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 September 30, 2009





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)





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  ̈
    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  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the ExchangeAct). Yes  ̈   Nox





The
number of shares of common stock, no par value per share, outstanding as of
November 11, 2009 was 42,079,940











GFR
PHARMACEUTICALS INC.





FORM
10-Q





QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2009





INDEX





TABLE OF CONTENTS
                PagePART
      I – FINANCIAL INFORMATIONItem
      1:
                Financial
      Statements
                3 –
      26Item
      2:
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                27Item
      3:
                Quantitative
      and Qualitative Disclosures About Market Risk
                31Item
      4T:
                Controls
      and Procedures
                31PART
      II – OTHER INFORMATIONItem
      1:
                Legal
      Proceedings
                31Item
      1A:
                Risk
      Factors
                32Item
      2:
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                32Item
      3:
                Defaults
      Upon Senior Securities
                32Item
      4:
                Submission
      of Matters to a Vote of Security Holders
                32Item
      5:
                Other
      Information
                32Item
      6:
                Exhibits
                32








2





PART
I. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





GFR
PHARMACEUTICALS INC.





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)





PageCondensed
      Consolidated Balance Sheets as of September 30, 2009 and December 31,
      2009
                
                4Condensed
      Consolidated Statements of Operations And Comprehensive Income for the
      nine and three months ended September 30, 2009 and 2008
                
                5Condensed
      Consolidated Statements of Cash Flows for the nine and three months ended
      September 30, 2009 and 2008
                
                6Condensed
      Consolidated Statement of Stockholders’ Equity for the nine and three
      months ended September 30, 2009
                
                7Notes
      to Condensed Consolidated Financial Statements
                
                8





3





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


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


As ofSeptember 30,
                                              
                                              
                                              December 31,2009
                                              
                                              
                                              2008(unaudited)
                                              
                                              
                                              (audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                              
                                              $
                                              30,289
                                              
                                              
                                              $
                                              552,398Trade
      accounts receivable, net
                                              
                                              
                                              591,896
                                              
                                              
                                              
                                              659,329Note
      receivable, net
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Inventories,
      net
                                              
                                              
                                              308,688
                                              
                                              
                                              
                                              282,307Prepayments
      and other receivables
                                              
                                              
                                              221,160
                                              
                                              
                                              
                                              243,242Other
      receivable, net
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Amount
      due from unconsolidated affiliate, net of allowance of
      $1,103,046
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Operating
      lease prepaid - current portion
                                              
                                              
                                              7,261
                                              
                                              
                                              
                                              7,255Total
      current assets
                                              
                                              
                                              1,159,294
                                              
                                              
                                              
                                              1,744,531Non-current
      assets:Property,
      plant and equipment, net
                                              
                                              
                                              6,337,121
                                              
                                              
                                              
                                              6,862,609Intangible
      asset, net
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Operating
      lease prepaid – non-current portion
                                              
                                              
                                              145,521
                                              
                                              
                                              
                                              150,844Long
      term prepayment
                                              
                                              
                                              569,276
                                              
                                              
                                              
                                              589,822TOTAL
      ASSETS
                                              
                                              $
                                              8,211,212
                                              
                                              
                                              $
                                              9,347,806LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Amount
      due to a related party
                                              
                                              $
                                              1,954,178
                                              
                                              
                                              $
                                              1,951,203Note
      payable, related parties
                                              
                                              
                                              563,296
                                              
                                              
                                              
                                              2,493,318Trade
      accounts payable
                                              
                                              
                                              123,457
                                              
                                              
                                              
                                              124,700Note
      payable
                                              
                                              
                                              -
                                              
                                              
                                              
                                              219,472Income
      tax payable
                                              
                                              
                                              156,809
                                              
                                              
                                              
                                              171,847Other
      payables and accrued liabilities
                                              
                                              
                                              530,398
                                              
                                              
                                              
                                              456,641Total
      current liabilities
                                              
                                              
                                              3,328,138
                                              
                                              
                                              
                                              5,417,181Loss
      in excess of investment in unconsolidated affiliate
                                              
                                              
                                              785,744
                                              
                                              
                                              
                                              785,100Total
      liabilities
                                              
                                              
                                              4,113,882
                                              
                                              
                                              
                                              6,202,281COMMITMENTS
      AND CONTINGENCIES (Note 23)GFRP
      Company stockholders’ equity:Common
      stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares
      issued and outstanding as of September 30, 2009 and December 31,
      2008
                                              
                                              
                                              42,080
                                              
                                              
                                              
                                              42,080Additional
      paid-in capital
                                              
                                              
                                              3,712,120
                                              
                                              
                                              
                                              3,712,120Accumulated
      other comprehensive income
                                              
                                              
                                              211,170
                                              
                                              
                                              
                                              210,695Statutory
      reserve
                                              
                                              
                                              423,760
                                              
                                              
                                              
                                              423,760Accumulated
      deficits
                                              
                                              
                                              (777,049
                                              )
                                              
                                              
                                              (1,675,728
                                              )Total
      GFRP shareholders’ equity
                                              
                                              
                                              3,612,081
                                              
                                              
                                              
                                              2,712,927Non-controlling
      interest
                                              
                                              
                                              485,249
                                              
                                              
                                              
                                              432,598Total
      equity
                                              
                                              
                                              4,097,330
                                              
                                              
                                              
                                              3,145,525TOTAL
      LIABILITIES AND EQUITY
                                              
                                              $
                                              8,211,212
                                              
                                              
                                              $
                                              9,347,806




See
accompanying notes to condensed consolidated financial statements.





4





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


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





Threemonths endedSeptember30,
                
                
                Ninemonths endedSeptember30,2009
                
                
                2008
                
                
                2009
                
                
                2008(unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)REVENUE,
      NETService
      revenue
                
                $
                896,387
                
                
                $
                941,336
                
                
                $
                2,424,264
                
                
                $
                2,517,325Product
      sales
                
                
                113,091
                
                
                
                87,011
                
                
                
                132,256
                
                
                
                329,778Total
      revenue, net
                
                
                1,009,478
                
                
                
                1,028,347
                
                
                
                2,556,520
                
                
                
                2,847,103COST OF REVENUE
      (exclusive of depreciation)Cost
      of products
                
                
                126,476
                
                
                
                79,471
                
                
                
                135,212
                
                
                
                215,417GROSS
      PROFIT
                
                
                883,011
                
                
                
                948,876
                
                
                
                2,421,308
                
                
                
                2,631,686OPERATING
      EXPENSES:Depreciation
      and amortization
                
                
                175,065
                
                
                
                186,441
                
                
                
                537,602
                
                
                
                543,265General
      and administrative
                
                
                156,827
                
                
                
                206,506
                
                
                
                543,280
                
                
                
                748,860Total
      operating expenses
                
                
                331,892
                
                
                
                392,947
                
                
                
                1,080,882
                
                
                
                1,292,125INCOME
      FROM OPERATIONS
                
                
                551,119
                
                
                
                555,929
                
                
                
                1,340,426
                
                
                
                1,339,561OTHER
      INCOME (EXPENSE):Interest
      income
                
                
                6,074
                
                
                
                6,151
                
                
                
                16,938
                
                
                
                6,239Rental
      income
                
                
                -
                
                
                
                158,556
                
                
                
                -
                
                
                
                561,520Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                (4,831
                )
                
                
                -Others
                
                
                -
                
                
                
                -
                
                
                
                (574
                )
                
                
                -Equity
      in net income of an unconsolidated affiliate
                
                
                -
                
                
                
                3,464
                
                
                
                -
                
                
                
                10,180Total
      other income
                
                
                6,074
                
                
                
                168,171
                
                
                
                11,533
                
                
                
                577,939INCOME
      BEFORE INCOME TAXES
                
                
                557,193
                
                
                
                724,100
                
                
                
                1,351,959
                
                
                
                1,917,500Income
      tax expenses
                
                
                (159,543
                )
                
                
                (180,426
                )
                
