GFR Pharmaceuticals 10-Q 2010 Q2 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2010

OR

o 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  o     No  o

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 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 o   No x

The number of shares of common stock, $0.001 par value per share, outstanding as of August 13, 2010 was 42,079,940.

GFR PHARMACEUTICALS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30, 2010

INDEX

	Page
PART I - FINANCIAL INFORMATION	3
Item 1: – Financial Statements	3
Item 2: - Management's Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3: – Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures	5
PART II - OTHER INFORMATION	6
Item 1: - Legal Proceedings	6
Item 1A: Risk Factors	6
Item 2: - Unregistered Sales of Equity Securities and Use of Proceeds	6
Item 3: – Default upon Senior Securities	6
Item 4: – Removed and Reserved	6
Item 5: – Other Information	6
Item 6: – Exhibits	6

2

GFR PHARMACEUTICALS, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Page
Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	F-3
Condensed Consolidated Statements of Operations And Comprehensive Income for the
Three and Six Months ended June 30, 2010 and 2009	F-4
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2010
and 2009	F-5
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months ended June
30, 2010	F-6
Notes to Condensed Consolidated Financial Statements	F-7 to F-19

F-2

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2010 AND DECEMBER 31, 2009

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

	June 30, 2010		December 31, 2009
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	398,954	$	55,486
Trade accounts receivable, net		1,306,082		541,206
Inventories, net		1,348		10,289
Prepayments and other current assets		326,054		277,455
Operating lease prepaid, current portion		7,283		7,252
Total current assets		2,039,721		891,688
Property, plant and equipment, net		7,102,617		6,723,519
Operating lease prepaid, non-current portion		140,495		143,534
TOTAL ASSETS	$	9,282,833	$	7,758,741
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable	$	75,247	$	90,682
Amount due to a related party		1,800,085		1,960,874
Income tax payable		195,819		171,708
Other payables and accrued liabilities		910,321		428,553
Total current liabilities		2,981,472		2,651,817
Long-term liabilities:
Loss in excess of investment in an unconsolidated affiliate		788,097		784,802
TOTAL LIABILITIES		3,769,569		3,436,619
Commitments and contingencies
Equity:
GFR Pharmaceuticals, Inc. stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares issued and outstanding as of June 30, 2010 and December 31, 2009		42,080		42,080
Additional paid-in capital		3,712,120		3,712,120
Accumulated other comprehensive income		223,519		210,882
Statutory reserve		595,253		595,253
Retained earnings / (accumulated deficits)		377,363		(750,589	)
Total GFR Pharmaceuticals, Inc. stockholders’ equity		4,950,335		3,809,746
Non-controlling interest		562,929		512,376
Total equity		5,513,264		4,322,122
TOTAL LIABILITIES AND EQUITY	$	9,282,833	$	7,758,741

See accompanying notes to condensed consolidated financial statements.

F-3

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

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

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Revenues, net:
Service revenue	$	1,143,957		$	973,621		$	1,923,625		$	1,527,877
Product sales		42,272			9,379			52,640			19,165
Total revenues, net		1,186,229			983,000			1,976,265			1,547,042
Cost of revenue (inclusive of depreciation):
Depreciation		(134,794	)		(142,255	)		(274,857	)		(267,698	)
Cost of products		(66,156	)		(5,388	)		(76,031	)		(8,745	)
Total cost of revenue		(200,950	)		(147,643	)		(350,888	)		(276,443	)
Gross profit		985,279			835,357			1,625,377			1,270,599
Operating expenses:
Depreciation and amortization		(46,076	)		(47,069	)		(96,180	)		(94,839	)
General and administrative		(94,710	)		(171,257	)		(266,162	)		(391,284	)
Total operating expenses		(140,786	)		(218,326	)		(362,342	)		(486,123	)
Income from operations		844,493			617,031			1,263,035			784,476
Other income (expense):
Interest income		282			3,726			291			10,864
Recovery from an unconsolidated affiliate		245,566			-			245,566			-
Other expense		-			(530	)		-			(574	)
Total other income		245,848			3,196			245,857			10,290
Income before income taxes		1,090,341			620,227			1,508,892			794,766
Income tax expense		(197,222	)		(175,881	)		(330,387	)		(240,996	)
Net income		893,119			444,346			1,178,505			553,770
Less: net income attributable to non-controlling interest		(30,578	)		(23,786	)		(50,553	)		(31,168	)
Net income attributable to GFR Pharmaceuticals, Inc.		862,541			420,560			1,127,952			522,602
Other comprehensive income:
- Foreign currency translation gain		12,298			40			12,637			125
Comprehensive income	$	874,839		$	420,600		$	1,140,589		$	522,727
Net income per share – Basic and diluted	$	0.02		$	0.01		$	0.03		$	0.01
Weighted average common stock 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-4

