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EX-31.02 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - CHINA PEDIATRIC PHARMACEUTICALS, INC.exhibit_31-2.htm
EX-31.01 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULES 13A-14(A) AND 15D-14(A), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - CHINA PEDIATRIC PHARMACEUTICALS, INC.exhibit_31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - CHINA PEDIATRIC PHARMACEUTICALS, INC.Financial_Report.xls
EX-32.01 - CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - CHINA PEDIATRIC PHARMACEUTICALS, INC.exhibit_32-1.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 September 30, 2012

 

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

 

ACT OF 1934

 

For the transition period from

 

Commission file number: 000-52007

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

(Exact name of registrant 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) (zip code)

 

86-29-8727-1818

(Registrant’s telephone number, including area code)

 

Copy of Communications to:

Bernard & Yam, LLP

Attn: Man Yam, Esq.

401 Broadway Suite 1708

New York, NY 10013

Phone: 212-219-7783

Fax: 212-219-3604

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  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 x 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.

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

 

As of September 30, 2012 and December 10, 2012, there were 44,556,104 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2


 
 

TABLE OF CONTENTS

 

       
  PART I    
Item 1. Financial Statements.    
    Consolidated Balance Sheets (unaudited and audited)    
    Consolidated Statements of Income and Comprehensive Income (unaudited)    
    Consolidated Statements of Cash Flows (unaudited)    
    Consolidated Statements of Stockholders’ Equity (unaudited)    
    Notes to Consolidated Financial Statements (unaudited)    
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.    
Item 3. Quantitative and Qualitative Disclosures About Market Risk.    
Item 4. Controls and Procedures.    
  PART II    
Item 1. Legal Proceedings.    
Item 1A. Risk Factors.    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.    
Item 3. Defaults Upon Senior Securities.    
Item 4. (Removed and Reserved).    
Item 5. Other Information.    
Item 6. Exhibits.    
SIGNATURES    

 

 

 

 

 

 

3


 
 

 

Item 1. Financial Statements

 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

 CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

 

 

Financial Statements  
   
Consolidated Balance Sheets F-2
   
Consolidated Statements of Operations and Comprehensive (Loss) Income F-3
   
Consolidated Statements of Cash Flows F-4
   
Consolidated Statements of Stockholders’ Equity F-5
   
Notes to Consolidated Financial Statements F-6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-1


 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

AS AT SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

 

September 30, 2012   December 31, 2011
  (Unaudited)   (Audited)
ASSETS        
         
Current Assets        
Cash and cash equivalents $ 987,440 $ 2,186,650
Accounts receivable, net of provision for doubtful accounts of $6,177,249 (December 31,2011: $2,039,909) 8,991,249 11,946,588
Other receivable (note 3) 799,494 118,254
Inventories (note 4) 662,920 177,933
Prepaid expenses (note 5) 2,522,071 4,982,512
Prepaid income taxes 209,044 207,992
Total Current Assets $ 14,172,218 $ 19,619,929
 
Property, plant & equipment, net (note 6) 811,906 876,900
Intangible assets, net (note 7) 1,511,818 1,709,769
 
Total Assets $ 16,495,942 $ 22,206,598
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities
Accounts payable $ 33,744 $ 314,696
Accrued expenses and other payables 1,456,013 868,812
Trade deposit received 6,817 6,783
VAT tax payable 92,188 418,657
Total Current Liabilities $ 1,588,762 $ 1,608,948
 
Stockholders' Equity
Common stock, $0.001 par value, 75,000,000 share authorized, 44,556,104 shares issued and outstanding at September 30, 2012 and December 31, 2011 (note 10) $ 44,556 $ 44,556
Additional paid in capital 14,102,507 14,102,507
Deferred compensation - (15,625)
Statutory reserve (note 11) 810,540 810,540
Accumulated other comprehensive income 3,150,176 3,038,258
Accumulated (deficit) retained earnings (3,200,599) 2,617,414
Total Stockholders' Equity $ 14,907,180 $ 20,597,650
 
Total Liabilities and Stockholders' Equity $ 16,495,942 $ 22,206,598

 

The accompanying notes are an integral part of these financial statements

 

F-2


 

 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(UNAUDITED)

 

 

  Three months ended September 30,   Nine months ended September 30,
  2012   2011   2012   2011
Sales $ 2,177,886 $ 7,889,737 $ 15,017,870 $ 23,055,367
Sales rebates (217,442 ) (1,384,649 ) (2,062,393 ) (3,153,701 )
Sales, net of rebates 1,960,444 6,505,088 12,955,477 19,901,666
Cost of sales 981,490 3,705,012 7,894,782 10,455,484
Gross profit 978,954 2,800,076 5,060,695 9,446,182
 
Advertising expense 947,859 2,525,678 3,877,809 5,984,090
Marketing expense - 3,724,681 - 3,724,681
Impairment loss on accounts receivables 2,900,192 - 4,132,574 -
Selling, general and administrative expense 711,332 1,306,651 2,868,158 6,006,282
(Loss) from operations (3,580,429 ) (4,756,934 ) (5,817,846 ) (6,268,871 )
 
Interest income (expense) - 6,177 44 (10,146)
Other income (expense) (32 ) (150 ) (211 ) (14,472 )
Derivative income (expense) - 241,250 - 5,762,500
Total Other (Expense) Income (32 ) 247,277 (167 ) 5,737,882
 
(Loss) before income taxes (3,580,461) (4,509,657) (5,818,013 ) (530,989 )
 
Provision for income taxes (note 9) - - - (200,825 )
 
Net (loss) $ (3,580,461 ) (4,509,657 ) $ (5,818,013 ) (731,814 )
 
Foreign currency translation adjustment (32,267 ) 322,054 111,918 891,784
 
Comprehensive (loss) income $ (3,612,728 ) $ (4,187,603 ) $ (5,706,095 ) $ 159,970
 
 
Net (loss) income per common share (note 13)
(Loss) per share - basic $ (0.08 ) $ (0.10 ) $ (0.13 ) $ (0.02 )
(Loss) per share - diluted (0.08 ) (0.11 ) (0.13 ) (0.15 )
 
