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EX-31.1 - EXHIBIT 31.1 - CHINA PEDIATRIC PHARMACEUTICALS, INC.ex311.htm
EX-31.2 - EXHIBIT 31.2 - CHINA PEDIATRIC PHARMACEUTICALS, INC.ex312.htm
EX-32.1 - EXHIBIT 32.1 - CHINA PEDIATRIC PHARMACEUTICALS, INC.ex321.htm
EX-32.2 - EXHIBIT 32.2 - CHINA PEDIATRIC PHARMACEUTICALS, INC.ex322.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q/A
Amendment No. 1
 
(Mark One)
 
IEIQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
 
For the quarterly period ended June 30, 2010
 
ElTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 
ACT OF 1934
 
For the transition period from _______ to _______
 
Commission file number: 000-52007
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
(Exact name of small business issuer as specified in its charter)
 
 Nevada    20-2718075
(State or other jurisdiction of incorporation or organization)    (IRS Employer identification No.)
 
9th Floor, No. 29 Nanxin Street
Xi'an, Shaanxi Province
People’s Republic of China 710004
(Address of principal executive offices)
 
86-29-8727-1818
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. Yesx No o
 
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 o Noo
 
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.
 
 Large accelerated filero Accelerated filer o  Non-accelerated filer o Smaller reporting company x
    (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o Nox
 
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
 
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 
Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes □ No □
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:
 
10,180,288 shares of common stock, $.001 par value, were outstanding as of  September 9, 2010 .
 
 
 
 
 

 
 
 
TABLE OF CONTENTS
 
 
 
Page
 
PART I
 
Item 1.
Financial Statements
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
4
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
14
     
Item 4.
Controls and Procedures
14
 
PART II
 
Item 1.
Legal Proceedings
15
     
Item 1A.
Risk Factors
15
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
15
     
Item 3.
Defaults Upon Senior Securities
15
     
Item 4.
(Removed and Reserved)
15
     
Item 5.
Other Information
15
     
Item 6.
Exhibits
15
     
 SIGNATURES
  16
     
 
 
 
 
2

 
 
 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
CHINA PEDIATRIC PHARMACEUTICALS, INC
 
CONSOLIDATED FINANCIAL STATEMENTS
 
June 30, 2010
 
TABLE OF CONTENTS
 
Consolidated Balance Sheets
F-1
   
Consolidated Statements of Income
F-2
   
Consolidated Statements of Cash Flows
F-3
   
Consolidated Statements of Stockholders’ Equity
F-4
   
Notes to Consolidated Financial Statements
F-5 - F-16
 
 
 
 
 
3

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
AS OF JUNE 30, 2010 AND DECEMBER 31, 2009
 
   
6/30/2010 (Unaudited)
   
12/31/2009
(Audited)
 
ASSETS
           
Current Assets                
Cash and cash equivalents
  $ 6,585,350     $ 905,874  
Accounts receivable, net
    6,430,750       5,666,307  
Other receivable
    1,436,579       43,305  
Inventory
    2,111,576       886,082  
Prepaid expenses
    2,938,561       2,487,493  
Total Current Assets
    19,502,816       9,989,061  
Long-term prepaid expenses
    1,762,477       1,755,104  
Property & equipment, net
    754,586       797,790  
Goodwill
    612,745       612,745  
Intangible Assets
    1,690,240       1,856,718  
Total Assets
  $ 24,322,864     $ 15,011,418  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
         
               
Current Liabilities
               
Accounts payable
  $ 731,604     $ 254,097  
Accrued expenses and other payables
    2,530,321       1,592,440  
Trade deposit received
    6,335       6,308  
Short-term bank loan
    440,619       438,776  
VAT tax payable
    71,720       321,521  
Income tax payable
    261,761       194,386  
Total Current Liabilities
    4,042,360       2,807,528  
                 
                 
Stockholders' Equity
               
Common stock, $ 0.001 per value, 75,000,000 share authorized,
               
10,180,171 and 8,305,171 shares issued and outstanding at June 30, 2010 and December 31, 2009
    10,180       8,305  
Additional paid in capital
    7,117,146       2,135,883  
Statutory reserve
    810,540       810,540  
Other comprehensive income
    696,786       328,567  
Retained earnings
    11,645,852       8,920,595  
Total Stockholders' Equity
    20,280,504       12,203,890  
Total Liabilities and Stockholders' Equity
  $ 24,322,864     $ 15,011,418  

 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
F-1

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
 
(UNAUDITED)
 
   
Three Months Ended
   
Six Months Ended
 
   
6/30/2010
   
6/30/2009
   
6/30/2010
   
6/30/2009
 
Sales, net
  $ 6,508,769     $ 3,547,124     $ 13,217,661     $ 7,142,774  
Cost of sales
    2,599,693       1,331,835       5,509,231       2,786,687  
                                 
Gross profit
    3,909,076       2,215,289       7,708,430       4,356,087  
                                 
Selling, general and administrative expense
    2,384,925       1,172,882       4,528,127       2,394,384  
                                 
Income from operations
    1,524,151       1,042,407       3,180,303       1,961,703  
                                 
Other income
    514       250       825       288  
Other expense
    (12,063 )     (108,185 )     (12,292 )     (108,211 )
Total Other Income (Expense)
    (11,549 )     (107,935 )     (11,467 )     (107,923 )
                                 
Income before income taxes
    1,512,602       934,472       3,168,836       1,853,780  
                                 
Provision for income taxes
    254,793       137,072       443,579       267,981  
Net income
  $ 1,257,809     $ 797,400     $ 2,725,257     $ 1,585,799  
                                 
Net income for common share
                               
Earnings per share - Basis
  $ 0.13     $ 0.10     $ 0.30     $ 0.19  
Earnings per share - Diluted
  $ 0.13     $ 0.10     $ 0.29     $ 0.19  
                                 
Weighted average common shares outstanding
                               
Basis
    9,537,314       8,228,571       9,026,165       8,228,571  
Diluted
    9,965,432       8,228,571       9,323,477       8,228,571  
                                 
Net income
  $ 1,257,809     $ 797,400     $ 2,725,257     $ 1,585,799  
Other comprehensive income (loss)
    369,626       79       368,219       6,882  
Comprehensive income (loss)
    1,627,435       797,479       3,093,476       1,592,681  

 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
F-2

 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
 
 
 
   
Six Months Ended
 
Current Assets  
6/30/2010
   
6/30/2009
 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net Income
  $ 2,725,257     $ 1,585,799  
Adjustments to reconcile net income to net cash
               
Provided by operating activities:
               
Depreciation and Amortization
    209,682       223,582  
Stock-based compensation
    483,138       -  
Impairment loss on accounts and other receivables
    -       108,180  
(Increase) / decrease in assets:
               
Accounts receivables
    (737,866 )     (1,895,483 )
Inventory
    (1,217,041 )     (214,104 )
Prepaid expense
    (438,851 )     (444,397 )
Other receivable
    (1,388,227 )     988  
Increase / (decrease) in current liabilities:
               
Accounts payable
    474,602       107,622  
Accrued expenses and other payables
    1,227,565       618,499  
Trade deposit received
    -       357  
Value-added tax payable
    (250,118 )     (23 )
Income tax payable
    66,317       (76,521 )
Net cash provided by operating activities
    1,154,458       14,499  
                 
Net cash from financing activities
               
Proceeds from issuance of common stock
    4,500,000       -  
                 
Effect of exchange rate changes on cash and cash equivalents
    25,018       1,563  
                 
