UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549








FORM 10-K








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





For the fiscal year ended December 31, 2010


OR


 ̈
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.





For the transition period from _________ to _________








GFR PHARMACEUTICALS, INC.


(Name of Small Business Issuer in Its Charter)










000-27959


(Commission file number)





77-0517964


(I.R.S. Employer Identification No.)





NEVADA


(State or Other Jurisdiction of Incorporation or Organization)





99 Yan Xiang Road, Biosep Building, Xi An, Shaan xi Province, P.R. China 710054


(Address of Principal Executive Office)





(86) 29- 8339-9676


(Issuer’s Telephone Number, Including Area Code)










Securities Registered Pursuant to Section 12(b) of the Exchange Act: NONE





Securities Registered Pursuant to Section 12(g) of the Exchange Act:





COMMON STOCK, $.001 PAR VALUE


(Title of Class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.    Yes ̈ Noþ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ̈  Noþ





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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  þ    No ̈





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained,  to the best of registrant's  knowledge,  in definitive proxy or information  statements incorporated  by reference  in Part III of this Form 10-K or any  amendment to this Form 10-K. ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405  of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes___. No_____.





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the 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 ̈ Small reporting companyx





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





The aggregate market value of the common stock held by non-affiliates (  26,079,940  shares)  was approximately $ 25,558,341  , based an the average closing bid and ask price of $ 0.98 for the Common Stock on March 29, 2011.





As of March 29, 2010, there were 42,079,940 shares of common stock outstanding.





Documents incorporated by reference: NONE











CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION





The discussion contained in this 10-K under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) contains forward-looking statements that involve risks and uncertainties. The issuer’s actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “the Company believes,” “management believes” and similar language, including those set forth in the discussion under “Description of Business,” including the “Risk Factors” described in that section, and “Management’s Discussion and Analysis or Plan of Operation” as well as those discussed elsewhere in this Form 10-k. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-k that are not historical facts are forward-looking statements that are subject to the “safe harbor” created by the Private Securities Litigation Reform Act of 1995.











TABLE OF CONTENTS





PAGEPART IItem 1.
Business

3Item 1A.
Risk Factors

6Item 1B.
Unresolved Staff Comments

8Item 2.
Properties

8Item 3.
Legal Proceedings

9Item 4.
Reserved

9PART IIItem 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

9Item 6.
Selected Consolidated Financial Information

10Item 7.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

10Item 7A.
Quantitative And Qualitative Disclosures About Market Risk

12Item 8.
Financial Statements And Supplementary Data

F-1Item 9.
Changes In And Disagreements With Accountants Or Accounting And Financial Disclosure

13Item 9A.
Controls And Procedures

13Item 9B.
Other Information

14PART IIIItem 10.
Directors And Executive Officers Of The Registrant

15Item 11.
Executive Compensation

18Item 12.
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters

19Item 13.
Certain Relationships And Related Transactions, And Director Independence

20Item 14.
Principal Accountant Fees And Services

21PART IV.Item 15.
Exhibits, Financial Statement Schedules

22





2





PART I





Item 1.Business





History





We were incorporated under the laws of the State of Nevada on December 18, 1996 under the name Laredo Investment Corp.  (“Laredo”).





On January 21, 2000, Laredo entered into an acquisition agreement with GFR Pharma, Ltd. (“Pharma”) (formerly GFR Nutritionals, Ltd.), a British Columbia corporation. The transaction was recorded as a reverse acquisition. In June 1998 Pharma changed its name to GFR Nutritionals Ltd. Business operations began in October 1998 after acquiring manufacturing equipment and arranging to manufacture nutritional supplements under a private label contract.





On June 21, 2000, we entered into an acquisition agreement with Nutritionals (USA) Direct.Com, a Washington corporation, (“NDC”), to acquire 100% of the outstanding common stock of NDC in exchange for $1,000. The transaction has been recorded as a purchase. NDC’s operations were wound down in October 2002 and we became dormant.





On November 1, 2000, we entered into an acquisition agreement with GFR Health, Inc. (Formerly R & L Health, Inc.), a British Columbia corporation, to acquire 100% of the outstanding common stock of GFR Health, Inc. in exchange for $0.01. The transaction was recorded as a purchase.





On April 5, 2004, GFR Nutritionals Ltd. and R&L Health Inc changed their names to GFR Pharma Ltd. and GFR Health Inc., respectively.  On August 9, 2004, Laredo Investment Corp. changed its name to GFR Pharmaceuticals, Inc. (“GFR”).





On June 26, 2006, we and our predecessor executed a Plan of Exchange with Shaan xi New Century Technology Investment Development Company, Ltd. (“New Century”), a corporation organized and existing under the laws of the Peoples’ Republic of China, with Richard Pierce, the former president and our former majority shareholder and Mr. Guo Li An, the majority shareholder of New Century.





On October 15, 2006, we executed an acquisition agreement (the “Hua Long Agreement”) with Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd., a corporation organized and existing under the laws of the Peoples’ Republic of China (“Hua Long”), Dong  Jian Zhong and Guo Li Zheng, the shareholders of Hua Long (collectively "Hua Long Shareholders").





Pursuant to the Hua Long Agreement, we paid Hua Long Shareholders approximately $187,500 in cash to acquire 100% interest in the shares of registered capital of Hua Long. Hua Long acts as the holding company of New Century. The acquisition of Hua Long allowed us to complete the legal processing regarding the share exchange with New Century in China. Upon completion of the acquisition, we owned 100% interest of Hua Long and 95% interest of New Century through Hua Long. Consolidated financial statements are filed in this annual report for the year ended December 31, 2010.





On December 11, 2006, pursuant to the Plan of Exchange Agreement, Mr. Pierce delivered 200,000 shares of our common stock to New Century and/or its nominee in exchange for total payments of $325,000 in cash and we issued to the New Century shareholders an amount equal to 40,000,000 new investment shares of our common stock pursuant to Regulation S under the Securities Act of 1933, as amended, representing approximately 95% of our then outstanding shares of common stock, in exchange for a 95% interest in the shares of registered capital of New Century. Upon completion of the exchange, New Century became our 95% owned indirect subsidiary.





Recent Developments





On January 1, 2008, New Century entered into a stock purchase agreement with the holders of all 60,000,000 shares of the capital stock of Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”) to acquire 58,060,000 shares of  their capital stocks of Bao Sai, or 96.77% of its capital stock.  The purchase price for Bao Sai equaled 96.77% of Bao Sai’s stockholders’ equity based on Bao Sai’s audited financial statements for the fiscal year ended December 31, 2009, prepared in accordance with the Generally Accepted Accounting Principles.





On May 14, 2008, the Company completed the acquisition of Bao Sai for total 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.  Prior to the closing of the transaction, the Company and Bao Sai were under common control and the principal owners of Bao Sai were affiliated with the Company.  Payment of the purchase price was made in two cash installments commencing in 2008, first to Xi’an Bio-sep Biological Filling Engineering Technology Company, Ltd., the owner of 28 million shares, or 46.67% of Bao Sai, and the balance in 2009 to the other three selling stockholders, in amounts equal to their respective percentage of share ownership pro rata of Bao Sai.




3





Bao Sai is engaged in research, development, manufacturing and the sale of biological separation medium products, which are 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, bacterin production, the gene chip, diagnostic reagents and other biochemical products.  Bao Sai’s principal office and manufacturing facility is located at 99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P. R. China.





Mr. Wang Li-An, one of the Company’s directors, is also a director of Bao Sai. Bao Sai is controlled by Mr. Guo Li An, who owns 38.03% of the Company.   Mr. Guo Li Zheng, who is Guo Li An’s brother, owns   3.23% of the Bao Sai common stock and no shares of the Company.   Additionally, Mr. Zhao Yan Ding and Ms. Zhong Ya Li, the Company’s Chief Executive Officer and Chief Financial Officer, respectively, were officers of Bao Sai through the date of the acquisition agreement.





Overview 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 to 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 owns radiology and oncology equipment and provides it to Tangdu Hospital, which is affiliated with the Fourth Military Medical University. New Century currently owns three different devices used for radiological imaging for the brain and body and cancer treatment. The Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (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 Tandgu Hospital, dated May 18, 2001, as amended (the “Tangdu Agreement”). Pursuant to the terms of the Tangdu Agreement, New Century presently receives seventy percent (70%) of the profits generated by the Center. New Century’s profit sharing percentage decreases over the term of the Tangdu Agreement, which is sixteen years from the date that the Center opened in January 2002. The respective profit sharing ratios and time periods are as follows:




1.
From January 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);
 
 3.
From January 2009 through December 2011, 70% to New Century;
 
 4
 
 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.





As of December 31, 2010, New Century owned three different devices used in the medical centers, and the profit sharing percentage to New Century was  70 %. The cases processed in Tangdu Gamma Knife Therapeutithec Center (the “Center”), averaged 292 cases per month in 2010, and 254 cases per month in 2009.  For the year ended December 31, 2010, the Center accounted for $3,950,033, or 92%, of the Company’s revenues.





Tangdu Hospital is located in Xi’an, a city of over 9-million people and is the capital of Shaan Xi province. With our competitive facilities, services, and reputation of Tangdu Hospital in Northwest China including Shaan Xi province and four other adjacent provinces, our medical center business has a good potential to grow. To grasp this market opportunity, New Century intends to expand the operation by investing in an additional tumor therapy center or hospital and a modernized tumor institute。 However, such expansion will require additional capital.





