China Pharmaceuticals Inc - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - China Pharmaceuticals Inc	ex321.htm
EX-31.2 - EXHIBIT 31.2 - China Pharmaceuticals Inc	ex312.htm
EX-31.1 - EXHIBIT 31.1 - China Pharmaceuticals Inc	ex311.htm
EX-32.2 - EXHIBIT 32.2 - China Pharmaceuticals Inc	ex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period from _______ to _______

Commission file number: 000-52763

CHINA PHARMACEUTICALS, INC.

______________________________________________________

(Exact name of small business issuer as specified in its charter)

Nevada		20-2638087
(State or other jurisdiction of incorporation or organization)		(IRS Employer identification No.)

24th Floor, Building A, Zhengxin Mansion

No. 5 of 1st Gaoxin Rd, Hi-Tech Development Zone

Xi’an City, People’s Republic of China 710075

(Address of principal executive offices)

011 - (86) 29-8406-7215

(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. Yes T No □

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes □ No □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer □ Accelerated filer □

Non-accelerated filer □ (Do not check if a smaller reporting company) Smaller reporting company T

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

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: 12,539,662 shares of common stock, $.001 par value, were outstanding as of May 16, 2011.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	9
Item 4.	Controls and Procedures	9
	PART II
Item 1.	Legal Proceedings	10
Item 1A.	Risk Factors	10
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	10
Item 3.	Defaults Upon Senior Securities	10
Item 4.	(Removed and Reserved)	10
Item 5.	Other Information	10
Item 6.	Exhibits	10
SIGNATURES		11

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA PHARMACEUTICAL INC.

CONSOLIDATED BALANCE SHEET

AS OF MARCH 31, AND DECEMBER 31, 2010


	2011 (Unaudited)		2010 (Audited)
ASSETS

CURRENT ASSETS
Cash & equivalents	$	9,509,111	$	4,729,149
Accounts receivable		12,418,861		12,673,111
Inventory		346,009		1,019,393
Deposits and other receivables		4,192,712		4,374,525
Trade deposits paid		56,673		-
Due from officer		-		5,587

Total current assets		26,523,366		22,801,765

NONCURRENT ASSETS
Property and equipment, net		13,913,154		14,173,718
Intangible assets		7,668,989		7,802,346

Total noncurrent assets		21,582,143		21,976,064

TOTAL ASSETS	$	48,105,509	$	44,777,829


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	490,252	$	446,462
Accrued liabilities and other payables		966,580		952,651
Value-added tax payable		540,489		435,614
Income tax payable		466,101		410,227

Total current liabilities		2,463,422		2,244,954

CONTINGENCIES AND COMMITMENT

STOCKHOLDERS' EQUITY
Common stock, par value, $0.001 per share; 25,000,000 shares authorized, 11,399,662 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		11,400		11,400
Paid in capital		11,438,995		11,438,995
Statutory reserve		3,585,087		3,274,593
Accumulated other comprehensive income		925,500		704,301
Retained earnings		29,681,105		27,103,586

Total stockholders' equity		45,642,087		42,532,875

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	48,105,509	$	44,777,829

The accompanying notes are an integral part of these combined financial statements.

F-1

CHINA PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010

(UNAUDITED)


	2011			2010

Net sales	$	7,687,217		$	7,053,199

Cost of goods sold		3,367,530			2,820,178

Gross profit		4,319,687			4,233,021

Operating expenses
Selling, general and administrative expenses		1,255,868			482,480
(Recovery) / reserve of bad debt allowance		(280,503	)		1,631,606

Total operating expenses		975,365			2,114,086

Income from operations		3,344,322			2,118,935

Non-operating income (expenses)
Interest income		9,888			120
Interest expense		-			(29,653	)
Financial expense		(342	)		-
Other income		(1,651	)		-

Total non-operating income (expenses), net		7,895			(29,533	)

Income before income tax		3,352,217			2,089,402

Income tax		464,204			541,526

Net income		2,888,013			1,547,876

Other comprehensive item
Foreign currency translation		221,199			(18,284	)

Comprehensive Income	$	3,109,212		$	1,529,592

Weighted average common shares outstanding
Basic		11,399,662			9,333,333

Diluted		11,778,040			9,333,333

Basic earnings per share	$	0.25		$	0.17

Diluted earnings per share	$	0.25		$	0.17

The accompanying notes are an integral part of these combined financial statements.