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

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

(Unaudited)

	Six months ended June 30,
	2010			2009
Cash flows from operating activities:
Net income	$	1,127,952		$	522,602
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization		371,037			362,537
Recovery from an unconsolidated affiliate		(245,566	)		-
Non-controlling interest		50,553			31,168
Change in operating assets and liabilities:
Trade accounts receivable		(759,686	)		53,576
Inventories		8,950			(25,468	)
Other receivable		-			6,804
Prepayments and other current assets		(47,250	)		107,160
Trade accounts payable		(15,755	)		(74,159	)
Income tax payable		23,300			1,170
Other payables and accrued liabilities		62,723			46,029
Net cash provided by operating activities		576,258			1,031,419
Cash flows from investing activities:
Purchase of property, plant and equipment		(277,992	)		-
Net cash used in investing activities		(277,992	)		-
Cash flows from financing activities:
Payments from an unconsolidated affiliate		245,566			-
Repayment of notes payable		-			(219,529	)
Repayment of notes payable to related parties		-			(1,344,846	)
Repayment from a related party		(205,061	)		(1,244	)
Net cash provided by (used in) financing activities		40,505			(1,565,619	)
Effect on exchange rate change on cash and cash equivalents		4,697			128
NET CHANGE IN CASH AND CASH EQUIVALENTS		343,468			(534,072	)
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD		55,486			552,398
CASH AND CASH EQUIVALENT, END OF PERIOD	$	398,954		$	18,326
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	306,276		$	239,826
Cash paid for interest	$	-		$	-

See accompanying notes to condensed consolidated financial statements.

F-5

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

	GFR Pharmaceuticals, Inc. stockholders’ equity
	Common stock				Additional paid-in capital		Accumulated other comprehensive income		Statutory reserve		Retained earnings (accumulated deficit)			Non-controlling interest		Total equity
	No. of shares		Amount
Balance as of January 1, 2010		42,079,940	$	42,080	$	3,712,120	$	210,882	$	595,253	$	(750,589	)	$	512,376	$	4,322,122
Foreign currency translation adjustment		-		-		-		12,637		-		-			-		12,637
Net income for the period		-		-		-		-		-		1,127,952			50,553		1,178,505
Balance as of June 30, 2010		42,079,940	$	42,080	$	3,712,120	$	223,519	$	595,253	$	377,363		$	562,929	$	5,513,264

See accompanying notes to condensed consolidated financial statements.

F-6

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(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, 2009 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 June 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2010 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, 2009.

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 in Xian City, Shaanxi Province, the People’s Republic of China (the “PRC”).

Description of subsidiaries

Name	Place of incorporation and kind of legal entity	Principal activities and place of operation	Particulars of registered share capital	Effective interest held
Xi'an Hua Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua Long”)	The PRC, a limited liability company	Investment holding	RMB1,500,000	100%
New Century Scientific Investment Ltd. (“New Century”)	The PRC, a limited liability company	Provision of medical management service in the PRC	RMB30,000,000	95%
Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)	The PRC, a limited liability company	Research and development of extraction process and trading of pharmaceutical products in the PRC	RMB60,000,000	96.77%

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

F-7

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

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 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.

·   Basis of consolidation

The 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 an unconsolidated affiliate” is reflected as a single amount on the Company’s condensed consolidated balance sheet as approximately $656,844 as of June 30, 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. For the six months ended June 30, 2010 and 2009, no allowance for doubtful accounts was provided during the periods.

F-8

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

·   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. For the six months ended June 30, 2010 and 2009, no inventory allowance was provided for the periods.

·   Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational and after taking into account their estimated residual values:

	Depreciable life	Residual value
Buildings	20 – 40 years	5%
Plant and equipment	5 – 16 years	5%
Motor vehicles	8 –12 years	5%
Furniture, fixture and equipment	5 – 8 years	5%

Expenditure for repairs and maintenance is expensed as incurred. When assets have retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations.

Depreciation expense for the three months ended June 30, 2010 and 2009 were $179,057 and $187,510 respectively, of which $134,794 and $142,255 were included in cost of revenue.