Biological Separation Medium Product and Pharmaceutical Business





In 2008, New Century acquired 96.77% of the equity 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.





The operations of Bao Sai are in the development stage and most of its efforts are focused on the research and development of new pharmaceutical and agricultural medium products, and the networking and advertisement to market these products in the future.  In 2009, Bao Sai spent approximately $50,400 (2008: $690,991) in research and development of new biological separation medium products and new medicine. Most of the money was used to fund local medical institutions in the development of new products.





Pursuant to this effort, Bao Sai entered into a Research and Development Cooperation Contract with XiAn Jiao Tong University R&D Center for Natural Chinese Medicine and Engineering (“the University”) in 2005.  According to the Cooperation Contract, Bao Sai provides funds in the research on the use of biological separation technology in the development of Xin Kang Ping medicine to treat heart diseases. The University performs all the laboratory work related to the general research project and toxic tests as the prerequisites of the clinical trial process for the application of a new medicine. The University presents the research results to Bao Sai, and Bao Sai has the right to the project report and possible patent rights as a result of the project. This contract expired on August 25, 2008 and was not renewed. However, we have been able to continue the pharmacodynamics test and toxicology test as the prerequisite to the commencement of clinical trials for the development of Xin Kang Ping medicine. These two tests are close to successful completion. As the rules of the State Food and Drug Administration of China (“SFDA”), now, Xin Kang Ping was changed its name to Fu Fang Dan Chuan Jiao Nang and we are in the process of applying for the clinical trial process with the State Food and Drug Administration of China (“SFDA”). Upon the approval of the SFDA, we will start clinical trials for Fu Fang Dan Chuan Jiao Nang . Less time is generally required in China than in the United States to complete the clinical trials for a new medicine, and the cost of clinical trials in China is also generally lower than those held in the United States. We therefore expect that we can complete the clinical trials sooner and at lower cost than would be the case  if the tests were done in the United States. Should the tests be successful and we obtain the approval of SFDA for the new medicine, we expect this new pharmaceutical product will be marketed in the PRC.





5




Until 2009, Bao Sai’s operations had consisted of bio-extraction and development of new products. In 2010, based on the separation media, our new products developed from traditional biochemical products to media derivatives—civil products. We have made research progress in development on anti-virus mask and have submitted information to Chinese government for a patent. We are applying for the patent of anti-virus mask.





Environmental Law Compliance





Our operations currently comply with all material environmental law and regulations in China. Moreover, since China does not have additional environmental regulations addressing climate change that are applicable  to our operations, we have no plan to make material capital expenditures for environmental control facilities or make material changes in our business practices to climate change





Employees





We are divided into six departments, including administration, marketing, facility management, network, R&D center and finance. As of December 31, 2010, we had 64 full-time employees, with 30 in New Century and 34 in Bao Sai.  All our employees are employed on a staff is full-time basis. No one is involved in any labor disputes. We believe that our relations with our employees are good.





Item 1A.  Risk Factors.





You should consider each of the following risk factors and any other information set forth in this Form 10-K and our other reports that we have filed with the Securities and Exchange Commission ("SEC"), including the Company's financial statements and related notes, in evaluating the Company's business and prospects. The risks and uncertainties described below are not the only ones that impact on the Company's operations and business. Additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, may also impair its business or operations. If any of the following risks actually occur, our business and financial condition, results or prospects could be harmed.





Risks Related to Our Business





Because there is no assurance that we will maintain the acceptance of our existing products and achieve success in our introduction of new business, any significant failure of our sales will adversely affect our business operations,.





Our ability to increase sales depends on numerous factors, including market acceptance of existing products, the successful introduction of new products, growth of consumer discretionary spending, and the ability to recruit new independent sales consultants. Business in all of our segments is driven by consumer preferences. Accordingly, there can be no assurances that our current or future products will maintain or achieve market acceptance. We can provide investors with no assurance that revenues will increase to a level which will reflect profitability. If we are unsuccessful in generating significant revenues, our business will most likely fail and our investors could lose their investment





Dependence on key corporate management personnel.





Our success depends in large part on the contributions of our key corporate management. We do not maintain any key person life insurance policies. The loss of our key corporate management personnel could have a material adverse effect on us.





6





Our Company and all of its assets are located in a jurisdiction that may not enforce the judgment of a US court.





Although we are incorporated in Nevada, the Company’s principal place of business and all of its assets are located in the People’s Republic of China.  In the past, some U.S. plaintiffs and/or judgment creditors have found it difficult or impossible to enforce U.S. court orders and/or judgments in the People’s Republic of China.  We can make no assurance that any shareholder or Company creditor who obtains a judgment or order against the Company, in Nevada or any other US jurisdiction will be able to successfully enforce that judgment or order against the Company.





One customer accounts for a majority of our revenues and failure to maintain the business relationship with this customer will adversely affect our business operations.





Tangdu Hospital accounts for over 85 % of our revenues and all our gross profit.   If we lose Tangdu Hospital as a customer or the business suffers adverse development, our financial condition will be materially and adversely affected.





Bao Sai’s efforts to develop and commercialize medical products may fail.





Bao Sai is attempting to develop new pharmaceutical and agricultural medium products, and to then market any products that are successfully developed.  There can be no assurance that the clinical trials will be successful, that the necessary government approvals will be obtained or that the products, if any, can be successfully marketed or that Bao Sai will have sufficient resources to complete the development and commercialization of any products.





We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors.





As directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K. We have established disclosure controls and procedures effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31, 2010. Commencing by the fiscal year ended December 31, 2010, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls. However, there can be no assurance that we will receive a positive attestation from our independent auditors. In the event we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements which will have a material adverse effect on our business. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.





We may be affected by global climate change or by legal, regulatory, or market responses to such change.





The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along with the increased frequency or duration of extreme weather conditions, could impact the availability or increase the cost of key raw materials that we use to produce our products. Additionally, the sale of our products can be impacted by weather conditions.





Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For example, proposals that would impose mandatory requirements on GHG emissions continue to be considered by policy makers in the territories that we operate. Laws enacted that directly or indirectly affect our production, distribution, packaging, cost of raw materials, fuel, ingredients, and water could all impact our business and financial results.





7





Risks Related to Our Common Stock





Our Common Stock has been relatively thinly traded and we cannot predict the extent to which an active trading market will develop.





Our Common Stock is currently traded on the Over the Counter Bulletin Board. Our Common Stock is thinly traded compared to larger more widely known companies. Thinly traded Common Stock can be more volatile than Common Stock trading in an active public market. We cannot predict the extent to which an active public market for our Common Stock will develop or be sustained.





We may need to raise additional capital which may not be available on acceptable terms or at all.





In the future, we may be required to raise funds. There can be no assurance that financing will be available in amounts or on terms acceptable to us. The inability to obtain capital may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our development plans. Any equity financing may involve substantial dilution to our then existing stockholders.





We do not intend to pay dividends on any investment in the shares of our stock.





We have never paid any cash dividends in the past five years and currently do not intend to pay any dividends for the foreseeable future. We intend to maintain the normal operation of the company. Any gain on an investment in us will need to come through an increase in the working capital and expansion and operation of the company in future.




Because our securities are subject to penny stock rules, you may have difficulty reselling your shares.





Our shares as penny stocks are covered by Section 15(g) of the Securities Exchange Act of 1934 which imposes additional sales practice requirements on broker/dealers who sell our securities including the delivery of a standardized disclosure document; disclosure and confirmation of quotation prices; disclosure of compensation the broker/dealer receives; and, furnishing monthly account statements. These rules apply to companies whose shares are not traded on a national stock exchange or on the NASDAQ system, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the SEC. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell our shares of Common Stock and may affect the secondary market for our shares of Common Stock. These rules could also hamper our ability to raise funds in the primary market for our shares of Common Stock.





Item 1B. Unresolved Staff Comments





Not Applicable.





Item 2.Properties





Our main office is located at 99 Yan Xiang Road, Biosep Building, Xi An, Shaan Xi Province, P.R. China 710054,  which we were under land use right for purposes of using the property as office space.  There is no private ownership of land in China.  Land use rights are obtained from the government for periods ranging from 50 to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of China (State Land Administration Bureau) upon payment of the required transfer fee. No other businesses operate from this office.





We also rent an operating office for New Century at Xi An Shi Gao Xin Qu Keji 2 Lu 68 Hao, Xi An Ruanjian Yuan C Zuo 2401 Shi, at an annual rent of $2,105.  These two spaces are adequate for our present and planned future operations.




8





Item 3.Legal Proceedings





None





Item 4.Submission of Matters to a Vote of Security Holders





None.





PART II





Item 5.     Market for Common Equity and Related and Stockholder





Market for Common Stock





Our Common Stock is quoted on the OTC Electronic Bulletin Board, a service maintained by The NASDAQ Stock Market, Inc., under the symbol “GFRP.OB”. In February of 2011, due to the transformation of its market makers to use the platform provided by OTC Markets Group to get our securities.





The Company intends to closely monitor its status on the bulletin board as it evaluates its alternatives such as determining whether to remain listed for quotation on the OTCQB or explore a listing on a national securities exchange.





The following table sets forth, for the periods indicated, the high and low closing prices of our common stock as reported by OTCQB and OTC Bulletin Board. Trading in our Common Stock in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions. Further, these quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and do not necessarily reflect actual transactions. Set forth below is the range high and low bid information for our Common Stock for each quarter of the years ended December 31, 2010 and 2009.