F-2

CHINA PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011 and 2010

(UNAUDITED)


	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,888,013		$	1,547,876
Adjustments to reconcile net income to net cash
provided by operating activities:
Recovery of bad debt allowance		(280,503	)		-
Provision for impairment loss on intangible assets		-			1,630,846
Loss on assets disposed		1,651			-
Depreciation and amortization		392,271			230,072
(Increase) decrease in current assets:
Accounts receivable		661,349			(3,644,289	)
Inventory		680,909			395,499
Due from officer		-			7
Deposits and other receivables		230,750			56,434
Trade deposit paid		(56,443	)		1,735,248
Increase (decrease) in current liabilities:
Accounts payable		39,115			(230,738	)
Trade deposit received		-			(71,787	)
Accrued liabilities and other payables		44,872			(425,376	)
Taxes payable		110,982			117,269

Net cash provided by operating activities		4,712,966			1,341,061

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property & equipment		-			(981	)
Construction in progress		-			4,853

Net cash used in investing activities		-			3,872

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term bank loans		-			(2,493,692	)

Net cash used in financing activities		-			(2,493,692	)

EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS		66,996			(18,284	)

NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS		4,779,962			(1,167,043	)

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		4,729,149			6,685,630

CASH & CASH EQUIVALENTS, END OF PERIOD	$	9,509,111		$	5,518,587


Supplemental Cash flow data:
Income tax paid	$	412,689		$	651,399
Interest paid	$	-		$	29,653

The accompanying notes are an integral part of these combined financial statements.

F-3

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010

Note 1 - ORGANIZATION

China Pharmaceuticals, Inc. (“the Company”), formerly named Allstar Restaurants, was incorporated in the United States in Nevada on December 22, 2004. China Qinba Pharmaceuticals, Inc. (“China Qinba”), a wholly-owned subsidiary of the Company, was incorporated in the United States in Delaware on May 29, 2008. China Qinba formed and owned 100% of Xi’an Pharmaceuticals Development Co., Ltd. (“Xi’an Pharmaceuticals” or the “WOFE”) in the People’s Republic of China (“PRC”) on August 18, 2008.

On October 28, 2008, WOFE entered into a series of agreements including a Management Entrustment Agreement, a Shareholders’ Voting Proxy Agreement, an Exclusive Option Agreement and a Share Pledge Agreement (the “Agreements”) with Xi’an Qinba Pharmaceutical Co., Ltd ("Xi’an Qinba") and its shareholders (the “Transaction”). Xi’an Qinba is a corporation formed under the laws of the PRC. According to these Agreements, WOFE acquired management control of Xi’an Qinba whereby WOFE is entitled to all of the net profits of Xi’an Qinba as a management fee, and is obligated to fund Xi’an Qinba’s operations and pay all of the debts. In exchange for entering into the Agreements, on October 28, 2008, WOFE issued 25,000,000 shares of its common stock to Xi’an Qinba owners, representing approximately 80% of the Company’s common stock outstanding after the Transaction. Consequently, the owners of Xi’an Qinba own a majority of WOFE's common stock immediately following the Transaction, therefore, the Transaction is being accounted for as a "reverse acquisition", and Xi’an Qinba is deemed to be the accounting acquirer in the reverse acquisition between Xi’an Qinba and WOFE.

These contractual arrangements completed on October 28, 2008 provide that WOFE has controlling interest in Xi’an Qinba as defined by FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), included in the FASB Accounting Standards Codification (“ASC”) 810, Consolidation, an Interpretation of Accounting Research Bulletin No. 51, included in the Codification as ASC 810, Consolidation, which requires WOFE to consolidate the financial statements of Xi’an Qinba and ultimately consolidate with its parent company, China Qinba (see Note 2, “Principles of Consolidation”).

On February 12, 2010, the Company completed its merger with China Qinba in accordance with a Merger Agreement (the “Merger Transaction”). Prior to the reverse merger, the Company was a non-operating public shell corporation. Pursuant to Securities and Exchange Commission rules, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction in substance, rather than a business combination. Accordingly, for accounting purposes, the transaction has been treated as a reverse acquisition and a recapitalization, and pro-forma information is not presented. Transaction costs incurred in the reverse acquisition have been charged to expense, The Company (the legal acquirer) is considered the accounting acquiree and China Qinba (the legal acquiree) is considered the accounting acquirer for accounting purposes. Pursuant to the Merger Agreement, the Company issued 33,600,000 shares (which were subsequently reduced to 9,333,333 shares by reverse split) of Common Stock to the shareholders China Qinba in exchange for 100% of the outstanding shares of China Qinba. Immediately after the Closing, the Company had a total of 10,680,559 shares (post-reverse split) of common stock outstanding, with all of the shareholders of China Qinba Pharmaceuticals (and their assignees) owning approximately 87.39 % of the Company’s outstanding common stock, and the balance held by those who held the Company’s common stock prior to the Closing. Subsequent to the Merger Transaction, the financial statements of the combined entity will in substance be those of China Qinba. The assets, liabilities and historical operations prior to the Merger Transaction will be those of China Qinba. Subsequent to the date of the Merger Transaction, China Qinba is deemed to be a continuation of the business of the Company. Therefore, post-merger financial statements will include the consolidated balance sheets of the Company and China Qinba, the historical operations of the Company and China Qinba from the closing date of the Merger Transaction forward.

