United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

¨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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes xNo ¨

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 o

Accelerated filer o

Non-accelerated filer

(Do not check if a smaller

reporting company) o

Smaller reporting

company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of common stock, $0.001 par value per share, outstanding as of August 10, 2011 was 42,079,940.

GFR Pharmaceuticals

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30, 2011

INDEX

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION

Item 1:	Financial Statements	4 - 19

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20-24

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4:	Controls and Procedures	25

PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	26

Item 1A:	Risk Factors	26

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3:	Defaults Upon Senior Securities	26

Item 4:	Submission of Matters to a Vote of Security Holders	26

Item 5:	Other Information	26

Item 6:	Exhibits	26

PART I. FINANCIAL INFORMATION

Item 1 Financial Statements

GFR PHARMACEUTICALS, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

		Page

Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010		4

Condensed Consolidated Statements of Operations And Comprehensive Income for The Three and Six Months ended June 30, 2011 and 2010		5

Condensed Consolidated Statements of Cash Flows for The Six Months ended June 30, 2011 and 2010		6

Condensed Consolidated Statement of Stockholders’ Equity for The Six Months ended June 30, 2011		7

Notes to Condensed Consolidated Financial Statements		8 - 19

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2011 AND DECEMBER 31, 2010

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

	June 30, 2011		December 31, 2010
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	383,755	$	300,716
Accounts receivable, net		504,187		1,245,616
Inventories, net		28,782		35,062
Prepayments and other current assets		436,873		135,226
Operating lease prepaid, current portion		7,671		7,499

Total current assets		1,361,268		1,724,119

Property, plant and equipment, net		6,912,176		6,957,273
Deposit on equipment purchase		1,547,030		-
Operating lease prepaid, non-current portion		140,314		140,928

TOTAL ASSETS	$	9,960,788	$	8,822,320

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	43,336	$	27,903
Amount due to a stockholder		525,489		439,267
Income tax payable		194,407		188,016
Other payables and accrued liabilities		217,522		394,311

Total current liabilities		980,754		1,049,497

Long-term liabilities:
Loss in excess of investment in an unconsolidated affiliate		827,390		811,555

TOTAL LIABILITIES		1,808,144		1,861,052

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, respectively		42,080		42,080
Additional paid-in capital		3,712,120		3,712,120
Accumulated other comprehensive income		417,392		313,694
Statutory reserve		800,309		800,309
Retained earnings		2,533,727		1,490,065
Total GFR Pharmaceuticals, Inc. stockholders’ equity		7,505,628		6,358,268
Non-controlling interest		647,016		603,000
Total equity		8,152,644		6,961,268

TOTAL LIABILITIES AND EQUITY	$	9,960,788	$	8,822,320

See accompanying notes to condensed consolidated financial statements.

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

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

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Revenue, net:
Service revenue	$	1,211,246		$	1,143,957		$	2,102,733		$	1,923,625
Product sales		11,587			42,272			53,122			52,640

Total revenues, net		1,222,833			1,186,229			2,155,855			1,976,265

Cost of revenue: (inclusive of depreciation)
Cost of service		(188,096	)		(134,794	)		(363,956	)		(274,857	)
Cost of products		(3,761	)		(66,156	)		(42,685	)		(76,031	)

Total cost of revenue		(191,857	)		(200,950	)		(406,641	)		(350,888	)

Gross profit		1,030,976			985,279			1,749,214			1,625,377

Operating expenses:
Depreciation and amortization		(53,045	)		(46,076	)		(106,782	)		(96,180	)
Recovery from uncollectible accounts		30,700			-			118,934			-
General and administrative		(55,629	)		(94,710	)		(387,658	)		(266,162	)

Total operating expenses		(77,974	)		(140,786)			(375,506	)		(362,342	)

Income from operations		953,002			844,493			1,373,708			1,263,035

Other income:
Interest income		497			282			718			291
Recovery from an unconsolidated affiliate		-			245,566			-			245,566

Total other income		497			245,848			718			245,857

Income before income taxes		953,499			1,090,341			1,374,426			1,508,892

Income tax expense		(195,137	)		(197,222	)		(286,748	)		(330,387	)

Net income		758,362			893,119			1,087,678			1,178,505

Less: net income attributable to non-controlling interest		(32,828	)		(30,578	)		(44,016	)		(50,553	)

Net income attributable to GFR Pharmaceuticals, Inc.	$	725,534		$	862,541		$	1,043,662		$	1,127,952

Net income per share – Basic and diluted	$	0.02		$	0.02		$	0.03		$	0.03

Weighted average common 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.

