GFR Pharmaceuticals 10-Q 2010 Q3 Quarterly report

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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 ¨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 ¨ Accelerated filer ¨ Non-accelerated filer (Do not check if a smaller reporting company) ¨ Smaller reporting company  x

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

The number of shares of common stock, $0.001 par value per share, outstanding as of November 10, 2010 was 42,079,940.

GFR PHARMACEUTICALS, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1: – Financial Statements	3
Item 2: - Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3: – Quantitative and Qualitative Disclosures About Market Risk	25
Item 4: Controls and Procedures	26
PART II - OTHER INFORMATION
Item 1: - Legal Proceedings	26
Item 1A: Risk Factors	26
Item 2: - Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3: – Default upon Senior Securities	26
Item 4: – Removed and Reserved	26
Item 5: – Other Information	26
Item 6: – Exhibits	26

2

GFR PHARMACEUTICALS, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

	Page
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	4
Condensed Consolidated Statements of Operations And Comprehensive Income for the Three and Nine Months ended September 30, 2010 and 2009	5
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2010 and 2009	6
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months ended September 30, 2010	7
Notes to Condensed Consolidated Financial Statements	8 - 22

3

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

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

	September 30, 2010		December 31, 2009
	(Unaudited)		(Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	1,429,840	$	55,486
Trade accounts receivable, net		857,343		541,206
Inventories, net		16,141		10,289
Prepayments and other current assets		268,106		277,455
Operating lease prepaid, current portion		7,403		7,252
Total current assets		2,578,833		891,688
Property, plant and equipment, net		7,016,061		6,723,519
Operating lease prepaid, non-current portion		140,962		143,534
TOTAL ASSETS	$	9,735,856	$	7,758,741
LIABILITIES AND EQUITY
Current liabilities:
Trade accounts payable	$	299,232	$	90,682
Amount due to a related party		1,876,126		1,960,874
Income tax payable		170,769		171,708
Other payables and accrued liabilities		331,738		428,553
Total current liabilities		2,677,865		2,651,817
Long-term liabilities:
Loss in excess of investment in an unconsolidated affiliate		801,099		784,802
TOTAL LIABILITIES		3,478,964		3,436,619
Commitments and contingencies
Equity:
GFR Pharmaceuticals, Inc. stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares issued and outstanding, respectively		42,080		42,080
Additional paid-in capital		3,712,120		3,712,120
Accumulated other comprehensive income		268,087		210,882
Statutory reserve		595,253		595,253
Retained earnings (accumulated deficits)		1,049,055		(750,589	)
Total GFR Pharmaceuticals, Inc. stockholders’ equity		5,666,595		3,809,746
Non-controlling interest		590,297		512,376
Total equity		6,256,892		4,322,122
TOTAL LIABILITIES AND EQUITY	$	9,735,856	$	7,758,741

See accompanying notes to condensed consolidated financial statements.

4

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Revenues, net:
Service revenue	$	1,184,821		$	896,387		$	3,108,446		$	2,424,264
Product sales		10,197			113,091			62,837			132,256
Total revenues, net		1,195,018			1,009,478			3,171,283			2,556,520
Cost of revenue:
Depreciation		164,195			143,511			439,052			411,209
Cost of products		20,879			126,467			96,910			135,212
Total cost of revenue		185,074			269,978			535,962			546,421
Gross profit		1,009,944			739,500			2,635,321			2,010,099
Operating expenses:
Depreciation and amortization		39,541			31,554			135,721			126,393
General and administrative		112,273			156,827			378,435			548,111
Total operating expenses		151,814			188,381			514,156			674,504
Income from operations		858,130			551,119			2,121,165			1,335,595
Other income (expense):
Interest income		657			6,074			948			16,938
Recovery from an unconsolidated affiliate		8,967			-			254,533			-
Other expense		-			-			-			(574	)
Total other income		9,624			6,074			255,481			16,364
Income before income taxes		867,754			557,193			2,376,646			1,351,959
Income tax expense		(168,694	)		(159,543	)		(499,081	)		(400,539	)
Net income		699,060			397,650			1,877,565			951,420
Less: net income attributable to non-controlling interest		(27,368	)		(21,573	)		(77,921	)		(52,741	)
Net income attributable to GFR Pharmaceuticals, Inc.		671,692			376,077			1,799,644			898,679
Other comprehensive income:
- Foreign currency translation gain		44,568			350			57,205			475
Comprehensive income	$	716,260		$	376,427		$	1,856,849		$	899,154
Net income per share – Basic and diluted	$	0.02		$	0.01		$	0.04		$	0.02
Weighted average common stock outstanding – Basic and diluted		42,079,940			42,079,940			42,079,940			42,079,940