Upon the closure of the Merger Transaction, the Company changed its name from Allstar Restaurants to China Pharmaceutical, Inc.

The Company, through its subsidiary and exclusive contractual arrangement with Xi’an Qinba Pharmaceutical Co., Ltd., is engaged in the business of manufacturing and marketing over-the-counter (“OTC”) and prescription pharmaceutical products which include capsules, granules and powder type medicines.

F-4

On June 8, 2010, the Company effected a 5 for 6 reverse split of issued and outstanding shares of common stock of the Company without changing the par value of the stock. The shares outstanding before reverse split were 39,650,000 shares; the shares outstanding after reverse split were 33,041,677. Shares after reverse split were retroactively restated from beginning of the period for all the periods presented.

On August 23, 2010, the Company sold 385,769 (post-reverse split) shares of common stock for approximately $1,600,000. On September 10, 2010 the Company effected a 1 for 3 reverse split of issued and outstanding shares of common stock of the Company without changing the par value of the stock. The shares outstanding after reverse split were 11,399,662. Shares after reverse split were retroactively restated from beginning of the period for all the periods presented.

The shares outstanding are presented as following:

		5 for 6 Reverse Split at			1 for 3 reverse split at
		June 8, 2010			September 10, 2010
Prior to reverse merger	4,850,014		4,041,678			1,347,226
Issued in connection with Reverse merger February 12, 2010	33,600,000		28,000,000			9,333,333
	38,450,014		32,041,678			10,680,559
Warrants exercised	1,200,000		1,000,000			333,333
Balance prior to 5 for 6 Reverse Split	39,650,014
Balance after 5 for 6 Reverse Split			33,041,678	33,041,678
Stock issued for services on August 23, 2010				1,157,307		385,769
Balance prior to 1 for 3 reverse split				34,198,985
Balance at March 31, 2011 and December 31, 2010						11,399,662

The unaudited financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) that are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) were omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the audited financial statements and footnotes included in the Company’s 2010 audited financial statements included in the Company’s Annual Report on Form 10-K. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying financial statements have been prepared in conformity with US GAAP. The Company's functional currency is the Chinese Yuan Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars. The accompanying financial statements present the historical financial condition, results of operations and cash flows of the operating companies.

F-5

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 FIN 46R, ASC 810, Consolidation, 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 Xi’an Qinba Pharmaceutical is the VIE of Xi’an Pharmaceuticals Development Co., Ltd., the Company considered the following indicators, among others:

Xi’an Pharmaceuticals has the full right to control and administrate the financial affairs and daily operation of Xi’an Qinba and has the right to manage and control all assets of Xi’an Qinba. The equity holders of Xi’an Qinba as a group have no right to make any decision about Xi’an Qinba’s activities without the consent of Xi’an Pharmaceuticals.

·	Xi’an Pharmaceuticals was assigned all voting rights of Xi’an Qinba and has the right to appoint all directors and senior management personnel of Xi’an Qinba. The equity holders of Xi’an Qinba possess no substantive voting rights.

·	Xi’an Pharmaceuticals will provide financial support if Xi’an Qinba requires additional funds to maintain its operations and to repay its debts.

Xi’an Pharmaceuticals should be paid a management fee equal to 25% of Xi’an Qinba’s sales amount. If there are no earnings before taxes and other cash expenses, then no fee shall be paid. If Xi’an Qinba sustains losses, they will be carried over to the next period and deducted from the next management fee. Xi’an Pharmaceuticals should assume all operation risks of Xi’an Qinba and bear all losses of Xi’an Qinba. Therefore, Xi’an Pharmaceuticals is the primary beneficiary of Xi’an Qinba.

Xi’an Qinba is wholly owned by the majority shareholders of the Company. The capital provided to Xi’an Qinba by the Company was recorded as interest-free loan to Xi’an Qinba. There was no written note to this loan and the loan is not interest bearing and was eliminated during consolidation. Under various contractual agreements, the shareholders of Xi’an Qinba are required to transfer their ownership to the Company’s subsidiary in China when permitted by PRC laws and regulations or to designees of the Company at any time when the Company considers it is necessary to acquire Xi’an Qinba. In addition, the shareholders of Xi’an Qinba have pledged their shares in Xi’an Qinba as collateral to secure these contractual arrangements.

Reclassifications

Certain prior year amounts were reclassified to conform to the manner of presentation in the current period.

Foreign Currency Translation

The Company’s reporting currency is the U.S. dollar. The Company’s operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial statements of the subsidiary are translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, included in the Codification as ASC 830, Foreign Currency Matters. According to the Statement, 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 SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’ equity, included in the Codification as ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the income statement. For the three months ended March 31, 2011 and 2010, the foreign currency translation adjustment to the Company’s comprehensive income (loss) was $221,199 and $(18,284) respectively.

F-6

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.

Risks and Uncertainties

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 guarantee, in which case the guarantee would be disclosed.

There were no loss contingencies at March 31, 2011.