High


Low2010Quarter Ended March 31, 2010

$
0.30


$
0.05Quarter Ended June 30, 2010

$
0.50


$
0.23Quarter Ended September 30, 2010

$
0.51


$
0.25Quarter Ended December 31, 2010

$
0.70


$
0.472009Quarter Ended March 31, 2009

$
0.49


$
0.02Quarter Ended June 30, 2009

$
0.47


$
0.05Quarter Ended September 30, 2009

$
0.15


$
0.05Quarter Ended December 31, 2009

$
0.15


$
0.04





As of March  29, 2011, the closing price of our Common Stock was $0.98 per share.





As of March 29, 2011 there were 3,740 stockholders of record of our Common Stock. Our registrar and transfer agent is Securities Transfer Corporation located at 2591 Dallas Parkway Suite 102, Frisco Texas 75034. Their telephone number is (469) 633-0101.





9


Limited Market for Common Stock





There is currently a limited trading market for our shares of Common Stock, and there can be no assurance that a more substantial market will ever develop or be maintained. Any market price for our shares of Common Stock is likely to be very volatile, and numerous factors beyond our control may have a significant adverse effect. In addition, the stock markets generally have experienced, and continue to experience, extreme price and volume fluctuations which have affected the market price of many small capital companies and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may also adversely affect the market price of our Common Stock. Further, there is no correlation between the present limited market price of our Common Stock and our revenues, book value, assets or other established criteria of value. The present limited quotations of our Common Stock should not be considered indicative of the actual value of our Common Stock.





Dividends





We have not paid any cash dividends to date and does not anticipate or contemplate paying cash dividends in the foreseeable future. We currently intend to retain any future earnings to fund the development and growth of its business.





Recent Sales of Unregistered Securities





None.





Securities Authorized for Issuance under Equity Compensation Plans.





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 December 31, 2010, no options or shares have been granted under the Plan.  A copy of the Plan is filed as an exhibit to our Form S-8 filed with the Commission in June 19, 2002.





Item 6.  Selected Financial Information





Not Applicable





Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of  Operations





This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our annual consolidated financial statements and notes thereto which appear elsewhere in this Annual Report on Form 10-K.





FORWARD LOOKING STATEMENTS





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





Overview


GFR Pharmaceuticals, Inc. was incorporated under the laws of the State of Nevada on December 18, 1996 under the name Laredo Investment Corp.  (“Laredo”). Its subsidiary companies currently are involved in bio-extraction, researching and inventing, manufacturing and sales of biological separation medium products, radiology and oncology equipment and cancer treatment equipment. The Company’s principal place of business and all of its assets are located in the People’s Republic of China.





10


On October 15, 2006, we executed an acquisition agreement with Xi'an Hua Long Yu Tian Ke Ji Shi Ye Co., Ltd. and owned 100% interest of Hua Long.





On December 11, 2006, pursuant to the Plan of Exchange Agreement, New Century became our 95% owned indirect subsidiary.





On January 1, 2008, New Century entered into a stock purchase agreement of the capital stock of Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”) to acquire 96.77% of its capital stock.





After consolidation, GFR Pharmaceuticals, Inc. is a holding company with two business segments. The Company is involved in bio-extraction, researching and inventing, manufacturing and sales of biological separation medium products operated by Xi’an Jiaoda Bao Sai Bio-technology Co., Ltd (“Bao Sai”). The Company also operates a Cancer Diagnosis and Treatment Center with professional team of doctors operated by Shaan Xi New Century Scientific Investment Development Ltd. (“New Century”) in the PRC.





New century





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





New Century currently owns three different devices used for radiological imaging for the brain and body and cancer treatment. The Company’s medical equipment is used in Tangdu Hospital’s Gamma Knife Therapeutic Center (the “Center”).





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 Tandgu Hospital, dated May 18, 2001, as amended (the “Tangdu Agreement”). Pursuant to the terms of the Tangdu Agreement, New Century presently receives seventy percent (70%) of the profits generated by the Center. New Century’s profit sharing percentage decreases over the term of the Tangdu Agreement, which is sixteen years from the date that the Center opened in January 2002. The respective profit sharing ratios and time periods are as follows:





1.
From January 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);





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 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.




With its advanced, professional and scientific management, New Century has established an outstanding marketing team and a well known cancer treatment center with a team of experts since it took over Gamma Knife Center on February 2, 2002. New Century has also successfully established a large integrated medical professional website - Medical Sina (www.120md.com), which provides extensive publicity and online integrated counseling services for patients. We extended our business to neighboring provinces of Shanxi Province and other provinces of the country. The Center is a well known cancer treatment center in the five northwestern provinces of China and even all over the country. The company’s operating revenue and profit have been increasing steadily.





The cases processed in the Center averaged 292 cases per month in 2010, 254 cases per month in 2009.  For the year ended December 31, 2010, the Center accounted for $3,732,781, or 86%, of the Company’s revenues.





The Center currently runs at full capacity of business and shows an increasing latent capacity so that the existing equipment capacity cannot meet the requirements of patients. The Company intends to invest in the construction and management of cancer treatment equipment in the next few years. With its resources, technologies and services, the Company believes it will seize market opportunities, gradually expand the treatment capacity and improve profitability by the addition of cancer treatment centers or hospitals to build a leading integrated service center with prevention, screening, treatment and rehabilitation capabilities in the Northwest of China and even across the country.





11


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





Bao Sai


Bao Sai is a high-tech company in China chartered and authorized by the Chinese government for involvement in researching and inventing, manufacturing and sales of biological separation medium products. It has the technology and facilities for the separation and purification of biological products and natural medicines and manufactures the agarose products of separation media.





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





The operations of Bao Sai are in the development stage and most of its efforts are focused on the research and development of new pharmaceutical and agricultural medium products, and the networking and advertisement to market these products in the future.  In 2010, Bao Sai spent approximately $25,225 in research and development of new biological separation medium products and new medicine. Most of the money was used to fund local medical institutions in the development of new products.





Pursuant to this effort, Bao Sai entered into a Research and Development Cooperation Contract with XiAn Jiao Tong University R&D Center for Natural Chinese Medicine and Engineering (“the University”) in 2005.  According to the Cooperation Contract, Bao Sai provides funds in the research on the use of biological separation technology in the development of Xin Kang Ping medicine to treat heart diseases. The University performs all the laboratory work related to the general research project and toxic tests as the prerequisites of the clinical trial process for the application of a new medicine. The University presents the research result to Bao Sai, and Bao Sai has all the right to the project report and possible patent right as a result of the project. This contract expired on August 25, 2008 and was not renewed. However, we have been able to continue the pharmacodynamics test and toxicology test as the prerequisite to the commencement of clinical trials for the development of Xin Kang Ping medicine. At present, these two tests are close to successful completion. As the rules of State Food and Drug Administration of China (“SFDA”), now, Xin Kang Ping was changed its name to Fu Fang Dan Chuan Jiao Nang and we are in the process of applying for the clinical trial process with the State Food and Drug Administration of China ( “SFDA”). Upon the approval by SFDA, we will start clinical trials for Fu Fang Dan Chuan Jiao Nang . Less time is generally required in China than in the United States to complete the clinical trials for a new medicine, and the cost of clinical trials in China is also generally lower than those held in the US. We therefore expect that we can complete the clinical trials sooner than would be the case in the United States and at lower cost. Should the tests be successful and we obtain the approval of SFDA for the new medicine, we expect this new pharmaceutical product will be marketed in the PRC.





Until 2009, Bao Sai’s operations had consisted of bio-extraction, biological separation medium production and development of new products.





In 2010, based on the separation media, our new products expanded from traditional biochemical products to media derivatives—civil products. With the adsorption media, civil products will be removed including the harmful substances such as bacteria, viruses, organic pesticides and tobacco tar. We have made research in project of anti-virus mask and submitted the required information to Chinese government. We are in the process of applying for the patent of anti-virus mask. Should we obtain the approval at an early date, we expect this new product will be marketed in the PRC. We also expect that our other researching project can make more progress and our civil products will open up the market and create more revenues and profits for the Company.





Results of Operations





Year Ended December 31, 2010 Compared to Year Ended December 31, 2009





Net revenue increased from $3,884,097 for the year ended December 31, 2009 to $4,361,556 for the year ended December 31, 2010, with an increase of 12.29%. This increase was principally the result of an increase of treatment cases sharing with Tangdu Center under the co-operation agreement and increased product sales. There are 3 sets of medical equipments which are operated by Tangdu Centre but owned by New Century. As well, the operations of Bao Sai increased about $590,000 from the provision of an extraction technology service. Our new pharmaceutical products are still in the development stage. We expect that as soon as we complete the government approval process for the new products, we have to be able to increase our revenues.





Our operating expenses incurred a substantial decrease from $1,081,383 in 2009 to $720,556 in 2010. The decrease is mainly attributable to a recovery of uncollectible accounts of $301,414 in 2010. As well, general and administrative expenses also decreased from $1,006,896 in 2009 to $801,819 in 2010.





12


Net income attributable to the Company increased from net income of $1,096,632 for the year ended December 31, 2009 to net income of $2,445,710 for the year ended December 31, 2010.





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





Liquidity and Capital Resources





Stockholder’s equity increased from $4,322,122 as of December 31, 2009 to $6,961,268 as of December 31, 2010. In addition, our principal shareholder, we made a $1,521,607 repayment to Mr. Lian Guo, our principal stockholder. As of December 31, 2010, the balance of the loan was $439,267 which was unsecured, interest-free and repayable on demand.





We have a 75% equity interest in Medicine but Medicine is no longer consolidated and we recovered $255,947 from this unconsolidated affiliate.