See accompanying notes to condensed consolidated financial statements.

5

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

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

(Unaudited)

	Nine months ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	1,799,644		$	898,679
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		574,773			537,602
Recovery from allowance for doubtful accounts		(46,207	)		-
Non-controlling interest		77,921			52,741
Change in operating assets and liabilities:
Trade accounts receivable		(240,777	)		67,943
Inventories		(5,540	)		(26,137	)
Other receivable		-			(42,374	)
Prepayments and other current assets		2,980			85,666
Trade accounts payable		203,080			(1,345	)
Income tax payable		(4,427	)		(13,045	)
Other payables and accrued liabilities		(68,763	)		71,222
Net cash provided by operating activities		2,292,684			1,630,952
Cash flows from investing activities:
Purchase of property, plant and equipment		(719,577	)		(1,291	)
Net cash used ininvesting activities		(719,577	)		(1,291	)
Cash flows from financing activities:
Repayment of notes payable		-			(219,549	)
Repayment of notes payable to related parties		-			(1,931,162	)
Repayment to a related party		(223,616	)		(1,244	)
Net cash provided by (used in) financing activities		(223,616	)		(2,151,955	)
Effect on exchange rate change on cash and cash equivalents		24,863			185
NET CHANGE IN CASH AND CASH EQUIVALENTS		1,374,354			(522,109	)
CASH AND CASH EQUIVALENT, BEGINNING OF PERIOD		55,486			552,398
CASH AND CASH EQUIVALENT, END OF PERIOD	$	1,429,840		$	30,289
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	503,508		$	400,539
Cash paid for interest	$	-		$	-

See accompanying notes to condensed consolidated financial statements.

6

GFR PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

	GFR Pharmaceuticals, Inc. stockholders’ equity
							Accumulated				Retained
							other				earnings
	Common stock				Additional		comprehensive		Statutory		(accumulated			Non-controlling		Total
	No. of shares		Amount		paid-in capital		income		reserve		deficit)			interest		equity
Balance as of January 1, 2010		42,079,940	$	42,080	$	3,712,120	$	210,882	$	595,253	$	(750,589	)	$	512,376	$	4,322,122
Foreign currency translation adjustment		-		-		-		57,205		-		-			-		57,205
Net income for the period		-		-		-		-		-		1,799,644			77,921		1,877,565
Balance as of September 30, 2010		42,079,940	$	42,080	$	3,712,120	$	268,087	$	595,253	$	1,049,055		$	590,297	$	6,256,892

See accompanying notes to condensed consolidated financial statements.

7

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

NOTE－1 BASIS OF PRESENTATION

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

In the opinion of management, the consolidated balance sheet as of December 31, 2009 which has been derived from audited financial statements and these unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary to state fairly the results for the periods presented. The results for the period ended September 30, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2010 or for any future periods.

These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Management’s Discussion and the audited financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2009.

