PINX:GFRP GFR Pharmaceuticals Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
Commission File No: 09081

GFR PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)

NEVADA
77-0517964
(State or other jurisdiction of
(I.R.S. Employer ID No)
incorporation or organization)
 

99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P.R. China 710054 
(Address of principal executive office)    (Zip Code) n/a

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

N/A
Former name, former address and former fiscal year,
(if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes 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 x     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  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 ¨    No x

The number of shares of common stock, $0.001 par value per share, outstanding as of May 8, 2012 was 42,079,940.
 
 
1

 
 
 GFR Pharmaceuticals
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2012
INDEX

TABLE OF CONTENTS
 
   
Page
     
PART I – FINANCIAL INFORMATION
 
Item 1:
Financial Statements
3
     
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
     
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
22
     
Item 4:
Controls and Procedures
22
 
PART II – OTHER INFORMATION
 
Item 1:
Legal Proceedings
23
     
Item 1A:
Risk Factors
23
     
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
23
     
Item 3:
Defaults Upon Senior Securities
23
     
Item 4:
Mine Safety Disclosures
24
     
Item 5:
Other Information
24
     
Item 6:
Exhibits
24
 
 
2

 

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, 2012 and December 31, 2011
 
4
     
Condensed Consolidated Statements of Operations And Comprehensive Income for The Three Months ended March 31, 2012 and 2011
 
5
     
Condensed Consolidated Statements of Cash Flows for The Three Months ended March 31, 2012 and 2011
 
6
     
Condensed Consolidated Statement of Stockholders’ Equity for The Three Months ended March 31, 2012
 
7
     
Notes to Condensed Consolidated Financial Statements
 
8 - 18

 
3

 

GFR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2012 AND DECEMBER 31, 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)

   
March 31, 2012
   
December 31, 2011
 
    (Unaudited)     (Audited)  
                 
ASSETS                
Current assets:                
Cash and cash equivalents
  $ 419,783     $ 460,883  
Accounts receivable, net
    1,033,867       532,167  
Inventories, net
    6,981       31,067  
Prepayments and other current assets
    77,398       61,272  
Operating lease prepaid, current portion
    7,855       7,806  
                 
Total current assets
    1,545,884       1,093,195  
                 
Property, plant and equipment, net
    10,944,041       11,097,390  
Operating lease prepaid, non-current portion
    137,797       138,879  
                 
TOTAL ASSETS
  $ 12,627,722     $ 12,329,464  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 44,763     $ 44,370  
Amount due to stockholders
    545,170       521,790  
Income tax payable
    92,439       202,473  
Other payables and accrued liabilities
    1,517,310       1,509,335  
                 
Total current liabilities
    2,199,682       2,277,968  
                 
Long-term liabilities:
               
Loss in excess of investment in an unconsolidated affiliate
    843,371       844,709  
                 
TOTAL LIABILITIES
    3,043,053       3,122,677  
                 
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, 2012 and December 31, 2011
    42,080       42,080  
Additional paid-in capital
    3,712,120       3,712,120  
Accumulated other comprehensive income
    546,173       501,866  
Statutory reserve
    1,002,635       1,002,635  
Retained earnings
    3,575,878       3,258,589  
Total GFR Pharmaceuticals, Inc. stockholders’ equity
    8,878,886       8,517,290  
Non-controlling interest
    705,783       689,497  
Total equity
    9,584,669       9,206,787  
TOTAL LIABILITIES AND EQUITY
  $ 12,627,722     $ 12,329,464  

See accompanying notes to condensed consolidated financial statements.
 