Weighted average common shares outstanding - basic and diluted 44,556,104 44,556,104 44,556,104 44,496,407

 

The accompanying notes are an integral part of these financial statements

 

F-3


 

 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(UNAUDITED)

 

    Nine months ended September 30,  
    2012   2011  
CASH FLOWS FROM OPERATING ACTIVITIES              
Net (loss) $ (5,818,013 ) $ (731,814 )
Adjustments to reconcile net (loss) to net cash used in operating activities    
Depreciation and amortization of property, plant and equipment and intangible assets 276,400   270,622  
  Provision for doubtful accounts 4,132,574   -  
  Recognition of stock based compensation expense 15,625   3,017,300  
  Recognition of change in value of derivative instruments -   (5,762,500 )
(Increase) decrease in current assets    
  Bills receivable -   (103,692 )
  Accounts receivable (1,112,751 ) (4,495,373 )
  Inventory (484,738 ) 718,986  
  Prepaid expense 2,488,987   1,674,106  
  Other receivable (681,557 ) (46,808 )
Increase (decrease) in current liabilities    
  Accounts payable (282,924 ) (180,219 )
  Accrued expenses and other payables 583,591   (124,810 )
  Value-added tax payable (329,028 ) 49,339  
  Income tax payable -   (288,204)  
Net cash (used in) operating activities (1,211,834 ) (6,003,067 )
       
CASH FLOWS FROM INVESTING ACTIVITIES    
  Acquisition of property, plant and equipment -   (4,167 )
       
CASH FLOWS FROM FINANCING ACTIVITIES    
  Repayment of loan -   (461,012 )
       
Effect of exchange rate changes on cash and cash equivalents 12,624   505,254  
       
Net change in cash and cash equivalents (1,199,210 ) (5,962,992 )
Cash and cash equivalents, beginning balance 2,186,650   10,992,141  
Cash and cash equivalents, ending balance $ 987,440   $ 5,029,149  
       
SUPPLEMENTAL DISCLOSURES:    
Cash paid during nine months for:    
  Income tax payments $ -   $ 479,258  
  Interest payments $ -   $ 12,342  

 

The accompanying notes are an integral part of these financial statements

 

F-4


 

 

 

 

 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

Description Common Shares Amount   Additional Paid-in Capital   Accumulated Other Comprehensive Income  
     
Balance, December 31, 2010 44,206,104 $ 44,206   $ 13,727,857   $ 2,155,609  
  Foreign currency translation adjustments - -   -   882,649  
  Stock-based compensation 350,000 350   374,650   -  
  Loss for the year - -   -   -  
Balance, December 31, 2011 44,556,104 44,556   14,102,507   3,038,258  
  Foreign currency translation adjustments - -   -   111,918  
  Stock-based compensation - -   -   -  
  Loss for the nine months - -   -   -  
Balance, September 30, 2012 44,556,104 $ 44,556   $ 14,102,507   $ 3,150,176  
                               
Description Statutory Reserves Retained Earnings   Deferred Compensation   Total Stock-holders' Equity  
     
Balance, December 31, 2010 $ 810,540 $ 9,583,939   $ (2,704,800 ) $ 23,617,351  
  Foreign currency translation adjustments - -   -   882,649  
  Stock-based compensation - -   2,689,175   3,064,175  
  Loss for the year - (6,966,525 ) -   (6,966,525 )
Balance, December 31, 2011 810,540 2,617,414   (15,625 ) 20,597,650  
  Foreign currency translation adjustments - -   -   111,918  
  Stock-based compensation - -   15,625   15,625  
  Loss for the nine months - (5,818,013 ) -   (5,818,013 )
Balance, September 30, 2012 $ 810,540 $ (3,200,599 ) $ -   $ 14,907,180  

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

F-5


 

 

 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

GOING CONCERN

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred a net loss of $3,580,461 and $4,509,657 for the three months ended September 30, 2012 and 2011; incurred a net loss of $5,818,013 and $731,814 for the nine months ended September 30, 2012 and 2011. Further, the Company had accumulated deficit of $3,200,599 as at September 30, 2012. These create an uncertainty about the Company’s ability to continue as a going concern. In this regard, the Company’s Chairman has issued a letter of undertaking that he will provide financial support to the Company (Note 17). These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-6


 

 

 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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, 2005.  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 in August 4, 2008 provide Xi'an Coova with controlling interest in Shaanxi Jiali as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”, Section 10-15, “Variable Interest Entities”, which requires the Company to consolidate the financial statements of Shaanxi Jiali. The Company, as an entity that consolidates a Variable Interest Entity is called the primary beneficiary of the VIE. Accordingly, the Company is the primary beneficiary of Shaanxi Jiali.

 

The outstanding stock of the Company prior to the Share Exchange Transaction was accounted for at their net book value and no goodwill was recognized.  

 

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-7


 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(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 Yuan 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 China Pediatric Pharmaceuticals, Inc., its wholly owned subsidiaries, China Children Pharmaceuticals Co. Limited, and Xi'an Coova Children Pharmaceuticals Co., Ltd. as well as Shaanxi Jiali Pharmaceuticals Co., Ltd., a variable interest entity (“VIE”) for which the Company is the primary beneficiary.  All inter-company accounts and transactions have been eliminated in consolidation.  

 

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 United States Dollars (USD) in accordance with ASC 830, “Foreign Currency Matters”.  All assets and liabilities were translated at the current exchange rate, stockholders’ equity was translated at the historical rates and income statement items were translated at the average exchange rate for the period.  The resulting translation adjustments are reported under other comprehensive income in accordance ASC 220, “Comprehensive Income”.  Foreign exchange transaction gains and losses are reflected in the Consolidated Statements of Operations and Comprehensive (Loss) Income.  

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

 

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, foreign currency translation adjustments.

 

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 un-asserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or un-asserted 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.

 

F-8


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

 

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed. There were no contingencies at September 30, 2012 and December 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. As of September 30, 2012 and December 31, 2011, cash and cash equivalents were mainly denominated in CNY and were placed with banks in the PRC. These cash and cash equivalents may not be freely convertible into foreign currencies and the remittance of these funds out of the PRC may be subjected to exchange control restrictions imposed by the PRC government.