NOTE－2 ORGANIZATION AND BUSINESS BACKGROUND

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

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

Description of subsidiaries

Name	Place of incorporation and kind of  legal entity	Principal activities and place of operation	Particulars of registered share capital		Effective interest held
Xi'an Hua Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua Long”)	The PRC, a limited liability company	Investment holding	RMB	1,500,000	100	%
New Century Scientific Investment Ltd. (“New Century”)	The PRC, a limited liability company	Operator medical clinic in the PRC	RMB	30,000,000	95	%
Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)	The PRC, a limited liability company	Research and development of extraction process and trading of pharmaceutical products in the PRC	RMB	60,000,000	96.77	%

8

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

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 Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC 810”), consolidation of a majority-owned subsidiary is precluded where control does not rest with the majority owner. From May 1, 2007, GFRP’s subsidiary Medicine ceased business and leased out its business license. Accordingly, GFRP deconsolidated Medicine and accounted Medicine for under the equity method of accounting.

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

As a result of deconsolidation under ASC 810 and the application of the equity method under ASC 323, GFRP had a negative basis in its investment in Medicine, the Equity Investee, because the subsidiary generated significant losses and intercompany liabilities in excess of its asset balances. This negative investment, “Loss in excess of investment in an unconsolidated affiliate” is reflected as a single amount on the Company’s condensed consolidated balance sheet as approximately $801,099 as of September 30, 2010.

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

9

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

· Cash and cash equivalents

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

· Accounts receivable and allowance for doubtful accounts

Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. For the nine months ended September 30, 2010, the Company recovered $46,207 from allowance for doubtful accounts.

· Inventories

Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company quarterly reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. For the nine months ended September 30, 2010 and 2009, no inventory allowance was provided for the periods.

· Property, plant and equipment

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

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

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

Depreciation expense for the three months ended September 30, 2010 and 2009 were $201,907 and $173,251 respectively, of which $164,195 and $143,511 were include in cost of revenue.

Depreciation expense for the nine months ended September 30, 2010 and 2009 were $569,317 and $532,159 respectively, of which $439,052 and $411,209 were include in cost of revenue.

· Operating lease prepaid

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

10

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

The lease expense on prepaid operating lease for the three months ended September 30, 2010 and 2009 was $526 and $528, respectively. The lease expense on prepaid operating lease for the nine months ended September 30, 2010 and 2009 was $5,456 and $5,443, respectively. As of September 30, 2010, the estimated annual amortization of the prepaid operating lease for the next five years and thereafter is as follows:

Years ending September 30:
2011	$	7,403
2012		7,403
2013		7,403
2014		7,403
2015		7,403
Thereafter		111,350
Total	$	148,365

· Impairment of long-lived assets

In accordance with the provisions of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived Assets”, all long-lived assets such as property, plant and equipment held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to estimated discounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. There has been no impairment as of September 30, 2010.

· Revenue recognition

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

(a) Medical service revenue

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

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

11

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

(b) Product sales

The Company recognizes revenue from the sale and trading of pharmaceutical products upon delivery to the customers, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes (“VAT”) under the PRC tax law which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. The Company experienced no product returns and has recorded no reserve for sales returns for the nine months ended September 30, 2010 and 2009.

(c) Technical service income

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

(d) Interest income

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

· Income taxes

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

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

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

The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority. For the nine months ended September 30, 2010, the Company filed and cleared 2009 PRC tax return by the tax authority.

· Net income per share

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

12

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

(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.

· 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$") and the accompanying financial statements have been expressed in US$. In addition, 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 accordance with ASC Topic 830-30, “Translation of Financial Statement”, assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses 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:

	September 30, 2010		September 30, 2009
Period-end RMB:US$1 exchange rate		6.6981		6.8319
Period-average RMB:US$1 exchange rate		6.8164		6.8328

· Related parties

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

· Segment reporting

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

· Fair value measurement

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

13

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

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

· Fair value of financial instruments

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

· Recent accounting pronouncements

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

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

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

In July 2010, the FASB issued an accounting standards update to require further disaggregated disclosures that improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and the reasons for those changes. This update will be effective for the Company in the second quarter of fiscal 2011, except for the disclosures relating to activity that occurred during a reporting period which is effective for the Company in the third quarter of fiscal 2011. Since this update addresses only disclosures related to credit quality of financing receivables and the allowance for credit losses, it is not expected that the adoption of this update will have a material impact on the Company’s financial position, results of operations or cash flows.