                
                (400,539
                )
                
                
                (464,341
                )NET
      INCOME
                
                
                397,650
                
                
                
                543,674
                
                
                $
                951,420
                
                
                $
                1,453,159Net
      income attributable to non-controlling interest
                
                
                (21,573
                )
                
                
                (27,431
                )
                
                
                (52,741
                )
                
                
                (72,030
                )NET
      INCOME ATTRIBUTABLE TO GFRP STOCKHOLDERS
                
                $
                376,077
                
                
                $
                516,243
                
                
                $
                898,679
                
                
                $
                1,381,129Other
      comprehensive income:-
      Foreign currency translation gain
                
                
                350
                
                
                
                22,193
                
                
                
                475
                
                
                
                506,694COMPREHENSIVE
      INCOME
                
                $
                376,427
                
                
                $
                538,436
                
                
                $
                899,154
                
                
                $
                1,887,823Net
      income per share attributable to GFRP stockholders – Basic and
      diluted
                
                $
                0.01
                
                
                $
                0.01
                
                
                $
                0.02
                
                
                $
                0.03Weighted
      average number of GFRP shares outstanding – Basic and
    diluted
                
                
                42,079,940
                
                
                
                42,079,940
                
                
                
                42,079,940
                
                
                
                42,079,940





See
accompanying notes to condensed consolidated financial statements.





5





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATION STATEMENT OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008


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




Ninemonths endedSeptember30,2009
                                            
                                            
                                            2008(unaudited)
                                            
                                            
                                            (unaudited)Cash
      flows from operating activities:Net
      income
                                            
                                            $
                                            898,679
                                            
                                            
                                            $
                                            1,381,129Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                                            
                                            
                                            537,602
                                            
                                            
                                            
                                            543,265Equity
      in net income of an unconsolidated affiliate
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (10,180
                                            )Non-controlling
      interest
                                            
                                            
                                            52,741
                                            
                                            
                                            
                                            72,030Change
      in operating assets and liabilities:Trade
      accounts receivable, net
                                            
                                            
                                            67,943
                                            
                                            
                                            
                                            (291,075
                                            )Other
      receivable
                                            
                                            
                                            (42,374
                                            )
                                            
                                            
                                            -Inventories
                                            
                                            
                                            (26,137
                                            )
                                            
                                            
                                            (6,127
                                            )Prepayments
      and deposits
                                            
                                            
                                            85,666
                                            
                                            
                                            
                                            188,124Trade
      accounts payable
                                            
                                            
                                            (1,345
                                            )
                                            
                                            
                                            (802,990
                                            )Income
      tax payable
                                            
                                            
                                            (13,045
                                            )
                                            
                                            
                                            (46,794
                                            )Other
      payables and accrued liabilities
                                            
                                            
                                            71,222
                                            
                                            
                                            
                                            7,809Net
      cash provided by operating activities
                                            
                                            
                                            1,630,952
                                            
                                            
                                            
                                            1,035,191Cash
      flows from investing activities:Partial
      payment in relation to the Bao Sai acquisition, net of cash
      acquired
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (864,709
                                            )Repayment
      from an unconsolidated affiliate
                                            
                                            
                                            -
                                            
                                            
                                            
                                            176,694Proceeds
      from repayment of note receivable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            1,414,516Repayment
      of notes payable – related to acquisition of Bao Sai – related
      parties
                                            
                                            
                                            (1,931,162
                                            )
                                            
                                            
                                            -Purchase
      of property, plant and equipment
                                            
                                            
                                            (1,291
                                            )
                                            
                                            
                                            (207,230
                                            )Net
      cash (used in) provided by investing activities
                                            
                                            
                                            (1,932,453
                                            )
                                            
                                            
                                            519,271Cash
      flows from financing activities:Advances
      to related companies
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (49,897
                                            )Repayment
      of notes payable
                                            
                                            
                                            (219,549
                                            )
                                            
                                            
                                            -Advance
      from stockholders
                                            
                                            
                                            -
                                            
                                            
                                            
                                            221,821Repayment
      from stockholders
                                            
                                            
                                            (1,244
                                            )Net
      cash (used in) provided by financing activities
                                            
                                            
                                            (220,793
                                            )
                                            
                                            
                                            171,924Foreign
      currency translation adjustment
                                            
                                            
                                            185
                                            
                                            
                                            
                                            36,484NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                            
                                            
                                            (522,109
                                            )
                                            
                                            
                                            1,762,870CASH
      AND BANK BALANCE, BEGINNING OF PERIOD
                                            
                                            
                                            552,398
                                            
                                            
                                            
                                            9,951CASH
      AND BANK BALANCE, END OF PERIOD
                                            
                                            $
                                            30,289
                                            
                                            
                                            $
                                            1,772,821SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                                            
                                            $
                                            400,539
                                            
                                            
                                            $
                                            491,301Cash
      paid for interest expenses
                                            
                                            $
                                            4,831
                                            
                                            
                                            $
                                            -




See
accompanying notes to condensed consolidated financial statements.





6





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


CONDENSED
CONSOLDIATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009


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





GFRP Company ShareholderAccumulated
                              
                              
                              
                              
                              
                              RetainedCommon stock
                              
                              
                              Additional
                              
                              
                              other
                              
                              
                              
                              
                              
                              earningsNo. of
                              
                              
                              
                              
                              
                              paid-in
                              
                              
                              comprehensive
                              
                              
                              Statutory
                              
                              
                              (accumulated
                              
                              
                              Non-controllingshares
                              
                              
                              Amount
                              
                              
                              capital
                              
                              
                              income
                              
                              
                              reserve
                              
                              
                              deficit)
                              
                              
                              interest
                              
                              
                              TotalBalance
      as of December 31, 2008 (Audited)
                              
                              
                              42,079,940
                              
                              
                              $
                              42,080
                              
                              
                              $
                              3,712,120
                              
                              
                              $
                              210,695
                              
                              
                              $
                              423,760
                              
                              
                              $
                              (1,675,728
                              )
                              
                              $
                              432,598
                              
                              
                              $
                              3,145,525Foreign
      currency translation adjustment
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              475
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              475Net
      income for the period
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              898,679
                              
                              
                              
                              52,741
                              
                              
                              
                              951,420Total
      comprehensive income
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              951,895Share
      of foreign currency translation adjustment by non-controlling
      interest
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              (90
                              )
                              
                              
                              (90
                              )Balance
      as of September  30, 2009 (Unaudited)
                              
                              
                              42,079,940
                              
                              
                              $
                              42,080
                              
                              
                              $
                              3,712,120
                              
                              
                              $
                              211,170
                              
                              
                              $
                              423,760
                              
                              
                              $
                              (777,049
                              )
                              
                              $
                              485,249
                              
                              
                              $
                              4,097,330




See
accompanying notes to condensed consolidated financial
statements.





7





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE 1
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”).





Xi'an Hua
Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua Long”) is a
wholly-owned subsidiary of the Company, which was incorporated as a limited
liability company in the PRC on December 23, 1999. Its principal activity is an
investment holding of 95% equity interest in New Century Scientific Investment
Ltd. (“New Century”).





New
Century was incorporated as a limited liability company in the PRC on November
23, 2001 with a registered capital of RMB30,000,000 (equivalent to
US$3,636,000). It jointly operates a PET Scanner and Rotary Gamma Ray
Stereotactic Neurosurgery System imaging center with Tong Du Hospital ("the
Hospital") in Xian City, Shaanxi Province, the PRC. The duration of the
operation was 11 years and it will expire in 2017.





On May
14, 2008, the Company completed the acquisition of Xi’an Jiaoda Bao Sai
Bio-Technology Co., Ltd ("Bao Sai") pursuant to the terms of a Stock Purchase
Agreement (“the Agreement”) dated January 1, 2008, between GFRP and Bao Sai for
a consideration of $4,500,211 (approximately RMB33,000,000) for 96.77% of its
equity interest in Bao Sai, based on the aggregate net book value of total
assets and liabilities of Bao Sai as of December 31, 2007. The closing date was
January 1, 2008. Upon the completion of the transaction, Bao Sai became a
subsidiary of the Company.