13





We have two business segments – the Cancer Diagnosis and Treatment Center at Tangdu Hospital and the biological extraction business that extracts raw materials to 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. In 2010, the cancer treatment business accounted for $3,732,781 (86%) of our revenue and generated $2,017,534 of net income.  The extraction business generated $628,775 of revenue in 2010 as compared to $547,258 in 2009.





In addition, as of December 31, 2010 and 2009, allowance for doubtful accounts receivable was $537,812 and $708,741, respectively. The inability to collect more outstanding receivables can aversely affect our operations.  Tangdu Hospital accounted for all of the revenues from the cancer diagnosis and treatment center and $1,169,993 of accounts receivable as of December 31, 2010.





Liquidity Analysis





December 31,

2010


December 31,

2009Working Capital

$
674,622


$
(1,760,129
)Stockholders’ Equity

$
6,961,268


$
4,322,122Total Liabilities

$
1,861,052


$
3,436,619





Critical Accounting Policies and Estimates





In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values.  In our preparation of the financial statements for 2010, there were no estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results.





We made no material changes to our critical accounting policies in connection with the preparation of financial statements for 2010.





Impact of Accounting Pronouncements





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





In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-14 to amend ASC 605 “Revenue Recognition.” The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. The amendments in ASU 2009-14 will be effective for the fiscal years beginning January 1, 2011. The Company believes that ASU 2009-13 will not have a material impact on its consolidated financial statements.





In October 2009, the FASB issued ASU 2009-13 amending ASC 605 related to revenue arrangements with multiple deliverables. Among other things, ASU 2009-13 provides guidance for entities in determining the accounting for multiple deliverable arrangements and establishes a hierarchy for determining the amount of revenue to allocate to the various deliverables. The amendments in ASU 2009-13 will be effective for the fiscal years beginning January 1, 2011. The Company believes that ASU 2009-13 will not have a material impact on its consolidated financial statements





In January 2010, the FASB issued further guidance under ASC No. 820, “Fair Value Measurements and Disclosures” ("ASC 820"). ASC 820 requires disclosures about the transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). ASC 820 is effective for the fiscal years and interim periods beginning after December 15, 2010. The Company will adopt the update on January 1, 2011 and expects that ASC 820 will not have a material impact on its consolidated financial statements.





Off-Balance Sheet Arrangements





We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.





Item 7A. Quantitative and Qualitative Disclosures About Market Risk





Foreign Exchange Risk





While our reporting currency is the US dollar, almost all of our consolidated revenues and consolidated costs and expenses are denominated in RMB. All of our assets are denominated in RMB except for some cash and cash equivalents and accounts receivables. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between US dollar and RMB. If the RMB depreciates against the US dollar, the value of our RMB revenues, earnings and assets as expressed in our US dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.





Inflation




Inflationary factors such as increases in the costs of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and distribution, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase to cope with these increased costs.





14





Item 8.   Financial Statements





GFR PHARMACEUTICALS, INC.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





PageReport of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets

F-3Consolidated Statements of Operations And Comprehensive Income

F-4Consolidated Statements of Cash Flows

F-5Consolidated Statements of Stockholders’ Equity

F-6Notes to Consolidated Financial Statements

F-7 to F-20





F-1











REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





The Board of Directors and Stockholders


GFR Pharmaceuticals, Inc.




We have audited the accompanying consolidated balance sheet of GFR Pharmaceuticals, Inc. and its subsidiaries (“the Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations and comprehensive income, cash flows and changes in equity for the years ended December 31, 2010 and 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America.





/s/ HKCMCPA Company LimitedHKCMCPA Company Limited(Formerly ZYCPA Company Limited)Certified Public AccountantsHong Kong, ChinaMarch 30, 2011











F-2





GFR PHARMACEUTICALS, INC.


CONSOLIDATED BALANCE SHEETS


AS OF DECEMBER 31, 2010 AND 2009


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





As of December 31,2010


2009ASSETSCurrent assets:Cash and cash equivalents

$
300,716


$
55,486Accounts receivable, net


1,245,616



541,206Inventories, net


35,062



10,289Prepayments and other current assets


135,226



277,455Operating lease prepaid, current portion


7,499



7,252Total current assets


1,724,119



891,688Property, plant and equipment, net


6,957,273



6,723,519Operating lease prepaid, non-current portion


140,928



143,534TOTAL ASSETS

$
8,822,320


$
7,758,741LIABILITIES AND EQUITYCurrent liabilities:Accounts payable

$
27,903


$
90,682Amount due to a related party


439,267



1,960,874Income tax payable


188,016



171,708Other payables and accrued liabilities


394,311



428,553Total current liabilities


1,049,497



2,651,817Long-term liabilities:Loss in excess of investment in an unconsolidated affiliate


811,555



784,802TOTAL LIABILITIES


1,861,052



3,436,619Commitments and contingenciesEquity:GFR Pharmaceuticals, Inc. stockholders’ equity:Common stock, $0.001 par value; 100,000,000 shares authorized; 42,079,940 shares issued and outstanding, respectively


42,080



42,080Additional paid-in capital


3,712,120



3,712,120Accumulated other comprehensive income


313,694



210,882Statutory reserve


800,309



595,253Retained earnings (accumulated deficits)


1,490,065



(750,589
)Total GFR Pharmaceuticals, Inc. stockholders’ equity


6,358,268



3,809,746Non-controlling interest


603,000



512,376Total equity


6,961,268



4,322,122TOTAL LIABILITIES AND EQUITY

$
8,822,320


$
7,758,741





See accompanying notes to consolidated financial statements.





F-3


GFR PHARMACEUTICALS, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


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





Years ended December 31,2010


2009Revenues, net:Service revenue

$
4,290,407


$
3,336,839Product sales


71,149



547,258Total revenues, net


4,361,556



3,884,097Cost of revenue(inclusive of depreciation):Cost of service


639,473



596,988Cost of products


34,709



474,724Total cost of revenue


674,182



1,071,712Gross profit


3,687,374



2,812,385Operating expenses:Depreciation and amortization


220,151



168,473Recovery from uncollectible accounts


(301,414
)


(93,986
)General and administrative


801,819



1,006,896Total operating expenses


720,556



1,081,383Income from operations


2,966,818



1,731,002Other income:Interest income


1,614



17,051Recovery from an unconsolidated affiliate


255,947



-Total other income


257,561



17,051Income before income taxes


3,224,379



1,748,053Income tax expense


(688,045
)


(571,643
)NET INCOME


2,536,334



1,176,410Less: net income attributable to non-controlling interest


(90,624
)


(79,778
)Net income attributable to GFR Pharmaceuticals, Inc.

$
2,445,710


$
1,096,632Net income per share – Basic and diluted

$
0.06


$
0.03Net income per share attributable to GFRP Pharmaceuticals, Inc.

$
0.06


$
0.03Weighted average common shares outstanding – Basic and diluted


42,079,940



42,079,940





See accompanying notes to consolidated financial statements.




F-4





GFR PHARMACEUTICALS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


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





Years ended December 31,2010


2009Cash flows from operating activities:Net income attributable to GFR Pharmaceuticals, Inc.

$
2,445,710


$
1,096,632Net income attributable to non-controlling interest


90,624



79,778Consolidated net income


2,536,334



1,176,410Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization


773,398



734,972Recovery of allowance for doubtful accounts


(170,929
)


(93,492
)(Recovery of) inventory allowance


(47,282
)


322,122Change in operating assets and liabilities:Accounts receivable


(498,137
)


80,542Inventories


23,461



(50,359
)Prepayments and other current assets


(110,801
)


(30,968
)Accounts payable


(64,248
)


(33,953
)Income tax payable


13,003



(2,856
)Other payables and accrued liabilities


(12,257
)


(28,430
)Net cash provided by operating activities


2,442,542



2,073,988Cash flows from investing activities:Repayment from an unconsolidated affiliate


255,947



130,759Purchase of property, plant and equipment


(770,519
)


(2,039
)Net cash (used in) provided by investing activities


(514,572
)


128,720Cash flows from financing activities:Repayment of notes payable


-



(219,269
)Repayment of notes payable to related parties


-



(2,490,997
)(Repayment to) advances from a related party


(1,690,426
)


11,622Net cash used in financing activities


(1,690,426
)


(2,698,644
)Effect on exchange rate change on cash and cash equivalents


7,686



(976
)NET CHANGE IN CASH AND CASH EQUIVALENTS


245,230



(496,912
)CASH AND CASH EQUIVALENT, BEGINNING OF YEAR


55,486



552,398CASH AND CASH EQUIVALENT, END OF YEAR

$
300,716


$
55,486SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for income taxes

$
675,041


$
574,499Cash paid for interest

$
-


$
-





See accompanying notes to consolidated financial statements.





F-5





GFR PHARMACEUTICALS, INC.


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


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





GFR Pharmaceuticals, Inc.Common stock


Additional

paid-in

capital


Accumulated

other

comprehensive

income


Statutory

reserve


Retained

earnings

(accumulated

deficit)


Non-controlling

interest


Total

equityNo. of

shares


AmountBalance as of January 1, 2009


42,079,940


$
42,080


$
3,712,120


$
210,695


$
423,760


$
(1,675,728
)

$
432,598


$
3,145,525Foreign currency translation adjustment


-



-



-



187



-



-



-



187Net income for the year


-



-



-



-



-



1,096,632



79,778



1,176,410Appropriation to statutory reserve


-



-



-



-



171,493



(171,493
)


-



-Balance as of December 31, 2009


42,079,940



42,080



3,712,120



210,882



595,253



(750,589
)


512,376



4,322,122Foreign currency translation adjustment


-



-



-



102,812



-



-



-



102,812Net income for the year


-



-



-



-



-



2,445,710



90,624



2,536,334Appropriation to statutory reserve


-



-



-



-



205,056



(205,056
)


-



-Balance as of December 31, 2010


42,079,940


$
42,080


$
3,712,120


$
313,694


$
800,309


$
1,490,065


$
603,000


$
6,961,268





See accompanying notes to consolidated financial statements.