Depreciation expense for the six months ended June 30, 2010 and 2009 were $367,410 and $358,908 respectively, of which $274,857 and $267,698 were include 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 six months ended June 30, 2010 and 2009 was $3,627 and $3,629, respectively. As of June 30, 2010, the estimated annual amortization of the prepaid operating lease for the next five years and thereafter is as follows:

Periods ending June 30:
2011	$	7,283
2012		7,283
2013		7,283
2014		7,283
2015		7,283
Thereafter		111,363
Total	$	147,778

F-9

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

·   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 held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of June 30, 2010.

·   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)   Medical service revenue

Pursuant to the agreements entered into between the Company and Tang Du Hospital (“the Hospital”) dated February 2, 2006, the Company and the Hospital would jointly operate the medical center in the provision of diagnostic imaging services to the patients. In return, the Company and the Hospital would share net revenues from services rendered, on a monthly basis, when earned, at their net realizable amounts from patients for services rendered at contractually established billing rates, after deducting the total operating cost of the centers. The Company recognizes net revenues based on the total amount received from the patients during the month, less the monthly operating costs incurred at the center.

The Company records the revenue, net of business tax, from the customers through the Hospital, on a net basis in compliance with EITF 99-19, “Reporting Revenues Gross as a Principal versus Net as an Agent.”

(b)   Product sales

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 six months ended June 30, 2010 and 2009.

(c)   Technical service income

The Company provides technical service based upon the customer’s specifications in a term of 3 years on a monthly fixed-rate basis. 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.

F-10

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

·   Income taxes

The provision for 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.

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 six months ended June 30, 2010 and 2009, the Company did not have any interest and penalties associated with tax positions. As of June 30, 2010, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority. For the six months ended June 30, 2010, the Company filed the 2009 PRC tax return, which such return was accepted as finalby the 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 stocks 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 stocks that would have been outstanding if the potential common stock equivalents had been issued and if the additional common stocks 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.

·   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-11

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(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:

	June 30, 2010		June 30, 2009
Period-end RMB:US$1 exchange rate		6.8086		6.8319
Period-average RMB:US$1 exchange rate		6.8348		6.8328

·   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 six months ended June 30, 2010, the Company operates in two reportable segments: Medical Business and Extraction Business in PRC.

·   Fair value measurement

ASC Topic 820-10, “Fair Value Measurements and Disclosures” (“ASC 820-10”) establishes a new framework for measuring fair value and expands related disclosures. Broadly, ASC 820-10 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820-10 establishes a three-level valuation hierarchy based upon observable and non-observable inputs. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

F-12

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

For financial assets and liabilities, fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

·   Fair value of financial instruments

The carrying value of the Company’s financial instruments include cash and cash equivalents, trade accounts receivable, prepayments and other current assets, trade 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.

·   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 September 2009, the Financial Accounting Standard Board (“FASB”) issued certain amendments as codified in ASC Topic 605-25, “Revenue Recognition; Multiple-Element Arrangements.” These amendments provide clarification on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. An entity is required to allocate revenue in an arrangement using estimated selling prices of deliverables in the absence of vendor-specific objective evidence or third-party evidence of selling price. These amendments also eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The amendments significantly expand the disclosure requirements for multiple-deliverable revenue arrangements. These provisions are to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. The Company will adopt the provisions of these amendments in its fiscal year 2011 and is currently evaluating the impact of these amendments to its consolidated financial statements.

In March 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-11, “Derivatives and Hedging (Topic 815) — Scope Exception Related to Embedded Credit Derivatives.” ASU 2010-11 clarifies that the only form of an embedded credit derivative that is exempt from embedded derivative bifurcation requirements are those that relate to the subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination may need to separately account for the embedded credit derivative feature. The provisions of ASU 2010-11 will be effective on July 1, 2010 and are not expected to have a significant impact on the Company’s consolidated financial statements.

 In April 2010, the FASB issued ASU 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and is not expected to have a significant impact on the Company’s financial statements.

In May 2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in ASU 2010-19 are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.

In July 2010, the FASB issued new accounting guidance that will require additional disclosures about the credit quality of loans, lease receivables and other long-term receivables and the related allowance for credit losses. Certain additional disclosures in this new accounting guidance will be effective for the Company on December 31, 2010 with certain other additional disclosures that will be effective on March 31, 2011. The Company does not expect the adoption of this new accounting guidance to have a material impact on its consolidated financial statements.