14

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

NOTE－4 TRADE ACCOUNTS RECEIVABLE

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

Trade accounts receivable consisted of the following:

	September 30, 2010			December 31, 2009
Trade accounts receivable, gross	$	1,530,444		$	1,259,263
Less: allowance for doubtful accounts		(673,101	)		(718,057	)
Trade accounts receivable, net	$	857,343		$	541,206

For the nine months ended September 30, 2010, the Company recovered $46,207 from allowance for doubtful accounts.

NOTE－5 AMOUNT DUE TO A RELATED PARTY

As of September 30, 2010 and December 31, 2009, a balance of $1,876,126 and $1,960,874 due to a stockholder, Mr. Lian Guo represented a temporary advance to the Company which was unsecured, interest-free and repayable on demand.

NOTE－6 INVESTMENT IN AN UNCONSOLIDATED AFFILIATE

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

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

	September 30, 2010			December 31, 2009
Investment in Medicine at the date of acquisition	$	106,804		$	106,804
Amount due from Medicine		741,910			980,575
Less: allowance for doubtful accounts		(741,910	)		(980,575	)
Share of accumulated losses in Medicine		(870,823	)		(870,823	)
Foreign translation difference		(37,080	)		(20,783	)
Loss in excess of investment in an unconsolidated affiliate	$	(801,099	)	$	(784,802	)

15

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

For the nine months ended September 30, 2010, the Company received $254,533 from Medicine as recovery from an unconsolidated affiliate and recorded as “other income” in the operation.

NOTE－7 PREPAYMENTS AND OTHER CURRENT ASSETS

Prepayments and other current assets consisted of the following:

	September 30, 2010		December 31, 2009
Advances to employees	$	192,626	$	151,720
Prepayments to equipment vendors		61,809		41,169
Prepaid operating expenses		13,671		84,566
	$	268,106	$	277,455

NOTE－8 OTHER PAYABLES AND ACCRUED LIABILITIES

Other payables and accrued liabilities consisted of the following:

	September 30, 2010		December 31, 2009
Business tax payable	$	82,859	$	81,174
Government levy payable		30,370		34,435
Salaries and welfare payable		102,490		97,724
Advances from employees		9,594		50,411
Customer deposits		52,555		-
Accrued operating expenses		53,870		164,809
	$	331,738	$	428,553

NOTE－9 INCOME TAXES

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

	Nine months ended September 30,
	2010		2009
Tax jurisdiction from:
– Local	$	-	$	-
– Foreign		2,376,646		1,351,959
Income before income taxes	$	2,376,646	$	1,351,959

16

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

The provision for income taxes consisted of the following:

	Nine months ended September 30,
	2010		2009
Current:
– Local	$	-	$	-
– Foreign		499,081		400,539
Deferred:
– Local		-		-
– Foreign		-		-
Income tax expense	$	499,081	$	400,539

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

United States of America

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

The PRC

Under the Corporate Income Tax Law of the People’s Republic of China, the Company’s subsidiaries in the PRC are subject to the unified statutory income tax rate of 25%. The reconciliation of income tax rate to the effective income tax rate for the nine months ended September 30, 2010 and 2009 is as follows:

	Nine months ended September 30,
	2010			2009
Income before income taxes from PRC operation	$	2,376,646		$	1,351,959
Statutory income tax rate		25	%		25	%
Income tax expense at statutory rate		594,162			337,990
Net operating loss not recognized as deferred tax assets		2,328			68,806
Non-deductible items		(97,409	)		(6,257	)
Income tax expense	$	499,081		$	400,539

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

17

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

	September 30, 2010			December 31, 2009
Deferred tax assets:
Net operating loss carryforwards	$	388,637		$	386,309
Allowance for doubtful accounts		844,420			919,616
Total deferred tax assets		1,233,057			1,305,925
Less: valuation allowance		(1,233,057	)		(1,305,925	)
Deferred tax assets	$	-		$	-

As of September 30, 2010, the Company incurred $1,554,549 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 $1,233,057 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 nine months ended September 30, 2010, the valuation allowance decreased by $72,868 primarily relating to the change in allowance for doubtful accounts.

