GFR PHARMACEUTICALS INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - GFR PHARMACEUTICALS INC	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - GFR PHARMACEUTICALS INC	ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - GFR PHARMACEUTICALS INC	ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - GFR PHARMACEUTICALS INC	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - GFR PHARMACEUTICALS INC	ex31-2.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2013

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)

Registrant's telephone number: 86-29-8339-9676

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 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 x 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 o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company x
		(Do not check if a 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 May 14, 2013 was 42,079,940.

GFR Pharmaceuticals

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 31, 2013

INDEX

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION

Item 1:	Financial Statements

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	5

Item 4:	Controls and Procedures	5

PART II – OTHER INFORMATION

Item 1:	Legal Proceedings	6

Item 1A:	Risk Factors	6

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	6

Item 3:	Defaults Upon Senior Securities	6

Item 4:	Mine Safety Disclosures	6

Item 5:	Other Information	6

Item 6:	Exhibits	6

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 March 31, 2013 and December 31, 2012		F-2

Condensed Consolidated Statements of Operations for The Three Months ended March 31, 2013 and 2012		F-3

Condensed Consolidated Statements of Comprehensive Income for The Three Months ended March 31, 2013 and 2012		F-4

Condensed Consolidated Statements of Cash Flows for The Three Months ended March 31, 2013 and 2012		F-5

Condensed Consolidated Statement of Stockholders’ Equity for The Three Months ended March 31, 2013		F-6

Notes to Condensed Consolidated Financial Statements		F-7 to F-17

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2013 AND DECEMBER 31, 2012

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

	March 31, 2013		December 31, 2012
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,049,852	$	564,548
Accounts receivable, net		770,160		757,796
Inventories, net		19,190		20,839
Prepayments and other current assets		84,304		83,575
Operating lease prepaid, current portion		7,894		7,851

Total current assets		1,931,400		1,434,609

Non-current assets:
Property, plant and equipment, net		9,240,511		9,586,648
Construction in progress		1,028,121		1,013,283
Operating lease prepaid, non-current portion		130,575		131,824

TOTAL ASSETS	$	12,330,607	$	12,166,364

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	18,055	$	17,850
Amount due to a related party		483,615		463,721
Income tax payable		51,306		92,845
Other payables and accrued liabilities		143,842		165,115

Total current liabilities		696,818		739,531

Long-term liabilities:
Loss in excess of investment in an unconsolidated affiliate		854,216		849,550

TOTAL LIABILITIES		1,551,034		1,589,081

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 March 31, 2013 and December 31, 2012		42,080		42,080
Additional paid-in capital		3,712,120		3,712,120
Accumulated other comprehensive income		578,106		537,282
Statutory reserve		1,140,591		1,140,591
Retained earnings		4,551,659		4,397,808
Total GFR Pharmaceuticals, Inc. stockholders’ equity		10,024,556		9,829,881
Non-controlling interest		755,017		747,402
Total equity		10,779,573		10,577,283
TOTAL LIABILITIES AND EQUITY	$	12,330,607	$	12,166,364

See accompanying notes to condensed consolidated financial statements.

F-2

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

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

(Unaudited)

	Three months ended March 31,
	2013			2012
Revenue, net:
Service revenue	$	790,127		$	870,260
Product sales		15,646			44,586

Total revenues, net		805,773			914,846

Cost of revenue: (inclusive of depreciation)
Cost of service		339,880			162,087
Cost of products		11,290			24,009

Total cost of revenue		351,170			186,096

Gross profit		454,603			728,750

Operating expenses:
Depreciation and amortization		70,467			72,292
Recovery from uncollectible accounts		-			(2,633	)
General and administrative		168,885			230,223

Total operating expenses		239,352			299,882

Income from operations		215,251			428,868

Other income:
Interest income		515			384

Total other income		515			384

Income before income taxes		215,766			429,252

Income tax expense		(54,300	)		(95,677	)

Net income		161,466			333,575

Less: net income attributable to non-controlling interest		(7,615	)		(16,286	)

Net income attributable to GFR Pharmaceuticals, Inc.		153,851			317,289

Net income per share – Basic and diluted	$	0.00		$	0.01
Net income per share attributable to GFR Pharmaceuticals, Inc.	$	0.00		$	0.01

Weighted average common shares outstanding – Basic and diluted		42,079,940			42,079,940

See accompanying notes to condensed consolidated financial statements.