Net change in cash and cash equivalents
    5,679,476       16,062  
                 
Cash and cash equivalents, beginning balance
    905,874       813,252  
Cash and cash equivalents, ending balance
  $ 6,585,350     $ 829,314  
                 
SUPPLEMENTAL DISCLOSURES:
               
Cash paid during the year for:
               
Income tax payments
  $ 377,262     $ 344,502  

 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
F-3

 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
(UNAUDITED)
 
   
Capital Stock
     
Additional
Paid-in
     
Other
Comprehensive
     
Statutory
     
Retained
     
Total
Stockholders
 
   
Shares Amount
   
Capital
   
 
Income
   
Reserves
   
Earnings
   
 
Equity
 
Balance December 31, 2009
    8,305,171     $ 8,305     $ 2,135,883     $ 328,567     $ 810,540     $ 8,920,595     $ 12,203,890  
Foreign currency translation adjustments
                            368,219                       368,219  
Stock-based compensation
                    483,138                               483,138  
Issuance of common stock
    1,875,000       1,875       4,498,125                               4,500,000  
Income for the six months ended June 30, 2010
                                            2,725,257       2,725,257  
Balance June 30, 2010
    10,180,171     $ 10,180     $ 7,117,146     $ 696,786     $ 810,540     $ 11,645,852     $ 20,280,504  
Balance December 31, 2008
    8,228,571     $ 8,229     $ 1,478,134     $ 313,429     $ 721,553     $ 6,493,979     $ 9,015,324  
Foreign currency translation adjustments
                            15,138                       15,138  
Transferred to Statutory reserve
                                    88,987       (88,987 )     -  
Stock-based compensation-warrants
                    641,725                               641,725  
Stock-based compensation
    76,600       76       16,011                               16,087  
Recapitalization
                    13                               13  
Income for the year ended December 31, 2009
                                            2,515,,603       2,515,603  
Balance December 31, 2009
    8,305,171     $ 8,305     $ 2,135,883     $ 328,567     $ 810,540     $ 8,920,595     $ 12,203,890  

 
The accompanying notes are an integral part of these financial statements.
 
 
 
 
F-4

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 1 – ORGANIZATION
 
China Pediatric Pharmaceuticals, Inc. ("the Company") was incorporated on April 20, 2005 in the state of Nevada. The Company was originally incorporated under the name Belford Enterprises, Inc. and changed its name to Lid Hair Studios International Inc. on August 15, 2--5. Asia-Pharm Holding Inc. ("Asia-Pharm") was incorporated in British Virgin Islands on June 20, 2008. China Children Pharmaceuticals Co. Limited ("China Children") a wholly owned subsidiary of Asia-Pharm Holdings Inc. was formed on June 27, 2008 under the laws of Hong Kong. Xi'an Coova Children Pharmaceuticals Co., Ltd. ("Xi'an Coova" or "WOFE") is a "wholly owned foreign enterprise" incorporated in People's Republic of China ("PRC"). Xi'an Coova is a wholly owned subsidiary of China Children.
 
On September 30, 2009 the Company completed its merger with China Children, a Hong Kong based pharmaceutical manufacturer company in accordance with the Share Exchange Agreement. The Share Exchange Transaction is being accounted for as a reverse acquisition. In accordance with the Accounting and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission, the Company (the legal acquirer) is considered the accounting acquiree and China Children (the legal acquiree) is considered the accounting acquirer for accounting purposes. Subsequent to the Share Exchange Transaction, the financial statements of the combined entity will in substance be those of China Children. The assets, liabilities and historical operations prior to the share exchange transaction will be those of China Children. Subsequent to the date of Share Exchange Transaction, China Children is deemed to be a continuation of the business of the Company. Therefore post exchange financial statements will include the combined balance sheet of the Company and China Children, the historical operations of China Children and the operations of the Company and China Children from the closing date of the Share Exchange Transaction forward.
 
On August 4, 2008, an Entrustment Management Agreement was entered into between Xi'an Coova and Shaanxi Jiali Pharmaceuticals Co., Ltd. ("Shaanxi Jiali") to which China Children exercises control over the operations and business of Shaanxi Jiali through Xi'an Coova. Pursuant to the Entrustment Management Agreement, China Children shall receive all net profits and assume all operational losses of Shaanxi Jiali through Xi'an Coova.
 
Xi'an Coova entered into a Management Entrustment Agreement with Shaanxi Jiali and the shareholders of Shaanxi Jiali (the "Management Entrustment Agreement"), in which Shaanxi Jiali and its shareholders agreed to transfer control, or entrust, the operations and management of its business to Xi'an Coova. Under the agreement, Xi'an Coova manages the operations and assets of Shaanxi Jiali, controls all of the cash flows of Shaanxi Jiali through a bank account controlled by Xi'an Coova, is entitled to 100% of earnings before tax of Shaanxi Jiali, a management fee, and is obligated to pay all payables and loan payments of Shaanxi Jiali. In addition, under the terms of the Management Entrustment Agreement, Xi'an Coova has been granted certain rights which include, in part, the right to appoint and terminate members of Shaanxi Jiali's Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments. We anticipate that Shaanxi Jiali will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Xi'an Coova exercises its option. The agreement does not terminate unless the business of Shaanxi Jiali is terminated or Xi'an Coova exercises its option to acquire all of the assets or equity of Shaanxi Jiali under the terms of the Exclusive Option Agreement.
 
The contractual arrangements completed on August 4, 2008 provide that Xi'an Coova has controlling interest in Shaanxi Jiali as defined by FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), an Interpretation of Accounting Research Bulletin No. 51, which requires Xi'an Coova to consolidate the financial statements of Shaanxi Jiali and ultimately consolidate with its parent company, China Children.
 
The outstanding stock of the Company prior to the Share Exchange Transaction will be accounted for at their net book value and no goodwill will be recognized. Details of the shares outstanding upon completion of the Merger are as follows:
 
Pre-Exchange Transaction Common Shares Outstanding:
    9,300,000  
Re-purchase of the Company's shares:
    (5,000,000 )
Reverse stock split (7 pre-shares for 2 post-shares):
    (3,071,429 )
Issuance of the Company's shares for all outstanding shares of China Children:
    7,000,000  
Post-Exchange Transaction Common Shares Outstanding:
    8,228,571  
 
The Company, through its subsidiary, and exclusive contractual arrangement with Shaanxi Jiali, is engaged in the business of manufacturing and marketing over-the-counter ("OTC") and prescription pharmaceutical products for the Chinese marketplace as treatment for a variety of diseases and conditions.
 
 
 
F-5

 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation
 
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.The Company's functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted the Consolidation Topic of the FASB Accounting Standards Codification (“ASC 810”) which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.
 
In determining Shaanxi Jiali is the VIE of Xi'an Coova, the Company considered the following indicators, among others:
 
· 
Xi'an Coova has the full right to control and administrate the financial affairs and daily operation of Shaanxi Jiali and has the right to manage and control all assets of Shaanxi Jiali. The equity holders of Shaanxi Jiali as a group have no right to make any decision about Shaanxi Jiali’s activities without the consent of Xi'an Coova.
 
· 
Xi'an Coova was assigned all voting rights of Shaanxi Jiali and has the right to appoint all directors and senior management personnel of Shaanxi Jiali. The equity holders of Shaanxi Jiali possess no substantive voting rights.
 
· 
Xi'an Coova will provide financial support if Shaanxi Jiali requires additional funds to maintain its operations and to repay its debts.
 