NOTE－10 SEGMENT INFORMATION

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

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

l Extraction Business – extraction of raw materials to medicine ingredients and distribution of extracted ingredients for medicine manufacturing uses.

The Company operates these segments in the PRC and all of the identifiable assets of the Company are located in the PRC during the period presented.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 3). The Company had no inter-segment sales for the nine months ended September 30, 2010 and 2009. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the different technology and marketing strategies of each business unit for making internal operating decisions.

Summary of financial information concerning the Company’s reportable segments is shown in the following table for the three and nine months ended September 30, 2010 and 2009:

	Three months ended September 30, 2010
	Medical Business			Extraction Business			Total
Operating revenue, net:
Product sales	$	-		$	10,197		$	10,197
Service revenue		963,730			221,091			1,184,821
		963,730			231,288			1,195,018
Cost of revenue		(139,114	)		(45,960	)		(185,074	)
Gross profit	$	824,616		$	185,328		$	1,009,944
Depreciation and amortization	$	166,386		$	37,350		$	203,736
Net income		547,357			151,703			699,060
Expenditure for long-lived assets	$	58,682		$	2,495		$	61,177

18

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

	Nine months ended September 30, 2010
	Medical Business			Extraction Business			Total
Operating revenue, net:
Product sales	$	-		$	62,837		$	62,837
Service revenue		2,741,683			366,763			3,108,446
		2,741,683			429,600			3,171,283
Cost of revenue		(400,567	)		(135,395	)		(535,962	)
Gross profit	$	2,341,116		$	294,205		$	2,635,321
Depreciation and amortization	$	427,837		$	146,936		$	574,773
Net income		1,558,412			319,153			1,877,565
Expenditure for long-lived assets	$	58,682		$	660,896		$	719,578

	Three months ended September 30, 2009
	Medical Business			Extraction Business			Total
Operating revenue, net :
Product sales	$	-		$	113,091		$	113,091
Service revenue		896,387			-			896,387
		896,387			113,091			1,009,478
Cost of revenue		(133,885	)		(136,093	)		(269,978	)
Gross profit	$	762,502		$	(23,002	)	$	739,500
Depreciation and amortization	$	133,885		$	41,180		$	175,065
Net income (loss)		486,972			(89,322	)		397,650
Expenditure for long-lived assets	$	-		$	1,291		$	1,291

	Nine months ended September 30, 2009
	Medical Business			Extraction Business			Total
Operating revenue, net:
Product sales	$	-		$	132,256		$	132,256
Service revenue		2,424,264			-			2,424,264
		2,424,264			132,256			2,556,520
Cost of revenue		(401,583	)		(144,838	)		(546,421	)
Gross profit	$	2,022,681		$	(12,582	)	$	2,010,099
Depreciation and amortization	$	401,583		$	136,019		$	537,602
Net income (loss)		1,226,645			(275,225	)		951,420
Expenditure for long-lived assets	$	-		$	1,291		$	1,291

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

19

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

NOTE－11 CONCENTRATIONS OF RISK

The Company is exposed to the following concentrations of risk:

(a)         Major customers

For the three months and nine months ended September 30, 2010, the customers who account for 10% or more of the Company’s revenues are presented as follows:

	Three months ended September 30, 2010					September 30, 2010
	Revenues		Percentage of revenues			Trade accounts receivable
Customer A	$	219,767		18	%	$	74,648
Customer B		860,928		81	%		782,695
Total:	$	1,090,775		99	%	$	857,343

	Nine months ended September 30, 2010					September 30, 2010
	Revenues		Percentage of revenues			Trade accounts receivable
Customer A	$	366,078		11	%	$	74,648
Customer B		2,741,684		87	%		782,695
Total:	$	3,107,762		98	%	$	857,343

For the three and nine months ended September 30, 2009, there was one customer who accounted for 10% or more of the Company’s revenue.