GFRP, Hua
Long, New Century and Bao Sai are hereinafter referred to as (the
“Company”).





NOTE 2 GOING
CONCERN AND MANAGEMENT PLAN





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. As of September 30, 2009, the Company had a
net working capital deficiency of $2,168,844 that indicates the Company may need
additional financing to meet cash requirements for its operations in order to
continue as a going concern.





The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded amounts of assets or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management believes the Company’s ability
to continue as a going concern is depending upon its ability to maintain
profitable operations and to obtain additional financing or refinancing as may
be required. The Company has generated net income and positive cash inflows from
operating activities during the periods ended September 30, 2009. The Company
will devote more resources on marketing in order to increase the market share
and improve the operating performance. Management believes the Company will
generate sufficient cash flow to meet its obligations on a timely basis in the
foreseeable future.





NOTE3 SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Basis of
preparation




These
interim condensed consolidated financial statements are unaudited. In the
opinion of management, all adjustments and disclosures necessary for a fair
presentation of these interim statements have been included. The results
reported in the condensed consolidated financial statements for any interim
periods are not necessarily indicative of the results that may be reported for
the entire year. The accompanying condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission
and do not include all information and footnotes necessary for a complete
presentation of financial statements in conformity with accounting principles
generally accepted in the United States. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and accompanying footnotes included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2008.





8





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





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 period
reported. Actual results may differ from these estimates.





Equity
Method of Accounting





Under
FASB ASC 860-10-60 (formerly Accounting Research Bulletin No. 51 “Consolidation
of Financial Statements (as Amended)” (“ARB 51”)), 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 FASB ASC 323-10-15 (formerly Accounting
Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”) 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 and the application of the equity method under FASB
ASC 860-10-60, 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 consolidated balance sheet as an approximate
$785,744 liability as of September 30, 2009. (See Note 14)





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. The reversal of the Company’s
liability into income will occur when Medicine commences business and generates
operating profit. GFRP will continue to evaluate the equity method investment in
Medicine quarterly to review the reasonableness of the liability
balance.





Shipping
and handling costs





Shipping
and handling costs were included in operating expenses. During the nine months
ended September 30, 2009 and 2008, shipping and handling costs were $80,956
and $72,836 respectively.





Advertising
costs





Advertising
costs are accounted for in accordance with FASB ASC 720-35 (formerly SOP
93-7,“Reporting for Advertising
Costs”). No
advertising expense was incurred for the nine months ended September 30, 2009
and 2008.





Research
and development expenses





Research
and development costs are charged to expense when incurred and are included in
operating expenses. During the nine months ended September 30, 2009 and
2008, research and development costs expensed to operating expenses
were approximately $27,906 and $524,042 respectively.





9





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





Research
and development expenses (Continued)





Comprehensive
income





FASB ASC
220-10 (formerly SFAS No. 130,“Reporting
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
the period from non-owner sources. Accumulated comprehensive income 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.





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 consolidated statement of
operations.





The
reporting currency of the Company is United States dollar ("US$"). The Company's
subsidiaries in the PRC, Hua Long, New Century and Bao Sai maintain their books
and records in its 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 US$ are translated into US$, in accordance with
FASB ASC 830-10-15 (formerly SFAS No 52. “Foreign Currency
Translation”),
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
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.





Recently
issued accounting standards





Foreign
currency





The
Company uses United States dollars (“US Dollar” or “US$” or “$”) for financial
reporting purposes. However, the Company maintains the books and records in its
functional currency, Chinese Renminbi (“RMB”), being the primary currency of the
economic environment in which its operations are conducted. In general, the
Company translates its assets and liabilities into U.S. dollars using the
applicable exchange rates prevailing at the balance sheet date, and the
statement of income is translated at average exchange rates during the reporting
period. Equity accounts are translated at historical rates. Adjustments
resulting from the translation of the Company’s financial statements are
recorded as accumulated other comprehensive income.





The
exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the consolidated financial statements were as
follows:-


As of September 30, 2009
                          
                          
                          As of December 31, 2008Balance sheet items, except for equity accounts
                          
                          US$1=RMB6.8290
                          
                          
                          US$1=RMB6.8346Nine months ended September 30,2009
                          
                          
                          2008Items
      in the statements of income and cash flows
                          
                          US$1=RMB6.8322
                          
                          
                          US$1=RMB6.9989





10





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





Recently
issued accounting standards (continued)





Fair
value measurements





ASC Topic
820, Fair Value Measurement and Disclosures, defines fair value as 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 on the
measurement date. This topic also establishes a fair value hierarchy which
requires classification based on observable and unobservable inputs when
measuring fair value. There are three levels of inputs that may be used to
measure fair value:





Level
      1 -
            Quoted
      prices in active markets for identical assets or
    liabilities.


Level
      2 -
            Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilities.


Level
      3 -
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities.





The
carrying values of cash and cash equivalents, trade receivables and payables,
and short-term debts approximate their fair values due to their short
maturities.





There
were no assets and liabilities measured at fair value on a nonrecurring basis as
of September 30, 2009.





In June
2009, the FASB established the FASB Accounting Standards CodificationTM (ASC)
as the single source of authoritative U.S generally accepted accounting
principles (GAAP) recognized by the FASB to be applied to nongovernmental
entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The ASC superseded all previously
existing non-SEC accounting and reporting standards, and any prior sources of
U.S. GAAP not included in the ASC or grandfathered are not authoritative. New
accounting standards issued subsequent to June 30, 2009 are communicated by the
FASB through Accounting Standards Updates (ASUs). The ASC did not change current
U.S. GAAP but changes the approach by referencing authoritative literature by
topic (each a “Topic”) rather than by type of standard. The ASC has been
effective for the Company effective July 1, 2009. Adoption of the ASC did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements, but references in the Company’s Notes to Consolidated Financial
Statements to former FASB positions, statements, interpretations, opinions,
bulletins or other pronouncements are now presented as references to the
corresponding Topic in the ASC.





Effective
January 1, 2009, the first day of fiscal 2009, the Company adopted FASB ASC
350-30 and ASC 275-10-50 (formerly FSP FAS 142-3, “Determination of the Useful
Life of Intangible Assets”), which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142 ("SFAS 142"), “Goodwill and
Other Intangible Assets.” The Company will apply ASC 350-30 and ASC 275-10-50
prospectively to intangible assets acquired subsequent to the adoption
date.  The adoption of these revised provisions had no impact on the
Company’s Condensed Consolidated Financial Statements.





Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS 161,
“Disclosures about Derivative Instruments and Hedging Activities”), which amends
and expands previously existing guidance on derivative instruments to require
tabular disclosure of the fair value of derivative instruments and their gains
and losses., This ASC also requires disclosure regarding the credit-risk related
contingent features in derivative agreements, counterparty credit risk, and
strategies and objectives for using derivative instruments. The adoption of this
ASC did not have a material impact on the Company’s Condensed Consolidated
Financial Statements.




During
2008, the Company adopted FASB ASC 820-10 (formerly FSP
FAS 157-2, "Effective Date of FASB Statement 157"), which deferred the
provisions of previously issued fair value guidance for nonfinancial assets and
liabilities to the first fiscal period beginning after November 15, 2008.
Deferred nonfinancial assets and liabilities include items such as goodwill and
other nonamortizable intangibles. Effective January 1, 2009, the Company adopted
the fair value guidance for nonfinancial assets and liabilities. The adoption of
FASB ASC 820-10 did not have a material impact on the Company’s Condensed
Consolidated Financial Statements.