F-3

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

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

(Unaudited)

	Three months ended March 31,
	2013			2012

Net income	$	161,466		$	333,575

Other comprehensive income, net of tax:
-Foreign currency translation gain		40,824			44,307

Comprehensive income		202,290			377,882

Less: comprehensive income attributable to non-controlling interest		(7,615	)		(16,286	)

Comprehensive income attributable to GFR Pharmaceuticals, Inc.	$	194,675		$	361,596

See accompanying notes to condensed consolidated financial statements.

F-4

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

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

(Unaudited)

	Three months ended March 31,
	2013			2012
Cash flows from operating activities:
Net income attributable to GFR Pharmaceuticals, Inc.	$	153,851		$	317,289
Net income attributable to non-controlling interest		7,615			16,286
Consolidated net income		161,466			333,575
Adjustments to reconcile net income to net cash (used in) provided by operating activities
Depreciation and amortization		403,725			226,235
Recovery from doubtful accounts		-			(2,633	)
Allowance for (recovery from) obsolete stock		2,877			(6,504	)
Loss on disposal of property, plant and equipment		-			72
Change in operating assets and liabilities:
Accounts receivable		(8,196	)		(499,481	)
Inventories		(1,114	)		30,843
Prepayments and other current assets		(270	)		(13,141	)
Accounts payable		106			111
Income tax payable		(41,524	)		(111,085	)
Other payables and accrued liabilities		(22,661	)		(2,112	)

Net cash provided by (used in) operating activities		494,409			(44,120	)

Cash flows from investing activities:
Purchase of plant and equipment		(3,232	)		-
Payment for construction in progress		(9,266	)		-
Proceeds from disposal of property, plant and equipment		-			32

Net cash (used in) provided by investing activities		(12,498	)		32

Effect on exchange rate change on cash and cash equivalents		3,393			2,988

NET CHANGE IN CASH AND CASH EQUIVALENTS		485,304			(41,100	)

CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD		564,548			460,883

CASH AND CASH EQUIVALENT, END OF PERIOD	$	1,049,852		$	419,783

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	96,319		$	205,711
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 THREE MONTHS ENDED MARCH 31, 2013

(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		Non-controlling interest		Total equity
	No. of shares		Amount		Additional paid-in capital		Accumulated other comprehensive income		Statutory reserve		Retained earnings		Non-controlling interest		Total equity

Balance as of January 1, 2013		42,079,940	$	42,080	$	3,712,120	$	537,282	$	1,140,591	$	4,397,808	$	747,402	$	10,577,283

Foreign currency translation adjustment		-		-		-		40,824		-		-		-		40,824

Net income for the period		-		-		-		-		-		153,851		7,615		161,466

Balance as of March 31, 2013		42,079,940	$	42,080	$	3,712,120	$	578,106	$	1,140,591	$	4,551,659	$	755,017	$	10,779,573

See accompanying notes to condensed consolidated financial statements.

F-6

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

(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, 2012 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2013 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, 2012.

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.

·	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.

F-7

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

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 $854,216 and $849,550 liability as of March 31, 2013 and December 31, 2012.

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

·	Cash and cash equivalents

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

·	Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of March 31, 2013 and December 31, 2012, the allowance for doubtful accounts was $462,004 and $462,377, respectively.

·	Inventories

Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company quarterly reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of March 31, 2013 and December 31, 2012, the inventory allowance was $615,852 and $619,170, respectively.

·	Property, plant and equipment

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

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

F-8

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

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

Depreciation expense for the three months ended March 31, 2013 and 2012 were $401,754 and $224,267 respectively, of which $333,259 and $153,943 were included in cost of revenue.

·	Construction in progress

Construction in progress is stated at cost, which includes acquisition of land use rights, cost of construction and other direct costs attributable to the development of a new manufacturing facility in Xi’an City, Shaanxi Province, the PRC. Construction in progress is not depreciated until such time as the assets are completed and put into operational use. No capitalized interest is incurred during the period of construction.