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

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

(Unaudited)

	Six months ended June 30,
	2011			2010
Cash flows from operating activities:
Net income attributable to GFR Pharmaceuticals, Inc.	$	1,043,662		$	1,127,952
Net income attributable to non-controlling interest		44,016			50,553
Consolidated net income		1,087,678			1,178,505
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		405,937			371,037
Recovery from doubtful accounts		(118,934	)		(245,566	)
Recovery from allowance for obsolete stock		(8,373	)		-
Change in operating assets and liabilities:
Accounts receivable		(650,011	)		(759,686	)
Inventories		15,364			8,950
Prepayments and other current assets		(292,902	)		(47,250	)
Accounts payable		14,605			(15,755	)
Income tax payable		2,065			23,300
Other payables and accrued liabilities		(183,415	)		62,723

Net cash provided by operating activities		272,014			576,258

Cash flows from investing activities:
Purchase of plant and equipment		(200,598	)		(277,992	)

Net cash used in investing activities		(200,598	)		(277,992	)

Cash flows from financing activities:
Payments from an unconsolidated affiliate		-			245,566
Advances from (repayment to) a related party		3,907			(205,061	)

Net cash provided by financing activities		3,907			40,505

Effect on exchange rate change on cash and cash equivalents		7,716			4,697

NET CHANGE IN CASH AND CASH EQUIVALENTS		83,039			343,468

CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD		300,716			55,486

CASH AND CASH EQUIVALENT, END OF PERIOD	$	383,755		$	398,954

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	284,682		$	306,276
Cash paid for interest	$	-		$	-

NON-CASH TRANSACTIONS:
Deposit on equipment purchase	$	1,527,137		$	-

See accompanying notes to condensed consolidated financial statements.

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

	GFR Pharmaceuticals, Inc. stockholders’ equity
	Common stock				Additional		Accumulated other comprehensive		Statutory		Retained		Non-controlling		Total
	No. of shares		Amount		paid-in capital		income		reserve		earnings		interest		equity

Balance as of January 1, 2011		42,079,940	$	42,080	$	3,712,120	$	313,694	$	800,309	$	1,490,065	$	603,000	$	6,961,268

Foreign currency translation adjustment		-		-		-		103,698		-		-		-		103,698

Net income for the period		-		-		-		-		-		1,043,662		44,016		1,087,678
Balance as of June 30, 2011		42,079,940	$	42,080	$	3,712,120	$	417,392	$	800,309	$	2,533,727	$	647,016	$	8,152,644

See accompanying notes to condensed consolidated financial statements.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

NOTE－1

BASIS OF PRESENTATION

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

In the opinion of management, the consolidated balance sheet as of December 31, 2010 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended June 30, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2011 or for any future periods.

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

NOTE－2

ORGANIZATION AND BUSINESS BACKGROUND

GFR Pharmaceuticals, Inc. (the “Company” or “GFRP”) was incorporated in the State of Nevada on December 18, 1996 as Laredo Investment Corp. On August 9, 2004, Laredo Investment Corp. changed its name to GFR Pharmaceuticals, Inc.

The Company, through its subsidiaries, mainly engages in a joint operation of a Positive Emission Tomography (“PET”) Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center, also the research and development of extraction process and trading of pharmaceutical products in Xian City, Shanxi Province in the People’s Republic of China (the “PRC”).

