
Salaries and welfare payable		98,019		100,405
Temporary advances		190,041		161,491
Customer deposits		44,790		8,457
Accrued expenses		72,474		83,413
	$	502,856	$	456,641

NOTE 17 INCOME TAXES

The PRC subsidiaries within the Group are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate, i.e. the PRC. The statutory PRC Enterprise Income Tax rate (“EIT”) for the six months ended June 30, 2009 and 2008 is generally 25%.

The Company’s income tax consisted of:

	June 30, 2009		December 31, 2008
	(unaudited)		(audited)
Current – PRC	$	240,996	$	46,424
Deferred		-		-
	$	240,996	$	46,424

F-18

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

A reconciliation of the provision for income taxes determined at PRC EIT to the Company’s effective income tax rate is as follows:

	June 30, 2009			December 31, 2008
	(unaudited)			(audited)
Pre-tax income	$	794,766		$	210,105
PRC EIT		25	%		25	%
Income tax computed at PRC EIT		198,691			52,526
Reconciling items:
Loss not recognized as deferred tax assets		46,476			-
Non-deductible expenses		-			3,495
Net operating loss carryforwards		-			(9,597	)
Others		(4,171	)		-
Effective tax expense	$	240,996		$	46,424

On March 16, 2007, the PRC government promulgated a new tax law, China’s Unified Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1, 2008. Under the New EIT Law, foreign-owned enterprises as well as domestic companies are subject to a uniform tax rate of 25%.

Deferred tax assets and liabilities reflect the tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the net deferred tax assets and liabilities as of June 30, 2009 were as follows:

	June 30, 2009			December 31, 2008
	(unaudited)			(audited)
Deferred tax assets:
- Net operating loss carryforwards		261,253			214,777
- Allowance for doubtful debts		956,519			956,519
		1,217,772			1,171,296
Less: valuation allowance		(1,217,772	)		(1,171,296	)
Net deferred tax assets	$	-		$	-

As of June 30, 2009 and 2008, full valuation allowance was provided to the deferred tax assets due to the uncertainty surrounding their realization.

NOTE 18 SEGMENT REPORTING  DON’T WE ALSO NEED SEGMENT REPORTING FOR THE 3 MONTHS ENDED JUNE 30, 2009?

The Company’s business units have been aggregated into two reportable segments, as defined by SFAS No. 131:

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

¨ Extraction Business – extraction of raw materials to medicine ingredients and distribution of extracted ingredients for medicine manufacturing uses.

F-19

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

The Company operates these segments in the PRC and all of the identifiable assets of the Company are located in the PRC during the period presented.

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 periods ended June 30, 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 three months ended June 30, 2009 and 2008:

	Three months ended June 30, 2009
	Medical Business		Extraction Business			Total
	(unaudited)		(unaudited)			(unaudited)
Net revenues	$	973,621	$	9,379		$	983,000
Cost of revenues		-		(5,388	)		(5,388	)
Gross profit	$	973,621	$	3,991		$	977,612
Depreciation and amortization	$	142,255	$	47,069		$	189,324
Net income (loss)	$	538,254	$	(86,526	)	$	451,728
Expenditure for long-lived assets	$	-	$	-		$	-

	Three months ended March 31, 2008
	Medical Business		Extraction Business			Total
	(unaudited)		(unaudited)			(unaudited)
Net revenues	$	1,122,457	$	416,856		$	1,539,313
Cost of revenues		-		(27,828	)		(27,828	)
Gross profit	$	1,122,457	$	389,028		$	1,511,485
Depreciation and amortization	$	138,436	$	44,230		$	182,666
Net income	$	654,184	$	61,723		$	715,907
Expenditure for long-lived assets	$	23,038	$	213		$	23,251

Summary of financial information concerning the Company’s reportable segments is shown in the following table for the six months ended June 30, 2009 and 2008:

	Six months ended June 30, 2009
	Medical Business		Extraction Business			Total
	(unaudited)		(unaudited)			(unaudited)
Net revenues	$	1,527,877	$	19,165		$	1,547,042
Cost of revenues		-		(8,745	)		(8,745	))
Gross profit	$	1,527,877	$	10,420		$	1,538,297
Depreciation and amortization	$	267,698	$	94,839		$	362,537
Net income (loss)	$	739,673	$	(185,903	)	$	553,770
Expenditure for long-lived assets	$	-	$	-		$	-

	Six months ended June 30, 2008
	Medical Business		Extraction Business			Total
	(unaudited)		(unaudited)			(unaudited)
Net revenues	$	1,598,152	$	623,568		$	2,221,720
Cost of revenues		-		(135,946	)		(135,946	)
Gross profit	$	1,598,152	$	487,622		$	2,085,774
Depreciation and amortization	$	270,023	$	86,802		$	356,825
Net income	$	766,052	$	98,833		$	864,885
Expenditure for long-lived assets	$	190,269	$	14,800		$	205,069

F-20

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 19 NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of the ordinary shares outstanding during the year. Diluted net income per share is computed using the weighted average number of ordinary shares and ordinary share equivalents outstanding during the year. Pursuant to stock exchange transaction on November 30, 2006, the weighted average number of common shares issued and outstanding was adjusted to account for the effects of the stock exchange transaction as a reverse acquisition.