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.

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.

The standard credit period of the Company’s most of client is three months. Within the medical industry in China, the collection period is generally longer than for other industries. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of December 31, 2010. The allowance for doubtful account as of March 31, 2011 and December 31, 2010 was $844,948 and $1,115,319, respectively.

F-7

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Costs that are capitalized to inventory primarily include direct manufacturing overhead such as labor costs and packing materials. As of March 31, 2011 and December 31, 2010, inventories consisted of the following:

	2011		2010

Raw materials	$	300,223	$	909,240
Finished goods		45,786		110,153
	$	346,009	$	1,019,393

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:

Building and improvements	20-42 years
Machinery	8-30 years
Fixture, furniture and equipment	5-15 years
Motor vehicles	5-7 years

Property, Plant & Equipment consisted of the following as of March 31, 2011 and December 31, 2010:

	2011			2010
Building and improvements	$	8,866,674		$	8,866,674
Machinery		6,812,297			6,812,716
Fixture, furniture and equipment		831,119			867,416
Motor vehicles		111,834			111,834
		16,621,924			16,658,640
Less: Accumulated depreciation		(2,708,770	)		(2,484,922	)
	$	13,913,154		$	14,173,718

Depreciation expense for the three months ended March 31, 2011 and 2010 was approximately $258,913 and $ 102,946, respectively.

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to fifty years. Management evaluates the recoverability of intangible assets at least annually 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 right purchased in 2003 will expire in 2053. All of the Company’s intangible assets are subject to amortization with estimated lives of:

Land use right	50 years
Proprietary technologies	20 years

F-8

As of March 31, 2011 and December 31, 2010, the components of intangible assets were as follows:

	2011			2010

Land use right	$	1,058,965		$	1,058,965
Proprietary technologies		8,965,538			8,965,538
		10,024,503			10,024,503
Less: Accumulated amortization		(1,618,199	)		(1,484,842	)
		8,406,304			8,539,661
Less: Impairment		(737,315)			(737,315)
	$	7,668,989		$	7,802,346

Amortization expense for the three months ended March 31, 2011 and 2010 was $133,358 and $127,126, respectively. The estimated future yearly amortization expenses related to intangible asset as of March 31, 2011 are as follows:


2011	$	540,000
2012		540,000
2013		540,000
2014		540,000
2015		540,000
Thereafter	$	4,968,989

Long-Lived Assets

The Company accounts for long-lived assets in accordance with Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, 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 APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 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 March 31, 2011 and December 31, 2010, there were no significant impairments of its long-lived assets.

Fair Value of Financial Instruments

Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments”, included in the Codification as ASC 820, Fair Value Measurements and Disclosures, requires that the Company discloses 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.

F-9

Fair Value Measurements and Disclosures

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The three levels are defined as follow:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

As of March 31, 2011 and December 31, 2010, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Value Added Tax Payable

The Company is subject to a value added tax rate of 17% on product sales by the People’s Republic of China. Value added tax payable is computed net of value added tax paid on purchases for all sales in the People’s Republic of China.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104, “Revenue Recognition”, included in the Codification as ASC 605, Revenue Recognition. Sales revenue is recognized when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

The Company has one revenue source from manufacturing and selling the pharmaceutical products, and does not allow its customers to return products. The Company’s customers can exchange products only if they are damaged in transportation.

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. There was no advertising expense incurred for the three months ended March 31, 2011 and 2010.

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, 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 for 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. There were no deferred tax provision in 2010 and 2009.

F-10

The Company adopted the provisions of the FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (codified in FASB ASC Topic 740). When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified as selling, general and administrative expense in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements. At March 31, 2011 and December 31, 2010, the Company had not taken any significant uncertain tax position on its tax return for 2010 and prior years or in computing its tax provision for 2010.

Comprehensive Income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. For the Company, comprehensive income for the periods presented includes net income, and foreign currency translation adjustments.

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows”, included in the Codification as ASC 230, Statement of Cash Flows, 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 balance sheet.

Basic and Diluted Earnings (Loss) per Share (EPS)

Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is similarly computed, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to have been exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

The following table presents a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2011 and 2010:


	2011		2010
Net income	$	2,888,013	$	1,547,876
Weighted average shares outstanding - basic		11,399,662		9,333,333
Effect of dilutive securities:
Warrants issued		378,378		-
Weighted average shares outstanding – diluted		11,778,040		9,333,333
Earnings per share – basic	$	0.25	$	0.17
Earnings per share – diluted	$	0.25	$	0.17

F-11

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.

Research and Development

Research and development costs are related primarily to the development of new drugs by the Company. Research and development costs are expensed as incurred.

The Company also develops new products through arrangements and corporation with several research institutes to develop new pharmaceutical products. The Company only pays these institutes for their research expenses if the research goals are accomplished, including certification of the product and approval for production, and these achievements are then transferred to the Company and recorded as intangible assets. There was no Research and Development expense in the three months ended March 31, 2011 and 2010.