 

Accounts Receivable

 

Management periodically 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 potential credit losses on accounts receivable. The Company grants 90 days payment terms to all credit sales customers.

 

The accounting estimates regarding provision for doubtful accounts was changed during the fourth quarter in 2011. Bad debt expense increased as accounts receivable turnover increased over 300 days during the three and nine months ended September 30, 2012. Historically, we did not make any provision for bad debt as all our accounts receivable were collected within 90 days. Provision for doubtful accounts is now estimated as follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181 to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.

 

Inventories

 

Inventories are valued at the lower of cost (determined on a weighted average basis) or market.  The Company compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower.  

 

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-9


 
 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)  

 

Goodwill

 

Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired.   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 September 30, 2012 and December 31, 2011 were $nil.  Goodwill was arisen from acquisition of assets and liabilities of Baoji facility in fiscal year 2000. During the year ended December 31, 2011, the Company recognized an impairment loss equal to the carrying amount of goodwill.

 

Intangible Assets

 

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

 

Long-Lived Assets

 

The Company accounts for long-lived assets in accordance with ASC 360, “Property, Plant, and Equipment”. The Company periodically evaluates the carrying value of long-lived assets to be held and used, impairment losses are 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 September 30, 2012 and December 31, 2011, there were no significant impairments of its long-lived assets.

 

 

 

F-10


 

 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)  

 

Fair Value of Financial Instruments

 

In accordance with FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

In determining fair value, the Company uses various valuation approaches.  In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.  Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund.  Unobservable inputs reflect the Fund.  Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  

 

The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

  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 assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

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

 

Derivative Financial Instruments

 

Derivative financial instruments, as defined in Financial Accounting Standard, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement.  Derivative financial instruments may be free-standing or embedded in other financial instruments.  Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.  The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks.  

 

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 FASB ASC Topic 605, "Revenue Recognition."

 

Revenue of the Company is primarily derived from the sales of OTC medicines in China. Sales are recognized when the following four revenue criteria are met: i) persuasive evidence of an arrangement exists, ii) shipment has occurred, iii) the selling price is fixed or determinable, and iv) collectability is reasonably assured. Sales are presented net of value added tax (“VAT”) and net of sales rebate.

 

 

F-11


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)  

 

 

There are two types of sales upon which revenue is recognized:

 

  • Credit sales: revenue is recognized at the date of shipment. Sales arrangements are FOB shipping point.

 

  • Payment received before all of the relevant criteria are satisfied: Cash received is recorded as “deposits from customers,” and revenue is recognized when the products have been shipped to the customers.

 

Advertising

 

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing, costs of direct advertising.  The Company expenses all advertising costs as incurred.  

 

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.  

 

Shipping and Handling Costs

 

The Company incurs certain expenses related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related to these activities are included as a component of selling, general and administrative expenses in the consolidated statement of operations. For the three months ended September 30, 2012 and 2011, the Company incurred shipping charges of $nil and $25,187 respectively. For the nine months ended September 30, 2012 and 2011, the Company incurred shipping charges of $983 and $71,352 respectively.

 

Stock based compensation

 

The Company accounts for stock based compensation in accordance to ASC 718. Compensation cost is measured at the grant date based on the fair value of the equity instruments awarded and is recognized over the period during which an employee is required to provide service in exchange for that award, or the requisite service period, which is usually the vesting period. For awards to non-employees, the amount of stock-based compensation expense recognized is based on the fair value of the equity instruments issued or the fair value of the goods or services received, whichever is more reliably measurable.

 

Income Taxes

 

The Company utilizes 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. Deferred tax assets and liabilities will be recognized, if any.

 

 

F-12


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)  

 

On January 1, 2007 the Company adopted the provisions of FASB issued Interpretation No. 48 (FIN 48), “Accounting for uncertainty in Income Taxes”, included in the Codification as ASC 740, Income Taxes.  The topic addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under ASC 740, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

Statement of Cash Flows

 

In accordance with ASC 230, “Statement of Cash Flows”, cash flows from the Company’s operations is 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.

 

Segment Reporting

 

ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related information” requires us 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.  The Company operates in one segment during the three and nine months ended September 30, 2012 and 2011.

 

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.

 

Reclassification

 

Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for the periods ended September 30, 2012. The reclassifications had no effect on previously reported net income.

 

 

F-13


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)  

 

Recent Accounting Pronouncements

 

In December 2011, the FASB issued guidance on offsetting assets and liabilities and disclosure requirements in Accounting Standards Update No. 2011-11, Disclosures about Offsetting Assets and Liabilities (“Update 2011-11). Update 2011-11 requires that entities disclose both gross and net information about instruments and transactions eligible for offsetting the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting agreement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. Update 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods with those annual periods. The implementation of the disclosure requirement is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

 

On July 27, 2012, the FASB issued ASU2012-02, Intangibles-Goodwill and Other (Topic 350) – Testing Indefinite-Lived Intangible Assets for Impairment. The ASU provides entities with an option to first assess qualitative factors to determine whether events or circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than 50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible assets to measure the amount of actual impairment, if any, as currently required under US GAAP. The ASU is effective for annual and interim impairment test performed for fiscal years beginning September 15, 2012. Early adoption is permitted. The adoption of this pronouncement will not have a material impact on the Company’s consolidated financial statements.

 

As of September 30, 2012, there is no other recently issued accounting standards not yet adopted that would have a material effect on the Company’s consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F-14


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 3 - OTHER RECEIVABLES

 

Other receivables mainly consist of cash advances to employees.  As of September 30, 2012 and December 31, 2011, other receivables were $799,494 and $118,254, respectively.