11





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





Recently
issued accounting standards (continued)





Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS 160,
"Noncontrolling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51"), which amends previously issued guidance to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this Statement requires that the consolidated net
income attributable to the parent and the noncontrolling interest be clearly
identified and presented on the face of the consolidated income
statement.  The adoption of the provisions in this ASC did not have a
material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS 141R,
"Business Combinations"), which establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in an
acquiree and the goodwill acquired.  In addition, the provisions in this
ASC require that any additional reversal of deferred tax asset valuation
allowance established in connection with our fresh start reporting on
January 7, 1998 be recorded as a component of income tax expense rather
than as a reduction to the goodwill established in connection with the
fresh start reporting. The Company will apply ASC 805-10 to any business
combinations subsequent to adoption.





Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS 141R-1,
"Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies"), which amends ASC 805-10 to require
that an acquirer recognize at fair value, at the acquisition date, an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If the acquisition-date fair value of
such an asset acquired or liability assumed cannot be determined, the acquirer
should apply the provisions of ASC Topic 450, Contingences, to determine whether
the contingency should be recognized at the acquisition date or after such date.
FSP The adoption of ASC 805-20 did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FASB Staff
Position (“FSP”) No. FAS 107-1 and Accounting Principles Board 28-1, "Interim
Disclosures about Fair Value of Financial Instruments"), which amends previous
guidance to require disclosures about fair value of financial instruments for
interim reporting periods of publicly traded companies as well as in annual
financial statements. The adoption of FASB ASC 825-10-65 did not have a material
impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments").
Under ASC 320-10-65, an other-than-temporary impairment must be recognized if
the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, ASC 320-10-65 requires impairments related to
credit loss, which is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis for each security, to be
recognized in earnings while impairments related to all other factors to be
recognized in other comprehensive income. The adoption of ASC 320-10-65 did not
have a material impact on the Company’s Condensed Consolidated Financial
Statements.





Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly"), which provides guidance on how to determine the fair value of assets
and liabilities when the volume and level of activity for the asset or liability
has significantly decreased when compared
with normal market activity for the asset or liability as well as guidance on
identifying circumstances that indicate a transaction is not orderly. The
adoption of ASC 820-10-65 did not have a material impact on
the





12





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





Recently
issued accounting standards (continued)





Company’s
Condensed Consolidated Financial Statements.




Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS 165,
“Subsequent Events”), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Adoption of ASC
855-10 did not have a material impact on the Company’s Condensed Consolidated
Financial Statements.





New
accounting pronouncements to be adopted





In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets”), which expands the disclosure requirements about plan
assets for defined benefit pension plans and postretirement plans. The Company
is required to adopt these disclosure requirements  in the fourth
quarter of 2009. It is expected the adoption of these disclosure requirements
will have no material effect on the Company’s Consolidated Financial
Statements.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140,” (not yet reflected in
FASB ASC). SFAS No. 166 limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred
the entire financial asset by taking into consideration the transferor’s
continuing involvement. The standard requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s
beneficial interest) and liabilities incurred as a result of a transfer of
financial assets accounted for as a sale. The concept of a qualifying
special-purpose entity is removed from SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
along with the exception from applying FIN 46(R), “Consolidation of Variable
Interest Entities.” The standard is effective for the first annual reporting
period that begins after November 15, 2009 (i.e. the Company’s fiscal year
beginning January 1, 2010), for interim periods within the first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. It is expected the adoption of this Statement
will have no material effect on the Company’s Consolidated Financial
Statements.





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R),” (not yet reflected in FASB ASC). The standard amends FIN
No. 46(R) to require a company to analyze whether its interest in a
variable interest entity (“VIE”) gives it a controlling financial interest. A
company must assess whether it has an implicit financial responsibility to
ensure that the VIE operates as designed when determining whether it has the
power to direct the activities of the VIE that significantly impact its economic
performance. Ongoing reassessments of whether a company is the primary
beneficiary are also required by the standard. SFAS No. 167 amends the
criteria to qualify as a primary beneficiary as well as how to determine the
existence of a VIE. The standard also eliminates certain exceptions that were
available under FIN No. 46(R). This Statement will be effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009  (i.e. the Company’s fiscal year
beginning January 1, 2010), for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. Comparative disclosures will be required for
periods after the effective date. As such, the Company will adopt this Statement
for interim and annual periods ending after January 1, 2010.  It
is expected the adoption of this Statement will have no material effect on the
Company’s Consolidated Financial Statements.





In
August, 2009, the FASB issued ASC Update No. 2009-05 (“Update 2009-05”) to
provide guidance on measuring the fair value of liabilities under FASB ASC 820
(formerly SFAS 157, "Fair Value  Measurements").  The
Company is required to adopt Update 2009-05 in the fourth quarter of
2009.  It is expected the adoption of this Update will have no
material effect on the Company’s Consolidated Financial Statements.





In
October 2009, the FASB concurrently issued the following ASC
Updates:





13





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





Recently
issued accounting standards (continued)




·           ASU
No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That Include
Software Elements (formerly EITF Issue No. 09-3) . This standard removes
tangible products from the scope of software revenue recognition
guidance and also provides guidance on determining whether software deliverables
in an arrangement that includes a tangible product, such as embedded software,
are within the scope of the software revenue guidance.




·           ASU
No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue No. 08-1).  This standard modifies
the revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction.  This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the individual
deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.




These
Accounting Standards Updates should 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.  Alternatively, an entity can elect to adopt these
standards on a retrospective basis, but both these standards must be
adopted in the same period using the same transition method.  The
Company expects to apply this standard on a prospective basis for revenue
arrangements entered into or materially modified beginning January 1,
2011.  The Company is currently evaluating the potential impact these
standards may have on its financial position and results of
operations.





Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Condensed Consolidated
Financial Statements upon adoption.





NOTE4 ACQUISITION OF INTEREST IN BAO
SAI





On
January 1, 2008, the Company acquired 96.77% equity interest in Bao Sai in
exchange for notes payable aggregating $4,500,211 as described below. Bao Sai is
engaged in research, development, manufacture and sale of biological separation
medium products, which is technological know-how and devices engineered to
separate and purify biological products and medicines. Separation medium
products are used in the production of antibiotics, genetic recombinant
medicine, bacteria production, the gene chip, diagnostic reagents and other
biochemical products.





Upon the
completion of the transaction, Bao Sai became a subsidiary of the Company. As
the Company and Boa Sai were under common control before the acquisition, the
acquisition was accounted for under the purchase method of accounting with
initial measurement of assets and liabilities recognized at book value. The
following table summarizes the historical value of the assets acquired and
liabilities assumed at the date of acquisition.





14




GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE4 ACQUISITION OF INTEREST IN BAO SAI
(Continued)




January 1, 2008Acquired
      assets:Cash
      and cash equivalents
                            
                            $
                            539,790Accounts
      receivable, net of reserve for bad debts of $15,222
                            
                            
                            518,786Inventories,
      net
                            
                            
                            258,365Amount
      due from related parties
                            
                            
                            743,887Notes
      receivables, net
                            
                            
                            2,368,745399,712Plant
      and equipment, net
                            
                            
                            1,978,200Intangible
      assets, net
                            
                            
                            154,515Investment
      in an unconsolidated affiliate
                            
                            
                            478,795Total
      assets acquired
                            
                            $
                            7,440,795Less:
      Liabilities assumedAccounts
      payable, trade
                            
                            
                            (884,939
                            )Note
      payable
                            
                            
                            (410,172
                            )Amount
      due to related parties
                            
                            
                            (1,039,606
                            )Other
      payables and accrued liabilities
                            
                            
                            (455,658
                            )Total
      liabilities assumed
                            
                            
                            (2,790,375
                            )Less:
      Non-controlling interest
                            
                            
                            (150,209
                            )Purchase
      price
                            
                            $
                            4,500,211Satisfied
      by:Net
      cash to be paid to acquire Bao Sai
                            
                            $
                            4,500,211The
      sellers of Bao Sai and consideration are as follows:A
      non-related party
                            
                            $
                            616,182Related
      partiesXi’an
      Bio-sep Biological Filler Engineering Technology Co., Ltd.
    (a)
                            
                            $
                            2,170,350Wang
      Zhidong (b)
                            
                            
                            1,143,073Guo
      Lizheng (c)
                            
                            
                            570,606$
                            3,884,029





15





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE4 ACQUISITION OF INTEREST IN BAO SAI
(Continued)





(a)
            This
      is a company owned mostly by the major shareholder of the
      Company.