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

NOTE－3

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

·	Use of estimates

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

·	Basis of consolidation

The condensed consolidated financial statements include the financial statements of GFRP and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

·	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. The Company, through Bai Sai, has a 70%-owned subsidiary, Xi’an Bao Sai Medicine Co., Ltd (“Medicine”) which ceased business and leased out its business license from May 1, 2007. Thus, the Company does not have control on the policy decisions in Medicine; and accordingly, GFRP deconsolidated Medicine and accounted Medicine for under the equity method of accounting.

Generally accepted accounting principles require that the investment in the investee be reported using the equity method under the provision of ASC Topic 323 “Investments - Equity Method and Joint Ventures” (“ASC 323”) when an investor corporation can exercise significant influence over the operations and financial policies of an investee corporation. When the equity method of accounting is used, the investor initially records the investment in the stock of an investee at cost. The investment account is then adjusted to recognize the investor’s share of the income or losses of the investee when it is earned by the investee. Such amounts are included when determining the net income of the investor in the period they are reported by the investee.

As a result of deconsolidation under ASC 810 and the application of the equity method under ASC 323, GFRP had a negative basis in its investment in Medicine, the Equity Investee, because the subsidiary generated significant losses and intercompany liabilities in excess of its asset balances. This negative investment, “Loss in excess of investment in Equity Investee,” is reflected as a single amount on the Company’s condensed consolidated balance sheet as $827,390 and $811,555 respective liabilities as of June 30, 2011 and December 31, 2010.

Since Medicine’s results are no longer consolidated and GFRP believes that it is not obligated to fund future operating losses at Medicine, any adjustments reflected in Medicine’s financial statements subsequent to May 1, 2007 are not expected to affect the results of operations of GFRP.

·	Cash and cash equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

·	Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of June 30, 2011 and December 31, 2010, the allowance for doubtful accounts was $539,467 and $557,657, respectively.

·	Inventories

Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company quarterly reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of June 30, 2011 and December 31, 2010, the inventory allowance was $669,817 and $663,136, respectively.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

·	Property, plant and equipment

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

	Expected useful life	Residual value
Buildings	20 years		5%
Plant and equipment	5 – 13 years		5%
Motor vehicles	8 – 8 years		5%
Furniture, fixture and equipment	5 years		5%
Leasehold improvement	5 years		-

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

Depreciation expense for the three months ended June 30, 2011 and 2010 were $201,289 and $179,057 respectively, of which $117,448 and $134,794 were included in cost of revenue.

Depreciation expense for the six months ended June 30, 2011 and 2010 were $402,151 and $367,410 respectively, of which $266,510 and $274,857 were included in cost of revenue.

·	Operating lease prepaid

All lands in the PRC are owned by the PRC government. The government in the PRC, according to the relevant PRC law, may grant the right to use the land for a specified period of time. Thus, all of the Company’s lands in the PRC are considered operating lease prepaid. Operating lease prepaid is amortized on a straight-line basis over the lease term of 50 years.

The lease expense on prepaid operating lease for the three months ended June 30, 2011 and 2010 was $1,900 and $1,814, respectively.

The lease expense on prepaid operating lease for the six months ended June 30, 2011 and 2010 was $3,786 and $3,627, respectively.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

As of June 30, 2011, the estimated amortization of the prepaid operating lease for the next five years and thereafter is as follows:

Year ending June 30:
2012	$	7,671
2013		7,671
2014		7,671
2015		7,671
2016		7,671
Thereafter		109,630

Total:	$	147,985

·	Impairment of long-lived assets

In accordance with the provisions of the provision of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment and intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment charge for the periods presented.

·	Revenue recognition

In accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectibility is reasonably assured.

(a)	Service revenue

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

The Company records the revenue, net of business tax, from the customers through the Hospital, on a net basis in compliance with ASC Topic 605-45, “Principal Agent Considerations.”

(b)	Sale of products

The Company recognizes revenue from the sale and trading of pharmaceutical products upon delivery to the customers, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes (“VAT”) under the PRC tax law which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. The Company experienced no product returns and has recorded no reserve for sales returns for the six months ended June 30, 2011 and 2010.