 

 

NOTE 4 - INVENTORIES

 

As at September 30, 2012 and December 31, 2011, inventories consist of the following:

 

  9/30/2012   12/31/2011
Raw materials $       275,058   $         24,985
Consumables             1,123                     -  
Finished goods         386,739           152,948
   Total $       662,920   $       177,933

 

 

NOTE 5 - PREPAID EXPENSES

 

Prepaid expenses

 

Prepaid expenses as at September 30, 2012 and December 31, 2011 represent the following components:

 

  1. Advance payments to OEM manufacturers for goods purchased: the Company is normally required by its vendors to pay 40% of the consigned processing contract in advance and these payments are recorded as "prepaid expenses" accordingly. They are reclassified to "Inventory-finished goods" when purchases are completed, and then charged to COGS as revenue is recognized.
  2. Advance payments to suppliers for raw materials and packing materials: the Company is normally required to pay 30% down payment in accordance with the terms of the purchasing agreements in advance, and these payments are recorded as "prepaid expenses". They are reclassified to "Inventory-raw materials" when the procurement of materials are completed and then included in the "production cost" when these raw materials are utilized to produce finished goods, which will finally be charged to COGS at the time when revenue is recognized.
  3. Advance payments to advertising companies for promotion: the Company’s advertising contracts are normally for up to twelve months. Payment terms require the Company to make two to four payments during the first several months of contractual period. These payments are recorded as "prepaid expense" when made and charged against "Selling and Distribution expenses" when advertisement first takes place.

 

  Payee   Nature   9/30/2012   12/31/2011
Advance advertising payments Advertising companies (c)   Advance payments to advertising companies for promotion   $               -      $  3,853,110
Advance payment to suppliers Suppliers (a), (b)   Advance payments to OEM manufactures for goods purchased & suppliers for raw Materials and packing materials      2,522,071      1,129,402
Total         $ 2,522,071   $ 4,982,512

 

F-15


 

 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

 

As of September 30, 2012 and December 31, 2011, Property, Plant and Equipment consist of the following:

 

  9/30/2012   12/31/2011
Buildings $       568,953   $       566,090
Plant and equipment      1,096,697        1,091,178
Transportation equipment             7,158               7,123
Office equipment           54,922             54,645
   Total      1,727,730        1,719,036
Accumulated depreciation       (915,824)         (842,136)
  $       811,906   $       876,900

 

Depreciation expense for the three months ended September 30, 2012 and 2011 were $22,902 and $22,971, respectively. Depreciation expense for the nine months ended September 30, 2012 and 2011 were $69,524 and $69,616, respectively.

 

 

NOTE 7 - 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 gynecology 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. Land use rights will expire in 2056 and 2058.  The components of finite-lived intangible assets are as follows:

 

  9/30/2012   12/31/2011
Land use right $       337,694   $       335,995
Proprietary technologies      2,807,397        3,606,264
   Total      3,145,091        3,942,259
Accumulated amortization    (1,633,273)      (2,232,490)
  $    1,511,818   $    1,709,769
           

 

Amortization expense for three months ended September 30, 2012 and 2011 were $68,875 and $67,935, respectively. Amortization expense for nine months ended September 30, 2012 and 2011 were $206,878 and $201,006, respectively.

 

The estimated future amortization expenses related to intangible asset as of September 30, 2012 are as follows:

 

Years ending December 31,    
2012 $ 68,959
2013   275,836
2014   275,836
2015   275,836
2016   275,836
Thereafter   339,515
Total $ 1,511,818

 

 

F-16


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 8 - COMPENSATED ABSENCES

 

Regulation 45 of the local labour law of the People’s Republic of China entitles employees to annual vacation leave after one year of service.  In general, all leave must be utilized annually, with proper notification.  Any unutilized leave is cancelled.

 

 

NOTE 9 - INCOME TAXES

The Company’s (loss) income before income taxes for the three and nine months ended September 30, 2012 and 2011 comprised of the following:

 

Three months ended September 30, Nine months ended September 30,
(Loss) Income before income taxes: 2012 2011 2012 2011
USA $ - $ 241,250 $ (9,693) $ 5,762,500
Hong Kong - - - -
PRC (3,580,461) (4,750,907) (5,808,320) (6,293,489)
Total (loss) income from all tax jurisdictions $ (3,580,461) $ (4,509,657) $ (5,818,013) $ (530,989)

 

Provision for income taxes for all tax jurisdictions for the three and nine months ended September 30, 2012 and 2011 is as follows:

 

Provision for income taxes Three months ended September 30, Nine months ended September 30,
2012 2011 2012 2011
USA $ - $ - $ - $ -
PRC - - - 200,825
Total income tax expense from all tax jurisdiction $ - $ - $ - $ 200,825

 

USA Income Taxes

 

The Company is registered in the State of Nevada and is subjected to USA tax law. The recognition of income tax at statutory rate to effective rate for the three and nine months ended September 30, 2012 and 2011 is as follows:

 

Three months ended September 30, Nine months ended September 30,
2012 2011 2012 2011
Income (loss) before taxes from USA $ - $ 241,250 $ (9,693) $ 5,762,500
Statutory tax rate 34% 34% 34% 34%
Income tax at statutory tax rate - 82,025 (3,296) 1,959,250
Permanent tax difference due to derivative income (82,025) - (1,959,250)
Increase in valuation allowance - - 3,296 -
Income tax expense at effective rate $ - $ - $ - $ -

 

 

F-17


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 9 - INCOME TAXES (CONT’D)

PRC Income Taxes

 

Pursuant to the State Council's Regulations on Encouraging Investment in and Development, Shaanxi Jiali was granted a reduction in its income tax rate under which it paid no income taxes from January 1, 2006 to December 31, 2007. Since 2008, the Company’s China operation is subject to PRC standard enterprise income tax rate of 25% based on its taxable net profit.  However, due to its “High Technology Business” status, the National Tax Bureau in Xi’an High-Tech Industries Development Zone granted Shaanxi Jiali a reduced tax rate of 15% as long as Shaanxi Jiali meets the high-tech enterprise qualification.

 

Provision for income taxes for the three and nine months ended September 30, 2012 and 2011 is reconciled as follows:

 

  Three months ended September 30,   Nine months ended September 30,
   2012    2011    2012    2011
Income (loss) before taxes from PRC operations $ (3,580,461)   $ (4,750,907)   $ (5,808,320)   $ (6,293,489)
Statutory tax rate   15%     15%     15%     15%
Income tax at statutory tax rate   (537,069)     (712,636)     (871,248)     (944,023)
Effects of permanent tax differences   -       712,636     2,344     1,144,848
Increase in valuation allowance   537,069     -       868,904     -  
Income tax expense at effective rate $ -     $ -     $ -     $ 200,825

 

Subject to the approval of the relevant tax authorities in the PRC, the Company had tax losses carry-forward against future years’ taxable income expiring in 2016 and 2017.