(b)
            This
      is former director of the Company and a director of Bao
    Sai.


(c)
            This
      is the brother of the major shareholder of the
  Company.





The
purchase price is scheduled to be paid by the Company in two installments for a
term of over 2 years due December 31, 2009. The first installment has been paid
to Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd., the
former owner of 28 million shares, or 46.67% of Bao Sai. The second
installment will be paid to the other three former owners, in amounts equal to
their respective percentage of equity ownership in Bao Sai, during the year
ending December 31, 2009.





As of
September 30, 2009, the purchase price consideration is payable are as
follows:





Repayable
      on or before
                  Year
      ending December 31,
                
                Approximately2009
                
                $
                563,296





Consideration
of the acquisition was in RMB and as payment made during the period was
accounted for at exchange rate as on the date of payment and amount outstanding
as of September 30, 2009 was accounted for at exchange rate at period end, there
is a reconciliation difference of $96,594 represented by exchange difference as
follows:





Amount
      paid
                    
                    $
                    4,253,598Amounts
      still outstanding
                    
                    
                    563,296Exchange
      difference
                    
                    
                    (316,683
                    )Total
      consideration
                    
                    $
                    4,500,211





For the
nine months ended September 30, 2009, the Company made a payment of purchase
price consideration totaling $1,931,162 (equivalent to
RMB13,194,085).





NOTE5 TRADE ACCOUNTS RECEIVABLE, NET





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. Based upon the aforementioned criteria, management has determined that
no allowance for doubtful accounts was required.





September 30, 2009
                                        
                                        
                                        December 31,2008(unaudited)
                                        
                                        
                                        (audited)Accounts
      receivable, cost
                                        
                                        $
                                        1,107,345
                                        
                                        
                                        $
                                        1,174,355Less:
      allowance for doubtful accounts
                                        
                                        
                                        (515,449
                                        )
                                        
                                        
                                        (515,026
                                        )Accounts
      receivable, net
                                        
                                        $
                                        591,896
                                        
                                        
                                        $
                                        659,329





16





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE6 NOTE RECEIVABLE, NET


September 30, 2009
                              
                              
                              December 31,2008(unaudited)
                              
                              
                              (audited)Note
      receivable, cost
                              
                              $
                              1,097,358
                              
                              
                              $
                              1,097,358Less:
      allowance for doubtful accounts
                              
                              
                              (1,097,358
                              )
                              
                              
                              (1,097,358
                              )Note
      receivable, net
                              
                              $
                              -
                              
                              
                              $
                              -





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 collectability has been considered doubtful, an allowance
of doubtful debt was made fully on the notes receivable.





NOTE7 INVENTORIES,
NET





Inventories
consisted of the followings:




September 30, 2009
                                
                                
                                December 31,2008(unaudited)
                                
                                
                                (audited)Raw
      materials
                                
                                $
                                20,451
                                
                                
                                $
                                74,270Work
      in process
                                
                                
                                17,420
                                
                                
                                
                                7,109Finished
      goods
                                
                                
                                636,144
                                
                                
                                
                                568,318674,015
                                
                                
                                
                                649,697Less:
      inventory allowances
                                
                                
                                (365,327
                                )
                                
                                
                                (367,390
                                )Inventories,
      net
                                
                                $
                                308,688
                                
                                
                                $
                                282,307





17





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS




NOTE8 OTHER RECEIVABLE


September 30, 2009
                              
                              
                              December 31,2008(unaudited)
                              
                              
                              (audited)Other
      receivable
                              
                              $
                              1,122,650
                              
                              
                              $
                              1,122,650Less:
      allowance for doubtful accounts
                              
                              
                              (1,122,650
                              )
                              
                              
                              (1,122,650
                              )Other
      receivable , net
                              
                              $
                              -
                              
                              
                              $
                              -





As of
September 30, 2009, the balance of $1,122,650 due from a former subsidiary
of the Company, represented temporary advance from the Company which was
unsecured, interest-free, with a with a fixed repayment term of 5 installments
and is due in full, no later than 2013. As of September 30, 2009, the future
installments to be received are as follows:





Years
      ending December 31,2009
                
                $
                73,1572010
                
                
                131,6832011
                
                
                219,4722012
                
                
                424,3122013
                
                
                274,026Total:
                
                $
                1,122,650





NOTE9 AMOUNT DUE TO RELATED
PARTIES





(a) Amount
due to a stockholder





September 30, 2009
                
                
                December 31, 2008(unaudited)
                
                
                (audited)Due
      to:Mr.
      Lian Guo
                
                $
                1,954,178
                
                
                $
                1,951,203





The
amount represented temporary advance to the Company which was unsecured,
interest-free and repayable on demand.





(b) Note
payable





As of
September 30, 2009, note payable to related parties represented payable to
ex-shareholder of Xi'an Jiaoda Bao Sai Bio-Technology Co., Ltd for the transfer
of their shares to New Century. The amount will be paid to these ex-shareholders
preceding December 31, 2009. (Note 4)





18





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE10 PREPAYMENTS AND OTHER
RECEIVABLES





Prepayments
and other receivables consisted of the following:





September 30, 2009
                
                December 31,2008(unaudited)
                
                (audited)Deposits
                
                $
                65,926
                
                
                $
                77,617Advances
      to employees
                
                
                79,505
                
                
                
                25,334Prepaid
      expenses for operating purpose
                
                
                75,729
                
                
                
                140,291$
                221,160
                
                
                $
                243,242





NOTE11 PROPERTY, PLANT AND EQUIPMENT,
NET





Property,
plant and equipment, net, consisted of the following:





September 30, 2009
                        
                        
                        December 31,2008(unaudited)
                        
                        
                        (audited)Buildings
                        
                        $
                        2,293,130
                        
                        
                        $
                        2,293,130Plant
      and equipment
                        
                        
                        6,322,678
                        
                        
                        
                        6,322,678Motor
      vehicles
                        
                        
                        246,806
                        
                        
                        
                        246,806Furniture,
      fixture and office equipment
                        
                        
                        152,616
                        
                        
                        
                        151,356Foreign
      translation difference
                        
                        
                        40,715
                        
                        
                        
                        33,2649,055,945
                        
                        
                        
                        9,047,234Less:
      accumulated depreciation
                        
                        
                        (2,426,521
                        )
                        
                        
                        (2,067,613
                        )Less:
      foreign translation difference
                        
                        
                        (292,303
                        )
                        
                        
                        (117,012
                        )Property,
      plant and equipment, net
                        
                        $
                        6,337,121
                        
                        
                        $
                        6,862,609





The buildings
were pledged as security for banking facilities related to the note payable as
of December 31, 2008. See also Note 15.





Depreciation
expense for the nine months ended September 30, 2009 and 2008 were $532,159 and
$537,951, respectively.





19





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE 12 INTANGIBLE ASSETS,
NET





September 30, 2009
                                  
                                  
                                  December 31,2008(unaudited)
                                  
                                  
                                  (audited)Technical
      know-how
                                  
                                  $
                                  1,131,064
                                  
                                  
                                  $
                                  1,131,064Less:
      accumulated impairment charge
                                  
                                  
                                  (1,131,064
                                  )
                                  
                                  
                                  (1,131,064
                                  )Net
      book value
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -




As of
September 30, 2009, the carrying value of the technical know-how was stated as
zero. The Company recognized a full impairment charge before the acquisition of
Bao Sai for recoverability test.





NOTE 13 OPERATING LEASE
PREPAID





The
Company has recorded as operating lease prepaid for the costs paid to acquire a
long-term interest to utilize the land underlying the building and production
facility for its business. This type of arrangement is common for the use of
land in the PRC. The operating lease prepaid is amortized on the straight-line
method over the term of the operating lease prepaid of 50 years.