Segment Reporting

Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information”, included in Codification ASC 280, Segment Reporting, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

SFAS 131 has no effect on the Company's financial statements as substantially all of the Company's operations are conducted in one industry segment of manufacturing and marketing over-the-counter and prescription pharmaceutical products. All of the Company's assets are located in the PRC.

New Accounting Pronouncements

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

F-12

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this Update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted the disclosure requirements for the business combinations in 2011.

On March 5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815 “Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the guidance within the derivative literature that exempts certain credit related features from analysis as potential embedded derivatives requiring separate accounting. The ASU specifies that an embedded credit derivative feature related to the transfer of credit risk that is only in the form of subordination of one financial instrument to another is not subject to bifurcation from a host contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives — Recognition. All other embedded credit derivative features should be analyzed to determine whether their economic characteristics and risks are “clearly and closely related” to the economic characteristics and risks of the host contract and whether bifurcation is required. The ASU is effective for the Company on July 1, 2010. Early adoption is permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Note 3– DEPOSITS AND OTHER RECEIVABLES

At March 31, 2011 and December 31, 2010, the Company had deposits and other receivables of $4,192,711 and $4,374,525, respectively, mainly including $3,817,186 (RMB 25,027,000) prepayment for purchasing two patents of medicine formulation from Xi’an Keli, a local pharmaceutical company (see Note 6).

F-13

Note 4 – ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following at March 31, 2011 and December 31, 2010:

	2011		2010
Accrued salaries	$	7,483	$	5,122
Accrued welfare		33,782		33,799
Other payables		24,461		20,463
Accrued expense		882,068		877,733
Other levies		18,786		15,534
Total	$	966,580	$	952,651

Note 5 – COMPENSATED ABSENCES

Regulation 45 of local labor law 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 6 – COMMITMENTS

Purchasing Agreement

The Company signed a contact with Xi’an Keli, a local pharmaceutical company to purchase two patents of medicine formulation from them; the total contracted amount was approximately $4,530,000 (RMB 30 million). As of March 31, 2011, the Company paid $3,817,186 (RMB 25,027,000), and the remaining $763,000 (RMB 5 million) will be paid upon the Company obtaining the registration certificate of the medicine.

Lease Agreement

As of March 31, 2011, the Company had rental commitment of approximately $900, which will be paid in 2011.

Employment Agreements

Through our wholly-owned subsidiary, China Qinba Pharmaceuticals, Inc, the Company has executed employment agreements with each of our executive officers, specifically, Guozhu Wang, Chief Executive Officer; Guiping Zhang, President and Teo Lei, Chief Financial Officer. Each employment agreement has a term of two years.

On January 1, 2010, the Company entered into a two year Employment Agreement with Guozhu Wang to serve as the Company’s Chief Executive Officer. The Agreement provides for an annual salary of USD$5,095 and an annual bonus of up to 50% of the executive’s annual salary.

On January 1, 2010, the Company entered into a two year Employment Agreement with Guiping Zhang to serve as the Company’s President. The Agreement provides for an annual salary of USD$5,622 and an annual bonus of up to 50% of the executive’s annual salary.

On January 1, 2010, the Company entered into a two year Employment Agreement with Tao Lei to serve as the Company’s Chief Financial Officer. The Agreement provides for an annual salary of USD$4,392 and an annual bonus of up to 50% of the executive’s annual salary.

F-14

Note 7 – INCOME TAX

The Company’s Chinese subsidiary (WOFE) and VIE were incorporated in the PRC which is governed by the Income Tax Laws of the PRC and various local tax laws. Effective January 1, 2008, China adopted a uniform tax rate of 25% for all enterprises (including foreign-invested enterprises).

The Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007. Starting from 2008, the Enterprise Income Tax (EIT) was at a statutory rate of 15%. The Company expensed $464,204 and $ 541,526 for income tax for the three months ended March 31, 2011 and 2010.

The following table reconciles the U.S. statutory rates to the Company’s consolidated effective tax rate for the three months ended March 31, 2011 and 2010:

	2011			2010
US statutory rates		34.0	%		34.0	%
Tax rate difference		(9.0	)%		(9.0	)%
Effect of tax holiday		(10.3	)%		(10.0	)%
Others		(1.5	)%		10.9	%
Valuation allowance		0.7	%		0	%
Tax per financial statements		13.9	%		25.9	%

Note 8 – MAJOR CUSTOMERS AND CREDIT RISK

For the three months ended March 31, 2011, no customer accounted for 10% or more of the Company’s sales. For the three months ended March 31, 2010, three customers accounted for 16%, 13% and 12% of the Company’s sales.

Three vendors provided 25%, 15% and 13% of the Company’s purchases of raw materials for the three months ended March 31, 2011; three vendors provided 12%, 10% and 10% of the Company’s purchase of raw materials for the three months ended March 31, 2010. At March 31, 2011 and December 31, 2010, the total payable due to these vendors was approximately $69,300, and $79,500, respectively.