 

Deferred Income Tax Asset

 

The primary components of temporary differences which might give rise to the Company’s deferred tax assets as at September 30, 2012 and December 31, 2011 were as follows:

 

  As at
  September 30,    December 31,
   2012    2011
USA $             3,400    $              104
PRC        1,925,324        1,056,420
         1,928,724        1,056,524
Less:  valuation allowance   (1,928,724)     (1,056,524)
Deferred income tax benefit, net of valuation allowance $                   -      $                 -  

 

Deferred tax asset which may arise as a result of these losses have been offset in these consolidated financial statements by a valuation allowance due to the uncertainty surrounding their realization.

 

Deferred USA income taxes have not been provided on the undistributed income of the Company’s foreign subsidiaries and controlled VIE, because the Company does not plan to initiate any action that would require the payment of USA income taxes.

 

F-18


 

 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 9 - INCOME TAXES (CONT’D)

 

Uncertain Tax Positions

 

FASB ASC 740-10-25 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Under the new Corporate Income Tax Law in the PRC (“CIT”), effective on January 1, 2008, the Company may be deemed to be a resident enterprise by the PRC tax authorities. If the Company was deemed to be resident enterprise, the Company may be subject to the CIT at 25% on the worldwide taxable income and dividends paid from PRC subsidiaries to their overseas holding companies may be exempted from 10% PRC withholding tax. Except for certain immaterial interest income from bank deposits placed with financial institutions outside the PRC, all of the Company’s income is generated from the PRC operation. Given the immaterial amount of income generated from outside the PRC and the PRC subsidiaries do not intend to pay dividend in the foreseeable future, management has determined the impact arising from resident enterprise rules on the Company’s financial position is not significant. Management evaluated the Company’s overall tax positions and has determined that no provision for uncertain income tax positions is necessary as of September 30, 2012 and December 31, 2011.

 

Currently the Company is not subject to examination by major tax jurisdictions, but the tax authority in PRC has the right to examine the Company’s tax position in all past years.

 

NOTE 10 - SHARE CAPITAL

 

Common Shares

 

The total authorized capital is 75,000,000 common shares with a par value of $0.001 per share. On December 19, 2011, the Company declared a 7 to 2 forward stock split, effective February 29, 2012. The number of shares, income (loss) per share presented elsewhere in these consolidated financial statements has been adjusted to reflect the result of the stock split.

 

During the year ended December 31, 2011, the Company:

 

 

For the year ended December 31, 2011 Number of Shares   Value
i.

On February 16, 2011, the Company granted 175,000 shares of common stock to an employee, valued at $187,500 and $187,500 was expensed in March, 2011. 

175,000

$

187,500

ii.

On February 16, 2011, the Company granted 175,000 shares of common stock to a consulting company in consideration for providing the Company and its affiliates consulting services over the next year. Total stock base compensation was valued at $187,500, $171,875 was expensed in the year ended December 31, 2011, and $15,625 is expensed during the nine months ended September 30, 2012.

175,000

187,500

  Total common shares issued during 2011 350,000 $ 375,000

 

 

As at September 30, 2012 and December 31, 2011, total issued and outstanding common stock was 44,556,104.

 

Stock based compensation

 

Include in sales, general and administrative expense were stock based compensation expense of $nil and $46,875 for the three months ended September 30, 2012 and 2011; and $15,625 and $3,017,300 for the nine months ended September 30, 2012 and 2011.

 

 

F-19



 
 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 10 - SHARE CAPITAL (CONT’D)

 

Warrants

 

The Company entered into several warrant placement agreements dated September 30, 2009, whereby the Company agreed to issue warrants to acquire shares of the Company’s common stock with an exercise price of $0.86, expiring September 30, 2011, with piggy back warrants to purchase additional shares of the Company’s common stock with an exercise price of $1.43, expiring on September 30, 2012, as consideration for services in connection with:

 

   

 

Warrants with an exercise price of $0.86, expiring September 30, 2011

  Piggy back warrants with an exercise price of $1.43, expiring September 30, 2012
i.

On August 15, 2009, Kang Xiulan referred a public shell company (Lid 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.  

 

875,000

 

 

875,000

 

ii.

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.  

 

2,100,000

 

 

2,100,000

 

iii.

The Company also obtained certain public company sector services, including investor relations advisory services.  

 

1,400,000

 

 

1,400,000

 

  Total warrants issued 4,375,000   4,375,000

 

The following is a summary of share purchase warrants information:

 

 

 

Warrants with an exercise price of $0.86, expiring September 30, 2011

    Piggy back warrants with an exercise price of $1.43, expiring September 30, 2012    

 

 

 

Total

 
Outstanding, December 31, 2009 4,375,000     4,375,000     8,750,000  
  -     -     -  
Outstanding, December 31, 2010 4,375,000     4,375,000     8,750,000  
Expired (4,375,000 )    (4,375,000 ) * (8,750,000 )
Outstanding, December 31, 2011 -     -     -  

 

* The piggy back warrants expired as the original warrants with an exercise price of $0.86, expired September 30, 2011 were not exercised.

 

F-20


 
 

 

 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 11 - 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 at September 30, 2012 and December 31, 2011, the Company had allocated $810,540 to these non-distributable reserve funds.

 

 

NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS

 

The consolidated balance sheets caption derivative liabilities consist of the Warrants, issued to consultants in connection with the merger and investor relations agreements during the year ended December 31, 2010.  These derivative financial instruments are indexed to an aggregate of 8,750,000 shares of the Company's common stock as of December 31, 2010, and were carried at fair value.  The following tabular presentations set forth information about the derivative instruments for the three and nine months ended September 30, 2012 and 2011, and as at September 30, 2012 and December 31, 2011:

 

  Three months ended September 30,   Nine months ended September 30,
Derivative income (expense) 2012   2011   2012   2011
Warrant derivative $             -     $ 241,250   $             -     $ 5,762,500
                       

 

 

  As at
Liabilities 9/30/2012   12/31/2011
Warrant derivative $ -   $  -
             

 

 

As at September 30, 2012 and December 31, 2011, all outstanding warrants have expired, thus were valued at $nil, the carrying amount of derivative liabilities was charged to derivative income in the consolidated statement of operations and comprehensive income.