F-6




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




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, also the research and development of extraction process and trading of pharmaceutical products in Xian City, Shanxi Province in the People’s Republic of China (the “PRC”).





Description of subsidiaries





Name

Place of incorporation

and kind of

legal entity

Principal activities

and place of operation

Particulars of

registered share

capital


Effective

interest

heldXi'an Hua Long Yu Tian Scientific and Technological Industry Co., Ltd. (“Hua Long”)

The PRC, a limited liability company

Investment holding

RMB
1,500,000



100
%New Century Scientific Investment Ltd. (“New Century”)

The PRC, a limited liability company

Operator of medical clinic in the PRC

RMB
30,000,000



95
%Xi’an Jiaoda Bao Sai Bio-Technology Co., Ltd (“Bao Sai”)

The PRC, a limited liability company

Research and development of extraction process and trading of pharmaceutical products in the PRC

RMB
60,000,000



96.77
%





GFRP and its subsidiaries are hereinafter referred to as (the “Company”).





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





·
Basis of presentation





These accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”).





·
Use of estimates





In preparing these 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 years reported. Actual results may differ from these estimates.





·
Basis of consolidation





The consolidated financial statements include the accounts of GFRP and its subsidiaries. All significant inter-company balances and transactions within the Company have been eliminated upon consolidation.





·
Equity method of accounting





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





F-7
 
  GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)


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





As a result of deconsolidation under ASC 810 and the application of the equity method under ASC 323, GFRP had a negative basis in its investment in Medicine, the Equity Investee, because the subsidiary generated significant losses and inter-company liabilities in excess of its asset balances. This negative investment, “Loss in excess of investment in an unconsolidated affiliate” is reflected as a single amount on the Company’s consolidated balance sheet as approximately $811,555 and $784,802 as of December 31, 2010 and 2009, respectively.





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





·
Cash and cash equivalents





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





·
Accounts receivable and allowance for doubtful accounts





Accounts receivable are recorded at the invoiced amount and do not bear interest. Management reviews the adequacy of the allowance for doubtful accounts on an ongoing basis, using historical collection trends and aging of receivables. Management also periodically evaluates individual customer’s financial condition, credit history, and the current economic conditions to make adjustments in the allowance when it is considered necessary. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers. As of December 31, 2010 and 2009, the allowance for doubtful accounts was $557,657 and $552,118, respectively.





·
Inventories





Inventories are stated at the lower of cost or market value (net realizable value), cost being determined on a weighted average method. Costs include material, labor and manufacturing overhead costs. The Company quarterly reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. As of December 31, 2010 and 2009, the inventory allowance was $663,136 and $688,153, respectively.





·
Property, plant and equipment





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





Expected useful life

Residual valueBuildings

20 years


5%Plant and equipment

5 – 13 years


5%Motor vehicles

5 – 8 years


5%Furniture, fixture and office equipment

5 years


5%Leasehold improvement

5 years


-




F-8




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




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





·
Operating lease prepaid





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





The lease expense on prepaid operating lease for the years ended December 31, 2010 and 2009 was $7,315 and $7,248, respectively. As of December 31, 2010, the estimated annual amortization of the prepaid operating lease for the next five years and thereafter is as follows:





Years ending December 31:2011

$
7,4992012


7,4992013


7,4992014


7,4992015


7,499Thereafter


110,932Total:

$
148,427





·
Impairment of long-lived assets





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





·
Revenue recognition





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





(a)
Medical service revenue





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





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




F-9




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




(b)
Product sales





The Company recognizes revenue from the sale and trading of pharmaceutical products upon delivery to the customers, whereas the title and risk of loss are fully transferred to the customers. The Company records its revenues, net of value added taxes (“VAT”) under the PRC tax law which is levied on the majority of the products at the rate of 17% on the invoiced value of sales. The Company experienced no product returns and has recorded no reserve for sales returns for the years ended December 31, 2010 and 2009.





(c)
Technical service income





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





(d)
Interest income





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





·
Cost of service





Cost of service consists primarily of depreciation of operating equipment and direct labor which are directly attributable to the rendering of medical and technical service.





·
Cost of products





Cost of products consists primarily of purchase cost of extractions, direct labor and other overheads, which are directly attributable to the extraction and trading of pharmaceutical materials. Shipping and handling cost, associated with the distribution of finished products to the customers, are borne by the customers.





·
Advertising expense





Advertising costs are expensed as incurred under ASC Topic 720-35, “Advertising Costs”. No advertising expense was incurred for the years ended December 31, 2010 and 2009.





·
Research and development





Research and development costs are expensed when incurred in the development of new processes including significant improvements and refinements of existing products. Such costs mainly relate to labor and material cost. The Company incurred $22,225 and $50,400 of such costs for the years ended December 31, 2010 and 2009.





·
Income taxes





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





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





For the years ended December 31, 2010 and 2009, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2010, the Company did not have any significant unrecognized uncertain tax positions.





The Company conducts major businesses in the PRC and is subject to tax in this jurisdiction. As a result of its business activities, the Company files tax returns that are subject to examination by the foreign tax authority. For the year ended December 31, 2010, the Company filed and cleared 2009 tax return with its local tax authority in the PRC.




F-10




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




·
Net income per share





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





·
Comprehensive income





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





Years ended December 31,2010


2009Net income

$
2,536,334


$
1,176,410Other comprehensive income:- Foreign currency translation gain


102,812



187Comprehensive income

$
2,639,146


$
1,176,597




·
Foreign currencies translation





Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the consolidated statement of operations.





The reporting currency of the Company is United States Dollars ("US$") and the accompanying financial statements have been expressed in US$. In addition, the Company's subsidiaries in the PRC maintain their books and records in their local currency, Renminbi Yuan ("RMB"), which is functional currency as being the primary currency of the economic environment in which these entities operate. In accordance with ASC Topic 830-30, “Translation of Financial Statement”,assets and liabilities of the Company whose functional currency is not US$ are translated into US$, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses are recorded as a separate component of accumulated other comprehensive income within the statement of stockholders’ equity.





Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective year:




2010


2009Year-end RMB:US$1 exchange rate


6.6118



6.8372Annual average RMB:US$1 exchange rate


6.7788



6.8409





·
Retirement plan costs





Contributions to retirement plans (which are defined contribution plans) are charged to general and administrative expenses in the consolidated statements of operations and comprehensive income as and when the related employee service is provided.




F-11




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




·
Related parties





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





·
Segment reporting





ASC Topic 280, “Segment Reporting” establishes standards for reporting information about operating segments on a basis consistent with the Company’s internal organization structure as well as information about geographical areas, business segments and major customers in financial statements. For the years ended December 31, 2010 and 2009, the Company operates in two reportable segments: Medical Business and Extraction Business in PRC.





·
Fair value of financial instruments





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





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





·
Level 1: Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets;





·
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and; and





·
Level 3: Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.





Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.





·
Reclassifications





Certain prior year amounts have been reclassified to confirm to the current period presentation. These reclassifications have no impact on previously reported financial position, results of operations or cash flows.





·
Recent accounting pronouncements





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





In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-14 to amend ASC 605 “Revenue Recognition.” The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. The amendments in ASU 2009-14 will be effective for the fiscal years beginning January 1, 2011. The Company believes that ASU 2009-13 will not have a material impact on its consolidated financial statements.





In October 2009, the FASB issued ASU 2009-13 amending ASC 605 related to revenue arrangements with multiple deliverables. Among other things, ASU 2009-13 provides guidance for entities in determining the accounting for multiple deliverable arrangements and establishes a hierarchy for determining the amount of revenue to allocate to the various deliverables. The amendments in ASU 2009-13 will be effective for the fiscal years beginning January 1, 2011. The Company believes that ASU 2009-13 will not have a material impact on its consolidated financial statements





F-12
 
  GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)


In January 2010, the FASB issued further guidance under ASC No. 820, “Fair Value Measurements and Disclosures” ("ASC 820"). ASC 820 requires disclosures about the transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). ASC 820 is effective for the fiscal years and interim periods beginning after December 15, 2010. The Company will adopt the update on January 1, 2011 and expects that ASC 820 will not have a material impact on its consolidated financial statements.




3.
ACCOUNTS RECEIVABLE





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





Accounts receivable consisted of the following:





As of December 31,2010


2009Accounts receivable, at original cost

$
1,803,273


$
1,249,947Less: allowance for doubtful accounts


(537,812
)


(708,741
)Less: foreign translation difference


(19,845
)


-Accounts receivable, net

$
1,245,616


$
541,206





For the years ended December 31, 2010 and 2009, the Company provided no further allowance for doubtful accounts.





For the years ended December 31, 2010 and 2009, the Company recovered $170,929 and $93,492 of allowance for doubtful accounts, respectively.