The lease
expenses on operating lease prepaid for the nine months ended September 30,
2009 and 2008 was $1,815 and $3,505, respectively. The estimated amount to be
expensed on operating lease prepaid over each of the next five years and
thereafter is $2,420 per annum.





NOTE 14 INVESTMENT IN AN UNCONSOLIDATED
AFFILIATE





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





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





Investment
      in Medicine at the date of acquisition
                
                $
                106,804Amount
      due from Medicine
                
                
                1,103,046Less:
      allowance for doubtful accounts
                
                
                (1,103,046
                )Share
      of accumulated losses in Medicine at date of loss of
    control
                
                
                (870,823
                )Foreign
      translation difference
                
                
                (21,725
                )Loss
      in excess of investment in unconsolidated affiliate
                
                $
                (785,744
                )





The
balance of $1,103,046 due from Medicine represented a temporary advance from the
Company which was unsecured and interest-free with a fixed repayment term of 4
installments and is due in full, no later than 2012. As of September 30, 2009,
the future installments to be received are as follows:





20





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE 14 INVESTMENT IN AN UNCONSOLIDATED
AFFILIATE(Continued)





Years
      ending December 31,2009
                
                $
                235,4072010
                
                
                292,5732011
                
                
                292,5732012
                
                
                282,493Total:
                
                $
                1,103,046





NOTE 15 NOTE
PAYABLE





The notes
payable was repaid in February 2009 and the related charge on the property
secured (Note 11) was released accordingly.





NOTE16 OTHER PAYABLES AND ACCRUED
LIABILITIES





Other
payables and accrued liabilities consisted of the followings:





September 30, 2009
                
                
                December 31,2008(unaudited)
                
                
                (audited)Business
      tax payable
                
                $
                15,646
                
                
                $
                82,554Government
      levy payable
                
                
                9,512
                
                
                
                20,321Salaries
      and welfare payable
                
                
                96,327
                
                
                
                100,405Temporary
      advances
                
                
                280,200
                
                
                
                161,491Customer
      deposits
                
                
                44,809
                
                
                
                8,457Accrued
      expenses
                
                
                83,904
                
                
                
                83,413$
                530,398
                
                
                $
                456,641





NOTE 17 INCOME
TAXES





The PRC
subsidiaries within the Group are subject to PRC income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which they operate,
i.e. the PRC. The statutory PRC Enterprise Income Tax rate (“EIT”) for the nine
months ended September 30, 2009 and 2008 is generally 25%.





The
Company’s income tax consisted of:




Nine months ended September 30,2009
                    
                    
                    2008Current
      – PRC
                    
                    $
                    400,539
                    
                    
                    $
                    464,341Deferred
                    
                    
                    -
                    
                    
                    
                    -$
                    400,539
                    
                    
                    $
                    464,341





21





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE 17 INCOME TAXES(Continued)





A
reconciliation of the provision for income taxes determined at PRC EIT to the
Company’s effective income tax rate is
as follows:





Nine months ended September 30,2009
                                          
                                          
                                          2008Pre-tax
      income
                                          
                                          $
                                          1,351,959
                                          
                                          
                                          $
                                          1,938,500PRC
      EIT
                                          
                                          
                                          25
                                          %
                                          
                                          
                                          25
                                          %Income
      tax computed at PRC EIT
                                          
                                          
                                          337,990
                                          
                                          
                                          
                                          484,625Reconciling
      items:Loss
      not recognized as deferred tax assets
                                          
                                          
                                          68,806
                                          
                                          
                                          
                                          -Non-deductible
      expenses
                                          
                                          
                                          (6,257
                                          )
                                          
                                          
                                          3,947Net
      operating loss carryforwards
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (24,231
                                          )Effective
      tax expense
                                          
                                          $
                                          400,539
                                          
                                          
                                          $
                                          464,341





On March
16, 2007, the PRC government promulgated a new tax law, China’s Unified
Enterprise Income Tax Law (“New EIT Law”), which took effect from January 1,
2008. Under the New EIT Law, foreign-owned enterprises as well as domestic
companies are subject to a uniform tax rate of 25%.





Deferred
tax assets and liabilities reflect the tax impact of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the net deferred tax assets
and liabilities as of September 30, 2009 and December 31, 2008 were as
follows:




September 30,2009
                
                
                December 31,2008(unaudited)
                
                
                (audited)Deferred
      tax assets:-
      Net operating loss carryforwards
                
                
                290,998
                
                
                
                214,777-
      Allowance for doubtful debts
                
                
                956,519
                
                
                
                956,5191,247,517
                
                
                
                1,171,296Less:
      valuation allowance
                
                
                (1,247,517
                )
                
                
                (1,171,296
                )Net
      deferred tax assets
                
                $
                -
                
                
                $
                -





As
of September 30, 2009 and December 31, 2008, full valuation allowance was
provided to the deferred tax assets due to the uncertainty surrounding their
realization.





NOTE 18 SEGMENT
REPORTING





The
Company’s business units have been aggregated into two reportable segments, as
defined by FASB ASC 280-10 (formerly SFAS No. 131):





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




22


GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS


o
            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 periods ended September 30, 2009 and 2008. 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 nine months ended September 30, 2009 and
2008:




Ninemonths
      endedSeptember 30, 2009Medical
                                Business
                              
                              
                              Extraction
                                Business
                              
                              
                              Total(unaudited)
                              
                              
                              (unaudited)
                              
                              
                              (unaudited)Net
      revenues
                              
                              $
                              2,424,264
                              
                              
                              $
                              132,256
                              
                              
                              $
                              2,556,520Cost
      of revenues
                              
                              
                              -
                              
                              
                              
                              (135,212
                              )
                              
                              
                              (135,212
                              )Gross
      profit
                              
                              $
                              2,424,264
                              
                              
                              $
                              (2,956
                              )
                              
                              $
                              2,421,308Depreciation
      and amortization
                              
                              $
                              401,583
                              
                              
                              $
                              136,019
                              
                              
                              $
                              537,602Net
      income (loss)
                              
                              $
                              1,226,645
                              
                              
                              $
                              (275,225
                              )
                              
                              $
                              951,420Expenditure
      for long-lived assets
                              
                              $
                              -
                              
                              
                              $
                              1,291
                              
                              
                              $
                              -





23





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS




NOTE 18 SEGMENT REPORTING
(Continued)




Ninemonths
      endedSeptember 30, 2008Medical
                  Business
                
                
                Extraction
                  Business
                
                
                Total(audited)
                
                
                (audited)
                
                
                (audited)Net
      revenues
                
                $
                2,517,325
                
                
                $
                329,778
                
                
                $
                2,847,103Cost
      of revenues
                
                
                -
                
                
                
                (215,417
                )
                
                
                (215,417
                )Gross
      profit
                
                $
                2,517,325
                
                
                $
                114,361
                
                
                $
                2,631,686Depreciation
      and amortization
                
                $
                411,481
                
                
                $
                131,784
                
                
                $
                543,265Net
      income
                
                $
                1,270,899
                
                
                $
                110,230
                
                
                $
                1,381,129Expenditure
      for long-lived assets
                
                $
                192,274
                
                
                $
                14,956
                
                
                $
                207,230





NOTE 19 NETINCOME PER
SHARE





Basic
net income per share is computed using the weighted average number of the
ordinary shares outstanding during the year. Diluted net income per share is
computed using the weighted average number of ordinary shares and ordinary share
equivalents outstanding during the year. Pursuant to stock exchange transaction
on November 30, 2006, the weighted average number of common shares issued and
outstanding was adjusted to account for the effects of the stock exchange
transaction as a reverse acquisition.