· 
Xi'an Coova should be paid a management fee equal to Shaanxi Jiali's earning before taxes. If there are no earnings before taxes and other cash expenses, then no fee shall be paid. If Shaanxi Jiali sustains losses, they will be carried over to the next period and deducted from the next management fee. Xi'an Coova should assume all operation risks of Shaanxi Jiali and bear all losses of Shaanxi Jiali. Therefore, Xi'an Coova is the primary beneficiary of Shaanxi Jiali.
 
Translation Adjustment
 
As of June 30, 2010 and December 31, 2009, the accounts of the Company were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars (“USD”) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (“ASC 830”), with the CNY as the functional currency. According to ASC 830, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standards Codification (“ASC 220”), as a component of shareholders’ equity. Transaction gains and losses are reflected in the income statement.
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Comprehensive Income
 
The Company follows the Comprehensive Income Topic of the FASB Accounting Standards Codification (“ASC 220”). Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
 
 
 
F-6

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Risks and Uncertainties
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC’s economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
 
Contingencies
 
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
 
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.
 
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
 
Prepaid Expenses
 
Prepaid account is primarily comprised of two factors: advance payments suppliers for goods purchased, and advance payments to R&D organizations for new medicines to be developed and purchased.
 
In December 2007, the Company signed a Medicine Research and Development Agreement with Shaanxi Research Institution of Chinese Traditional Medicine (SRICTM). Pursuant to the terms of the agreement and Supplemental Agreement between the Company and SRICTM, SRICTM must successfully develop and obtain governmental approval for production of five new pediatric medicines, otherwise, the Company is entitled to a full refund of fees. Therefore, the costs paid in connection with these services were not classified as research and development costs, but rather as prepaid expenses. Such advance payments will not be expensed if we do not receive the desired results from  SRICTM.
 
 
 
F-7

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
A table of the outstanding prepaid expenses as of June 30, 2010, March 31, 2010, and December 31, 2009 are as follows:
 
 
Payee
Nature
 
6/30/2010
    3/31/2010    
12/31/2009
 
                       
Advance payment to R&D organization
Shaanxi Research Institution of Chinese Traditional Medicine
Advanced payment to Shaanxi Research Institution of Chinese Traditional Medicine for five new pediatric cold medicines
  $ 1,762,477     $ 1,755,387     $ 1,755,104  
                             
Advance payment to suppliers
Suppliers
Advance payments to suppliers for goods purchased
      2,938,561        2,926,740         2,487,493  
                             
Total
      $ 4,701,038       4,682,127     $ 4,242,597  

 
Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded primarily on a specific identification basis.  These are no allowances for doubtful accounts as of June 30, 2010 and December 31, 2009.
 
Inventories
 
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower. As of June 30, 2010 and December 31, 2009, inventories consist of the following:
 
   
6/30/2010
   
12/31/2009
 
Raw materials
  $ 1,248,401     $ 1,163,589  
Finished goods
    863,175       214,450  
Provision for obsolescence
    -       (491,957 )
Total
  $ 2,111,576     $ 886,082  

Property, Plant & Equipment
 
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
 
Buildings
30 years
Plant and equipment
5-14 years
Transportation equipment
5-10 years
Office equipment
5-10 years
 
 
 
 
F-8

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
As of June 30, 2010 and December 31, 2009, Property, Plant & Equipment consist of the following:
   
6/30/2010
   
12/31/2009
 
Buildings
  $ 445,845     $ 445,845  
Plant and equipment
    859,665       859,665  
Transportation equipment
    5,609       5,609  
Office equipment
    40,354       40,354  
Total
    1,351,473       1,351,473  
Accumulated depreciation
    (596,887 )     (553,683 )
    $ 754,586     $ 797,790  

 
Depreciation expense for the three months ended June 30, 2010 and 2009 were $21,599 and $28,622, respectively. Depreciation expense for the six months ended June 30, 2010 and 2009 were $43,204 and $57,311, respectively.
 
Goodwill
 
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with the Intangibles, Goodwill and other topic of the FASB Accounting Standard Codification (“ASC 350”), indefinite-life identifiable intangible assets and goodwill are not amortized. Under the provisions of ASC 350, we are required to perform an annual impairment test of our goodwill. Goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit, which we define as our business segments, with its net book value or carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Goodwill as of June 30, 2010 and December 31, 2009 is $612,745.
 
Intangible Assets
 
The Company has four proprietary technologies: propriety technology for antioxidant technique, proprietary technology for “liren” capsule, patent-Chinese medicine and production method for skin and gyhecology disease and patent: Chinese medicine and production method for tracheitis. Propriety technology for antioxidant technique was contributed by a shareholder in exchange for shares of the Company’s common stock. Proprietary technology for “liren” capsule was purchased from third party at the price agreed by the Company and the third party. Two patents were purchase from the shareholders at the prices determined by an independent appraiser. These proprietary technologies were acquired for the future use of the Company. We capitalized them as intangible assets as acquired.
 
Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land use rights will expire in 2056 and 2058. All of the Company’s intangible assets are subject to amortization with estimated lives of:
 
Land use right 50 years
Proprietary technologies 10 years
 
 
 
 
 
 
F-9

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
The components of finite-lived intangible assets are as follows:
           
   
June 30
   
December 31,
 
   
2010
   
2009
 
Land use right
  $ 264,625     $ 264,625  
Proprietary technologies
    2,966,355       2,966,355  
Total
    3,230,980       3,230,980  
Less: Accumulated amortization
    (1,540,740 )     (1,374,262 )
    $ 1,690,240     $ 1,856,718  
 
Amortization expense for the three months ended June 30, 2010 and 2009 were $83,255 and $83,176, respectively. Amortization expense for the six months ended June 30, 2010 and 2009 were $166,478 and $166,271, respectively. The estimated future amortization expenses related to intangible asset as of June 30, 2010 are as follows:
 
2010
    332,892  
2011
    333,018  
2012
    333,018  
2013
    333,018  
2014
    333,018  
Thereafter
  $ 25,276  
 
Long-Lived Assets
 
Effective January 1, 2002, the Company adopted the Property, Plant and Equipment Topic of the FASB Accounting Standard Codification (“ASC 360”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2010 and December 31, 2009, there were no significant impairments of its long-lived assets.
 
Fair Value of Financial Instruments
 
The Financial Instrument Topic of the FASB Accounting Standards Codification (“ASC 825”) requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
 
Revenue Recognition
 
The Company’s revenue recognition policies are in compliance with the Revenue Recognition Topic of the FASB Accounting Standards Codification (“ASC 605”). Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
 
Advertising
 
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.
 
 
 
 
F-10

 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Customer rebates
 
Rebates are paid to customers every quarter and we recorded customer rebates as customers earned. They are classified as a reduction of revenue according to ASC 605-55-64. The Company paid rebates to customers for the three months ended June 30, 2010 and 2009 were $761,526 and $415,014 respectively. The Company paid rebates to customers for the six months ended June 30, 2010 and 2009 were $1,343,541 and $835,558 respectively.
 
Income Taxes
 
The Company utilizes the Income Taxes Topic of the FASB Accounting Standards Codification (“ASC 740”) which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
In September 2009, the FASB issued Income Taxes Topic of the FASB Accounting Standards Codification (“ASC 740”). ASC 740 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, “Accounting for Contingencies”.
 
Statement of Cash Flows
 
In accordance with the Statement of Cash Flows Topic of the FASB Accounting Standards Codification (“ASC 230”), cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the statement of financial position.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
 
Recent Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (“FASB”) issued the following new accounting standards:
 
● FASB Staff Position FAS No. 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, (“FSP FAS No. 157-4”) provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FSP FAS No. 157-4 provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. It is applicable to all assets and liabilities (i.e., financial and non-financial) and will require enhanced disclosures. FSP FAS No. 157-4 was superseded by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification (“ASC 820”).
 