F-13

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

NOTE－4 TRADE ACCOUNTS RECEIVABLE

The majority of the Company’s sales are on open credit terms and in accordance with terms specified in the contracts governing the relevant transactions. The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required.

Trade accounts receivable consisted of the following:

	June 30, 2010			December 31, 2009
Trade accounts receivable, gross	$	1,860,519		$	1,093,324
Less: allowance for doubtful accounts		(554,437	)		(552,118	)
Trade accounts receivable, net	$	1,306,082		$	541,206

For the six months ended June 30, 2010 and 2009, the Company does not provide an allowance for doubtful accounts.

NOTE－5 AMOUNT DUE TO A RELATED PARTY

As of June 30, 2010 and December 31, 2009, a balance of $1,800,085 and $1,960,874 due to a stockholder, Mr. Lian Guo represented a temporary advance to the Company which was unsecured, interest-free and repayable on demand.

NOTE－6 INVESTMENT IN AN UNCONSOLIDATED AFFILIATE

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

As of June 30, 2010 and December 31, 2009, the investment in an unconsolidated affiliate is presented as follows:-

	June 30, 2010			December 31, 2009
Investment in Medicine at the date of acquisition	$	106,804		$	106,804
Amount due from Medicine		735,009			980,575
Less: allowance for doubtful accounts		(735,009	)		(980,575	)
Share of accumulated losses in Medicine		(870,823	)		(870,823	)
Foreign translation difference		(24,078	)		(20,783	)
Loss in excess of investment in an unconsolidated affiliate	$	(788,097	)	$	(784,802	)

For the three months ended June 30, 2010, the Company received $245,566 from Medicine as recovery from an unconsolidated affiliate.

F-14

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

NOTE－7 PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the following:

	June 30, 2010		December 31, 2009
Advances to employees	$	219,243	$	151,720
Prepayments to equipment vendors		9,685		41,169
Prepaid operating expenses		97,126		84,566
	$	326,054	$	277,455

NOTE－8 OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the following:

	June 30, 2010		December 31, 2009
Business tax payable	$	81,515	$	81,174
Government levy payable		30,354		34,435
Salaries and welfare payable		98,564		97,724
Advances from employees		17,444		50,411
Customer deposits		51,702		-
Payable to an equipment vendor		440,619		-
Accrued operating expenses		190,123		164,809
	$	910,321	$	428,553

NOTE－9 INCOME TAXES

For the six months ended June 30, 2010 and 2009, the local (“United States of America”) and foreign components of income (loss) before income taxes were comprised of the following:

	Six months ended June 30,
	2010		2009
Tax jurisdiction from:
– Local	$	-	$	-
– Foreign		1,508,892		794,766
Income before income taxes	$	1,508,892	$	794,766

The provision for income taxes consisted of the following:

	Six months ended June 30,
	2010		2009
Current:
– Local	$	-	$	-
– Foreign		330,387		240,996
Deferred:
– Local		-		-
– Foreign		-		-
Income tax expense	$	330,387	$	240,996

F-15

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

The effective tax rate in the periods 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 subsidiaries 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 six months ended June 30, 2010 and 2009 is as follows:

	Six months ended June 30,
	2010			2009
Income before income taxes from PRC operation	$	1,508,892		$	794,766
Statutory income tax rate		25	%		25	%
Income tax expense at statutory rate		377,223			198,691
Net operating loss not recognized as deferred tax assets		14,485			46,476
Non-deductible items		(61,321	)		-
Others		-			(4,171	)
Income tax expense	$	330,387		$	240,996

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of June 30, 2010 and December 31, 2009:

	June 30, 2010			December 31, 2009
Deferred tax assets:
Net operating loss carry forwards	$	254,911		$	240,426
Allowance for doubtful accounts		895,128			956,519
Total deferred tax assets		1,150,039			1,196,945
Less: valuation allowance		(1,150,039	)		(1,196,945	)
Deferred tax assets	$	-		$	-

As of June 30, 2010, the Company incurred $1,019,645 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 $1,150,039 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 six months ended June 30, 2010, the valuation allowance decreased by $46,906 primarily relating to the recovery of doubtful accounts.

F-16

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

NOTE－10 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 – extraction of raw materials to medicine ingredients and distribution of extracted ingredients for medicine manufacturing uses.