Note 9 – STATUTORY RESERVES

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 affair 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 affair 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 March 31, 2011 and December 31, 2010, the Company had allocated $ 3,585,087 and $3,274,593 to these non-distributable reserve funds.

Note 10 – STOCK-BASED COMPENSATION PLAN

On December 17, 2009, China Qinba entered into a Shell Referral agreement with Dragon Link Investments, Ltd (Dragon Link) for Dragon Link to identify and refer a public shell company to the Company to consummate a reverse merger in the US. As consideration for the services provided by Dragon Link (and in accordance with a warrant placement agreement dated February 12, 2010 between the Company and Dragon Link), China Qinba agreed to issue to Dragon Link warrants to acquire 1,200,000 shares of the Company’s common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 333,333 shares post reverse split), with registration rights, and exercisable at a price of $3.00 per post-split share within three years after the control acquisition or merger by China Qinba with a public company identified by Dragon Link . The warrants will expire on February 11, 2013. The fair value of the warrants at issuing date was $701,058. The warrants were fully exercised in May of 2010. The Company received $1 million proceeds from exercise of the warrants.

F-15

On January 5, 2010, China Qinba entered into an agreement with IFG Investments Services, Inc (IFG) to obtain certain consulting services including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested. In consideration for the consulting services to be performed by IFG (and in accordance with a warrant placement agreement dated February 12, 2010 between the Company and IFG), China Qinba agreed to issue to IFG warrants to acquire 1,800,000 shares of the Company’s common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 500,000 shares post reverse split), with registration rights, exercisable at $3.00 per post-split share within three years after the closing of the control acquisition or merger by China Qinba with public company. The warrants will expire on February 11, 2013. The warrants were vested immediately. The fair value of the warrants at issuing date was $1,051,588.

On January 27, 2010, China Qinba entered into an investor relations agreement with HACG Investor Relations Services, Inc (HACG), to obtain certain public company sector services, including advising on and with respect to investor relations. The term of the contract expires January 31, 2011. As consideration for the services to be performed by HACG (and in accordance with a warrant placement agreement dated February 12, 2010 between the Company and HACG), China Qinba agreed to issue to HACG warrants to acquire 1,200,000 shares of the Company’s common stock, subject to adjustment for any forward or reverse splits (and subsequently reduced to 333,333 shares post reverse split), with registration rights, exercisable at $3.00 per post-split share until January 31, 2013. The warrants were vested immediately. The fair value of the warrants at issuing date was $469,976.

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 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 – 1.89%; expected life – 3 years; expected volatility – 219%; and expected dividends – nil. No estimate of forfeitures was made as the Company has a short history of granting warrants.

The following table summarizes activities of these warrants (post-reverse split) for the three months ended March 31, 2011:

	Number of Shares		Average Exercise Price per Share		Weighted Average Remaining Contractual Term in Years
Outstanding at January 1, 2010		-	$	-		-
Exercisable at January 1, 2010		-
Cancelled		-		-		-
Granted		1,166,666		3		3.00
Exercised		333,333		3		-
Outstanding at December 31, 2010		833,333	$	3		2.11
Exercisable at December 31, 2010		833,333	$	3		2.11
Granted
Exercised						-
Outstanding at March 31, 2011		833,333	$	3		1.86
Exercisable at March 31, 2011		833,333	$	3		1.86

F-16

Note 11 - CONTINGENCY

May 17, 2010, ValueRich, Inc. commenced litigation to compel arbitration against the Company, alleging ownership of 20% of the outstanding shares of the Company’s common stock pursuant to a May 2008 consulting agreement between ValueRich and Xi'an Pharmaceuticals. The Company is currently evaluating the possible outcome of this litigation and does not believe it will have any material effect on the company’s financial position.

Note 12 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

The Company’s major operations are carried out in the PRC; therefore the Company is subject to the risks not typically associated with entities operating in the United States of America. 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. All of the following risks may impair the Company’s business operations. If any of the following risks actually occurs, the Company’s business, financial condition or results of operations could be materially adversely affected. In such case, investor may lose all or part of the investment. Additional risks include:

§	The Company may not be able to adequately protect and maintain its intellectual property.
§	The Company may not be able to obtain regulatory approvals for its products.

§	The Company may have difficulty competing with larger and better financed companies in the same sector. New legislative or regulatory requirements may adversely affect the Company’s business and operations. The Company is dependent on certain key existing and future personnel.
§	The Company’s growth is dependent on its ability to successfully develop, market, or acquire new drugs. The Company may be subject to product liability claims in the future.

§	Changes in the laws and regulations in the PRC may adversely affect the Company’s ability to conduct its business.
§	The Company may experience barriers to conducting business due to governmental policy.