The following table sets forth the computation of basic and diluted net income per share for the periods ended June 30, 2009 and 2008:

	Six months ended June 30,
	2009		2008
	(unauidted)		(unauidted)
Basis and diluted net income per share calculation
Numerator:
- Net income in computing basic and diluted net income per share	$	522,602	$	864,885
Denominator:
- Weighted average ordinary shares outstanding		42,079,940		42,079,940
Basic and diluted net income per share	$	0.01	$	0.02

NOTE 20 STOCK-BASED COMPENSATION

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 June 30, 2009 and 2008, no options or shares have been granted under the Plan.

NOTE 21 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, New Century and Bao Sai are required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $5,091 and $8,307 for the periods ended June 30, 2009 and 2008, respectively.

NOTE 22 CONCENTRATION AND RISK

(a) Major customers

For both periods ended June 30, 2009 and 2008, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues were derived from customers located in the PRC.

For the six months ended June 30, 2009, one customer represented more than 10% of the Company’s revenue and accounts receivable, respectively. As of June 30, 2009, this customer accounted for 99% or $1,616,800 of the Company’s revenues and 44% or $488,669 of accounts receivable.

For the six months ended June 30, 2008, one customer represented more than 10% of the Company’s revenue and accounts receivable, respectively. As of June 30, 2008, this customer accounted for 72% of the Company’s revenues

F-21

GFR PHARMACEUTICALS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

NOTE 22 CONCENTRATION AND RISK (continued)

and 37% of accounts receivable, amounting to $1,596,152 and $168,915, respectively.

(b) Major vendors

For the six months ended June 30, 2009, one vendor represented more than 10% of the Company’s purchases and accounts payable, respectively.

For the six months ended June 30, 2008, one vendor represented more than 10% of the Company’s purchases and accounts payable, respectively.

(c) Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral to support such receivables.

(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 the RMB depreciates against US$, the value of the RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

NOTE 23 COMMITMENTS AND CONTINGENCIES

Lease Obligations

The Company has entered into operating leases related to office space under non-cancelable agreement expired through June 2009.

As of June 30, 2009, total future lease commitment was as follows:

Reminder of 2009 $ Nil

Rental expense for the six months ended June 30, 2009 and 2008 totaled approximately $1,054 and $3,054, respectively.

F-22

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

GENERAL DESCRIPTION OF BUSINESS

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

We are a high-tech company in China chartered and authorized by the Chinese government for research and inventing, manufacturing and selling biological separation medium products, which refers to the separation and purification of biological products and natural medicines. Such technology has been widely used in producing antibiotic products, Genetic Recombinant Medicine, the Gene Chip, bacterin production, diagnoses reagent, and biochemical products.

We were 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. GFRP specialized in formulating, blending, encapsulating and packing nutritional products. The Company’s operations were located in the province of British Columbia, Canada.

On October 15, 2006, we executed an acquisition agreement with Hua Long. Pursuant to the Agreement, we paid Hua Long Shareholders approximately $187,500 in cash to acquire a 100% interest in the shares of registered capital of Hua Long. Hua Long acts as the holding company of New Century Scientific Investment Ltd. ("New Century"), a Chinese corporation with which we entered into a stock exchange transaction through Hua Long, on December 11, 2006, pursuant to which 40,000,000 shares of GFRP common stock were exchanged for 95% of the equity of New Century.

The acquisition of Hua Long allowed us to complete the share exchange with New Century in China. Upon completion of the acquisition, we owned 100% equity interest of Hua Long which in turn owns a 95% equity interest in New Century. The transaction was treated for accounting purposes as a capital transaction and recapitalization by the accounting acquirer, Hua Long, and as a re-organization by the accounting acquiree.

          Subsequent to completion of the exchange transaction and acquisition, we have continued operations of New Century, through Hua Long. The principal activity of New Century is to lease diagnostic imaging medical equipment to hospitals.  Our current operation commenced in March 2006.  All customers are located in China.