 

F-21


 

 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

 

NOTE 13 – NET (LOSS) INCOME PER SHARE

 

In accordance with FASB ASC Topic 260-1-50, “Earnings per Share”, basic net income or loss per common share is computed by dividing net income or loss 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 September 30, Nine months ended September 30,
2012 2011 2012 2011
Basic (loss) earnings per share
Net (loss) $ (3,580,461 ) $ (4,509,657 ) $ (5,818,013 ) $ (731,814 )
Weighted average common shares outstanding - basic 44,556,104 44,556,104 44,556,104 44,496,407
Basic (loss) per share $ (0.08 ) $ (0.10 ) $ (0.13 ) $ (0.02 )
Diluted (loss) earnings per share
Net (loss) $ (3,580,461 ) (4,509,657 ) (5,818,013 ) (731,814 )
Derivative income (note 12) - (241,250 ) - (5,762,500 )
Adjusted net (loss) applicable to common share holders (3,580,461 ) (4,750,907 ) (5,818,013 ) (6,494,314 )
Weighted average common shares outstanding 44,556,104 44,556,104 44,556,104 44,496,407
Weighted average effect of dilutive securities - warrants (note 10) - - - -
Weighted average common shares outstanding - diluted 44,556,104 44,556,104 44,556,104 44,496,407
Diluted (loss) per share (0.08 ) (0.11 ) (0.13 ) (0.15 )

 

  

F-22


 
 

 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012

(UNAUDITED)

 

NOTE 14 - 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 15 - CONCENTRATION AND CREDIT RISK

 

There was no customer that accounted for more than 10% of accounts receivable at September 30, 2012 and December 31, 2011. As of September 30, 2012 and December 31, 2011, three and five vendors, each accounted for more than 10% of accounts payable, totaling 66% and 80% respectively.

 

There was no customer that accounted for more than 10% total sales for the three months ended September 30, 2012 and 2011. Four and three vendors each accounted for more than 10% of purchases for the three months ended September 30, 2012 and 2011, totaling 69% and 81% respectively.

 

There was no customer that accounted for more than 10% total sales for the nine months ended September 30, 2012 and 2011. Three and four vendors each accounted for more than 10% of purchases for the nine months ended September 30, 2012 and 2011, totaling 66% and 61% respectively.

 

 

NOTE 16 – COMMITMENT

 

The Company is committed to pay $790,326 for advertising through October 2012.

 

 

NOTE 17 – CHAIRMAN FINANCIAL UNDERTAKING

 

On December 18, 2012, the Chairman issued an undertaking that the Chairman will give his every endeavor and effort to obtain necessary and adequate funding to meet the Company’s financial obligations as when required. There are no assurances that the Chairman will be successful in this endeavor.

 

 

NOTE 18 - SUBSEQUENT EVENT

 

The Company has evaluated subsequent events for potential recognition and disclosure. No significant events occurred subsequent to the September 30, 2012, to the date these consolidated financial statements are filed with the Securities Exchange Commissions that would have a material impact on the Company’s consolidated financial statements.

 

 

 

F-23


 

 
 

 

 

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

 

The following discussion of financial condition as at September 30, 2012 and December 31, 2011, and results of operation of the Company for the three and nine months ended September 30, 2012, and 2011 should be read in conjunction with the interim consolidated financial statements and the notes to those statements are included elsewhere in this Quarterly 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 Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements, including any statements relating to future actions and outcomes including but not limited to prospective products, future performance or results of current or anticipated products, sales and marketing efforts, costs and expense trends, future interest rates, outcome of contingencies and their future impact on financial condition, results of operations, liquidity, business strategies, cost savings, objectives of management, and other matters. You can identify forward-looking statements by those that are not historical in nature, particularly those that use terminology such as “expects,” “anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “contemplates,” “predicts,” “potential,” or “continue” or variations and/or the negative of these similar terms. Forward-looking statements are based on current expectations, estimates, forecasts and projections about the Company, us, our future performance, our beliefs and our Management’s assumptions. All forward-looking statements made in this Report, including any future written or oral statements made by us or on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

 

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. Any assumptions, upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Report. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash.    Please also refer to our other filings with the Securities and Exchange Commission. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

 

Overview

 

We are engaged in the business of manufacturing and marketing of over-the-counter and prescription pharmaceutical products for the Chinese marketplace as treatment for a variety of disease and conditions.

 

Critical Accounting Policies

 

We believe that the critical accounting policies and estimates discussed below involve the most complex management judgments due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue and expense amounts. In consultation with our Board of Directors, we have identified the following critical accounting policies that require management’s most difficult subjective judgment:

 

Accounts receivable

 

We periodically 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 potential credit losses on accounts receivable. We grant 90 days payment terms to all credit sales customers.

 

4


 

 
 

Inventories

 

Inventories are valued at the lower of cost (determined on a weighted average basis) or market value. We compare the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower.

 

Intangible assets

 

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years.  We 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.  

 

Derivative financial instruments

 

Derivative financial instruments, as defined in Financial Accounting Standard, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement.  Derivative financial instruments may be free-standing or embedded in other financial instruments.  Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.  We generally do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks.  

 

 

Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

 

Net sales

 

  Three Months Ended September 30,
  2012   2011
"Xianzhi" Series $             57,438 2.64%   $            214,176 2.71%
"Cooer" Series          1,829,339 84.00%             6,973,353 88.39%
"Qiangsongling" Series             291,109 13.37%                702,208 8.90%
Total gross sales $     2,177,886 100.00%   $       7,889,737 100.00%
(Sales Rebate)           (217,442) (9.98%)            (1,384,649) (17.55%)
Net sales $     1,960,444     $       6,505,088  

 

During the three months ended September 30, 2012, our gross sales have decreased by 72% to $2,177,886 from $7,889,737 for the three months ended September 30, 2011. The decrease was in parts due to increased competition and a general decrease in consumer demand in China during the three months ended September 30, 2012. For the three months ended September 30, 2012, our sales, net of sales rebates were $1,960,444 (9/30/2011: $6,505,088).