§	Capital outflow policies in the PRC may hamper the Company’s ability to remit income to the United States.
§	Fluctuation of the Renminbi could materially affect the Company’s financial condition and results of operations.

§	The Company may face obstacles from the communist system in the PRC.
§	The Company may have difficulty establishing adequate management, legal and financial controls in the PRC.

§	Trade barriers and taxes may have an adverse affect on the Company’s business and operations.
§	There may not be sufficient liquidity in the market for the Company’s securities in order for investors to sell their securities.

Note 13 – SUBSEQUENT EVENTS

For the three months ended March 31, 2011, the Company has evaluated subsequent events for potential recognition and disclosure through the date of the financial statement issuance.

In May 2011, the board of directors approved the China Pharmaceuticals, Inc. 2011 Incentive Stock Plan which authorized 1,140,000 shares of the Company’s common stock to be used for the exercise of options to be granted to directors, officers, employees and/or consultants to the Company.

F-17

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

Cautionary Notice Regarding Forward-Looking Statements

In this quarterly report, references to “China Pharmaceutical,” “CFMI,” “the Company,” “we,” “our,” “us,” and the Company’s variable interest entity, “Xian Pharmaceuticals,” refer to China 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.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere in this Report.

Results of Operations

Comparison of the Three Months Ended March 31, 2011 and 2010

Net Sales

The following table sets forth the results of our operations for the three months ended March 31, 2011 and 2010 indicated as a percentage of net sales:


	2011					2010
	$		% of Sales			$			% of Sales
Sales		7,687,217					7,053,199
Cost of Goods Sold		3,367,530		44	%		2,820,178			40	%
Gross Profit		4,319,687		56	%		4,233,021			60	%
Operating Expenses		975,365		12	%		2,114,086			30	%
Income from Operations		3,344,322		44	%		2,118,935			30	%
Other Income (Expenses), net		7,895		-	%		(29,533	)		-	%
Income Tax Expense		464,204		6	%		541,526			8	%
Net Income		2,888,013		38	%		1,547,876			22	%

Net Sales

In the three months ended March 31, 2011, we had net sales of $7,687,217, an increase of 9% as compared with $7,053,199 in the same period of 2010. This increase was primarily due to increased demand for our products as a result of our successful marketing and promotion strategies.

Cost of Goods Sold

Cost of goods sold consisted of cost of raw materials, workers’ salary, fuel and energy, workshop, etc. Cost of goods sold increased to $3,367,530 for the three months ended March 31, 2011, representing a 19% increase as compared with $2,820,178 for 2010 period. This increase was primarily due to an increase in sales and production volume; the cost of goods sold as a percentage to the sales was 44% for the three months ended March 31, 2011 period as compared to 40% for the same period of 2010. The increase in cost of goods sold as a percentage to the sales was attributable to increased production related expenses, which was resulted from overall inflation in China.

Gross Profit

Gross profit increased 2% to $4,319,687 for the three months ended March 31, 2011 as compared to $4,233,021 for the same period of 2010. Our gross profit margin decreased from 60% for three months ended March 31, 2010 to 56% for the same period of 2011; the decrease in gross margin was a result of increased cost of goods sold.

Operating Expenses

Operating expenses consisted of selling, general and administrative expenses. Operating expenses were $975,365 for the three months ended March 31 2011, a decrease of 54% as compared to $2,114,086 for the same period of 2010. This decrease was primarily due to a recovery of bad debt allowance of approximately $0.28 million, while in the 2010 period, we had bad debt allowance provision of $1.63 million.

Other Income

Other income was $7,895 for the three months ended March 31, 2011, compared with other expenses of $29,533 for the same period of 2010, a decrease of $37,428. The decrease in other expense was primarily due to decreased interest expense as a result of payment in full for all the short term loans.

Net Income

Net income was $2,888,013 for the three months ended March 31, 2011, an increase of 87% from $1,547,876 for the same period of 2010. Our net profit margin increased 16% from 22% for the three months ended March 31, 2010 period to 38% for the three months ended March 31, 2011. This increase was primarily attributable to an increase in net sales, gross profit and decreased operating expenses resulted from recovery of bad debt allowance for approximately $0.28 million.

Liquidity and Capital Resources

Overview

We had net working capital of $24,059,944 at March 31, 2011, an increase of $3,503,133 over a net working capital of $20,556,811 at December 31, 2010. The ratio of current assets to current liabilities was 10.77:1 at March 31, 2011.

The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended March 31, 2011 and 2010:


	2011		2010
Cash provided by (used in):
Operating Activities	$	4,712,966	$	1,341,061
Investing Activities		-		3,872
Financing Activities		-		(2,493,692)

Net cash provided by operating activities

Net cash provided by operating activities was $4,712,966 for the three months ended March 31, 2011, an increase of $ 3,371,905 or 251% from $1,341,061 cash provided for the same period of 2010. The increase in cash inflow was primarily attributable to an increase in net income and decreased inventory on hand and decreased other receivables and account receivable outstanding.