 
● FASB Staff Positions FAS No. 115-2, FAS 124-2, and EITF No. 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, (“FSP FAS No. 115-2, FAS No. 124-2, and EITF No. 99-20-2”) provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities. FSP FAS No. 115-2 and FAS No. 124-2 were superseded by the Investments-Debt and Equity Securities Topic of the FASB Accounting Standards Codification (“ASC 320”).

 
 
F-11

 
 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 
● FASB Staff Position FAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, (“FSP FAS No. 107-1 and APB No. 28-1”) amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. FSP FAS No. 107-1 and APB No. 28-1were superseded by the Financial Instruments Topic of the FASB Accounting Standards Codification (“ASC 825”).
 
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which is included in ASC Topic 855, Subsequent Events. ASC Topic 855 established principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. ASC Topic 855 also required disclosure of the date through which subsequent events are evaluated by management. ASC Topic 855 was effective for interim periods ending after June 15, 2009 and applies prospectively. Because ASC Topic 855 impacted the disclosure requirements, and not the accounting treatment for subsequent events, the adoption of ASC Topic 855 did not impact our results of operations or financial condition.
 
Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity
with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
 
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, an entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
 
In September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC 820 to provide guidance on measuring the fair value of certain alternative investments such as hedge funds, private equity funds and venture capital funds. The ASU indicates that, under certain circumstance, the fair value of such investments may be determined using net asset value (NAV) as a practical expedient, unless it is probable the investment will be sold at something other than NAV. In those situations, the practical expedient cannot be used and disclosure of the remaining actions necessary to complete the sale is required. The ASU also requires additional disclosures of the attributes of all investments within the scope of the new guidance, regardless of whether an entity used the practical expedient to measure the fair value of any of its investments. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
 
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a
 
 
 
 
F-12

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. ASU No. 2009-13 is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on its consolidated results of operations and financial condition.
 
Note 3 – OTHER RECEIVABLES
 
 
Other receivables mainly consist of cash advances to employees. As of June 30, 2010 and December 31, 2009, other receivables were $1,436,579 and $43,305, respectively.
 
Note 4 – COMPENSATED ABSENCES
 
Regulation 45 of the local labour law of the People’s Republic of China (“PRC”) entitles employees to annual vacation leave after 1 year of service. In general, all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.
 
Note 5 –SHORT-TERM BANK LOAN
 
As of June 30, 2010, the Company had debt as follows:
 
 
 
Amount
 
Interest rate
 
Due
Short term bank loan
  $ 440,619  
0.85845% /per month
 
June 25, 2010
 
The Company is using these loans for working capital purposes and secured by property right.
 
Note 6 –INCOME TAXES
 
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) through December 31, 2007 is at a statutory rate of 33%, which is comprised of 30% national income tax and 3% local income tax. As of January 1, 2008, the EIT is at a statutory rate of 25%. The Company is a high tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year exemption for 2006 through 2007. Starting from January 1, 2008, the EIT is at a discounted rate of 15%.
 
The following is a reconciliation of income tax expense:
 
For the six months ended June 30, 2010
 
International
   
Total
 
Current
  $ 443,579     $ 443,579  
Deferred
    -       -  
Total
  $ 443,579     $ 443,579  
                 
For the six months ended June 30, 2009
 
International
   
Total
 
Current
  $ 267,981     $ 267,981  
Deferred
    -       -  
Total
  $ 267,981     $ 267,981  
 
 
Note 7 – COMMITMENTS & CONTINGENCIES
 
The Company is committed to pay $649,179, for advertising through November 2010.
 
 
 
 
F-13

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 8 – COMMON STOCK, STOCK OPTION AND COMPENSATION
 
On October 2, 2009, the Company granted 76,600 shares common stock to employees, valued at $16,087.
 
On February 11, 2010, the Company closed a private placement issued 375,000 shares common stock at $4 per share to several investors for total cash consideration of $1,500,000.
 
On April 29, 2010, the Company issued 1,200,000 shares common stock at $2 per share to several investors for total cash consideration of $2,400,000.
 
On June 23, 2010, the Company issued 300,000 shares common stock at $2 per share to several investors for total cash consideration of $600,000.
 
Warrants
 
On August 15, 2009, Kang Xiulan referred a public shell companyLid Hair Studios International, Inc.to China Children Pharmaceutical Inc. China Children Pharmaceutical Inc. came to be quoted on the OTCBB successfully through the reverse merger with Lid Hair Studios International, Inc. on September 30, 2009 and changed its name into China Pediatric Pharmaceuticals, Inc. As consideration for the services provided by Kang Xiulan (and in accordance with a warrant placement agreement dated September 30, 2009 between the Company and Kang Xiulan), The Company agreed to issue to Kang Xiulan warrants to acquire 250,000 shares of the Company’s common stock with an exercise price of $3, 00 with piggyback warrants to purchase 250,000 shares of the Company’s common stock with an exercise price of $5, 00. The warrants will expire on September 30, 2011 and September 30, 2012, respectively.
 
During the above-mentioned reverse merger process, the Company obtained certain consulting services from IFG Investments Services, Inc., including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested from IFG. In consideration for the consulting services to be performed by IFG (and in accordance with a warrant placement agreement dated September 30, 2009 between the Company and IFG), The Company agreed to issue to IFG warrants to acquire 600,000 shares of the Company’s common stock with an exercise price of $3, 00 with piggyback warrants to purchase 600,000 shares of the Company’s comment stock with an exercise price of $5,00. The warrants will expire on September 30, 2011 and September 30, 2012, respectively.
 
The Company also obtained certain public company sector services, including investor relations advisory services. In consideration for the investor relation services provided by China National Information Network (and in accordance with a warrant placement agreement dated September 30, 2009 between the Company and China National Information Network), the Company agreed to issue to China National Information Network the warrants to acquire 400,000 shares of the Company’s common stock with an exercise price of $3,00 with piggyback warrants to purchase 400,000 shares of the Company’s comment stock with an exercise price of $5,00. The warrants will expire on September 30, 2011 and September 30, 2012, respectively.
 
 Based on the fair value method under ASC Topic 505, the fair value of each warrant granted is estimated on the date of the grant using the Black-Scholes option pricing model and is recognized as compensation expense over the service period of each warrants issued. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for US Treasury debt securities at a maturity near the term remaining on the warrant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the similar company’s stock price. The fair value was estimated at the date of grant using the following range of assumptions: average risk-free interest rate – 1.61%; expected life –2-3 years; expected volatility – 105.1%; and expected dividends – nil.  No estimate of forfeitures was made as the Company has a short history of granting warrants. The fair market value of warrants, $483,138, has been recorded as stock based compensation cost with a corresponding increase to additional paid-in capital (warrants) for the six months ended June 30, 2010.
 
  
 
Total
 
Exercise Price
 
Remaining Life
 
Aggregate
Intrinsic Value
 
                   
Outstanding, December 31, 2009
   
2,500,000
   
$
3.00-5.00
       
-
 
                           
Outstanding, June 30, 2010
   
2,500,000
     
  
 
1.25-2.25yrs
       
 
Note 9 – STATUTORY RESERVE
 
In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
 
Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of June 30, 2010 and December 31, 2009, the Company had allocated $810,541 to these non-distributable reserve funds.
 