·	Operating lease prepaid

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

The lease expense on prepaid operating lease for the three months ended March 31, 2013 and 2012 was $1,971 and $1,968, respectively. As of March 31, 2013, the estimated amortization of the prepaid operating lease for the next five years and thereafter is as follows:

Year ending March 31:
2014	$	7,894
2015		7,894
2016		7,894
2017		7,894
2018		7,894
Thereafter		98,999

Total:	$	138,469

·	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 undiscounted 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.

F-9

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

(a) Service revenue

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

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

(b) Sale of products

The Company recognizes revenue from the sale and trading of pharmaceutical products upon delivery to the customers, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes (“VAT”) under the PRC tax law which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. The Company experienced no product returns and has recorded no reserve for sales returns for the three months ended March 31, 2013 and 2012.

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

(d) Interest income

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

·	Income taxes

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

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

For the three months ended March 31, 2013 and 2012, the Company did not have any interest and penalties associated with tax positions. As of March 31, 2013, 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.

F-10

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

·	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.

·	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:

	March 31, 2013		March 31, 2012
Period-end RMB:US$1 exchange rate		6.2816		6.3122
Period-average RMB:US$1 exchange rate		6.2858		6.2975

·	Related parties

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

·	Segment reporting

ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the three months ended March 31, 2013 and 2012, the Company operates in two reportable segments: Medical Business and Extraction Business in PRC.

F-11

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

·	Fair value of financial instruments

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

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

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; 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 February 2013, the Financial Accounting Standards Board (“FASB”) issued guidance requiring an entity to disclose additional information about reclassifications out of accumulated other comprehensive income, including (1) changes in accumulated other comprehensive income balances by component and (2) significant items reclassified out of accumulated other comprehensive income and the effect on the respective line items in net income if the amounts are required to be reclassified in their entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The new guidance is effective prospectively for fiscal years beginning after December 15, 2012. The adoption of these disclosure requirements did not have a material impact on the Company’s consolidated financial statements.

NOTE－4 AMOUNT DUE TO A RELATED PARTY

As of March 31, 2013, amount due to a stockholder, Mr. Lian Guo represented temporary advances to the Company, which was unsecured, interest-free and repayable on demand.

F-12

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

NOTE－5 OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the following:

	March 31, 2013		December 31, 2012

Business tax payable	$	3,184	$	3,167
Government levy payable		16,121		25,733
Value-added tax payable		14,085		16,953
Salaries and welfare payable		70,061		79,382
Advances from employees		6,268		6,235
Advances from customers		637		-
Accrued operating expenses		33,486		33,645

	$	143,842	$	165,115

NOTE－6 INCOME TAXES

For the three months ended March 31, 2013 and 2012, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:

	Three months ended March 31,
	2013		2012
Tax jurisdiction from:
– Local	$	-	$	-
– Foreign		215,766		429,252

Income before income taxes	$	215,766	$	429,252

The provision for income taxes consisted of the following:

	Three months ended March 31,
	2013		2012
Current:
– Local	$	-	$	-
– Foreign		54,300		95,677

Deferred:
– Local		-		-
– Foreign		-		-

Income tax expense	$	54,300	$	95,677

The effective tax rate in the years presented is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The Company has subsidiary and VIE that operate in various countries: United States and the PRC that are subject to tax in the jurisdictions in which they operate, as follows:

United States of America

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

F-13

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(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 three months ended March 31, 2013 and 2012 is as follows:

	Three months ended March 31,
	2013			2012

Income before income taxes from PRC operation	$	215,766		$	429,252
Statutory income tax rate		25	%		25	%
Income tax expense at statutory rate		53,942			107,313

Net operating loss not recognized as deferred tax assets		455			472
Utilization of net operating loss		(8,475	)		(6,887	)
Non-deductible expenses		7,659			(4,563	)
Recovery from doubtful accounts not recognized as deferred taxes		719			(658	)

Income tax expense	$	54,300		$	95,677

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of March 31, 2013 and December 31, 2012:

	March 31, 2013			December 31, 2012
Deferred tax assets:
Net operating loss carryforwards	$	381,388		$	388,689
Allowance for doubtful accounts		751,826			747,720
Total deferred tax assets		1,133,214			1,136,409
Less: valuation allowance		(1,133,214	)		(1,136,409	)

Deferred tax assets	$	-		$	-

As of March 31, 2013, the Company incurred $1,525,554 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 $1,133,214 on the expected future tax benefits from the net operating loss carryforwards and allowance for doubtful accounts as the management believes it is more likely than not that these assets will not be realized in the future. For the three months ended March 31, 2013, the valuation allowance decreased by $3,195, primarily relating to the decrease in net operating loss carryforwards.

NOTE－7 SEGMENT INFORMATION

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

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

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

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the three months ended March 31, 2013 and 2012. 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.

F-14

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

Summary of financial information concerning the Company’s reportable segments is shown in the following table for the three months ended March 31, 2013 and 2012:

	Three months ended March 31, 2013
	Medical Business			Extraction Business			Total

Operating revenue	$	610,121		$	195,652		$	805,773
Cost of revenue		(314,383	)		(36,787	)		(351,170	)

Gross profit	$	295,738		$	158,865		$	454,603

Depreciation and amortization	$	333,781		$	69,944		$	403,725
Net income		132,262			29,204			161,466
Expenditure for long-lived assets	$	-		$	3,232		$	3,232

	Three months ended March 31, 2012
	Medical Business			Extraction Business			Total

Operating revenue	$	690,340		$	224,506		$	914,846
Cost of revenue		(136,955	)		(49,141	)		(186,096	)

Gross profit	$	553,385		$	175,365		$	728,750

Depreciation and amortization	$	156,317		$	69,918		$	226,235
Net income		307,914			25,661			333,575
Expenditure for long-lived assets	$	-		$	-		$	-

All long-lived assets are located in the PRC.

NOTE－8 CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a) Major customers

For the three months ended March 31, 2013, the customers who account for 10% or more of revenues of the Company are presented as follows:

	Three months ended March 31, 2013					March 31, 2013
	Revenues		Percentage of revenues			Trade accounts receivable

Customer A	$	610,121		76	%	$	647,093
Customer B		180,086		22	%		63,678

Total:	$	790,207		98	%	$	710,771

F-15

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

	Three months ended March 31, 2012					March 31, 2012
	Revenues		Percentage of revenues			Trade accounts receivable

Customer A	$	690,341		75	%	$	901,750
Customer B		179,919		20	%		63,369

Total:	$	870,260		95	%	$	965,119

All customers are located in the PRC.

(b) Major vendors

For the three months ended March 31, 2013, the vendors who account for 10% or more of revenues of the Company are presented as follows:

	Three months ended March 31, 2013					March 31, 2013
	Purchase		Percentage of purchases			Trade accounts payable

Vendor A	$	625		27	%	$	-
Vendor B		549		24	%		-
Vendor C		463		20	%		-

Total:	$	1,637		71	%	$	-

For the three months ended March 31, 2012, there was no single vendor who represented more than 10% of the Company’s purchases.

All venders are located in the PRC.

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.

F-16

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2013

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

(Unaudited)

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－9 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 three months ended March 31, 2013 and 2012 was $573 and $572, respectively.

As of March 31, 2013, the Company has $502 of future minimum rental payments due under non-cancelable operating lease agreement in the next twelve months.

(b) Capital commitments

As of March 31, 2013, the Company is committed to the future contingent payments of approximately $394,000 in connection with the construction of manufacturing facilities in the next twelve months.

NOTE－10 SUBSEQUENT EVENTS

The Company evaluated subsequent events through the date the financial statements were issued and filed with this Form 10-Q. There were no subsequent events that required recognition or disclosure.

F-17

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

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

The following discussion should be read in conjunction with, and is qualified in its entirety by, the financial statements and related notes thereto and other financial information included in this Quarterly Report on Form 10- Q and our Annual Report on Form 10-K for the year ended December 31, 2011. 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. Our subsidiary companies are involved in bio-extraction, researching, and inventing, manufacturing and sales of biological separation medium products, oncology diagnosis and 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, we entered into a Plan of Exchange Agreement with Shan Xi New Century Scientific Investment Development Ltd. (“New Century”). 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 96.77% of the capital stock of Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”).