(c)	Technical service income

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

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

(d)	Interest income

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

·	Income taxes

Income tax 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, 2011 and 2010, the Company did not have any interest and penalties associated with tax positions. As of June 30, 2011, the Company did not have any significant unrecognized uncertain tax positions.

The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority.

·	Net income per share

The Company calculates net income per share in accordance with ASC Topic 260, “Earnings per Share.” Basic income per share is computed by dividing the net income by the weighted-average number of common shares outstanding during the period. Diluted income per share is computed similar to basic income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common stock equivalents had been issued and if the additional common shares were dilutive.

·	Comprehensive income

ASC Topic 220, “Comprehensive Income”, establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during a period from non-owner sources. Accumulated other comprehensive income, as presented in the accompanying condensed consolidated statement of stockholders’ equity, consists of changes in unrealized gains and losses on foreign currency translation. This comprehensive income is not included in the computation of income tax expense or benefit.

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010

Net income	$	758,362	$	893,119	$	1,087,678	$	1,178,505

Other comprehensive income:
- Foreign currency translation gain		66,873		12,298		103,698		12,637

Comprehensive income	$	825,235	$	905,417	$	1,191,376	$	1,191,142

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

·	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.

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, 2011		June 30, 2010
Period-end RMB:US$1 exchange rate		6.4640		6.8086
Period-average RMB:US$1 exchange rate		6.5482		6.8348

·	Related parties

Parties, which can be a corporation or individual, are considered to be related if the Company has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Companies are also considered to be related if they are subject to common control or common significant influence.

·	Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the three months ended June 30, 2011 and 2010, the Company operates in two reportable segments: Medical Business and Extraction Business in PRC.

·	Fair value of financial instruments

The carrying value of the Company’s financial instruments include cash, accounts receivable, prepayments and other current assets, accounts payable, amount due to a related party, income tax payable, other payables and accrued liabilities. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

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

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

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

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

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

·	Recent accounting pronouncements

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of its operations.

In May 2011, the Financial Accounting Standard Board (“FASB”) issued ASU 2011-04, which is an update to Topic 820, “Fair Value Measurement”. This update establishes common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 is effective for all interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, which is an update to Topic 220, “Comprehensive Income”. This update eliminates the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity, requires consecutive presentation of the statement of net income and other comprehensive income and requires reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. ASU 2011-05 is effective for all interim and annual reporting periods beginning after December 15, 2011. The Company does not expect the adoption of this guidance to have a material impact on its financial position or results of operations.

NOTE－4

DEPOSIT ON EQUIPMENT PURCHASE

On June 21, 2011, the Company and the Hospital agreed to purchase a new set of medical equipment and to operate at the medical center. The purchase price of this medical equipment is approximately $4,332,000 (equal to RMB28 million). The Company made a deposit of $1,547,030 to secure the purchase order of the medical equipment.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

The deposit is unsecured and interest free, will be capitalized when the medical equipment is received and operated by the medical center.

NOTE－5

PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the following:

	June 30, 2011		December 31, 2010

VAT receivable	$	585	$	1,601
Advances to employees		17,098		79,843
Prepaid operating expenses		419,190		53,782
	$	436,873	$	135,226

NOTE－6

AMOUNT DUE TO A STOCKHOLER

As of June 30, 2011, amount due to a stockholder, Mr. Lian Guo represented temporary advances to the Company, which was unsecured, interest-free and repayable on demand.

