GFR Pharmaceuticals, Inc. (fka GFRP)

[pmunch]

Revenues

Through the second quarter of 2009, we continued to realize our revenues from the business operations of two subsidiaries: New Century and Bao Sai. New Century owns radiology and oncology equipment and provides it to Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”) in Shaan Xi province, which is affiliated with the Fourth Military Medical University. New Century currently owns three different devices used for radiological imaging for the brain and body and cancer treatment. New Century receives a percentage of profits from the Center. We recognize net revenues based on the total amount received from the patients during the month, less the monthly operating costs incurred at the centers. The service revenues were recorded when services are received by the customers and realized the amounts net of provisions for discounts, allowance and taxes which are recognized at the time of services performed.


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

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

Expenses

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

Net Income

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

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

Impact of Inflation

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

Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars. The conversion of our accounts from RMB to Dollars results in translation adjustments. While our net income is added to the retained earnings on our balance sheet; the translation adjustments are added to a line item on our balance sheet labeled “other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business. During the six and three months ended June 30, 2009, the effect of converting our financial results to Dollars was to add $125 and $40 to our comprehensive income.


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LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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