 
4

 
 
GFR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Currency expressed in United States Dollars (“US$”), except for number of shares)
(Unaudited)

   
Three months ended March 31,
 
   
2012
   
2011
 
Revenue, net:
           
Service revenue
  $ 870,260     $ 891,487  
Product sales
    44,586       41,535  
Total revenues, net
    914,846       933,022  
                 
Cost of revenue: (inclusive of depreciation)
               
Cost of service
    162,087       175,860  
Cost of products
    24,009       38,924  
Total cost of revenue
    186,096       214,784  
                 
Gross profit
    728,750       718,238  
                 
Operating expenses:
               
Depreciation and amortization
    72,292       53,737  
Recovery from uncollectible accounts
    (2,633 )     (88,234 )
General and administrative
    230,223       332,029  
Total operating expenses
    299,882       297,532  
                 
Income from operations
    428,868       420,706  
                 
Other income:
               
Interest income
    384       221  
Total other income
    384       221  
                 
Income before income taxes
    429,252       420,927  
                 
Income tax expense
    (95,677 )     (91,611 )
                 
Net income
    333,575       329,316  
                 
Less: net income attributable to non-controlling interest
    (16,286 )     (11,188 )
                 
Net income attributable to GFR Pharmaceuticals, Inc.
    317,289       318,128  
                 
Net income per share – Basic and diluted
  $ 0.01     $ 0.01  
                 
Weighted average common shares outstanding – Basic and diluted
    42,079,940       42,079,940  

See accompanying notes to condensed consolidated financial statements.
 
 
5

 
 
GFR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
 
   
Three months ended March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income attributable to GFR Pharmaceuticals, Inc.
  $ 317,289     $ 318,128  
Net income attributable to non-controlling interest
    16,286       11,188  
Consolidated net income
    333,575       329,316  
Adjustments to reconcile net income to net cash (used in) provided by operating activities
               
Depreciation and amortization
    226,235       202,751  
Recovery from doubtful accounts
    (2,633 )     (30,435 )
Recovery from allowance for obsolete stock
    (6,504 )     (3,957 )
Loss on disposal of property, plant and equipment
    72       -  
Change in operating assets and liabilities:
               
Accounts receivable
    (499,481 )     327,405  
Inventories
    30,843       21,059  
Prepayments and other current assets
    (13,141 )     (279,296 )
Accounts payable
    111       14,488  
Income tax payable
    (111,085 )     (100,460 )
Other payables and accrued liabilities
    (2,112 )     (110,104 )
Net cash (used in) provided by operating activities
    (44,120 )     370,767  
                 
Cash flows from investing activities:
               
Purchase of plant and equipment
    -       (82,176 )
Proceeds from disposal of property, plant and equipment
    32       -  
Net cash provided by (used in) investing activities
    32       (82,176 )
                 
Cash flows from financing activities:
               
Advances from a related party
    -       6,176  
Net cash provided by financing activities
    -       6,176  
                 
Effect on exchange rate change on cash and cash equivalents
    2,988       3,725  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (41,100 )     298,492  
                 
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD
    460,883       300,716  
                 
CASH AND CASH EQUIVALENT, END OF PERIOD
  $ 419,783     $ 599,208  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for income taxes
  $ 205,711     $ 696,352  
Cash paid for interest
  $ -     $ -  
 
See accompanying notes to condensed consolidated financial statements.
 
 
6

 
 
GFR PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(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
                                 
Balance as of January 1, 2012
  42,079,940   $ 42,080   $ 3,712,120   $ 501,866   $ 1,002,635   $ 3,258,589   $ 689,497   $ 9,206,787  
                                                 
Foreign currency translation adjustment
  -     -     -     44,307     -     -     -     44,307  
                                                 
Net income for the period
  -     -     -     -     -     317,289     16,286     333,575  
Balance as of March 31, 2012
  42,079,940   $ 42,080   $ 3,712,120   $ 546,173   $ 1,002,635   $ 3,575,878   $ 705,783   $ 9,584,669  

See accompanying notes to condensed consolidated financial statements.
 
 
7

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
 
 
NOTE1           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, 2011 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, 2012 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2012 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, 2011.


NOTE2           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”).


NOTE3           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.
 
 
8

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(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 $843,371 and $844,709 liability as of March 31, 2012 and December 31, 2011.