NOTE－7

OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the following:

	June 30, 2011		December 31, 2010

Business tax payable	$	22,105	$	102,054
Government levy payable		3,664		8,085
Salaries and welfare payable		90,621		91,890
Advances from employees		20,708		22,862
Customer deposits		41,422		-
Accrued operating expenses		39,002		169,420
	$	217,522	$	394,311

NOTE－8

INCOME TAXES

For the six months ended June 30, 2011 and 2010, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:

	Six months ended June 30,
	2011		2010
Tax jurisdiction from:
– Local	$	-	$	-
– Foreign		1,374,426		1,508,892

Income before income taxes	$	1,374,426	$	1,508,892

The provision for income taxes consisted of the following:

	Six months ended June 30,
	2011		2010
Current:
– Local	$	-	$	-
– Foreign		286,748		330,387

Deferred:
– Local		-		-
– Foreign		-		-

Income tax expense	$	286,748	$	330,387

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 subsidiary and VIE that operate in various countries: United States and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

GFRP is registered in the State of Nevada and is subject to the tax laws of the United States of America. The Company has no operation in the United States of America.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

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, 2011 and 2010 is as follows:

	Six months ended June 30,
	2011			2010

Income before income taxes from PRC operation	$	1,374,426		$	1,508,892
Statutory income tax rate		25	%		25	%
Income tax expense at statutory rate		343,607			377,223

Net operating loss not recognized as deferred tax assets		835			14,485
Non-deductible expenses		(38,307	)		(61,321	)
Recovery from doubtful accounts not recognized as deferred taxes		(19,387	)		-

Income tax expense	$	286,748		$	330,387

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of June 30, 2011 and December 31, 2010:

	June 30, 2011			December 31, 2010
Deferred tax assets:
Net operating loss carryforwards	$	386,242		$	388,689
Allowance for doubtful accounts		777,278			779,103
Total deferred tax assets		1,163,520			1,167,792
Less: valuation allowance		(1,163,520	)		(1,167,792	)

Deferred tax assets	$	-		$	-

As of June 30, 2011, the Company incurred $1,544,968 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 $1,163,520 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, 2011, the valuation allowance decreased by $4,272, primarily relating to the recovery from allowance for doubtful accounts and decrease in net operating loss carryforwards.

NOTE－9

SEGMENT INFORMATION

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

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

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the three and six months ended June 30, 2011 and 2010. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the different technology and marketing strategies of each business unit for making internal operating decisions.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

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, 2011 and 2010:

	Three months ended June 30, 2011
	Medical Business			Extraction Business			Total

Operating revenue, net	$	1,022,966		$	199,867		$	1,222,833
Cost of revenue		(163,991	)		(27,866	)		(191,857	)

Gross profit	$	858,975		$	172,001		$	1,030,976

Depreciation and amortization	$	150,635		$	52,554		$	203,189
Net income		656,553			101,809			758,362
Expenditure for long-lived assets	$	27,763		$	172,835		$	200,598

	Six months ended June 30, 2011
	Medical Business			Extraction Business			Total

Operating revenue, net	$	1,662,364		$	493,491		$	2,155,855
Cost of revenue		(315,918	)		(90,723	)		(406,641	)

Gross profit	$	1,346,446		$	402,768		$	1,749,214

Depreciation and amortization	$	300,217		$	105,720		$	405,937
Net income		880,315			207,363			1,087,678
Expenditure for long-lived assets	$	27,763		$	172,835		$	200,598

	Three months ended June 30, 2010
	Medical Business			Extraction Business			Total

Operating revenue, net	$	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

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

	Six months ended June 30, 2010
	Medical Business			Extraction Business			Total

Operating revenue, net	$	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

NOTE－10

CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a) Major customers

For the three and six months ended June 30, 2011, the customers who accounted for 10% or more of revenues of the Company and their outstanding balances at period-end date, are presented as follows:

	Three months ended June 30, 2011			June 30, 2011
	Revenues		Percentage of revenues	Trade accounts receivable

Customer A	$	1,022,965	84%	$	441,641
Customer B		188,281	15%		61,881

Total:	$	1,211,246	99%	$	503,522

	Six months ended June 30, 2011			June 30, 2011
	Revenues		Percentage of revenues	Trade accounts receivable

Customer A	$	1,662,364	77%	$	441,641
Customer B		440,369	20%		61,881

Total:	$	2,102,733	97%	$	503,522

For the three months ended June 30, 2010, there was one single customer (Customer A) who accounted for 89% of the Company’s revenues amounting to $1,055,710, with $1,224,765 of trade accounts receivable at period-end date.