The Company operates these segments in the PRC and all of the identifiable assets of the Company are located in the PRC during the 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 six months ended June 30, 2010 and 2009. 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 and six months ended June 30, 2010 and 2009:

	Three months ended June 30, 2010
	Medical Business			Extraction Business			Total
Operating revenue, net:
Product sales	$	-		$	42,272		$	42,272
Service revenue		997,647			146,310			1,143,957
		997,647			188,582			1,186,229
Cost of revenue		(121,390	)		(79,560	)		(200,950	)
Gross profit	$	876,257		$	109,022		$	985,279
Depreciation and amortization	$	121,388		$	59,482		$	180,870
Net income		651,582			241,537			893,119
Expenditure for long-lived assets	$	-		$	658,401		$	658,401

	Six months ended June 30, 2010
	Medical Business			Extraction Business			Total
Operating revenue, net:
Product sales	$	-		$	52,640		$	52,640
Service revenue		1,777,953			145,672			1,923,625
		1,777,953			198,312			1,976,265
Cost of revenue		(261,453	)		(89,435	)		(350,888	)
Gross profit	$	1,516,500		$	108,877		$	1,625,377
Depreciation and amortization	$	261,451		$	109,586		$	371,037
Net income		1,011,055			167,450			1,178,505
Expenditure for long-lived assets	$	-		$	658,401		$	658,401

	Three months ended June 30, 2009
	Medical Business			Extraction Business			Total
Operating revenue, net :
Product sales	$	-		$	9,379		$	9,379
Service revenue		973,621			-			973,621
		973,621			9,379			983,000
Cost of revenue		(142,255	)		(5,388	)		(147,643	)
Gross profit	$	831,366		$	3,991		$	835,357
Depreciation and amortization	$	142,255		$	47,069		$	189,324
Net income (loss)		530,872			(86,526	)		444,346
Expenditure for long-lived assets	$	-		$	-		$	-

F-17

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

	Six months ended June 30, 2009
	Medical Business			Extraction Business			Total
Operating revenue, net:
Product sales	$	-		$	19,165		$	19,165
Service revenue		1,527,877			-			1,527,877
		1,527,877			19,165			1,547,042
Cost of revenue		(267,698	)		(8,745	)		(276,443	)
Gross profit	$	1,260,179		$	10,420		$	1,270,599
Depreciation and amortization	$	267,698		$	94,839		$	362,537
Net income (loss)		739,673			(185,903	)		553,770
Expenditure for long-lived assets	$	-		$	-		$	-

For the three and six months ended June 30, 2010 and 2009, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues and purchases were derived from customers and vendors located in the PRC.

NOTE－11 CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)         Major customers

For the three months ended June 30, 2010, one customer represented more than 10% of the Company’s revenue and trade accounts receivable. This customer accounted for 89% of the Company’s revenues amounting to $1,055,710, with $411,938 of trade accounts receivable.

For the six months ended June 30, 2010, one customer represented more than 10% of the Company’s revenue and trade accounts receivable. This customer accounted for 95% of the Company’s revenues amounting to $1,880,756, with $1,224,765 of trade accounts receivable.

For the three months ended June 30, 2009, one customer represented more than 10% of the Company’s revenue and trade accounts receivable. This customer accounted for 99% of the Company’s revenues amounting to $973,621, with $763,973 of trade accounts receivable.

For the six months ended June 30, 2009, one customer represented more than 10% of the Company’s revenue and trade accounts receivable. This customer accounted for 99% of the Company’s revenues amounting to $1,527,877, with $763,973 of trade accounts receivable.

(b)         Major vendors

For the three and six months ended June 30, 2010, no vendor represented more than 10% of the Company’s purchases and trade accounts payable.

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

F-18

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

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

(Unaudited)

(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.

NOTE－12 COMMITMENTS AND CONTINGENCIES

The Company leased certain office space under a non-cancelable operating lease agreement with a term of 2 years with fixed monthly rentals, expiry in June 2011. Total rent expenses for the six months ended June 30, 2010 and 2009 was $1,053 and $1,052, respectively.

As of June 30, 2010, the Company has $2,115 of future minimum rental payments due under the non-cancelable operating lease agreement.

NOTE－13 COMPARATIVE FIGURES

Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation.

F-19

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 Annual 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.

Results of Operations

Through the second quarter of 2010, 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 Tang Du 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 Center. 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.

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, which refers to the separation and purification of biological products and natural medicines. Such technology has been widely used in the producing of antibiotic products, Genetic Recombinant Medicine, the Gene Chip, bacteria production, diagnoses reagent, and biochemical products.