4.
INVENTORIES, NET





Inventories consisted of the following:





As of December 31,2010


2009Raw materials

$
13,607


$
17,876Work-in-process


19,640



-Finished goods


664,951



680,566698,198



698,442Less: inventory allowance


(640,871
)


(688,153
)Less: foreign translation difference


(22,265
)


-Inventories, net

$
35,062


$
10,289





For the year ended December 31, 2010, the Company recovered $47,282 from inventory allowance. For the year ended December 31, 2009, the Company recorded inventory allowance of $322,122.





F-13




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




5.
PREPAYMENTS AND OTHER CURRENT ASSETS





Prepayments and other current assets consisted of the following:





As of December 31,2010


2009VAT receivable

$
1,601


$
-Advances to employees


79,843



151,720Prepayments to equipment vendors


-



41,169Prepaid operating expenses


53,782



84,566$
135,226


$
277,455





6.
PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment consisted of the following:





As of December 31,2010


2009Buildings

$
1,863,446


$
2,293,130Plant and equipment


8,071,246



6,323,428Motor vehicles


263,070



246,806Furniture, fixture and equipment


162,616



152,645Leasehold improvement


44,256



-Foreign translation difference


347,887



619,42310,752,521



9,635,432Less: accumulated depreciation


(3,676,681
)


(2,795,337
)Less: foreign translation difference


(118,567
)


(116,576
)Property, plant and equipment, net

$
6,957,273


$
6,723,519





Depreciation expense for the years ended December 31, 2010 and 2009 were $766,083 and $727,724 respectively, of which $553,247 and $596,988 were include in cost of revenue.





7.
AMOUNT DUE TO A RELATED PARTY





As of December 31, 2010 and 2009, a balance of $439,267 and $1,960,874 due to a major shareholder, Mr. Lian Guo represented temporary advances to the Company which was unsecured, interest-free and repayable on demand.





8.
OTHER PAYABLES AND ACCRUED LIABILITIES





Other payables and accrued liabilities consisted of the following:





As of December 31,2010


2009Business tax payable

$
102,054


$
81,174Government levy payable


8,085



34,435Salaries and welfare payable


91,890



97,724Advances from employees


22,862



50,411Accrued operating expenses


169,420



164,809$
394,311


$
428,553




F-14




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)


9.
INVESTMENT IN AN UNCONSOLIDATED AFFILIATE





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





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





As of December 31,2010


2009Investment in Medicine at the date of acquisition

$
106,804


$
106,804Amount due from Medicine


751,593



980,575Less: allowance for doubtful accounts


(751,593
)


(980,575
)Share of accumulated losses in Medicine


(870,823
)


(870,823
)Foreign translation difference


(47,536
)


(20,783
)Loss in excess of investment in an unconsolidated affiliate

$
(811,555
)

$
(784,802
)





For the year ended December 31, 2010, the Company received $255,947 from Medicine as recovery from an unconsolidated affiliate and recorded as “other income” in the statement of operations.





10.
INCOME TAXES





For the years ended December 31, 2010 and 2009, the local (“United States of America”) and foreign components of income before income taxes were comprised of the following:





Years endedDecember 31,2010


2009Tax jurisdiction from:– Local

$
-


$
-– Foreign


3,224,378



1,748,053Income before income taxes

$
3,224,378


$
1,748,053





The provision for income taxes consisted of the following:





Years endedDecember 31,2010


2009Current:– Local

$
-


$
-– Foreign


688,045



571,643Deferred:– Local


-



-– Foreign


-



-Income tax expense

$
688,045


$
571,643




F-15


GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




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





United States of America





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





The PRC





Under the Corporate Income Tax Law of the People’s Republic of China, the Company’s subsidiaries in the PRC are subject to the unified statutory income tax rate of 25%. The reconciliation of income tax rate to the effective income tax rate for the years ended December 31, 2010 and 2009 is as follows:





Years endedDecember 31,2010


2009Income before income taxes from PRC operation

$
3,224,378


$
1,748,053Statutory income tax rate


25
%


25
%Income tax expense at statutory rate


806,095



437,013Net operating loss not recognized as deferred tax assets


1,559



171,533Recovery from allowance of doubtful accounts not recognized as deferred taxes


(74,158
)


(36,903
)Non-deductible items


(45,451
)


-Income tax expense

$
688,045


$
571,643





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





As ofDecember 31,2010


2009Deferred tax assets:Net operating loss carryforwards

$
388,689


$
386,309Allowance for doubtful accounts


779,103



919,616Total deferred tax assets


1,167,792



1,305,925Less: valuation allowance


(1,167,792
)


(1,305,925
)Deferred tax assets

$
-


$
-





As of December 31, 2010, the Company incurred $1,554,758 of aggregate cumulative operating losses carryforwards available to offset its taxable income for PRC income tax purposes. The Company has provided for a full valuation allowance against the deferred tax assets of $1,167,792 on the expected future tax benefits from the net operating loss carryforwards and allowance for doubtful accounts as the management believes it is more likely than not that these assets will not be realized in the future. For the year ended December 31, 2010, the valuation allowance decreased by $138,133 primarily relating to the recovery from allowance for doubtful accounts.





11.
NET INCOME PER SHARE





Basic net income per share is computed using the weighted-average number of the common share outstanding during the year. The dilutive effect of potential common shares outstanding is included in diluted net income per share. The following table sets forth the computation of basic and diluted net income per share for the years ended December 31, 2010 and 2009:




F-16




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




Years ended December 31,2010


2009Net income

$
2,536,334


$
1,176,410Net income attributable to GFR Pharmaceuticals, Inc.

$
2,445,710


$
1,096,632Weighted average common shares outstanding


42,079,940



42,079,940Net income per share – Basic and diluted

$
0.06


$
0.03Net income per share attributable to GFR Pharmaceuticals, Inc. – Basic and diluted

$
0.06


$
0.03





12.
SEGMENT INFORMATION





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





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





·
Extraction Business – provision of extraction service 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 years presented.





The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). The Company had no inter-segment sales for the years ended December 31, 2010 and 2009. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the different technology and marketing strategies of each business unit for making internal operating decisions.





Summary of financial information concerning the Company’s reportable segments is shown in the following table for the years ended December 31, 2010 and 2009:





Year ended December 31, 2010Medical Business


Extraction Business


TotalOperating revenue from external customers:Service revenue

$
3,732,781


$
557,626


$
4,290,407Product sales


-



71,149



71,149Total revenues, net


3,732,781



628,775



4,361,556Cost of revenue


(576,001
)


(98,181
)


(674,182
)Gross profit

$
3,156,780


$
530,594


$
3,687,374Depreciation and amortization

$
576,278


$
197,120


$
773,398Net income


2,017,534



518,800



2,536,334Expenditure for long-lived assets

$
59,008


$
711,511


$
770,519




F-17




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)


Year ended December 31, 2009Medical Business


Extraction Business


TotalOperating revenue from external customers:Service revenue

$
3,336,839


$
-


$
3,336,839Product sales


-



547,258



547,258Total revenues, net


3,336,839



547,258



3,884,097Cost of revenue


(555,397
)


(516,315
)


(1,071,712
)Gross profit

$
2,781,442


$
30,943


$
2,812,385Depreciation and amortization

$
596,988


$
137,984


$
734,972Net income (loss)


1,767,050



(590,640
)


1,176,410Expenditure for long-lived assets

$
2,039


$
-


$
2,039





For the years ended December 31, 2010 and 2009, 100% of the Company’s assets were located in the PRC and 100% of the Company’s revenues and purchases were derived from customers and vendors located in the PRC.





13.
CHINA CONTRIBUTION PLAN





Under the PRC Law, full-time employees of its subsidiaries in the PRC 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. They are required to accrue for these benefits based on certain percentages of the employees’ salaries. The total contributions made for such employee benefits were $22,916 and $12,148 for the years ended December 31, 2010 and 2009, respectively.





14.
STATUTORY RESERVES





Under the PRC Law the Company’s subsidiaries, Hua Long, New Century and Bao Sai are required to make appropriations to the statutory reserve based on after-tax net earnings and determined in accordance with generally accepted accounting principles of the People’s Republic of China (the “PRC GAAP”). Appropriation to the statutory reserve should be at least 10% of the after-tax net income until the reserve is equal to 50% of the registered capital. The statutory reserve is established for the purpose of providing employee facilities and other collective benefits to the employees and is non-distributable other than in liquidation.





For the years ended December 31, 2010 and 2009, the Company made appropriations of $205,056 and $171,493 to statutory reserve, respectively.





15.
CONCENTRATIONS OF RISK





The Company is exposed to the following concentrations of risk:





(a)
Major customers





For the years ended December 31, 2010 and 2009, the customer who accounted for 10% or more of the Company’s revenues, are presented as follows:




Year ended December 31, 2010


December 31, 2010PercentageRevenues


of revenues


Accounts receivableCustomer A

$
3,732,783



86
%

$
1,169,993Customer B


557,626



12
%


75,622Total:

$
4,290,409



98
%

$
1,245,615




F-18




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)




Year ended December 31, 2009


December 31, 2009Revenues


Percentage

of revenues


Accounts receivableCustomer A

$
3,336,858



86
%

$
502,907Customer B


526,400



13
%


731Total:

$
3,863,258



99
%

$
503,638





(b)
Major vendors





For the years ended December 31, 2010 and 2009, the vendor who accounted for 10% or more of the Company’s purchases, are presented as follows:





Year ended December 31, 2010


December 31, 2010Purchases


Percentage

of purchase


Accounts payableVendor A

$
19,918



40
%

$
-Vendor B


4,426



10
%


-Total:

$
24,344



50
%

$
-





Year ended December 31, 2009


December 31, 2009Purchases


Percentage

of purchase


Accounts payableVendor A

$
468,580



82
%

$
-Vendor B


72,067



13
%


35,541Total:

$
540,647



95
%

$
35,541





(c)
Credit risk





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





(d)
Exchange rate risk





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





(e)
Economic and political risks





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




F-19




GFR PHARMACEUTICALS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
 (Currency expressed in United States Dollars (“US$”), except for number of shares)


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





16.
COMMITMENTS AND CONTINGENCIES





The Company is committed to an office space under a non-cancelable operating lease agreement with a term of 2 years with fixed monthly rentals, expiry in June 2011. Total rent expenses for the years ended December 31, 2010 and 2009 was $2,124 and $2,105, respectively. As of December 31, 2010, the Company has $1,208 of future minimum rental payments due under a non-cancelable operating lease agreement in the next twelve months.