 

  Nine Months Ended September 30,
  2012   2011
"Xianzhi" Series $           326,920 2.18%   $            868,750 3.77%
"Cooer" Series        12,932,489 86.11%           19,526,325 84.69%
"Qiangsongling" Series          1,758,461 11.71%             2,660,292 11.54%
Total gross sales $   15,017,870 100.00%   $     23,055,367 100.00%
(Sales Rebate)        (2,062,393) (13.73%)            (3,153,701) (13.68%)
Net sales $   12,955,477     $     19,901,666  

 

During the nine months ended September 30, 2012, our gross sales have decreased by 35% to $15,017,870 from $23,055,367 for the nine months ended September 30, 2011. The decrease was in parts due to increased competition and a general decrease in consumer demand in China during the nine months ended September 30, 2012. For the nine months ended September 30, 2012, our sales, net of sales rebates were $12,955,477 (9/30/2011: $19,901,666).

 

5


 
 

 

During the three months ended September 30, 2012, we began implementing a new sales model, as well as engaged in aggressive advertising and marketing campaigns. It is now apparent that our planned sales model has not been successful because of our lack of expertise in certain areas of sales and marketing management. We are now re-examining the sales model and implementing corrective measures to improve sales.

 

Cost of sales

 

For the three months ended September 30, 2012 and 2011, our costs of sales were $981,490 and $3,705,012 respectively, representing a decrease of 74% or $2,723,522. This decrease is consistent with the decline in sales. During the three months ended September 30, 2012, our costs of sales were 45% (9/30/2011: 47%) of our gross sales.

 

For the nine months ended September 30, 2012 and 2011, our costs of sales were $7,894,782 and $10,455,484 respectively, representing a decrease of 24% or $2,560,702. During the nine months ended September 30, 2012, our costs of sales were 53% (9/30/2011: 45%) of our gross sales. There was a 21% increase in the unit costs of our products, which was due to increases in raw material, labor and OEM manufacturing costs. The decrease in our costs of sales is consistent with the decline in sales and increased unit costs.

 

 

Gross profit

 

Gross profit for the three months ended September 30, 2012 and 2011 were $978,954 and $2,800,076, respectively. The decrease was due to lower sales volume.

 

Gross profit for the nine months ended September 30, 2012 and 2011 were $5,060,695 and $9,446,182, respectively. The decrease was due to lower sales volume and high unit costs.

 

 

Advertising expense

 

During the three months ended September 30, 2012, we incurred $947,859 (9/30/2011: $2,525,678) of advertising expense. During the nine months ended September 30, 2012, we incurred $3,877,809 (9/30/2011: $5,984,090) of advertising expense. We started several advertising campaigns by placing commercials with several television stations.

 

 

Marketing expense

 

During the three and nine months ended September 30, 2011, we started an aggressive marketing campaign in anticipation of the implementation of our new sales model. We incurred $3,724,681 in marketing expense during the three and nine months ended September 30, 2011. We did not incur any marketing expense during the three and nine months ended September 30, 2012.

 

 

Impairment loss on accounts receivables

 

Bad debt expense was $2,900,192 and $4,132,574 for the three and nine months ended September 30, 2012 as compared to $nil for the three and nine months ended September 30, 2011.

 

We changed our accounting estimates regarding provision for doubtful accounts during the fourth quarter in 2011. Bad debt expense increased as accounts receivable turnover increased over 300 days during the three and nine months ended September 30, 2012. Historically, we did not make any provision for bad debt as all our accounts receivable were collected within 90 days. Provision for doubtful accounts is now estimated as follows: i) 50% on accounts that are outstanding between 91 and 180 days, ii) 75% on accounts that are outstanding between 181 to 365 days, and iii) 100% on accounts that are outstanding for over 365 days.

 

During the three and nine months ended September 30, 2012, as part of the implementation of our new sales model, we have terminated our relationships with certain customers and distributors, as such, these customers and distributors were not as motivated to settle their outstanding amounts.

 

6


 

 
 

 

Selling, general and administrative expenses

 

The following table illustrates components of selling, general and administrative expenses:

 

  Three months ended September 30,   Change
Selling, general and administrative expenses 2012    2011   Amount   %
Salaries, wages and benefits   368,682     349,852     18,830   5%
Sales commission   127,400           461,055          (333,655)   (72%)
Stock based compensation   -       46,875     (46,875)   (100%)
Other selling, general and administrative expenses   215,250     448,869     (233,619)   (52%)
Total $ 711,332   $ 1,306,651   $ (595,319)   (46%)

 

Total selling, general and administrative expenses decreased by 44% to $711,332 (9/30/2011: $1,306,651) for the three months ended September 30, 2012. It represents 33% (9/30/2011: 17%) of our sales before sales rebate, and 36% (9/30/2011: 20%) of our net sales for the three months ended September 30, 2012.

 

Salaries, wages and benefits remains relative the same.

 

Sales commission decrease is consistent with the decrease in gross sales. Sales commissions were 6% of sales before sales rebates for the three months ended September 30, 2012 and 2011.

 

Stock based compensation is a non-cash expense that is recognized as we amortized the fair value of stock purchase options on the date that it was granted.

 

The decrease in other selling, general and administrative is attributable to decreased administrative activities as a result of the decline in sales.

 

  Nine months ended September 30,   Change
Selling, general and administrative expenses 2012    2011   Amount   %
Salaries, wages and benefits   1,174,620     632,632     541,988   86%
Sales commission   889,576     1,267,339     (377,763)   (30%)
Stock based compensation   15,625     3,017,300     (3,001,675)   (99%)
Other selling, general and administrative expenses   788,337     1,089,011     (300,674)   (28%)
Total $ 2,868,158   $ 6,006,282   $ (3,138,124)   (52%)

 

Total selling, general and administrative expenses decreased by 52% to $2,868,158 (9/30/2011: $6,006,282) for the nine months ended September 30, 2012. It represents 19% (9/30/2011: 26%) of our sales before sales rebate, and 22% (9/30/2011: 30%) of our net sales for the nine months ended September 30, 2012.