New Century, formerly Shan Xi New Century Technology Investment Development Company Ltd., owns radiology and oncology equipment and provides it to Tangdu Hospital in Shan 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”).  The Center averaged approximately 217 cases per month for the first six months of 2009, compared to 188 cases per month in the same period of 2008, New Century is paid a percentage of profits from the Center.

Pursuant to the Purchase Agreement dated January 1, 2008, by and among New Century and the holders of all 60,000,000 shares of the capital stock of Bao Sai, the Company acquired 58,060,000 shares of its capital stock of Bao Sai, or 96.77% of its common stock, as of January 1, 2008.

Supplemental Agreements executed on August 14, 2008 set the aggregate purchase price for the shares at $4,500,211.  The Purchase Agreement set forth that the purchase price of the 58,060,000 shares would equal Bao Sai’s net asset value based on Bao Sai’s audited financial statements for the fiscal year ended December 31, 2007 prepared in accordance with Generally Accepted Accounting Principals.  The net asset value was $4,650,420.

Pursuant to the Supplemental Agreements, the Company will pay an aggregate purchase price of RMB 15,873,030 yuan to Xi’an Bio-sep Biological Filler Engineering Technology Co., Ltd. for 46.67% of the Bao Sai stock (28 million shares) in two installments.  For the year ended December 31, 2008, the Company made a payment of purchase price consideration totaling $2,322,436. As of June 30, 2009, we still have note payable in the amount of $1,149,277 due on December 31, 2009.

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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.

New Century’s strategic purchase of Bao Sai provides us with key technology in the biotech purification field and in chromatography and an experienced R&D team.   The acquisition increased the number of our full time employees by about 50.  The Bao Sai employees are primarily in sales, research and development and administrative areas.

The Company believes that it has strong prospects of increasing its overall market share and revenues. Management believes that Bao Sai’s business has good growth potential and its revenue will increase in the second half of 2009 as Bao Sai recovers from the effect of the worldwide financial crisis .  The Center’s diagnostic imaging and radiation oncology treatments and equipment are all covered by the Chinese national medical insurance system, which provides greater assurance that the Company will continue to generate reliable revenues from the Center.  .  We have no plans to purchase or sell any plant or equipment.  We experience little, if any, seasonality in our business.

RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED JUNE 30, 2009

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 that August be 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.

Revenues

Through the second quarter of 2009, we continued to realize our revenues from the business operations of two subsidiaries: New Century and Bao Sai. New Century owns radiology and oncology equipment and provides it to Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”) 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. New Century receives a percentage of profits from the Center. We recognize net revenues based on the total amount received from the patients during the month, less the monthly operating costs incurred at the centers. The service revenues were recorded when services are received by the customers and realized the amounts net of provisions for discounts, allowance and taxes which are recognized at the time of services performed.

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The revenue from our operation of the Center decreased from $1,503,258 for the quarter ended June 30, 2008 to $973,621 for the same period of 2009 and. decreased from $1,978,953 during the six months ended June 30, 2008 to $ 1,527,877 during the six months ended June 30, 2009. During the second quarter of 2009, the Center, on average handled approximately 217 cases per month, compared to 188 cases per month in the same period of 2008.  Revenues from our operation of the Center declined, despite more cases, in part because the respective profit sharing ratios between us and the Center changed. New Century receives 70% of the revenues of the Centers in 2009 compared to 80% in 2008. Similarly, our production sales from our Bao Sai subsidiary also decreased from $623,568 during the six months ended June 30, 2008 to $19,165 during the six month ended June 30, 2009. Baosai’s revenue decrease so much from 2008 to 2009 principally as a result of the financial crisis affecting its customers. .

As a result, our overall revenues for the second quarter of 2009 slightly decreased to $983,000 from $1,539,313 for the same period ended June 30, 2009. Likewise, our overall revenue decreased from $2,221,720 during the six months ended June 30, 2008 to $1,547,042 during the six months ended June 30, 2009. This decrease was attributed to our business adjustment after our acquisition of a new subsidiary Bao Sai in August 2008. Our Bao Sai operation was still in a developmental stage.  We expect it will put us in a stronger position for increasing our market share and revenue later in 2009 because we believe the market for its services provides significant opportunities for growth.

Expenses

Accordingly, our operating expenses for the second quarter of 2009 was reduced to $360,578, a decrease of $164,080 or 31% from $524,658 for the same period of 2008. Our operating expenses during the six months ended June 30, 2009 was reduced to $748,990, a decrease of $ 150,189 or 16.7% to $ 899,179 during the six months ended June 30, 2008.  The reduction in our operating expenses was due primarily to the decrease of our business scope and scale as a result of our acquisition of Bao Sai in August 2008, despite of the increased number of our full time employees by about 52 as of June 30, 2009 as a result of the acquisition.