As a result of these transactions, 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 Bao Sai. The Company also operates a Cancer Diagnosis and Treatment Center with a professional team of doctors operated by New Century.

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 to customers with advanced radiology and oncology equipment. New Century owns four different devices used for radiological imaging for the brain and body and cancer treatment. The Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”). The cases processed in the Center averaged 244 cases per month in the first quarter of 2013 as compared to 198 cases per month in the same period of 2012. During the three months ended March 31, 2013, the Center attributed $610,121 or 76% of the Company’s revenues.

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”) under 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 Tangdu Agreement, New Century presently receives sixty percent (60%) 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 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.

The Center runs at full capacity and the existing equipment capacity cannot meet the requirements of patients. In order to take advantage of the improved technology in this market and meet the need for additional capacity at the Center, the Company purchased a set of PET-CT cancer examination equipment, which is amongst the most advanced cancer examination equipment in the world. New Century entered into a supplementary agreement to the Tangdu Agreement with Tangdu Hospital on June 21, 2011 in order for both parties to cooperate in exploiting the business opportunities arising from the introduction of the PET-CT equipment (“Supplementary Agreement”). Pursuant to the Supplementary Agreement, the Company agreed to provide a new set of medical equipment and the Center agreed to jointly operate this equipment at the existing medical center. The purchase price of this medical equipment was approximately $4,332,000 (equal to RMB28 million). The Company agreed to acquire the medical equipment in lieu of accounts receivable due from the Center and the Center agreed to make the order and payment of the medical equipment in accordance with their need and specification. In return, both parties mutually agreed to share net revenues generated 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 center, in a term of 6 years, commencing from January 2012. The profit sharing ratio during the PET-CT cooperation period is 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. At the end of the 6- year term, the Hospital has an option to purchase the medical equipment used in the center at 50% of its residual value.

With our competitive facilities, services, and the reputation of Tangdu Hospital in Northwest China including Shaan Xi province and four other adjacent provinces, our medical center business has good growth potential. New Century intends to expand the operation by investing in an additional tumor therapy center or hospitals and a modernized tumor institute. However, the Company needs additional capital to finance its expansion plans for PET-CT. The Company does not have a commitment for such additional capital and there is no assurance that such capital can be obtained on terms acceptable to the Company.

Bao Sai

Bao Sai is a high-tech company, 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 producing antibiotic products, Genetic Recombinant Medicine, the Gene Chip, bacteria production, diagnoses reagent and biochemical products. In addition to its use in the biotechnology industry, the technology has the wide applications and can be used in the environmental protection industry, chemical and pharmaceutical industry and modernization of Chinese medicine.

Until 2009, Bao Sai’s operations had consisted of bio-extraction and development of new products. In 2010, based on the separation media, our new products developed from traditional biochemical products were media derivatives. In 2011, Bao Sai successfully developed the following bio-separation media civil products: Anti-virus Mask, Functional Medium Cigarette Holder and Water Purifier (including Multimedia Water Purifier and Reverse Osmosis Water Purifier). In 2012, we got the registered certificate and applied for four patents for the Anti-virus Mask. The Anti-virus Mask has the requisite government approval to be marketed and we are finding manufacturers and distributors. The Company needs additional capital to finance the manufacture and marketing of the Anti-virus Mask. The Company does not have a commitment for such additional capital and there is no assurance that such capital can be obtained on terms acceptable to the Company.

The water filtration products combine the media products to create a product that purifies water for human consumption. A limited number of water filtration products are being tested. The Company expects to produce the separation medium and use a manufacturer to make and assemble the machine. The environmental certificate for the products has been issued. The products have been sent to the national testing center for the test of functionality and safety. We will market the products after passing the test and getting the Sanitation License. In 2012, we tested our water filtration technology and got feedback information from marketing and clients who enjoyed the samples we gave them. The feedback showed that there are still some problems in our design. As a result, we have suspended the production of our water filtration product and began to improve the function design and to test the product..