For the six months ended June 30, 2010, there was one single customer (Customer A) who accounted for 95% of the Company’s revenues amounting to $1,880,756, with $1,224,765 of trade accounts receivable at period-end date.

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

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

(Unaudited)

(b) Major vendors

For the three and six months ended June 30, 2011 and 2010, there was no single vendor who accounted for more than 10% of the Company’s purchases.

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－11

COMMITMENTS AND CONTINGENCIES

(a) Operating lease commitments

The Company is committed to an office space under a non-cancelable operating lease agreement with a term of 2 years with fixed monthly rentals, expiry in June 2013. Total rent expenses for the six months ended June 30, 2011 and 2010 was $1,100 and $1,053, respectively.

As of June 30, 2011, the Company has future minimum rent payments due under a non-cancelable operating lease in next two years, as follows:

Year ending June 30:
2012	$	2,228
2013		2,135
Total:	$	4,363

(b) Capital commitment

As of June 30, 2011, the Company has future contingent payment of approximately $2,785,000 in connection with the purchase of medical equipment in the next twelve months.

NOTE－12

SUBSEQUENT EVENTS

In accordance with ASC Topic 855, “Subsequent Events”, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company has evaluated all events or transactions that occurred after June 30, 2011 through the date of the condensed financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.

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

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

The following discussion should be read in conjunction with, and is qualified in its entirety by, the financial statements and related notes thereto and other financial information included in this Quarterly Report on Form 10- Q. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking.

FORWARD LOOKING STATEMENTS

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

Overview

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

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

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

On January 1, 2008, New Century entered into a stock purchase agreement whereby we acquired 96.6% of the capital stock of Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”).

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

New Century

New Century is a medical equipment investment management company, which mainly engages in investment and management of cancer treatment equipment and provides comprehensive services for customers with advanced radiology and oncology equipment. New Century owns three different devices used for radiological imaging for the brain and body and cancer treatment. The Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”).

New Century entered into its relationship with Tangdu Hospital on February 2, 2006, when it accepted the rights and responsibilities previously held by Masep Medical Science & Technology Development (Shenzhen) Co., Ltd. (“Masep”) which Masep undertook pursuant to the “Cooperation Establishment of ‘Tangdu Gamma Knife Therapeutic Center’ Agreement” by and between Masep and Tandgu Hospital, dated May 18, 2001, as amended (the “Tangdu Agreement”). Pursuant to the terms of the Tangdu Agreement, New Century presently receives seventy percent (70%) of the profits generated by the Center. New Century’s profit sharing percentage decreases over the term of the Tangdu Agreement, which is sixteen years from the date that the Center opened in January 2002. The respective profit sharing ratios and time periods are as follows:

From January 2002 through December 2003, 90% to Masep;

From January 2004 through December 2008, 80% to Masep (or to New Century, giving effect to the assignment as of February 2006);

From January 2009 through December 2011, 70% to New Century;

From January 2012 through December 2014, 60% to New Century;

From January 2015 through December 2017, 50% to New Century.

Pursuant to the Tangdu Agreement, New Century has the power to appoint the Director of the Center. Upon the termination of the Tangdu Agreement, the Tangdu Hospital has an option to purchase the equipment for fifty percent of its residual value.

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

The cases processed in the Center averaged 307 cases per month in the second quarter of 2011 as compared to 314 cases per month in the same period of 2010. For the six months ended June 30, 2011, the Center attributed $1,662,364 or 77.1% of the Company’s revenues.

The Center runs at full capacity and the existing equipment capacity cannot meet the requirements of patients. In order to meet the increasing updating of medical equipment production and to keep our competitive advantage in the medical market, the Center plans to purchase a set of PET-CT cancer examine equipment. Based on the present cooperation, New Century and Tangdu Hospital agreed that the cooperation period of PET-CT is six years, which will begin commencing with the formal operation. The profit sharing ratio during the PET-CT cooperation period will be 7:3, with New Century receiving 70% of the profits. At the end of the six year period, Tangdu Hospital will be entitled to 100% of the profits.