 

Salaries, wages and benefits increased as a result of the expansion of our sales network by increasing sales employees. As at September 30, 2012, we have over 400 (9/30/2011: 200) employees.

 

Sales commission decrease is consistent with the decrease in gross sales. Sales commissions were 6% and 5% of sales before sales rebates for the nine months ended September 30, 2012 and 2011.

 

Stock based compensation is a non-cash expense that is recognized as we amortized the fair value of stock purchase options on the date that it was granted.

 

The decrease in other selling, general and administrative is attributable to decreased administrative activities as a result of the decline in sales.

 

7


 
 

 

Other income (expense)

 

Other income (expense) consists mostly of derivative income for the three and nine months ended September 30, 2011. Derivative income is a non-cash gain that is recognized when there was a change in fair value in share purchase warrants that we issued to consultants to purchase our common shares. The issuance of share purchase warrants was originally recorded as derivative liability based upon the fair value of the share purchase warrants at the issuance date. No derivative income was recognized during the three and nine months ended September 30, 2012 as all warrants have expired during the year ended December 31, 2011.

 

Net income (loss)

 

For the three months ended September 30, 2012, our net loss was $3,580,461 (9/30/2011: $4,509,657). Net loss for the three months ended September 30, 2012 was mainly attributable to decreased sales volume, and the recognition of impairment loss on accounts receivables. Net loss for the three months ended September 30, 2011 was mainly attributable to expenses related to marketing activities.

 

For the nine months ended September 30, 2012, our net loss was $5,818,013 (9/30/2011: $731,814). Net loss for the nine months ended September 30, 2012 was mainly attributable to decreased sales volume, and the recognition of impairment loss on accounts receivables. Net loss for the nine months ended September 30, 2011 was also attributable to expenses related to marketing activities offset by recognition of derivative income.

 

Liquidity and Capital Resources

 

As at September 30, 2012, we have cash and cash equivalents of $987,440 (12/31/2011: $2,186,650) and net working capital of $12,583,456 (12/31/2011: $18,010,981). We incurred a net loss of $3,580,461 and $4,509,657 for the three months ended September 30, 2012 and 2011; incurred a net loss of $5,818,013 and $731,814 for the nine months ended September 30, 2012 and 2011. Further, we had accumulated deficit of $3,200,599 as at September 30, 2012. These create an uncertainty as to our ability to maintain operations at the present level for at least the next twelve months. In this regard, our Chairman has issued a letter of undertaking that will give his every endeavor and effort to obtain necessary and adequate funding to meet our financial obligations as when required. There are no assurances that the Chairman will be successful in this endeavor.

 

Cash flows from operating activities

 

During the nine months ended September 30, 2012, net cash used in operating activities was $1,211,834 (9/30/2011: $6,003,067). Significant changes to our working capital include decrease in prepaid expense as well as increase in accounts receivable, inventories and other receivables.

 

Contractual Obligations

 

We are committed to pay $790,326 for advertising through October 2012.

 

Off-Balance Sheet Commitments and Arrangements

 

We do not have any financial undertaking or any other guarantee responsible for third party obligations and commitments. We have not entered into any derivative products contracts linking the Company’s equity that have not been reflected in the consolidated Pro Forma financial statements. Furthermore, in passing our assets to those Bodies providing credits, clearing, or market risk support services, we have not reserved any rights or undefined rights on the passing of assets. The Company does not have any benefits from Bodies providing finance, clearing, market risk or credit support services or with Bodies engaged by us for leasing, hedging or research and development services.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required under Regulation S-K for “smaller reporting companies.”

 

8


 
 

Item 4. Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2012. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of September 30, 2012, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  The material weaknesses, which relate to internal control over financial reporting, that were identified are: 

 

  a) We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures.  As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and
   
  b) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process.  The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis.

 

We are committed to improving our financial organization. As part of this commitment, we will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of 2011 to resolve non-routine or complex accounting matters. In addition, when funds are available, which we expect to occur by the end of 2011, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel. As necessary, we will engage consultants or an outside accounting firm in order to ensure proper accounting for our consolidated financial statements.

 

Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weakness: insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements.

 

Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our internal accounting staff consists of only a small number of people, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

 

We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

 

9


 

 
 

(b) Changes in internal control over financial reporting.

 

 We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.  There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

 We are currently not a party to any material legal proceedings or claims

 

Item 1A. Risk Factors.

   

Not required under Regulation S-K for “smaller reporting companies.”

 

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

 

On February 16, 2011, the Company issued 50,000 shares of common stock to an employee.

 

On February 16, 2011, the Company issued 50,000 shares of common stock to a consulting company as consideration of the services provided to the Company and its affiliates within one year valued at $187,500.

 

The issuances of the above-mentioned shares were exempt from registration, in part pursuant to Regulation S under the Securities Act of 1933 (the “Act”) and in part pursuant to Section 4(2) of the Act. We made this determination based on the representations of the investors which included, in pertinent part, that such shareholders were not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the investors understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. (Removed and Reserved).

 

 

Item 5. Other Information.

 None.

 

10


 
 

Item 6. Exhibits.

 

31.01 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.02 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.01 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
EX 101.INS XBRL INSTANCE DOCUMENT
   
EX-101.SCH XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
   
EX-101.CAL XBRL TAXONOMY EXTENSION CALCULATION LINKBASE
   
EX-101.DEF XBRL TAXONOMY EXTENSION DEFINITION LINKBASE
   
EX-101.LAB XBRL TAXONOMY EXTENSION LABELS LINKBASE
   
EX-101.PRE XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE

 

 

 

 

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 PEDIATRIC PHARMACEUTICALS, INC.  
       
Dated: December 18, 2012    By: /s/ Jun Xia  
    Name: Jun Xia  
    Title: Chief Executive Officer  
    (principal executive officer)  
       
Dated: December 18, 2012       
  By: /s/ Minggang Xiao  
    Name: Minggang Xiao  
    Title: Chief Financial Officer  
    (principal financial and accounting officer)  

 

 

11