Net Income

Our net income during the three and six months ended June 30, 2009 was $444,346 and $553,770 respectively, compared to $752,803 and $909,484 during the three and six months ended June 30, 2008.  The reduction of our net income was primarily due to our decreased revenue as a result of our business adjustment after our acquisition of Bao Sai. As we complete our business adjustment and our operation of Bao Sai expands in the future, we expect our net income to increase.

We expect to be profitable during fiscal year 2009 through the implementation of our marketing strategies. However, we cannot be certain that we will be able to successfully implement our marketing strategies and revenues may decline in 2009 compared to 2008 or, therefore, that we will be profitable.

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. During the six and three months ended June 30, 2009, the effect of converting our financial results to Dollars was to add $125 and $40 to our comprehensive income.

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LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, cash in the bank decreased to $18,326, compared to $552,398 as of December 31, 2008. This decline is primarily due to repayment of $1,344,846 of notes payable to related parties arising from the acquisition of Bao Sai. Our Cash flows provided by operating activities were $1,031,419 for six months ended June 30, 2009; a significant increase of $821,421 or 391% compared to cash flows of $209,998 from operating activities for the same period ended June 30, 2008. The increase in the positive cash flows from operations for the first six months of 2009 was due primarily to the substantial increase of collected accounts receivable of $53,576 from ($ 264,322) for the six months of 2008, and substantial reduction of our trade accounts payable to ($74,159) for the first six months of 2009 from ($887,603) for the same period of 2008.

However, cash flows used in investment activities were $(1,344,846) for the six months ended June 30, 2009, which was used to repay the notes payable to related parties. .Meanwhile, cash flows used in financing activities were $(220,733) for the six months ended June 30, 2009.

Our stockholders’ equity increased from $2,712,927 at December 31, 2008 to $3,235,654 at June 30, 2009.

In connection with the purchse of Bao Sai, we still have a note payable in the amount of $1,149,277 due on December 31, 2009 for the balance of the purchase price.  We may not be able to generate sufficient cash to satisfy this obligation from internally generated funds. In such event, we would need to obtain funds from related parties or outside sources or seek to renegotiate the terms of the loan, of which there can be no assurance.

In addition, allowance for doubtful accounts receivable was $515,230 as of June 30, 2009 ($515,026 recorded as a doubtful account receivable on December 31, 2008) with total accounts receivable totaling $1,121,237, compared to $1,196,511 as of June 30, 2008. The inability to collect more outstanding receivables can adversely affect our operations.  The Center accounted for 81% of our accounts receivable as of June 30, 2009.

On September 3, 2007, the Company’s newly acquired subsidiary, Bao Sai, disposed of its investment in 75% of HuaYang for a cash consideration of $1,097,358 (equivalent to RMB7, 500,000). The balance was unsecured and interest-free and repayable in 4 installments due in full, by December 31, 2008. However, the balance was overdue as of December 31, 2008, and additional agreement was entered into by both parties to extend the payment term up to December 31, 2009. As collectibility has been considered doubtful, an allowance of doubtful debt was made fully on the notes receivable.  The failure of the Company to collect this receivable has adversely affected the Company’s liquidity.

We also advanced to Xi’an Bao Sai Medicine Co., Ltd (“Medicine”) a loan in the principal amount of $1,103,046 which was unsecured and interest-free. The loan is repayable in four equal annual installments commencing December 31, 2009 through December 31, 2012. The Company leased Bao Sai’s business license for an annual fixed return. Bao Sai has a 75% equity interest in Medicine.

Overall, we have funded our cash needs from inception through June 30, 2009 primarily with a series of debt and equity transactions, including note payable to related parties of $1,149,277, accounts payable of $50,580, and amount due to stockholders of $1,951,993.  At June 30, 2009, we have a negative working capital of ($2,744,941). If we are unable to receive additional cash from our related parties, we need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls 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.  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.

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Changes in Internal Control Over Financial Reporting.  During the most recent quarter ended June 30, 2009, there has been no change in our internal control 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 control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A.  Risk Factors

A small 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. Submission of Matters to a Vote of Security Holders

None.

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 2002

31.2 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 2002

32.1 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 2002

32.2  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

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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:  August  13 , 2009	By:	s/Zhan Yan Ding
	Zhao Yan Ding, Chief Executive Officer
	By:	/s/Zhong Ya Li
	Zhong Ya Li, the Principal Financial Officer

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