17.
SUBSEQUENT EVENTS





In accordance with ASC Topic 855, “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, the Company has evaluated all events or transactions that occurred after December 31, 2010 up through the date was the Company issued the audited consolidated financial statements. During the period, the Company did not have any material recognizable subsequent events.


F-20





Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





On January 25, 2010, the Company’s former independent accountants, AGCA, Inc. Certified Public Accountants (“AGCA”), advised the Company that it would not seek re-election as the Company’s  independent accountants and resigned as independent accountants  effective January 25, 2010.   The choice of  new independent accountants was approved by the Board of Directors of the Company.





The former independent accountant’s report on the Company’s financial statements for the fiscal year ended December 31, 2008 did not contain any adverse opinions or disclaimer opinions, nor were the reports qualified or modified as to uncertainty, audit scope or accounting principles. Furthermore, the accountant’s report did not include any disclosure of uncertainty regarding the Company’s ability to continue as a going concern. AGCA did not serve as the Company’s independent accountants for the fiscal year ended December 31, 2007.





During the Company’s last two fiscal years ended December 31, 2008 and December 31, 2009 and through January 25, 2010, the date of resignation and declination, there were no disagreements between the Company and AGCA, its former independent accountants, on any matters relating to accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of the former independent accountants, would have caused them to make reference to the subject matter of the disagreement in their report.





A letter addressed to the Securities and Exchange Commission stating whether or not AGCA agrees with the above statements was filed as an exhibit to the Company’s Current Report on Form 8-K that was filed with the Securities and Exchange Commission on January 29, 2010.





On January 27, 2010, the Company engaged HKCMCPA Company Limited (formerly ZYCPA Company Limited), Certified Public Accountants (“HKCMCPA”), as Company’s new independent accountants. During the two most recent years ended December 31, 2009 and 2008, and any subsequent interim period through January 27, 2009, the Company did not consult with HKCMCPA, the newly engaged accountant, regarding any matter described in Item 304(a)(2) of Regulation SK, including any issue related to Company’s financial statements or the type of audit opinion that might be rendered for the Company. HKCMCPA served as the Company’s independent accountants for the fiscal year ended December 31, 2007.





ITEM 9A.
Controls and Procedures





Evaluation of Disclosure Controls and Procedures





Based on their evaluation as of December 31, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-K.





Management’s Report on Internal Control over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010.





13





Our internal control over financial reporting is a process designed by or under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.





In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in ‘Internal Control – Integrated Framework’. Our management has concluded that, as of December 31, 2010, our internal control over financial reporting is effective based on these criteria.





This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.





There were no changes in our internal controls over financial reporting during the year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.





Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within GFR Pharmaceuticals Inc. have been detected.





Item 9B.Other Information





Not Applicable.





14


PART III





Item 10.  Directors and Executive Officers of the Registrant and Corporate Governance





Identification of Directors and Executive Officers





The following table sets forth the names and ages of our directors and executive officers, the positions and offices held with us, and the period during which each served in such positions and offices. Each director and executive officer serves for a term of one (1) year and until his successor is duly elected and qualified. . Directors are elected annually by our stockholders at the annual meeting. Each director holds his office until his successor is elected and qualified or his earlier resignation or removal





DIRECTORS AND OFFICERS





Name

Age

Position

Period In OfficeZhao Yan Ding

37

Chief Executive Officer &

January 2008 - PresentDirectorZhong Ya Li

31

Chief Financial Officer &

January 2008 - PresentDirectorWang Li An

47

Director

September 2006 - Present





The following is a summary of the business experience and other biographical information with respect to each of the Company’s officers and directors listed in the above-referenced table.





Zhao Yan Ding – Chief Executive Officer and Director





Mr. Zhao Yan Ding, our Chief Executive Officer and Director is 37 year old.  He holds a master’s degree as a senior engineer. He worked for Xi'an Herbal Medicine Company in the Administration and Marketing Department from 1997 to 2001, and gained the honor of advanced staff within two years. In 2001, he took a position with Xi'an Rising Bio-sep Bio-technique Co., Ltd. in the Researches & Production Department.  He also worked for Zhejiang Haikang Bio-Products Co., Ltd, to set up their bio research department within company. From 2003 to the present, he has worked in Xi'an Bio-sep Bio-technique Co., Ltd. as their chief of research and the supervisor of the company. The Board believes that Mr. Zhao has the experience, qualifications, attributes and skills necessary to serve on the Board because of his extensive academic knowledge of the biotech industry and research accomplishments, the leadership and strategic direction he showed in Zhejiang Haikang Bio-Products Co., Ltd, and his unparalleled knowledge  of the Company and its business by serving the Company for7 years. Mr. Zhao is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past six years.





Zhong Ya Li – Chief Financial Officer and Director





Ms. Zhong Ya Li, our Chief Financial Officer and Director is 31 years old.  She holds a bachelor degree in accounting.  Ms. Zhong Ya Li previously worked at Xi'an Rising Building Management Co., Ltd as a cashier and the chief accountant from 1999 to 2003. Then she worked for the Xi'an Bio-sep Bio-technique Co., Ltd as their Chief Accountant. In 2006, she was promoted to Vice Chief Financial Officer of Xi'an Bio-sep Bio-technique Co., Ltd. The Board believes that Ms. Zhong has the experience, qualifications, attributes and skills necessary to serve on the Board because of her relevant experience in finance and accounting. Ms. Zhong is not a member of the Board of any other public company or any investment company, neither has she been a member of the boards of directors of such companies for the past six years.





15





Wang Li An - Director





Mr. Wang Li An has been a director of the Company since September 2006 and the Chairman of the Board of Director of New Century since March 2006. Mr. Wang is also the Vice General Manager and Director of Bao Sai since June 2005. From July 2002 to May 2005, Mr. Wang was the Secretary of the Board of Bao Sai and was responsible for corporate finance, taxation, capital restructure, operational management, and government relations. From October 1997 to June 2002, Mr. Wang was the dean of Security Investment Department of Shanxi Rising Group Corp. and was responsible for the initial set up of the subsidiaries and capital investment. Mr. Wang graduated from Xia Men University in 1987 with a bachelor degree in Mathematics. The Board believes that Mr.  Wang has the experience, qualifications, attributes and skills necessary to serve on the Board because of his 9 years of experience with the Company and his knowledge of our business. Mr. Wang is not a member of the Board of any other public company or any investment company, neither has he been a member of the boards of directors of such companies for the past six years.





Board Committees





Our board of directors is currently composed of three directors: Mr. Zhao Yan Ding, Ms. Zhong Ya Li, and Mr. Wang Li An. All board action requires the approval of a majority of directors in attendance at a meeting at which a quorum is present.  We currently do not have standing audit, nominating or compensation committees.  Our entire board of directors handles the functions that would otherwise be handled by each of the committees.





Audit Committee Financial Expert





We do not have a separately designated standing audit committee. The entire Board of Directors acts as an audit committee for the purpose of overseeing the accounting and financial reporting processes, and audits of our financial statements. The Commission recently adopted new regulations relating to audit committee composition and functions, including disclosure requirements relating to the presence of an “audit committee financial expert” serving on its audit committee. In connection with these new requirements, our Board of Directors examined the Commission’s definition of “audit committee financial expert” and concluded that Zhong Ya Li qualifies as such an expert. Presently, there are three directors serving on our Board, Each of our directors, by virtue of his past employment experience, has considerable knowledge of financial statements, finance, and accounting, and has significant employment experience involving financial oversight responsibilities. Accordingly, we believe that our current directors capably fulfill the duties and responsibilities of an audit committee in the absence of such an expert.





Involvement in Certain Legal Proceedings





None of our directors, executive officers, or control persons have been involved in any of the following events during the past ten years:





·
Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of bankruptcy or within two years prior to that time; or





·
Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); or





·
Being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or




16




·
Being found by a court of competent jurisdiction (in a civil violation), the SEC or the Commodity Future Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; or





·
Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: any Federal or State securities or commodities law or regulation; or any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity. This violation does not apply to any settlement of a civil proceeding among private litigants; or





·
Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.





Code of Ethics





We have adopted a code of ethics that applies to our principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions (the “Code of Ethics”). The Code of Ethics is designed to deter wrongdoing, and to promote the following:





·
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.





·
Full, fair, accurate, timely and understandable disclosure in reports and documents that a small business issuer files with, or submits to, the Commission and in other public communications made by the small business issuer.





·
Compliance with applicable governmental laws, rules and regulations.





·
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code.





·
Accountability for adherence to the code.





Additionally, the Chief Financial Officer, Zhong Ya Li, carries out her functions under the code of ethics and rules of professional conduct as outlined by the Peoples Republic of China.