 
 
 
F-14

 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 (UNAUDITED)
 
Note 10 – NET INCOME (LOSS) PER SHARE
 
In accordance with FASB ASC Topic 260-1-50, “Earnings per Share”, and SEC Staff Accounting Bulletin No. 98, basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted - average number of common shares outstanding during the period. Under FASB ASC 260-10-50, diluted income or loss per share is computed by dividing net income or loss for the period by the weighted - average number of common and common equivalent shares, such as stock options, warrants and convertible securities outstanding during the period.
 
The following table sets forth the computation of basic and diluted earnings per share of common stock:
 
   
Three Months Ended
   
Six Months Ended
 
   
6/30/2010
   
6/30/2009
   
6/30/2010
   
6/30/2009
 
                         
Basic earnings from continuing operations per share:
                       
Numerator:
                       
Income from operations used in computing basic earnings per share
  $ 1,257,809     $ 797,400     $ 2,725,257     $ 1,585,799  
Income from operations applicable to common shareholders
  $ 1,257,809     $ 797,400     $ 2,725,257     $ 1,585,799  
Denominator:
                               
Weighted average common shares outstanding
    9,537,314       8,228,571       9,026,165       8,228,571  
Basic earnings per share from continuing operations
  $ 0.13     $ 0.10     $ 0.30     $ 0.19  
Diluted earnings (losses) per share from operations:
                               
Numerator:
                               
Income from operations used in computing diluted earnings per share
  $ 1,257,809     $ 797,400     $ 2,725,257     $ 1,585,799  
Income (loss) from operations applicable to common shareholders
  $ 1,257,809     $ 797,400     $ 2,725,257     $ 1,585,799  
Denominator:
                               
Weighted average common shares outstanding
    9,537,314       8,228,571       9,026,165       8,228,571  
Weighted average effect of dilutive securities:
                               
Stock options and warrants
    428,118       -       297,312       -  
Shares used in computing diluted net income per share
    9,965,432       8,228,571       9,323,477       8,228,571  
Diluted earnings per share from operations
  $ 0.13     $ 0.10     $ 0.29     $ 0.19  

 
Note 11 – OTHER COMPREHENSIVE INCOME
 
Balances of related after-tax components comprising accumulated other comprehensive income, included in stockholders’ equity, at of June 30, 2010, are as follows:
 
   
Foreign
   
Accumulated
 
   
Currency
   
Other
 
   
Translation
   
Comprehensive
 
   
Adjustment
   
Income
 
Balance at December 31, 2009
  $ 328,567     $ 328,567  
Change for 2010
    368,219       368,219  
Balance at June 30, 2010
  $ 696,786     $ 696,786  
 
 
 
 
F-15

 
 
 
 
CHINA PEDIATRIC PHARMACEUTICALS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(UNAUDITED)
 
Note 12 – CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS
 
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC’s economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
Note 13–MAJOR CUSTOMERS AND CREDIT RISK
 
Six and Three customers accounted for more than 10% of accounts receivable at June 30, 2010 and December 31, 2009 totalling 66% and 33%, respectively; As of June 30, 2010 and December 31, 2009, four vendors were greater than 10% of accounts payable, totalling 64% and 71%, respectively.
 
Two and six customers accounted for 21% and 97% of sales for the six months ended June 30, 2010 and 2009, respectively. Two and five vendors accounted for 85% and 86% of purchases for the six months ended June 30, 2010 and 2009, respectively.
 
Note 14–SUBSEQUENT EVENT
 
For the six months ended June 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosure. No significant events occurred subsequent to the end of the reporting period but prior to the filing of this report that would have a material impact on our consolidated financial statements.
 
 
 
 
F-16

 
 
Item 2. Management’s Discussion and Analysis or Plan of Operation
 
    The following discussion of the financial condition and results of operation of the Company for the six months ended June 30, 2010 and 2009, should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Quarter Report.
 
    Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
 
Cautionary Notice Regarding Forward-Looking Statements
 
    In this quarterly report, references to “China Pediatric,” “CPDU,” “the Company,” “we,” “our,” “us,” and the Company’s variable interest entity, “Shaanxi Jiali,” refer to China Pediatric Pharmaceuticals, Inc.
 
    We make certain forward-looking statements in this report. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” as well as captions elsewhere in this document, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”, “could,” “may,” “should,” “will,” “would,” and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Indeed, it is likely that some of our assumptions will prove to be incorrect. Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material. You are cautioned not to place undue reliance on such forward-looking statements. These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.
 
    The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:
 
· the effect of political, economic, and market conditions and geopolitical events;
· legislative and regulatory changes that affect our business;
· the availability of funds and working capital;
· the actions and initiatives of current and potential competitors;
· investor sentiment; and
· our reputation.
 
 
    We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
 
 
 
 
4

 
 
 
BUSINESS OVERVIEW
 
    Our operations are headquartered in Xi’an, Shaanxi Province, the People's Republic of China (the "PRC"or "China"). We are a profitable, mid-sized Chinese pharmaceutical company that identifies, discovers, develops manufactures and distributes both prescription and over-the counter, including both conventional and Traditional Chinese Medicines (“TCMs”), for the treatment of some of the most common ailments and diseases, with pediatric medicine as its focus.
 
    We currently have one operating company: Shaanxi Jiali identifies, discovers, develops manufactures and distributes both prescription and over-the counter, including both conventional and Traditional Chinese Medicines (“TCMs”), for the treatment of some of the most common ailments and diseases, with pediatric medicine as its focus. We distribute our high value, branded medicines, both prescription and OTC, through exclusive territory agents who sell our products directly to local pharmacies who in turn sell them to their retail customers.
 
    We currently have 26 products that are manufactured by both our in-house production facility and through OEM companies.
 
    We intend to further develop the series of products based on the Cooers Brand and designed to target the pediatric medicine market. These products will continue be sold through exclusive territory agents who in turn distribute to local pharmacies in their assigned territories. Shaanxi Jiali intends to further expand its distribution channels by increasing the number of exclusive territory agents. These additional exclusive territory agents will be contracted to distribute Shaanxi Jaili products to local pharmacies in several additional provinces or regions throughout China.
 
    We will continue to evaluate and develop additional product candidates, both through our in-house research and development department and working with our research and development partners, to expand our pipeline where we perceive an unmet need and commercial potential. We will face the risk that in developing new products we may spend substantial sums of money and the new products developed may not effectively meet the perceived need or may not be successfully commercialized.
 
    With intense price competition among many similar or identical products in the industry, we believe that building brand equity is the primary means to generate and sustain profitable growth in the future. The company intends to focus its brand development efforts on building the Cooers brand name with the intent on it becoming a leading pediatric medicine brand in China.
 
    We intend to grow our internal marketing and sales function and increase our relationships with other exclusive territory distributors to expand the distribution and presence of our pharmaceutical products. In expanding market share of our products, we intend to take advantage of our large manufacturing scale and reasonable cost control mechanisms, and our strong sales network. In addition, our goal is to establish our products as a preferred choice for children’s medicines in local pharmacies. We hope to add other pharmaceutical products into this channel over the next few years. We may face risks in obtaining adequate quantities of raw materials at reasonable prices in order to meet increased demand for our products that result from any growth. In seeking additional employees, sales representatives, and exclusive territory agents, we will compete with many other established pharmaceutical manufacturers that may have greater resources than we do.
 
RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
 
Results of Operations Net Sales
 
Three Months Ended June 30,
         
% of
 
   
2010
         
2009
         
change
 
"Xianzhi" Series
  $ 397,215       6.10 %   $ 436,327       12.30 %     (9 ) %
"Cooer" Series
    5,563,885       85.48 %     2,360,221       66.54 %     136 %
"Qingsongling" Series
    547,669       8.41 %     750,576       21.16 %     (27 ) %
Others
    -       -       -       -       -  
Total net sales
  $ 6,508,769       100 %   $ 3,547,124       100 %     83 %
 
 
 
 
 
5

 
 
 
   
Six Months Ended June 30,
         
% of
 
   
2010
         
2009
   
 
   
change
 
"Xianzhi" Series
  $ 410,055       3.10 %   $ 837,242       11.72 %     (51 ) %
"Cooer" Series
    11,249,083       85.11 %     5,115,568       71.62 %     119 %
"Qingsongling" Series
    575,629       4.35 %     1,189,964       16.66 %     (52 ) %
Others
    982,894       7.44       -       -       -  
Total net sales
  $ 13,217,661       100 %   $ 7,142,774       100 %     85 %
 
    During the three and six months ended June 30, 2010, total net sales increased by approximately $3 million or 83% and $6.1 million or 85%, respectively, compared to the same periods of 2009.
 
    This was primarily due to the sales increases for "Cooer" Series by $3.2 million or 136% and $6.1 million or 119% in the three and six months ended June 30, 2010, respectively. The increase in “Cooer” Series sales was mainly due to the increase in sales volume as we expanded our customer base and as a result of the increase in number of customers from 8 to 11 in the three months ended June 30, 2010 and from 8 to 18 in the six months ended June 30, 2010. These were also as a result of our intensive promotion of the series in 2010.
 
Cost of Sales
 
   
Three Months Ended June 30,
         
% of
 
   
2010
         
2009
   
 
   
change
 
"Xianzhi" Series
  $ 45,495       1.75 %   $ 47,715       3.58 %     (5 ) %
"Cooer" Series
    2,293,042       88.20 %     928,845       69.74 %     147 %
"Qingsongling" Series
    261,156       10.05 %     355,275       26.68 %     (26 ) %
Others
    -               -       -       -  
Total cost of sales
  $ 2,599,693       100 %   $ 1,331,835       100 %     95 %
                                         
                                         
   
Six Months Ended June 30,
           
% of
 
      2010               2009            
change
 
"Xianzhi" Series
  $ 46,910       0.85 %   $ 149,264       5.36 %     (69 ) %
"Cooer" Series
    4,543,970       82.48 %     1,969,938       70.69 %     130 %
"Qingsongling" Series
    272,670       4.95 %     667,485       23.95 %     (59 ) %
Others
    645,681       11.72 %     -       -       -  
Total cost of sales
  $ 5,509,231       100 %   $ 2,786,687       100 %     98 %
 
    Compared to the same periods of 2009, the total cost of sales increased about $1.3 million or 95% and $2.7 million or 98%, in the three and six months ended June 30, 2010, respectively. This was primarily due to increase in cost of sales for "Cooer" Series which is in line with the increase in these products' net sales. The slight decrease in cost of sales for "Xianzhi" Series and "Qingsongling" Series were mainly due to decrease in these products' net sales. The increase in total cost of sales was primarily due to the increase in average unit costs. The increase in average unit costs was mainly caused by the increase in wages of workers due to the increase in statutory minimum wages in the PRC..
 
Gross Profit
 
     
Three Months Ended June 30,
         
     
2010
     
2009
         
             
gross profit
             
gross profit  
      % of  
              margin              
margin
     
change
 
"Xianzhi" Series
  $ 351,720       89 %   $ 388,612       89 %     (9 ) %
"Cooer" Series
    3,270,843       59 %     1,431,376       61 %     129 %
"Qingsongling" Series
    286,513       52 %     395,301       53 %     (28 ) %
Others
    -       -       -       -       -  
Total
  $ 3,909,076       60 %   $ 2,215,289       62 %     76 %

 
 
 
6

 
 
      Six Months Ended June 30,          
     
2010
     
2009
         
             
gross profit
              gross profit       % of  
             
margin
             
margin
     
change
 
"Xianzhi" Series
  $ 363,145       89 %   $ 687,978       82 %     (47 ) %
"Cooer" Series
    6,705,113       60 %     3,145,630       61 %     113 %
"Qingsongling" Series
    302,959       53 %     522,479       44 %     (42 ) %
Others
    337,213       34 %     -       -       -  
Total
  $ 7,708,430       58 %   $ 4,356,087       61 %     77 %

 
    Gross profit increased about $1.7 million or 76% and $3.4 million or 77%, respectively, in the three and six months ended June 30, 2010 compared to the same periods of 2009. The increase in gross profits was due primarily to the increase in net sales of "Cooer" Series achieved through afore-mentioned expansion of our customer base.
 
    The overall gross profit margin decreased 2% and 3% points in the three and six months ended June 30, 2010, respectively, compared to the same periods of 2009.
 
    For the three months ended June 30, 2010, the slight decrease in overall gross profit margin was primarily due to the increase in cost of sales while the sales price of finished goods remained constant. The increase in cost of sales was primarily due to the increase in average unit cost of finished goods as direct labour costs increased following the increase in statutory minimum wages in PRC. The sales prices of finished goods were kept constant in order to maintain market share among competitors.
 
    As a result of GMP inspection, production was temporarily suspended in the first quarter of 2010 and as a result we experienced a surplus inraw materials on hand for production. The Company therefore sold all the surplus raw materials with carrying value amounting to US$645,682 (i.e. at cost US$1,136,898 net of impairment brought forward US$491,216) included in “Others” back to its suppliers at US$982,894 (i.e. at a discount around 86% of the original costs US$1,136,898). Consequently, the overall gross profit ratio slightly decreased in the six months ended June 30, 2010 compared with the same period in 2009.
 
Selling, General And Administrative Expenses
 
   
Three Months Ended June 30,
       
   
2010
   
2009
       
         
% of total
         
% of total
   
% of
 
Selling, general and
       
net sales
         
net sales
   
change
 
administrative expenses
  $ 2,384,925       37 %   $ 1,172,882       33 %     103 %
                                         
   
Six Months Ended June 30,
         
      2010         2009         
           
% of total
           
% of total
   
% of
 
           
net sales
           
net sales
   
change
 
Selling, general and
                                       
administrative expenses
  $ 4,528,127       34 %   $ 2,394,384       34 %     89 %
 
 
    The increases in dollar amount and as a percentage of total net sales for the three and six months ended June 30, 2010 were mainly due to the increase in promotional and advertising expenditures of around $220,000 and $439,000, respectively, increase in sales commissions expenses of around $173,000 and 254,000, respectively, increase in sales rebate to customers of around $347,000 and $508,000, respectively, all resulting from the ongoing marketing expansion, and also due to increase in sales related tax levy of around $30,000 and $38,000, respectively, as a result of increased net sales. Other items contributed to the increase in selling, general and administrative expenses for the three and six months ended June 30, 2010 included increase in operating expenses in the nature of IPO expenses of around $214,000 and $401,000, respectively and stock-based compensation costs of around $240,000 and $480,000, respectively.
 
 
 
7

 
 
 
Provision For Income Taxes
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Provision for income taxes
  $ 254,793     $ 137,072     $ 443,579     $ 267,981  
Effective tax rate
    15 %     15 %   $ 15 %     15 %
 
 
    The amount of Enterprise Income Tax payable is computed on the basis of the taxable income and by applying the tax rate of 25%. The Company enjoyed a reduced rate to 15% from the Enterprises Income Tax in 2010 and 2009 because the Company is considered to be a "High Technology Business" under PRC income tax laws.
 