Bao Sai

Bao Sai is a high-tech company in China, chartered and authorized by the Chinese government for researching, inventing, manufacturing and sales of biological separation medium products. It has the technology and facilities for the separation and purification of biological products and natural medicines and manufactures the agarose products of separation media.

Biological separation medium refers to the separation and purification of biological products and natural medicines, which is the core technology of the biotechnology Industry. Such technology has been widely used in the producing of antibiotic products, Genetic Recombinant Medicine, the Gene Chip, bacteria production, diagnoses reagent and biochemical products. In addition to the biotechnology industry, the technology also has the wide applications and can be used for environmental protection industry, chemical and pharmaceutical industry and modernization of Chinese medicine.

The operations of Bao Sai are in the development stage and most of its efforts are focused on the research and development of new pharmaceutical and agricultural medium products, and the future networking and promoting of these products. In the six months ending June 30, 2011, Bao Sai spent approximately $13,338 in research and development of new biological separation medium products and new medicine. Most of the money was used to fund local medical institutions in the development of new products.

Pursuant to this effort, Bao Sai entered into a Research and Development Cooperation Contract with XiAn Jiao Tong University R&D Center for Natural Chinese Medicine and Engineering (the “University”) in 2005. According to the Cooperation Contract, Bao Sai provides funds in the research on the use of biological separation technology in the development of Xin Kang Ping medicine to treat heart diseases. The University performs all the laboratory work related to the general research project and toxic tests as the prerequisites of the clinical trial process for the application of a new medicine. The University presents the research result to Bao Sai, and Bao Sai has all the rights to the project reports and possible patent rights as a result of the project. This contract expired on August 25, 2008 and was not renewed. However, we have been able to continue the pharmacodynamics test and toxicology test as the prerequisites to the commencement of clinical trials for the development of Xin Kang Ping medicine. As required by the rules of State Food and Drug Administration of China (“SFDA”), Xin Kang Ping changed its name to Fu Fang Dan Chuan Jiao Nang and is in the process of applying for the clinical trial process with the SFDA. Now SFDA is reviewing it. Upon the approval of SFDA, of which there can be no assurance, we will start clinical trials for Fu Fang Dan Chuan Jiao Nang. Less time is generally required in China as opposed to in the United States in order to complete the clinical trials for new medicine, and the cost of administering clinical trials in China is also generally lower than those held in the US. We, therefore, expect that we can complete the clinical trials sooner than would be the case in the United States and at lower costs. Should the tests be successful and we obtain the approval of SFDA for the new medicine, we expect this new pharmaceutical product will be marketed in the PRC.

Until 2009, Bao Sai’s operations had consisted of bio-extraction, biological separation medium production and development of new products. In 2010, based on the separation media, our new products expanded from traditional biochemical products to media derivatives—civil products. With the absorption media, civil products will be removed including harmful substances such as bacteria, viruses, organic pesticides and tobacco tar. We have conducted research in areas of anti-virus masks.

In January 2011, the patent and the Manufacturing License of our new anti-virus mask were approved. In May 2011, we received the Certificate of Utility Model Patent. Currently we are taking the quality management system assessment to regulate the .procedure of purchasing, production and sales and other sides.. Once we finish this assessment, we can apply for the Products Registration Certificate (i.e. production batch number), which allows us to produce and sell the new anti-virus mask. We hope we obtain all the approvals soon, so that we can produce and sell this new product in the PRC. There can be no assurances, however, that such approvals will be obtained.