With respect to the Functional Medium Cigarette Holder, we are going to apply for two patents. We have submitted the required information for the patents’ prosecution, which is in the process of review by the approval authority. The product has been test marketed on a limited basis. We need to redesign the appearance of our product according to the feedback from clients. The Company is going to cooperate with the sales agent to create a marketing plan and sell our products. We are looking for the suitable sales agent.

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 planning to market these products. In the three months ended March 31, 2013, Bao Sai spent approximately $1,378 in research and development of new biological separation medium products.

Considering the broad market prospects of separation media product, in order to improve its competitiveness in the market, the Company plans to expand the process scale of the separation media and reduce its cost. In October 2012, the Company began to build an automation production line workshop for separate media products at Xi'an Fengjing Industrial Park in Huxian County, Xi’an Shaanxi province. Construction is expected to take about two years and the facility is expected to be operational at the end of September 2014. Total investment for the production line is about $3 million (RMB20 million). The production workshop has been built. We have invited bids for the production equipment which is being developed and produced by the manufacturers.

RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2013

Revenues

Our overall revenues for the three months ended March 31, 2013 decreased to $805,773, compared to $914,846 during the same period of 2012, a decrease of $109,073 or 11.92%. In the first quarter of 2013, the cancer treatment business accounted for $610,121 or 76 % of our total revenues; and Bao Sai accounted for $195,652 or 24% among which product sales from Bao Sai generated $15,646 and technology service generated $180,006. The revenue decrease was primarily attributed to the decreased revenues from the sharing ratios of New Century.

Expenses

General and Administrative expenses during the first quarter of 2013 were $168,885, a decrease of $61,338 compared to $230,223 during the same period of 2012. This decrease was attributable to the decreased general and administrative costs during the three months ended March 31, 2013. Total operating expenses decreased to $239,352 in the first quarter of 2013 from $299,882 in the first quarter of 2012, a decrease of $60,530 or 20.18%, primarily as a result of improvement of cost control.

Cost of service increased to $339,880 during the three months ended March 31, 2013 from $162,097 in the three months ended March 31, 2012, an increase of 109%. Cost of service increased because of the depreciation cost from the new equipment.

Net Income attributable to GFR Pharmaceuticals, Inc.

Our net income attributable to GFR Pharmaceuticals, Inc. during the three months ended March 31, 2013 was $153,851, compared to $317,289 during the same period of 2012, a decrease of $163,438. This decrease was primarily due to the decreased revenues from the clinical service in New Century.

Impact of Inflation

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

	March 31, 2013		December 31, 2012
Working Capital	$	1,234,582	$	695,078
Stockholders’ Equity	$	10,024,556	$	9,829,881
Total Liabilities	$	1,551,034	$	1,589,081

Our working capital as of March 31, 2013 increased to $1,234,582 from $695,078 as of December 31, 2012, which was mainly attributable to the increase of monetary capital.

Stockholders’ equity increased from $9,829,881 as of December 31, 2012 to $10,024,556 as of March 31, 2013, an increase of $194,675 or 2%.

Total liabilities decreased from $1,589,081 as of December 31, 2012 to $1,551,034 as of March 31, 2013, a decrease of $38,047 or 2%. In addition, our principal shareholder, Mr. Guo Li’an, made a loan to fund our operations during the first quarter of 2008. As of March 31, 2013, the balance of the loan was $483,615, which was unsecured, interest-free and repayable on demand.

As of March 31, 2013, cash and cash equivalents increased to $1,049,852 from $564,548 as of December 31, 2012, an increase of $485,304 or 85.96%. The increase of cash and cash equivalents was mainly due to the additional cash flows provided by operating activities by $494,409.

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 March 31. 2013, 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. Mine Safety Disclosures

None

Item 5. Other Information

None.

Item 6. Exhibits

	31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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: May 14, 2013	By:	/s/ Zhao Yan Ding
		Zhao Yan Ding, Chief Executive Officer (Principal executive officer)


DATE: May 14, 2013	By:	/s/ Zhong Ya Li
		Zhong Ya Li, Chief Financial Officer
		(Principal financial officer)

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GFR PHARMACEUTICALS INC Reports

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