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, 2012 and December 31, 2011, the allowance for doubtful accounts was $496,323 and $497,292, 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, 2012 and December 31, 2011, the inventory allowance was $643,803 and $637,299, 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
 
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
    -  

 
9

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(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, 2012 and 2011 were $224,267 and $200,862 respectively, of which $153,943 and $149,065 were included in cost of revenue.

            Operating lease prepaid

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

The lease expense on prepaid operating lease for the three months ended March 31, 2012 and 2011 was $1,968 and $1,886, respectively. As of March 31, 2012, the estimated amortization of the prepaid operating lease for the next five years and thereafter is as follows:

Year ending March 31:
     
2013
  $ 7,855  
2014
    7,855  
2015
    7,855  
2016
    7,855  
2017
    7,855  
Thereafter
    106,377  
         
Total:
  $ 145,652  

            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 collectability 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.
 
 
10

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
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, 2012 and 2011.

(c)      Technical service income

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

(d)       Interest income

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

            Income taxes

Income taxes are 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, 2012 and 2011, the Company did not have any interest and penalties associated with tax positions. As of March 31, 2012, 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.
 
 
11

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
            Comprehensive income

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

   
Three months ended March 31,
 
   
2012
   
2011
 
             
Net income
  $ 333,575     $ 329,316  
                 
Other comprehensive income:
               
- Foreign currency translation gain
    44,307       36,825  
                 
Comprehensive income
  $ 377,882     $ 366,141  

            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, 2012
   
March 31, 2011
 
Period-end RMB:US$1 exchange rate
    6.3122       6.5501  
Period-average RMB:US$1 exchange rate
    6.2975       6.5713  

            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.
 
 
12

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
 
            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, 2012 and 2011, the Company operates in two reportable segments: Medical Business and Extraction Business in PRC.

            Fair value of financial instruments

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

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

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

o
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 June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Comprehensive Income: Presentation of Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 requires companies to present the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements of net income and other comprehensive income. This statement is effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted and the amendments in this update will be applied retrospectively. The adoption has not had a material effect on the Company’s financial statements.


NOTE4           AMOUNT DUE TO A RELATED PARTY

As of March 31, 2012, amount due to a stockholder, Mr. Lian Guo, represented temporary advances to the Company, which was unsecured, interest-free and repayable on demand.
 
 
NOTE5           OTHER PAYABLES AND ACCRUED LIABILITIES
 
 
13

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)

 
Other payables and accrued liabilities consisted of the following:

   
March 31, 2012
   
December 31, 2011
 
             
Business tax payable
  $ 18,137     $ 22,076  
Government levy payable
    12,026       2,698  
Value-added tax payable
    13,296       6,568  
Salaries and welfare payable
    84,604       91,362  
Advances from employees
    6,381       21,268  
Payable on equipment purchase
    1,267,387       1,259,386  
Advances from customers
    38,972       38,726  
Accrued operating expenses
    76,507       67,251  
    $ 1,516,561     $ 1,509,335  


NOTE6            INCOME TAXES

For the three months ended March 31, 2012 and 2011, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:

   
Three months ended March 31,
 
   
2012
   
2011
 
Tax jurisdiction from:
           
– Local
  $ -     $ -  
– Foreign
    429,252       420,927  
Income before income taxes
  $ 429,252     $ 420,927  

The provision for income taxes consisted of the following:

   
Three months ended March 31,
 
   
2012
   
2011
 
Current:
           
– Local
  $ -     $ -  
– Foreign
    95,677       91,611  
                 
Deferred:
               
– Local
    -       -  
– Foreign
    -       -  
Income tax expense
  $ 95,677     $ 91,611  

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.
 