    Increase in the amount of provision for income taxes for the three and six months ended June 30, 2010 are mainly due to the increase in assessable income compared to the same period of 2009.
 
Net Income
 
    As a result of the above, in the three and six months ended June 30, 2010, the net income was $1,257,809 and $2,725,257 compared to the net income of $797,400 and $1,585,799 for the three and six months ended June 30, 2009, respectively.
 
Liquidity And Capital Resources
 
    As of June 30, 2010, we had cash and cash equivalents of approximately $6.6 million. We believe our existing cash and cash equivalents will be sufficient to maintain our operations at present level for at lease the next twelve months.
 
    Net cash provided by operating activities for the six months ended June 30, 2010 was $1,154,458. This was primarily due to the net income of $2,725,257, adjusted by non-cash related expenses including depreciation and amortization of $209,682 and stock-based compensation costs of $483,138 and a net increase in working capital items of $2,263,619. The net increase in working capital items was mainly due to increase in accounts payable, accrued expenses and other payables and income tax payable. The net increase in working capital items was partially offset by the increase in accounts receivable, increase in other receivables and prepayments, and increase in inventories to prepare for the ongoing sales promotion, and decrease in VAT tax payable.
 
    Net cash provided by operating activities for the six months ended June 30, 2009 was $14,499. This was primarily due to the net income of $1,585,799, adjusted by non-cash related expenses including depreciation and amortization of $223,582 and impairment loss on accounts and other receivables of $108,180 and offset by a net decrease in working capital items of $1,903,062. The net decrease in working capital items was mainly due to an increase in accounts receivable, which was a result of the significant increase in revenue during the first six months of 2009, an increase in prepayments, ab increase in inventories, and a decrease in VAT and income tax payable. The net decrease in working capital items was partially offset by the increase in accounts payable, accrued expenses and other payables.
 
    Net cash flow provided by financing activities for the six months ended June 30, 2010 was $4,500,000. The increase of net cash inflow from financing activities for the six months ended June 30, 2010 was due to the proceeds from issuance of common stock of 1,875,000 shares.
 
Inflation
 
    Inflation in recent years have affected the business results of the Company. First of all, on the global economic expansion, supply has been restricted and coupled with the fact that USA has adopted a relaxed currency policy etc., these increase inflation risks. Secondly, GNP increases in China also elevates consumption ability and production cost, prices increase as a natural tendency. Finally, as a result of the macro economic trend, prices increase, the Company’s procurement prices are also affected resulting in increase in cost of sales.
 
    The Company operates in China and as such, the Company’s business activities, financial position and operational results will be affected by PRC politics, economic and legal environments and also affected by the overall economic situation of China. The business of the Company may be affected by the relevant laws, regulations, anti-inflation measures, currency conversion and overseas remittance and exchange rates issues etc that are related to PRC politics.
 
 
 
 
8

 
 
Off-Balance Sheet Commitments And Arrangements
 
    The Company does not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.
 
Short-Term Loans
 
    As of June 30, 2010, the Company had short-term debt as follows:
 
             
   
Amount
 
Interest rate
 
Due
Short term bank loan
  $ 440,619  
0.85845% /per month
 
June 25, 2010, extended
              until June 25, 2011
 
    The Company uses these loans for working capital purposes. The loan is secured by the factory building of Shaanxi Jiali's Baoji production base.
 
    Our anticipated needs for the future are to be negotiated in accordance with manufacturing and operation needs, and market conditions of next year.
 
Critical Accounting Policies and Estimates
 
    Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP"). US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
 
    We believe the following is among the most critical accounting policies that impact our consolidated financial statements. We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations. See also Note 2 to our consolidated financial statements for further discussion of our accounting policies.
 
Revenue recognition
 
    The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605, Revenue Recognition.
 
    We recognize revenue at the date of shipment to customers as the sales price is either fixed or determinable at the date of shipment to customers, and the management deems no other significant obligations such as warranties or product returns of the Company exist. The Company signs general Annual Sales Cooperation Agreements with its distributors each year and also signs specific purchase orders for each sale. All sales proceeds can be collected reasonably.
 
Allowance for Doubtful Accounts
 
    The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
 
    The following table sets out the aging of our accounts receivable for each of the two balance sheet periods presented.
 
 
Accounts
          1-30       31-60       61-90       91-180       181-365    
> 365
 
Receivable Aging
 
Total
   
days
   
days
   
days
   
days
   
days
   
days
 
As of June 30, 2010
  $ 6,430,750     $ 2,601,607     $ 2,430,795     $ 1,180,299     $ 214,886     $ 446     $ 2,717  
As of December 31, 2009
  $ 5,666,307     $ 2,320,203     $ 1,635,568     $ 956,329     $ 414,810     $ 336,691     $ 2,706  
 
 
 
 
9

 
 
    The following presents the days sales outstanding calculated based on sales and accounts receivables in RMB term for the three and six months ended June 30, 2010 and 2009.
 
 
 
 
Three Months Ended
    Six Months Ended  
 
 
  June 30,    
June 30,
 
 
 
 
2010
   
2009
   
2010
   
2009
 
Days sales outstanding
      89       130       88       129  
 
Prepaid expenses
 
A table of the outstanding prepaid expenses as of June 30, 2010, March 31, 2010, and December 31, 2009 are as follows:
 
   
Payee
 
Nature
 
6/30/2010
   
3/31/2010
   
12/31/2009
 
                           
Advance payment to R&D organization
 
Shaanxi Research Institution of Chinese Traditional Medicine
 
Advanced payment to Shaanxi Research Institution of Chinese Traditional Medicine for five new pediatric cold medicines
 
$
1,762,477
   
$
1,755,387
   
$
1,755,104
 
                                 
Advance payment to suppliers
 
Suppliers
 
Advance payments to suppliers for goods purchased
   
  2,938,561
     
 2,926,740
     
  2,487,493
 
                                 
Total
         
$
4,701,038
     
4,682,127
   
$
4,242,597
 
 
 Prepayments to suppliers did not change from December 31, 2009 to June 30, 2010  due to the following reasons: 
 
Prepayments to suppliers are primarily comprised of two types of expenses: (i) an advertising fee (the term of service which is generally one year), which will be expensed in the third and fourth quarters of 2010; and (ii)prepaid deposits for purchasing raw materials and packaging materials required for our manufacturing and operations, which is typically expensed with three months.   Although a portion of prepayments for the raw materials and packaging materials have been expensed, due to the purchasing behavior of our customers in 2010 which has caused a slightly higher demand for raw materials and packaging materials, as of June 30, 2010, such prepayments have not reduced but have in fact increased. In the third and fourth quarters of 2010, when our advertising fees are expensed, our prepayment will be reduced.
 
Inventory
 
    Management compares the cost of inventories with the market value. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future pricing and market conditions.
 
Property, plant and Equipment
 
    Property, plant and equipment are stated at historical cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to earnings as incurred, additions, renewals and betterments are capitalised. When property and equipment are retired or otherwise disposal of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss in included in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Judgment is required to determine the estimated useful lives of assets, especially for plant and equipment and transportation equipment, including determining how long existing equipment can function and when new technologies will be introduced at cost-effective price points to replace existing equipment. Changes in these estimates and assumptions could materially impact the financial position and results of operations.
 
Accountingfor Stock-Based Compensation
 
    The account for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", as amended by the Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." Accounting Principles Board Opinion No. 25 and Financial Accounting Standards Board Interpretation No. 44 state that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the company’s common stock on the grant date. We adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which requires compensation expense to be disclosed based on the fair value of the options granted at the date of the grant.
 