Section 16(a) Beneficial Ownership Reporting Compliance





Under Section 16(a) of the Exchange Act, all executive officers, directors, and each person who is the beneficial owner of more than 10% of the common stock of a company that files reports pursuant to Section 12 of the Exchange Act, are required to report the ownership of such common stock, options, and stock appreciation rights (other than certain cash-only rights) and any changes in that ownership with the Commission.





17





Item 11.Executive Compensation





Compensation Philosophy





Our board of directors have historically determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, and contributions made by the officers’ to our success.  Each of the named officers will be measured by a series of performance criteria by the board of directors, on a yearly basis.  Such criteria will be based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.





Our board of directors have not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers.  As our executive leadership and board of directors grow, our board of directors may decide to form a compensation committee charged with the oversight of executive compensation plans, policies and programs.





Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking. We provide our executive officers solely with a base salary to compensate them for services rendered during the year.  Our policy of compensating our executives with a cash salary has served us well.  To date, we have not believed it necessary to provide our executives discretionary bonuses, equity incentives, or other benefits in order for us to continue to be successful.  While we have established an incentive stock option plan, the Company has made no awards under the plan. Senior executives do not have the incentive to take unnecessary risks in order to receive a bonus.    However, as the Company grows and the operations become more complex, the Board of Directors may deem it in the best interest of the Company to provide such additional compensation to existing executives and in order to attract new executives.





Summary Compensation Table





The following table sets forth compensation earned by the executive officers during the three years preceding December 31, 2010. -


Name

and

Principal

Position

Year

Salary

($)


Bonus

($)


Stock

Awards

($)


Option

Awards

($)


Non-Equity

Incentive

Plan

Compensation

($)


Nonqualified

Deferred

Compensation

Earnings

($)


All Other

Compensation

($)


Total

($)Zhao Yan Ding

2010


8,503



-



-



-



-



-



-



8,503Chief Executive

2009


4,811



-



-



-



-



-



-



4,811Officer

2008


4,753



-



-



-



-



-



-



4.753Zhong Ya Li,

2010


7,966



-



-



-



-



-



-



7,966Chief Financial

2009


0



-



-



-



-



-



-



0Officer

2008


3,734



-



-



-



-



-



-



3,734Jie Su, former

2010


-



-



-



-



-



-



-



-Director, former

2009


-



-



-



-



-



-



-



-CEO & former

2008


15,867



-



-



-



-



-



-



15,867PresidentZhi Dong Wang,

2010


-



-



-



-



-



-



-



-former director,

2009


4,590



-



-



-



-



-



-



4,590former CFO &

2008


4,244



-



-



-



-



-



-



4,244former VP




18




Elements of Compensation





We provide our executive officers with a base salary to compensate them for services rendered during the year. Our policy of compensating our executives with a cash salary has served us well. Because of our history of attracting and retaining executive talent, we do not believe it is necessary at this time to provide our executives equity incentives, or other benefits in order for us to continue to be successful.





Stock Option Plan





The Company has established the 2002 Incentive and Non-qualified Stock Option Plan (“the Plan”) under which we may grant to employees, officers, directors, attorneys, consultants or other advisers of the Company or affiliated companies up to 10,000,000 shares of 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 December 31, 2010, no options or shares have been granted under the Plan.





Compensation of Independent Directors





No compensation had been paid to any director solely in connection with their role as a director for the fiscal year ended December 31, 2010.





Employment Agreements





There are no written employment agreements with any of the Company's officers, as of December 31, 2010.





Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





The following table sets forth certain information regarding the beneficial ownership of our Common Stock as of March 29, 2011 (i) each person known to us to be the beneficial owner of more than 5% of its Common Stock, (ii) each of our directors and executive officers, and (iii) all directors and executive officers as a group.





Name and Address of Beneficial Owner(1)

Amount and Nature

of Beneficial Ownership(2)(3)


Percentage

of Class(3)Guo Li An


16,000,000



38.0
%XinChengQuChangLeXiLu169Hao

Xi’An Shanxi Province, P.R. China 710054Mr. Wang Li An

c/o GFR Pharmaceuticals, Inc.

99 Yan Xiang Road, Biosep Building

Xi An, Shaan Xi Province, P.R. China 710054


0



0Ms. Zhong Ya Li

c/o GFR Pharmaceuticals, Inc.

99 Yan Xiang Road, Biosep Building

Xi An, Shaan Xi Province, P.R. China 710054


0



0Mr. Zhao Ya Ding

c/o GFR Pharmaceuticals, Inc.

99 Yan Xiang Road, Biosep Building

Xi An, Shaan Xi Province, P.R. China 710054


0



0Officers and directors as a group (3 persons)


0



0





(1)
As used herein, a person is deemed to be the “beneficial owner” of a security if he or she has or shares voting or investment power with respect to such security, or has the right to acquire such ownership within sixty (60) days. As used herein, “voting power” includes the power to vote or to direct the voting of shares, and “investment power” includes the power to dispose or to direct the disposition of shares, irrespective of any economic interest therein.




19




(2)
Except as otherwise indicated by footnote, the persons named in the table have sole voting and investment power with respect to all Common Stock beneficially owned by them.





(3)
Percentage ownership for a given individual or group is calculated on the basis of (i) the amount of outstanding shares owned as of March 29, 2011plus , (ii) the number of shares that such individual or group has the right to acquire within sixty (60) days pursuant to options, warrants, conversion privileges or other rights.





Item 13.Certain Relationships and Related Transactions and Director Independence





Transactions with Related Persons





Mr. Guo Li An, who owns 38.03% of the Company, made a loan to fund our operations. As of December 31, 2010, the balance of the loan was $439,267, which was unsecured, interest-free and repayable on demand.





We have a 75% equity interest in Medicine but Medicine is no longer consolidated in our financial statement and recovered 255,947 from this unconsolidated affiliate.




Director Independence





None of the members of the Company’s Board of Directors is an independent director, pursuant to the definition of “independent director” under the Rules of NASDAQ Stock Market.




20




ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





Our auditor is HKCMCPA Company Limited (formerly ZYCPA Company Limited).





Audit Fees





HKCMCPA Company Limited billed $60,000 to the Company for professional services rendered for the audit of our 2010 financial statements and billed $58,000 to the Company for professional services rendered for the audit of our 2009 financial statements.




Audit-Related Fees





The former independent accountants, AGCA, Inc. billed $11,000 and current independent accountants HKCMCPA Company, Limited billed $0 to the Company during 2010 for assurance and related services that are reasonably related to the performance of the 2010 audit or review of the quarterly financial statements.





Tax Fees





The current independent accountants billed $0 to the Company during 2010 for professional services rendered for tax compliance, tax advice and tax planning.  AGCA, Inc. billed $0 to the Company during 2010 for professional services rendered for tax compliance, tax advice and tax planning.





All Other Fees





The former independent accountants, AGCA Inc. and current accountants, HKCMCPA Company Limited billed $0 to the Company in 2010 and 2009 for services not described above.





It is the policy of the Company that all services other than audit, review or attest services must be pre-approved by the Board of Directors.  No such services have been performed by either the former independent accountants or current independent accountants.





21


PART IV





Item 15.Exhibits and Financial Statement Schedules





(a) Exhibits.


Exhibit

Number

Description2.1

Purchase Agreement for Bao Sai, dated January 1, 2008 (1)3.1

Articles of Incorporation as Amended (2)3.2

Bylaws(2)4.1

See Exhibits 3.1 and 3.2 for the provisions of our Articles of Incorporation and Bylaws that define the rights of holders of our Common Stock4.2

Specimen of Common Stock Certificate (3)4.3

2002 Non-Qualified Stock Incentive Plan(4)10.2

Bao Sai Purchase Agreement, dated January 1, 2008 (5)14.1

Code of Ethics (6)16.1

Letter from AGCA dated January 28, 2010(7)21.1

Subsidiaries of the Registration31.1

Rule 13a-14(a)/15d-14(a) Certifications of Zhao Yan Ding, Chief Executive Officer31.2

Rule 13a-14(a)/15d-14(a) Certifications of Zhong Ya Li, Chief Financial Officer32.1

Section 1350 Certifications of Zhao Yan Ding, Chief Executive Officer32.2

Section 1350 Certifications ofZhong Ya Li, Chief Financial Officer





(1)
Filed as an Exhibit to our Form 8-K filed with the Commission on March 23, 2008





(2)
Filed as an Exhibit to our Form 10-SB12G, as filed with the Commission on November 5, 1999.





(3)
Filed as an Exhibit to the Company’s Annual Report on Form 10-k, as filed with the Commission on April 21, 2006.




(4)
Filed as Exhibit 4.1 to our Form S-8 filed June 19, 2002





(5)
Filed as an exhibit to the Company’s Form 8K filed on March 28, 2008.





(6)
Filed as an Exhibit to our Form 10-k filed with the commission April 13, 2007





(7)
Filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the Commission on January 29, 2010.





22





SIGNATURES





In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Date: March 30, 2011





GFR PHARMACEUTICALS, INC.By:
/s/ Zhao Yan DingZhao Yan Ding, Chief Executive Officer





By:
/s/ Zhong Ya LiZhong Ya Li, Chief Financial Officer





In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title

Date/s/ Zhao Yan Ding

Director

March 30, 2011Zhao Yan Ding/s/   Zhong Ya Li

Director

March 30, 2011Zhong Ya Li/s/Wang Li-An

Director

March 30, 2011Wang Li-An




23