 
14

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(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, 2012 and 2011 is as follows:

   
Three months ended March 31,
 
   
2012
   
2011
 
             
Income before income taxes from PRC operation
  $ 429,252     $ 420,927  
Statutory income tax rate
    25 %     25 %
Income tax expense at statutory rate
    107,313       105,232  
                 
Net operating loss not recognized as deferred tax assets
    472       5,579  
Utilization of net operating loss
    (6,887 )     -  
Non-deductible expenses
    (4,563 )     (5,661 )
Recovery from doubtful accounts not recognized as deferred taxes
    (658 )     (13,539 )
Income tax expense
  $ 95,677     $ 91,611  

The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of March 31, 2012 and December 31, 2011:

   
March 31, 2012
   
December 31, 2011
 
Deferred tax assets:
           
Net operating loss carryforwards
  $ 369,844     $ 376,258  
Allowance for doubtful accounts
    765,640       761,461  
Total deferred tax assets
    1,135,484       1,137,719  
Less: valuation allowance
    (1,135,484 )     (1,137,719 )
Deferred tax assets
  $ -     $ -  

As of March 31, 2012, the Company incurred $369,844 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 $1,135,484 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, 2012, the valuation allowance decreased by $2,235, primarily relating to the recovery from allowance for doubtful accounts and decrease in net operating loss carryforwards.


NOTE7            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, 2012 and 2011. 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.
 
 
15

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(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, 2012 and 2011:
 
   
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 (loss)
    307,914       25,661       333,575  
Expenditure for long-lived assets
  $ -     $ -     $ -  

   
Three months ended March 31, 2011
 
   
Medical Business
   
Extraction Business
   
Total
 
                   
Operating revenue, net:
  $ 639,398     $ 293,624     $ 933,022  
Cost of revenue
    (151,927 )     (62,857 )     (214,784 )
                         
Gross profit
  $ 487,471     $ 230,767     $ 718,238  
                         
Depreciation and amortization
  $ 149,582     $ 53,169     $ 202,751  
Net income
    223,762       105,555       329,317  
Expenditure for long-lived assets
  $ -     $ 82,176     $ 82,176  

All long-lived assets are located in the PRC.


NOTE8           CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)         Major customers

For the three months ended March 31, 2012 and 2011, the customers who account for 10% or more of revenues of the Company are presented as follows:

 
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  
 
 
16

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
 
 
 
Three months ended March 31, 2011
 
March 31, 2011
 
 
Revenues
   
Percentage
of revenues
 
Trade accounts
receivable
 
               
Customer A
  $ 452,503       49 %   $ 882,732  
Customer B
    252,089       27 %     76,335  
                         
Total:
  $ 704,592       76 %   $ 959,067  
 
All customers are located in the PRC.

(b)         Major vendors

For the three months ended March 31, 2012 and 2011, there was no single vendor who represented more than 10% of the Company’s purchases.

All venders are located in the PRC.

(c)         Credit risk

Financial instruments that are potentially subject to credit risk consist principally of trade accounts receivables. The Company believes the concentration of credit risk in its trade receivables is substantially mitigated by its ongoing credit evaluation process and relatively short collection terms. The Company does not generally require collateral from customers. The Company evaluates the need for an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.

(d)         Exchange rate risk

The reporting currency of the Company is US$, to date the majority of the revenues and costs are denominated in RMB and a significant portion of the assets and liabilities are denominated in RMB. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates against US$, the value of RMB revenues and assets as expressed in US$ financial statements will decline. The Company does not hold any derivative or other financial instruments that expose to substantial market risk.

(e)         Economic and political risks

The Company's operations are conducted in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Company's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation.


NOTE9           COMMITMENTS AND CONTINGENCIES

The Company is committed to an office space under a non-cancelable operating lease agreement with a term of 2 years with fixed monthly rentals, expiry in June 2013. Total rent expenses for the three months ended March 31, 2012 and 2011 was $572 and $548, respectively.
 
 
17

 
 
GFR PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2012
(Currency expressed in United States Dollars (“US$”))
(Unaudited)
 
 
As of March 31, 2012, the Company has $2,851 of future minimum rental payments due under non-cancelable operating lease agreement in the next two years.

Year ending March 31:
     
2013
    2,281  
2014
    570  
         
Total
  $ 2,851  

 
NOTE10         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.
 