    In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees. FAS No. 123R is effective beginning in the first quarter of fiscal 2006.
 
    We did not issue any stock options to employees during the three months ended June 30, 2010, therefore pro forma disclosures are not required.
 
 
 
10

 
 
Accountingfor Defined Benefit Pensions and Other Postretirement Plans
 
    In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded statues in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements.
 
a. A brief description of the provisions of this Statement
b. The date that adoption is required
 
c. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
 
    The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
Valuation ofIntangibles
 
    From time to time, we acquire intangible assets that are beneficial to our product development processes. Management periodically evaluates the carrying value of intangibles, including the related amortization periods. In evaluating acquired intangible assets, management determines whether there has been impairment by comparing the anticipated undiscounted cash flows from the operation and eventual disposition of the product line with its carrying value. If the undiscounted cash flows are less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on either a discounted cash flows analysis or market analysis. Future operating income is based on various assumptions, including regulatory approvals, patents being granted, and the type and nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.
 
    In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The adoption of this new FSP did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
The Fair Value Option for Financial Assets and Financial Liabilities
 
    In February, 2007, FASB issued SFAS 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
Income Taxes
 
    The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
    In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for uncertainty in Income Taxes." FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, "Accounting for Contingencies." FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Company's financial statements.
 
    Pursuant to the PRC income tax laws, the Enterprise Income Tax ("EIT") through December 31, 2007 is at a statutory rate of 33%, which is comprised of 30% national income tax and 3% local income tax. As of January 1, 2008, the EIT is at a statutory rate of 25%. The Company is a high technology business and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007. Starting from January 1, 2008, the EIT is at a reduced rate of 15% to the Company.
 
 
 
 
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Foreign Currency
 
    Our functional currency is the U.S. dollar and our subsidiary and our operating company in China use their respective local currencies as their functional currencies, i.e. the Chinese Yuan Renminbi (CNY). An entity's functional currency is the currency of the primary economic environment in which the entity operates. Management must use judgment in determining an entity's functional currency, assessing economic factors including cash flow, sales price, sales market, expense, financing and inter-company transactions and arrangements. Impact from exchange rate changes related to transactions denominated in currencies other than the functional currency is recorded as a gain and loss in the statements of operations, while impact from exchange rate changes related to translating a foreign entity's financial statements from the functional currency to its reporting currency, the U.S. dollar, is disclosed and accumulated in a separate component under the equity section of the balance sheets. Different judgments or assumptions resulting in a change of functional currency may materially impact our financial position and results of operations.
 
Statutory Reserve
 
    In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund. Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund. The public welfare fund reserve was limited to 50 percent of the registered capital. Effective January 1, 2006, there is now only one fund requirement. The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.
 
    Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of June 30, 2010 and December 31, 2009, the Company had allocated $810,540 to these non-distributable reserve funds.
 
Recent Accounting Pronouncements
 
    In April 2009, the Financial Accounting Standards Board (“FASB”) issued the following new accounting standards:
 
 
● FASB Staff Position FAS No. 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, (“FSP FAS No. 157-4”) provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157. FSP FAS No. 157-4 provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. It is applicable to all assets and liabilities (i.e., financial and non-financial) and will require enhanced disclosures. FSP FAS No. 157-4 was superseded by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification (“ASC 820”).
 
 
● FASB Staff Positions FAS No. 115-2, FAS 124-2, and EITF No. 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, (“FSP FAS No. 115-2, FAS No. 124-2, and EITF No. 99-20-2”) provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities. FSP FAS No. 115-2 and FAS No. 124-2 were superseded by the Investments-Debt and Equity Securities Topic of the FASB Accounting Standards Codification (“ASC 320”).
 
 
● FASB Staff Position FAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, (“FSP FAS No. 107-1 and APB No. 28-1”) amends FASB Statement No. 107, Disclosures about Fair Value ofFinancial Instruments, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. FSP FAS No. 107-1 and APB No. 28-1were superseded by the Financial Instruments Topic of the FASB Accounting Standards Codification (“ASC 825”).
 
    In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which is included in ASC Topic 855, Subsequent Events. ASC Topic 855 established principles and requirements for evaluating and reporting subsequent events and distinguishes which subsequent events should be recognized in the financial statements versus which subsequent events should be disclosed in the financial statements. ASC Topic 855 also required disclosure of the date through which subsequent events are evaluated by management. ASC Topic 855 was effective for interim periods ending after June 15, 2009 and applies prospectively. Because ASC Topic 855 impacted the disclosure requirements, and not the accounting treatment for subsequent events, the adoption of ASC Topic 855 did not impact our results of operations or financial condition.
 
 
 
 
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    Effective July 1, 2009, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification is non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The FASB will not consider ASUs as authoritative in their own right. ASUs will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. References made to FASB guidance throughout this document have been updated for the Codification.
 
    In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, which provides additional guidance on how companies should measure liabilities at fair value under ASC 820. The ASU clarifies that the quoted price for an identical liability should be used. However, if such information is not available, an entity may use, the quoted price of an identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities traded as assets, or another valuation technique (such as the market or income approach). The ASU also indicates that the fair value of a liability is not adjusted to reflect the impact of contractual restrictions that prevent its transfer and indicates circumstances in which quoted prices for an identical liability or quoted price for an identical liability traded as an asset may be considered level 1 fair value measurements. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
 
    In September 2009, the FASB issued ASU No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), that amends ASC 820 to provide guidance on measuring the fair value of certain alternative investments such as hedge funds, private equity funds and venture capital funds. The ASU indicates that, under certain circumstance, the fair value of such investments may be determined using net asset value (NAV) as a practical expedient, unless it is probable the investment will be sold at something other than NAV. In those situations, the practical expedient cannot be used and disclosure of the remaining actions necessary to complete the sale is required. The ASU also requires additional disclosures of the attributes of all investments within the scope of the new guidance, regardless of whether an entity used the practical expedient to measure the fair value of any of its investments. This ASU is effective October 1, 2009. The Company is currently evaluating the impact of this standard, but would not expect it to have a material impact on the Company’s consolidated results of operations or financial condition.
 
    In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. ASU No. 2009-13 is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on its consolidated results of operations and financial condition.
 
 
 
 
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    In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements—a consensus of the FASB Emerging Issues Task Force, that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components would be excluded from the scope of software revenue recognition guidance: the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product’s essential functionality, and undelivered components that relate to software that is essential to the tangible product’s functionality. The ASU also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). ASU No. 2009-14 is effective beginning January 1, 2011. The Company is currently evaluating the impact of this standard on its consolidated results of operations and financial condition.
 
    For information regarding these and other recent accounting pronouncements and their expected impact on our future financial condition or results of operations, see Note 2 to our consolidated financial statements.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk. N/A.
 
Item 4. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
    The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
    Based upon their evaluation as of the end of the period covered by this report, the Company's chief executive officer and chief financial officer concluded that, the Company's disclosure controls and procedures are effective to ensure that information required to be included in the Company's periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms. The Company’s chief executive officer and chief financial officer also concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required to be filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
 
Changes in internal controls
 
    The Company’s management, with the participation of its CEO and CFO, performed an evaluation as to whether any change in the Company’s internal controls over financial reporting occurred during the quarter ended June 30, 2010. Based on that evaluation, the Company’s CEO and CFO concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.
 
 
 
 
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PART II – OTHER INFORMATION