3

The Company believes that New Century has strong prospects of increasing our market share and revenues because our diagnostic imaging and radiation oncology treatments and equipment are all covered by the Chinese national medical insurance system. Bao Sai is focused on strengthening its market share and improving its business performance. We also believe that Bao Sai will increase our market share and revenue later in 2010. 

Revenues

The revenue from our operation of the Center increased from $973,621 for the three months ended June 30, 2009 to $1,143,957 for the same period of 2010, an increase of 17.50%; and increased from $ 1,527,877 during the six months ended June 30, 2009 to $ 1,923,625 during the six months ended June 30, 2010 an increase of 25.90%. In the second quarter of 2010, the cancer treatment business accounted for $1,143,957 (96.44%) of our revenue. The product sales generated $42,272 of revenue in the second quarter of 2010 as compared to $9,379 in the same period of 2009. Our overall revenues for the second quarter of 2010 increased from $983,000 for the three months ended June 30, 2009 to $1,186,229 for the same period of 2010, an increase of 20.67%. Likewise, our overall revenue increased from $1,547,042 during the six months ended June 30, 2009 to $1,976,265 during the six months ended June 30, 2010. The increase was attributed primarily to the increased service revenue from Center and the increased product sales from Bao Sai. 

Expenses

Operating expenses for the second quarter of 2010 were $140,786 as compared to $218,326 for the same period of 2009, a decrease of $77,540.  For the six months ended June 30, 2010, our operating expenses decreased from $486,123 to $362,342 as compared to the same period of 2009. This decrease was attributable to the reduction of professional and consultancy expenses during the six months ended June 30, 2010compared to the same period of 2009.

Net Income

Net income attributable to GFR Pharmaceuticals, Inc. during the three and six months ended June 30, 2009 was $420,560 and $522,602 respectively, compared to $862,541 and $1,127,952 during the three and six months ended June 30, 2010.  This increase was primarily due to our increased revenue from New Century and a slight decrease of our operating expenses for the second quarter of 2010.

We hope to be profitable in 2010 through the implementation of our marketing strategies. However, we cannot be certain that we will be able to successfully implement our marketing strategies and there can be no assurance for the achievement of any revenue growth 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.

4

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Analysis

	June 30, 2010			December 31, 2009
Working Capital	$	(941,751	)	$	(1,760,129	)
Stockholders’ Equity	$	5,513,264		$	4,322,122
Total Liabilities	$	3,769,569		$	3,436,619

Our working capital deficit was decreased from $1,760,129 as of December 31, 2009 to $941,751 as of at June 30, 2010. The primary reason for the decrease in working capital deficit in 2010 by $818,378 was attributable to the  increase in accounts receivable by $764,876: an increase of cash and cash equivalents by $343,468; which was partly offset by an increase of accounts payable by $481,768 and a decrease of amounts due to shareholders by $160,789 for the six months period ended June 30, 2010.

Stockholders’ equity increased from $4,322,122 as of December 31, 2009 to $5,513,264 as of June 30, 2010, an increase of $1,191,142 or  27.6%. Total liabilities increased from $3,436,619 as of December 31, 2009 to $3,769,569 as of June 30, 2010, an increase of $332,950 or 9.7%. The increase of total liabilities was mainly due to the increase of other payables and accrued liabilities from $428,553 as of December 31, 2009 to $910,321 as of June 30, 2010, an increase of $481,768 or 112.4%. In addition, our principal shareholder, Mr. Guo Li’an made a loan to fund our operations. As of June 30, 2010 and December 31, 2009, the balance of the loan was $1,800,085 and $1,960,874, respectively, which was unsecured, interest-free and repayable on demand.

As of June 30, 2010, cash and cash equivalents increased to $398,954 from $55,486 as of December 31, 2009, an increase of $343,468 or 619.0%. The increase of cash and cash equivalents was mainly due to the cash flows provided from operating activities by $576,258; and provided from financing activities by $40,505; offset by the  outflow in vesting activities of $277,992 for the six months ended June 30, 2010.

Item 4T. 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.

Changes in Internal Control Over Financial Reporting. During the most recent quarter ended June 30, 2010, 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.

5

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.   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 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, 2010	By:	/s/Zhao Yan Ding
		Zhao Yan Ding, Chief Executive Officer
		(Principal executive officer)
DATE:  August  13, 2010	By:	/s/ Zhong Ya Li
		Zhong Ya Li, Chief Financial Officer
		(Principal financial officer)

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