 
18

 
 
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 Our subsidiary companies 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, 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.
 
 
19

 
 
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 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 three different devices used for radiological imaging for the brain and body and cancer treatment. The Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”). The cases processed in the Center averaged 195 cases per month in the first quarter of 2011 as compared to 198 cases per month in the same period of 2012.   During the three months ended March 31, 2012, the Center attributed $730,519 or 79.31% 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:

 
1.
From January 2012 through December 2014, 60% to New Century;

 
2.
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 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. The PET-CT equipment was installed in December 2011 and a limited operation of the equipment commenced in January 2012 as some supplemental equipment is still being tested.  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 values.

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.
 
 
20

 

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.
 
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 biological medium products, and we intend to market these products when the development is complete and all required certifications are received.  In 2011, the Company has successfully developed several new products using the separation technology, a Functional Medium Cigarette Holder and two Water Purifiers (including Multimedia Water Purifier and Reverse Osmosis Water Purifier).  In the first quarter of 2012, Bao Sai spent approximately $11,411 in research and development of new biological separation medium products and new medicine.   Most of the money was used  for the development of bio-separation media civil products.  We also expect progresses on our other research projects to create more civil products.

 
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 2012
 
Revenues

Our overall revenues for the three months ended March 31, 2012 decreased to $914,846, compared to $933,022 during the same period of 2011, a decrease of $18,176 or 1.95%. In the first quarter of 2012, the cancer treatment business accounted for $690,340 or 75.46% of our total revenues; and Bao Sai accounted for $224,506 or 24.54% among which product sales from Bao Sai generated $44,587 and technology service generated $179,919. The revenue decrease was primarily attributed to the decreased revenues from the technology service of Bao Sai.

Expenses
 
General and Administrative expenses during the first quarter of 2012 were $230,223, a decrease of $101,806 compared to $332,029 during the same period of 2011. Total operating expenses increased to $299,882 in the first quarter of 2012 from $297,532 in the first quarter of 2011, an increase of $2,330 or 1%, primarily as a result of the decline in the reduction of doubtful accounts.

Net Income

Our net income during the three months ended March 31, 2012 was $317,289, compared to $318,128 during the same period of 2011, a decrease of $839. This decrease was primarily due to the decreased revenues from the technology service of Bao Sai.

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.
 
 
21

 

LIQUIDITY AND CAPITAL RESOURCES

  
 
March 31,
2012
   
December 31,
2011
 
Working Capital Deficit
 
$
653,798
   
$
1,184,733
 
Stockholders’ Equity
 
$
8,878,886
   
$
8,517,290
 
Total Liabilities
 
$
3,043,053
   
$
3,122,677
 
 
Our working capital deficit as of March 31, 2012 decreased to $653,798, from $1,184,733 as of December 31, 2011, which was mainly attributable to the increase of accounts receivable.

Stockholders’ equity increased from $8,517,290 as of December 31, 2011 to $8,878,886 as of March 31, 2012, an increase of $361,596 or 4.25%.

Total liabilities decreased from $3,122,677 as of December 31, 2011 to $3,043,053 as of March 31, 2012, a decrease of $79,624 or 2.55%. 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, 2012, the balance of the loan was $545,170, which was unsecured, interest-free and repayable on demand.

As of March 31, 2012, cash and cash equivalents decreased to $419,783 from $460, 883 as of December 31, 2011, a decrease of $41,100 or 8.92 %. The decrease of cash and cash equivalents was mainly due to the additional cash flows used in operating activities by $44,120.
 
 
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.
 
 
22

 

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, 2012, 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.
 
 
23

 

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.
 
 
24

 
 
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 10, 2012
By:
/s/ Zhao Yan Ding
 
   
Zhao Yan Ding, Chief Executive Officer
(Principal executive officer)
 
       
       
DATE:   May 10, 2012
By:
/s/ Zhong Ya Li
 
   
Zhong Ya Li, Chief Financial Officer
 
   
(Principal financial officer)
 
 
 

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