RESULTS OF OPERATIONS FOR SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2011

Revenues

Our overall revenues for the three months ended June 30, 2011 increased from $1,186,229 for the three months ended June 30, 2010 to $1,222,833 for the same period of 2011, an increase of $36,604 or 3.1%. In the second quarter of 2011, the cancer treatment business accounted for $1,022,966 (83.7%) and Bao Sai accounted for $199,867(the product sales generated $11,587 and technology service accounted for $188,280) of our revenue. Our overall revenues for the six months ended June 30, 2011 increased from $1,976,265 for the six months ended June 30, 2010 to $2,155,855 for the same period of 2011, an increase of $179,590 or 9.1%. During the six months ended June 30, 2011, the cancer treatment business accounted for $1,662,364 (77.1%) and Bao Sai’s revenue accounted for $493,491 (the product sales generated $53,122 and technology service accounted for $440,369) of our revenue. The increase was attributed primarily to the increased technology service and product sales revenue from Bao Sai.

Expenses

Operating expenses for the second quarter of 2011 were $77,974 as compared to $140,786 for the same period of 2010, an increase of $62,812. For the six months ended June 30, 2011, our operating expenses were $375,506 as compared to $362,342 for the same period of 2010, an increase of $13,164 or 3.6%. This increase was attributable to the increase in general and administrative costs and set-off by the recovery of uncollectible accounts for the six months ended June 30, 2011.

Net Income

Our net income during the three and six months ended June 30, 2011 was $758,362 and $1,087,678 respectively, compared to $893,119 and $1,178,505 during the three and six months ended June 30, 2010. This decrease was primarily due to our decreased recovery from uncollectible accounts and increased revenue cost from Bao Sai for the six months ended June 30, 2011.

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

Impact of Inflation

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

Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments. While our net income is added to the retained earnings on our balance sheet; the translation adjustments are added to a line item on our balance sheet labeled “other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Analysis

	June 30, 2011		December 31, 2010
Working Capital	$	380,514	$	674,622
Stockholders’ Equity	$	7,505,628	$	6,358,268
Total Liabilities	$	1,808,144	$	1,861,052

Our working capital decreased from $674,622 as of December 31, 2010 to $380,514 as of June 30, 2011, which was mainly attributable to the decrease in accounts receivable.

Stockholders’ equity increased from $6,358,268 as of December 31, 2010 to $7,505,628 as of June 30, 2011, an increase of $1,147,360 or 18%.

Total liabilities decreased from $1,861,052 as of December 31, 2010 to $1,808,144 as of June 30, 2011, a decrease of $52,908 or 2.8%. In addition, our principal shareholder, Mr. Guo Li’an, made a loan to fund our operations during the first quarter of 2008. As of June 30, 2011, the balance of the loan was $525,489, which was unsecured, interest-free and repayable on demand.

As of June 30, 2011, cash and cash equivalents increased to $383,755 from $300,716 as of December 31, 2010, an increase of $83,039 or 27.6%. The increase of cash and cash equivalents was mainly due to the cash flows provided from operating activities by $272,014 for the six months ended June 30, 2011. We hope this trend will continue for the coming quarter. Management believes that the Company’s profitability and increases in available cash and cash equivalents will help ensure our continued operations for the next 6 months, but there can be no assurance that our profitability will continue.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Foreign Exchange Risk

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

Inflation

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

ITEM 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.

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

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

Changes in Internal Controls over Financial Reporting.

During the three months ended June 30, 2011, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Under Rule 13a-15(e) and 15d-15(e), the term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the issuer's principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

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

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Removed and Reserved.

Item 5. Other Information

None

Item 6. Exhibits

10.1		Supplementary Agreement between Tangdu Hospital Affiliated to the Fourth Military Medical University and Shaanxi New Century Science & Technology Investment Decelopment Co., Ltd. dated June 21, 2011
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

XBRL Exhibit

101.INS† XBRL Instance Document.

101.SCH† XBRL Taxonomy Extension Schema Document.

101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF† XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB† XBRL Taxonomy Extension Label Linkbase Document.

101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.

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 12, 2011	By:	/s/ Zhao Yan Ding
		Zhao Yan Ding, Chief Executive Officer
		(Principal executive officer)


DATE: August 12, 2011	By:	/s/ Zhong Ya Li
		Zhong Ya Li, Chief Financial Officer
		(Principal financial officer)

GFR PHARMACEUTICALS INC 10-Q