The
following table sets forth the computation of basic and diluted net income per
share for the periods ended September 30, 2009 and 2008:




NinemonthsendedSeptember 30,2009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)Basis
      and diluted net income per share calculationNumerator:-
      Net income in computing basic and diluted net income per
      share
                  
                  $
                  898,679
                  
                  
                  $
                  1,381,129Denominator:-
      Weighted average ordinary shares outstanding
                  
                  
                  42,079,940
                  
                  
                  
                  42,079,940Basic
      and diluted net income per share
                  
                  $
                  0.02
                  
                  
                  $
                  0.03





NOTE20 STOCK-BASED
COMPENSATION





The Board
of Directors has authorized and GFRP has established the 2002 Incentive and
Non-qualified Stock Option Plan (“the Plan”) under which GFRP may grant to
employees, officers, directors, attorneys, consultants or other advisers of the
Company or affiliated companies up to 10,000,000 shares of GFRP’s common stock
with such exercise price and vesting periods as the Board of Directors deems to
be in the best interest of the Company. As of September 30, 2009 and 2008, no
options or shares have been granted under the Plan.





24





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE21 CHINA CONTRIBUTION PLAN





Under the
PRC Law, full-time employees of its subsidiaries in the PRC, Hua Long, New
Century and Bao Sai are entitled
to staff welfare benefits including medical care, welfare subsidies,
unemployment insurance and pension benefits through a China government-mandated
multi-employer defined contribution plan. Hua Long, New Century and Bao Sai are
required to accrue for these benefits based on certain percentages of the
employees’ salaries. The total contributions made for such employee benefits
were $7,831 and $7,334 for the periods ended September 30, 2009 and
2008, respectively.





NOTE 22 CONCENTRATION AND
RISK





(a) Major
customers





For both
periods ended September 30, 2009 and 2008, 100% of the Company’s assets were
located in the PRC and 100% of the Company’s revenues were derived from
customers located in the PRC.





For the
nine months ended September 30, 2009, one customer represented more than 10% of
the Company’s revenue and accounts receivable, respectively. As of September 30,
2009, this customer accounted for 95% or $2,565,359 of the Company’s
revenues and 37% or $407,529 of accounts receivable.





For the
nine months ended September 30, 2008, one customer represented more than 10% of
the Company’s revenue and accounts receivable, respectively. As of September 30,
2008, this customer accounted for 75% of the Company’s revenues and 30% of
accounts receivable, amounting to $2,696,518 and $362,908,
respectively.





(b) Major
vendors





For the
nine months ended September 30, 2009, two vendors represented more than 10% of
the Company’s purchases and accounts payable, respectively.





For the
nine months ended September 30, 2008, two vendors represented more than 10% of
the Company’s purchases and accounts payable, respectively.





(c) Credit
risk





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers’ financial
condition, but does not require collateral to support such
receivables.





(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 the RMB depreciates
against US$, the value of the RMB revenues and assets as expressed in US$
financial statements will decline. The Company does not hold any derivative or
other financial instruments that expose to substantial market risk.





25





GFR
PHARMACEUTICALS INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLDIATED FINANCIAL STATEMENTS





NOTE 23 COMMITMENTSAND
CONTINGENCIES





Lease
Obligations





The
Company has entered into operating leases related to office space under
non-cancelable agreement expired through June 2011.





As of
September 30, 2009, total future lease commitment was as follows:





2009
                
                $
                5272010
                
                
                2,1092011
                
                
                1,054Total
      minimum lease payments
                
                $
                3,690





Rental
expense for the nine months ended September 30, 2009 and 2008 totaled
approximately $1,581 and $4,828, respectively.





NOTE
24 SUBSEQUENT EVENTS





The
Company has evaluated events subsequent to the balance sheet date through
November 16, 2009, which represents the issue date of this Form 10-Q. There were
no events or transactions occurring during this subsequent event report period
which requires recognition or disclosure in the financial statements.





26





Item
2. Management’s Discussion and Analysis of Financial Condition 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





GENERAL
DESCRIPTION OF BUSINESS





GFR
Pharmaceuticals, Inc. is a holding company with two business
segments.  The Company is involved in a Cancer Diagnosis and Treatment
Center, which is a joint operation of PET Scanner and Rotary Gamma Ray
Stereotactic Neurosurgery System imaging center in the PRC. The Company also
operates a biological extraction business that extracts raw materials from
medicine ingredients and distributes the extracted ingredients for medicine
manufacturing uses.





The
Company owns 100% of Hua Long’s outstanding common stock. Hua Long is approved
in China to, among other things, engage in industrial chromatography to separate
and purify chemical components for further use in agricultural and biotechnology
products and in medicines, as well as for the research, development, manufacture
and sale of biological separation medium products. However, Hua Long currently
has no operating business and serves as a holding company for the operating
subsidiary, New Century. Hua Long owns 95% of the outstanding stock of New
Century.





Cancer
Diagnosis and Treatment Center





New
Century, formerly Shan Xi New Century Technology Investment Development Company
Ltd.,  owns radiology and oncology equipment and provides it to Tangdu
Hospital in the Shan Xi province, which is affiliated with the Fourth Military
Medical University. New Century currently owns three different devices used for
radiological imaging of the brain and body and for use in cancer treatment. The
Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic
Center (the “Center”).   The Center averaged approximately 292
cases per month for the nine months of 2009, compared to 237 cases per month in
the same period of 2008, New Century is paid a percentage of profits from the
Center.  The Center’s diagnostic imaging and radiation oncology
treatments and equipment are all covered by the Chinese national medical
insurance system, which provides greater assurance that the Company will
continue to generate reliable revenues from the Center.





New
Century entered into its relationship with Tangdu Hospital on February 2, 2006,
when it accepted the rights and responsibilities previously held by Masep
Medical Science & Technology Development (Shenzhen) Co., Ltd. (“Masep”)
which Masep undertook pursuant to the “Cooperation Establishment of ‘Tangdu
Gamma Knife Therapeutic Center’ Agreement” by and between Masep and Tangdu
Hospital, dated May 18, 2001, as amended (the “Tangdu Agreement”). New Century’s
share the profits generated by the Center 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 2002 through
      December 2003, 90% to Masep;





2.
            From January 2004 through
      December 2008, 80% to Masep (or to New Century, giving effect to the
      assignment as of February
2006);




27




3.
            From January 2009 through
      December 2011, 70% to New
Century;





4.
            From January 2012 through
      December 2014, 60% to New
Century;




5.
            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 Gamma Knife Center. Upon the termination of the Tangdu Agreement, the Tangdu
Hospital has an option to purchase the equipment for fifty percent of its
residual value.





Biological Separation Medium
Product and Pharmaceutical Business





In 2008,
New Century acquired a 96.77% equity interest in Jiaoda Bao Sai Bio-technology
Co Ltd. (“Bao Sai”). Bao Sai is engaged in research, development, manufacture
and distribution of biological separation medium products which are used to
recover and purify biosynthetic products, particularly pharmaceuticals, from
natural sources such as animal or plant tissue or fermentation broth, including
the recycling of salvageable components and the proper treatment and disposal of
waste. Biological separation medium products are integral to the production of
pharmaceuticals such as antibiotics, hormones (e.g. insulin and human growth
hormone), antibodies, and vaccines; antibodies and enzymes used in diagnostics;
industrial enzymes; and natural fragrance and flavor
compounds.        Bao Sai is focused on
the research and development of new pharmaceutical and agricultural medium
products, and the networking and marketing of these
products.





RESULTS
OF OPERATIONS FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009





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 that November be 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.





Revenues




We have
two business segments – the Cancer Diagnosis and Treatment Center at Tangdu
Hospital and the  biological extraction business that extracts raw
materials from medicine ingredients and distributes the extracted ingredients
for medicine manufacturing uses.  We are dependent on the continued
success of the operations at the cancer diagnostic and treatment business to
continue our operations. During the nine months ended September 30, 2009, the
cancer treatment business accounted for $2,424,264 (94.8%) of our revenue and
generated $1,226,645 of net income.  The extraction business accounted
for $132,256 of revenue (5.2%) but lost $275,225 during the nine months ended
September 30, 2009.