Net cash used in investing activities

Net cash used in investing activities was $0 for the three months ended March 31, 2011, compared with $3,872 cash provided by investing activities for same period of 2010. We had no investing activity for the three months ended March 31, 2011, while we had construction in progress in the same period of 2011.

Net cash used in financing activities

Net cash provided by financing activities was $0 for the three months ended March 31, 2011, compared to $2,493,692 cash used in financing activity in the same period of 2010. We had no financing activity in the 2011 period, while we had paid off $2,493,692 short term loan in the same period of 2010.

Contractual Obligations and Off-Balance Sheet Arrangements

We have certain fixed contractual obligations and commitments that may include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments.

We signed a contact with Xi’an Keli, a local pharmaceutical company to purchase two patents of medicine formulation from them; the total contracted amount was approximately $4,570,000 (RMB 30 million). As of March 31, 2011, we paid $3,817,186 (RMB 25,027,000), and the remaining $755,000 (RMB 5 million) will be paid upon the Company obtaining the registration certificate of the medicine.

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

While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe the following accounting policies are the most critical to aid you in fully understanding and evaluating this management’s discussion and analysis.

Use of Estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and the valuation of inventories. Actual results could differ from those estimates.

Accounts Receivable

Property, Plant & Equipment

Building and improvements	20-42 years
Machinery	8-30 years
Fixture, furniture and equipment	5-15 years
Motor vehicles	5-7 years

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one 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 rights purchased in 2003 will expire in 2053. All of the Company’s intangible assets are subject to amortization with estimated lives of:

Land use right	50 years
Proprietary technologies	20 years

Revenue Recognition

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, 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.

Inflation

Inflation in recent years has 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 trends and price increases, 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 China politics.

New Accounting Pronouncements

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

N/A.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Guozhu Wang, the Company’s Chief Executive Officer (“CEO”), and Tao Lei, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the three months ended March 31, 2011. Based upon that evaluation, the Company’s CEO and CFO concluded that, as of the date of evaluation, there was a material weakness and therefore the Company’s internal control over financial reporting was not effective. The Company’s material weakness in its internal control over financial reporting is related to the lack of accounting personnel with U.S. GAAP proficiency. The Company’s internal accounting department has primarily engaged in ensuring compliance with PRC accounting and reporting requirements for our operating affiliates. As a result, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although the Company’s accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. In order to mitigate this material weakness to the fullest extent possible, external consultants were used and the Company’s review process was strengthened. Therefore, management believes that the consolidated financial statements and other information presented herewith are materially correct. Management believes that the weakness did not have any effect on the accuracy of the Company’s consolidated financial statements for the current reporting period.

As a result of such evaluation, the Company's CEO concluded that, as of the date of evaluation, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, or that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controls

Our management, with the participation of our CEO and CFO, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended March 31, 2011. Based on that evaluation, our CEO and CFO concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings.

ValueRich, Inc. (“ValueRich”) commenced a private arbitration against the Company in Florida asserting breach of contract, conversion, and unjust enrichment claims arising out of a Consulting Agreement between ValueRich and Xi’an Qinba Pharmaceuticals Co. Ltd. (“Qinba”), which is the operating entity that a Company’s wholly owned subsidiary has a contractual Entrust Management Relationship. ValueRich asserts that the Company breached and circumvented the Consulting Agreement by terminating it and becoming a public entity through other means. ValueRich seeks specific performance to obtain 20% of the Company’s outstanding shares, or, in the alternative, unspecified monetary damages equal to the value of 20% of the Company’s outstanding shares, attorneys’ fees, arbitration costs, and interest.

On March 11, 2011, the Company filed its Answer and Counterclaims. ValueRich has filed its Reply to the Company’s Counterclaims. As this matter is at its inception, it is difficult to estimate the likelihood of an adverse award. The Company’s management has indicated that it intends to vigorously defend the claim. No arbitration hearing dates have yet been scheduled.

We know of no other material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any other material proceeding or pending litigation

Item 1A.

Risk Factors.

N/A.

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

To our knowledge, there are no material defaults upon senior securities.

Item 4.

(Removed and Reserved).

Item 5.

Other Information.

None.

Item 6.

Exhibits.

(a)

Exhibits

31.1		Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.
31.2		Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.
32.1		Certification Required Under Section 906 of Sarbanes-Oxley Act of 2002.
32.2		Certification Required Under Section 302 of Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CHINA PHARMACEUTICALS, INC.

Dated: May 20, 2011	By:	/s/ Guozhu Wang
		Name: Guozhu Wang
		Title: Chief Executive Officer


Dated: May 20, 2011	By:	/s/ Tao Lei
		Name: Tao Lei
		Title: Chief Financial Officer

China Pharmaceuticals Inc - FORM 10-Q - May 20, 2011

Attached files

China Pharmaceuticals Inc Reports