(b)         Major vendors

For the three and nine months ended September 30, 2010, there was one vendor who accounted for 10% or more of the Company’s purchases.

For the three and nine months ended September 30, 2009, there were two vendors who accounted for 10% or more of the Company’s purchases.

(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.

20

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

(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.

21

GFR PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010

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

(Unaudited)

 (e)         Economic and political risks

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

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

NOTE－12 COMMITMENTS AND CONTINGENCIES

The Company 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 2011. Total rent expenses for the nine months ended September 30, 2010 and 2009 was $1,578 and $1,581, respectively.

As of September 30, 2010, the Company has $1,612 of future minimum rental payments due under the non-cancelable operating lease agreement in the next 12 months.

NOTE－13 COMPARATIVE FIGURES

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

22

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

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

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

FORWARD LOOKING STATEMENTS

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

GENERAL DESCRIPTION OF BUSINESS

GFR Pharmaceuticals, Inc. is a holding company with two business segments. The Company is involved in a biological extraction business that extracts raw materials to medicine ingredients and distributes the extracted ingredients for medicine manufacturing uses by Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”). The Company also operates a Cancer Diagnosis and Treatment Center, which is a joint operation of PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery System imaging center operated by Shan Xi New Century Scientific Investment Development Ltd. (“New Century”) in the PRC.

Bao Sai is a high-tech company in China chartered and authorized by the Chinese government for involvement in researching and inventing, manufacturing and sales of biological separation medium products. 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. 

23

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

In the next two years, Bao Sai intends to expand the production scale of separation media technology by two or five times by developing media derivatives—civil products. With the adsorption media, civil products will be removed the harmful substances such as bacteria, viruses, organic pesticides and tobacco tar etc. Civil products have a wide market and we believe they create more revenues and profits for the Company.

New Century is a medical equipment investment management company, which mainly engages in investment and management of cancer treatment equipment and provides comprehensive services for customers with advanced radiology and oncology equipment.

New Century cooperates with Tangdu Hospital in Shan Xi province, which is affiliated with the Fourth Military Medical University. New Century’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”). The Center is a well known cancer treatment center with a team of experts, for patients in need of high-quality treatment in the industry with high authority, in the five northwestern provinces of China and the country is renowned.

New Century has successfully established a large integrated medical professional website - Medical Sina (www.120md.com), which provides extensive publicity and online integrated counseling services for patients.

New Century has established an outstanding marketing team and management team, which will extend our business to neighboring provinces of Shaanxi Province and other provinces of the country. The Center currently has owns three different devices used for radiological imaging of the brain and body and for use in cancer treatment and runs in full volume of business so that the existing equipment capacity can not meet the requirements of patients. The company’s operating revenue and profit are increasing steadily.

The Company intends to continue to invest in the construction and management of cancer treatment equipment in the next few years. With its resources, technologies and services, the Company believes it will seize market opportunities, gradually expand the treatment capacity and improve profitability by the addition of cancer treatment centers or hospitals. The Company may build an integrated service center with prevention, screening, treatment and rehabilitation capabilities in the Northwest of China.

The Company needs additional capital to finance its expansion plans.  The Company does not presently have a commitment for such additional capital and there is no assurance such capital can be obtained on terms acceptable to the Company.

RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010

Revenues

The revenue from our operation of the Center increased from $896,387 for the three months ended September 30, 2009 to $1,184,821 for the same period of 2010, an increase of 32.18%; and increased from $ 2,424,264 during the nine months ended September 30, 2009 to $ 3,108,446 during the nine months ended September 30, 2010, an increase of 28.22%. In the third quarter of 2010, the cancer treatment business accounted for $1,184,821 (99.15%) of our revenue. The product sales generated $10,197of revenue in the third quarter of 2010 as compared to $113,091 in the same period of 2009. Our overall revenues for the third quarter of 2010 increased from $1,009,478 for the three months ended September 30, 2009 to $1,195,018 for the same period of 2010, an increase of 18.38%. Likewise, our overall revenue increased from $2,556,520 during the nine months ended September 30, 2009 to $3,171,283 during the nine months ended September 30, 2010. The increase was attributed primarily to the increased service revenue from the Center.

Expenses

Operating expenses for the third quarter of 2010 were $151,814 as compared to $188,381 for the same period of 2009, a decrease of $36,567, a decrease of 19.4%.  For the nine months ended September 30, 2010, our operating expenses decreased from $674,504 for the nine months ended September 30, 2010 to $514,156, a decrease of 23.8%. This decrease was attributable to the reduction of professional and consultancy expenses during the nine months ended September 30, 2010 compared to the same period of 2009.

24

Net Income

Net income attributable to GFR Pharmaceuticals, Inc. during the three and nine months ended September 30, 2009 was $376,077 and $898,679 respectively, compared to $671,692 and $1,799,644 during the three and nine months ended September 30, 2010.  This increase was primarily due to our increased revenue from New Century, a slight decrease of our operating expenses and increased technical service revenue from Bao Sai for the third quarter of 2010.

We hope to remain profitable in 2010 through the implementation of our marketing strategies.

Impact of Inflation

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

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

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Analysis

	September 30, 2010			December 31, 2009
Working Capital	$	(99,032	)	$	(1,760,129	)
Stockholders’ Equity	$	6,256,892		$	4,322,122
Total Liabilities	$	3,478,964		$	3,436,619

Our working capital deficit was decreased from $1,760,129 as of December 31, 2009 to $99,032 as of September 30, 2010, which was mainly attributable to the increase in cash and cash equivalents generated from operating activities in New Century.

Stockholders’ equity increased from $4,322,122 as of December 31, 2009 to $6,256,892 as of September 30, 2010, an increase of $1,934,770 or 44.76%.

Total liabilities increased from $3,436,619 as of December 31, 2009 to $3,478,964 as of September 30, 2010, an increase of $42,345 or 1.23%. In addition, our principal shareholder, Mr. Guo Li’an made a loan to fund our operations since the first quarter of 2008. As of September 30, 2010 and December 31, 2009, the balance of the loan was $1,876,126 and $1,960,874 respectively, which was unsecured, interest-free and repayable on demand.

As of September 30, 2010, cash and cash equivalents increased to $1,429,840 from $55,486 as of December 31, 2009, an increase of $1,374,354 or 2,476.94%. The increase of cash and cash equivalents was mainly due to the cash flows provided from operating activities by $2,292,684 for the nine months ended September 30, 2010. Our liquidity improved dramatically during the nine months ended September 30, 2010. We expect this trend will continue for the coming quarter

Item 3. Quantitative and Qualitative Disclosure about Market Risk

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

25

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer, Zhao Yan Ding, and Principal Financial Officer, Zhong Ya Li, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report.  Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Control Over Financial Reporting. During the most recent quarter ended September 30, 2010, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A.  Risk Factors

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4.   Removed and Reserved.

Item 5. Other Information

None

Item 6. Exhibits

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

26

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:  November 11 , 2010	By:	/s/Zhao Yan Ding
		Zhao Yan Ding, Chief Executive Officer
		(Principal executive officer)

DATE:  November 11, 2010	By:	/s/ Zhong Ya Li
		Zhong Ya Li, Chief Financial Officer
		(Principal financial officer)

27