28





Entering
the third quarter of 2009, we continued to realize our revenues from the
business operations of two subsidiaries: New Century and Bao Sai. New Century
jointly operates a PET Scanner and Rotary Gamma Ray Stereotactic Neurosurgery
System imaging center with Tangdu Hospital in Xi’an city, Shaanxi Province. 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. As a result, of
providing this equipment, New Century receives a percentage of profits from the
Center, currently 70%. New Century currently owns three devices used for
radiological imaging for the brain and body and for use in cancer treatment. 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 are recorded when services are received by the customers and
the amounts net of provisions for discounts, allowance and taxes are recognized
at the time services are performed.





The
revenue from our operation of the Center decreased from $941,336 for the quarter
ended September 30, 2008 to $896,387 for the same period of 2009. Likewise, the
same revenue decreased from $2,517,325 during the nine months ended September
30, 2008 to $ 2,424,264 during the nine months ended September 30, 2009. During
the third quarter of 2009, the Center, on average, handled approximately 292
cases per month, compared to 237 cases per month in the same period of
2008.  The decreased revenues from our operation of the Center was
attributed in part to the change of profit sharing ratios between us and Tangdu
Hospital. New Century receives 70% of the revenues of the Centers in 2009,
compared to 80% in 2008.





Similarly,
the revenue from our extraction business operated by Bao Sai subsidiary also
decreased from $329,778 during the nine months ended September 30, 2008 to
$132,256 during the same period of 2009. Such decrease was principally due to
the financial crisis in the year of 2008 which had an adverse effect on our
sales to the customers. .However, the revenue from our extraction business
increased by $26,080 or 30% to $113,091 during the third quarter of 2009,
compared to $87,011 during the third quarter of 2008. As the economy revives and
our marketing efforts on the new products succeed, we hope that our revenue from
this segment of business continues to increase.





As a
result, our overall revenues for the third quarter of 2009 slightly decreased to
$1,009,478 from $1,028,347 for the same period ended September 30, 2008.
Likewise, our overall revenue decreased from $2,847,103 during the nine months
ended September 30, 2008 to $2,556,520 during the nine months ended September
30, 2009. As we complete our transition stage in the Bao Sai operation, we
believe we will be able to increase our market share in the industry and thus
hope to increase our overall revenues in the future.





Expenses




Our
operating expenses for the third quarter of 2009  were reduced to
$331,892, a decrease of $61,055 or 15.5% from $392,947 for the same period of
2008. Our operating expenses during the nine months ended September 30, 2009
were reduced to $1,080,882, a decrease of $ 211,243 or 16.3% from $1,292,125
during the nine months ended September 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 November 2008, despite the
addition of approximately 50 full time employees as a result of the
acquisition.





Net
Income





Our net
income during the three and nine months ended September 30, 2009 was $397,650
and $951,420 respectively, compared to $543,674 and $1,453,159 during the three
and nine months ended September 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 hope that our
net income will increase.




29





Impact of
Inflation




We
believe that inflation has had a negligible effect on operations during this
period covered by this report. 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 nine and three months ended September 30, 2009, the effect of
converting our financial results to Dollars was to add $475 and $350,
respectively, to our comprehensive income.





LIQUIDITY
AND CAPITAL RESOURCES





Liquidity
Analysis




September 30,
                  2009
                
                
                December 31,
                  2008Working
      Capital
                
                $
                (2,168,844)
                )
                
                $
                (3,672,650
                )Stockholders’
      Equity
                
                $
                4,097,330
                
                
                $
                3,145,525Total
      Liabilities
                
                $
                4,113,882
                
                
                $
                6,202,281




Working
capital increased by $1,503,806 from $(3,672,650) at December 31, 2008 to
$(2,168,844)at September 30, 2009, and stockholder’s equity also increased from
$3,145,525 to $4,097,330 for the same periods. The primary reason for the
increase in working capital in 2008 was the substantial decrease of our debts to
our related parties. In connection with our acquisition of Bao Sai on January 1,
2008, we incurred a payment obligation in the amount of $4,500,211 payable to
the former owners of Bao Sai.  As of September 30, 2009, we only have
a note payable in the amount of $563,296 due on December 31, 2009, as compared
to $2,493,318 as of December 31, 2008.





As of
September 30, 2009, our cash decreased significantly to $30,289, compared to
$552,398 as of December 31, 2008. This decline is primarily due to repayment of
the notes payable to related parties arising from the acquisition of Bao Sai,
which reduced the amount from $2,493,318 as of December 31, 2008 to $563,296 as
of September 30, 2009.





The
net cash provided by operating activities was $1,630,952 during nine months
ended September 30, 2009, a significant increase of $595,761 or 57.5% compared
to $1,035,191 from operating activities during the same period ended September
30, 2008. However, our net cash used in investment activities decreased
significantly to $(1,932,453) during the nine months ended September 30, 2009,
compared to the positive cash of $ 519,271 provided by investing activities
during the same period of 2008. The reduced amount was used to repay the notes
payable to related parties. Meanwhile, net cash used in financing activities was
reduced to $(220,793) during the nine months ended September 30,
2009.





On
September 30, 2007, the Company’s newly acquired subsidiary, Bao Sai, disposed
of its investment of a 75% equity interest in HuaYang for a cash consideration
of $1,097,358 (equivalent to RMB7, 500,000). The balance
of  $2,493,318 was evidenced by an unsecured and interest-free loan
repayable in 4 installments being due in full, by December 31, 2008. However,
the balance was overdue as of December 31, 2008, and an agreement was
entered into by both parties to extend the maturity date to December 31, 2009.
As collectibility has been considered doubtful, an allowance of doubtful debt
was made fully on the notes receivable.  As of September 30, 2009,
allowance for doubtful accounts receivable was $515,449 ($515,026 recorded as a
doubtful account receivable on December 31, 2008, with total accounts receivable
totaling $1,174,355), compared to $1,107,345 as of September 30, 2008. The
inability to collect more outstanding receivables can adversely affect our
operations. The failure of the Company to collect this receivable has adversely
affected the Company’s liquidity.




30





In
connection with the purchase of Bao Sai, we still have a note payable in the
amount of $563,296 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.





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. Bao Sai has a 75%
equity interest in Medicine. The Company does not expect repayment of this loan
because Medicine ceased operations in 2007.





In
addition, our principal shareholder, Mr. Lian Guo contributed a loan to fund our
operations. As of September 30, 2009, the balance of the loan was
$1,954,178 which was unsecured, interest-free and repayable on
demand.





We have
funded our cash needs from inception through September 30, 2009 primarily with a
series of debt and equity transactions, including notes payable to related
parties of $563,296, accounts payable of $123,457, and a loan from our principal
shareholder, in the amount of $1,954,178. If we are unable to receive additional
cash from our related parties, we need to rely on financing from outside sources
through debt or equity transactions. Our related parties are under no legal
obligation to provide us with capital infusions. Failure to obtain such
financing could have a material adverse effect on operations and financial
condition.





Based on
the financial resources available, management believes the Company’s ability to
continue as a going concern depends upon its ability to maintain profitable
operations in its medical business and to obtain additional financing or
refinancing as may be required. The Company has generated positive cash inflows
from operating activities during the nine months ended September 30, 2009 and
2008. The Company will devote more resources on marketing in order to increase
the market share and improve the operating performance. Management believes the
Company will generate sufficient cash flow and either obtain additional
financing or refinancing to meet its obligations on a timely basis for the
foreseeable future.




Item
3. Quantitative and Qualitative Disclosures about Market Risk




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





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.  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, 2009, 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




31





Item
1A.  Risk Factors





A small
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. Submission of Matters to a Vote of Security Holders





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
  200231.2
              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
  200232.1
              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
  200232.2
              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





32




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
      16, 2009
              By:
              /s/Zhao Van DingZhao
      Yan Ding, Chief Executive OfficerBy:
              /s/ Zhong Ya LiZhong
      Ya Li, the Principal Financial
Officer





33