China Pharmaceuticals (CRRWF) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

T QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                       For the quarterly period ended September 30, 2010

¨ 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: 11,399,662 shares of common stock, $.001 par value, were outstanding as of November15, 2010.

1

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
	PART II
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	(Removed and Reserved)	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
SIGNATURES		25

2

PART I – FINANCIAL INFORMATION

Item 1.                       Financial Statements

CHINA PHARMACEUTICAL INC.

CONSOLIDATED BALANCE SHEETS

	SEPTEMBER 30, 2010		DECEMBER 31, 2009
	(UNAUDITED)		(AUDITED)
ASSETS
CURRENT ASSETS
Cash & cash equivalents	$	5,970,252	$	6,685,630
Accounts receivable		15,457,660		3,525,444
Inventory		1,227,244		396,513
Other receivables		551,462		708,761
Prepayment		1,178,698		-
Trade deposit paid		-		2,991,628
Subscription receivable		830,224		-
Due from officer		5,521		5,427
Total current assets		25,221,061		14,313,403
NONCURRENT ASSETS
Property and equipment, net		7,383,531		7,686,245
Construction in progress		3,432,272		3,373,819
Intangible assets		7,945,549		8,321,329
Total noncurrent assets		18,761,352		19,381,393
TOTAL ASSETS	$	43,982,413	$	33,694,796
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,118,623		744,880
Trade deposit received		-		83,879
Short-term bank loans		-		2,493,692
Accrued liabilities and other payables		972,998		778,290
Value-added tax payable		483,742		318,142
Income tax payable		577,883		651,399
Total current liabilities		3,153,246		5,070,282
CONTINGENCIES AND COMMITMENT
STOCKHOLDERS' EQUITY
Common stock, par value, $0.001 per share; 25,000,000            shares authorized, 11,399,662 and 9,333,333 shares            issued and outstanding at September 30, 2010 and            December 31, 2009, respectively		11,400		9,333
Additional paid in capital		11,414,171		6,573,617
Statutory reserves		3,092,334		2,137,797
Accumulated other comprehensive income		467,014		72,543
Retained earnings		25,844,248		19,831,224
Total stockholders' equity		40,829,167		28,624,514
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	43,982,413	$	33,694,796

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

3

CHINA PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Nine Months Ended September 30,						Three Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	25,385,668		$	18,394,922		$	7,884,881		$	8,617,377
Cost of goods sold		10,380,853			8,439,397			3,194,085			4,643,008
Gross profit		15,004,815			9,955,525			4,690,796			3,974,369
Operating expenses
Selling,  general and administrative expenses		6,744,602			2,313,604			4,001,583			610,952
Income from operations		8,260,213			7,641,921			689,213			3,363,417
Non-operating income (expenses)
Interest income		14,035			12,489			6,159			47
Interest expense		(29,403	)		(258,268	)		(79	)		(201,087	)
Financial income (expense)		(433	)		-			(28	)		81,304
Other income		614,554			61,817			614,554			7,125
Total non-operating income (expenses)		598,753			(183,962	)		620,606			(112,611	)
Income before income tax		8,858,966			7,457,959			1,309,819			3,250,806
Income tax		1,891,410			1,148,072			357,816			487,624
Net income		6,967,556			6,309,887			952,003			2,763,182
Other comprehensive item
Foreign currency translation		394,471			16,213			302,124			9,812
Comprehensive Income	$	7,362,027		$	6,326,100		$	1,254,127		$	2,772,994
Basic weighted average shares outstanding		10,687,133			9,333,333			11,177,425			9,333,333
Diluted weighted average shares outstanding		10,975,745			9,333,333			11,508,262			9,333,333
Basic earnings per share	$	0.65		$	0.68		$	0.09		$	0.30
Diluted earnings per share	$	0.63		$	0.68		$	0.08		$	0.30

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

4

CHINA PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,967,556		$	6,309,887
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss on assets disposed		-			1,253
Stock based compensation expense		2,222,622			-
Depreciation and amortization		686,727			600,061
(Increase) decrease in current assets:
Accounts receivable		(11,686,694	)		(2,797,725	)
Due from officer		-			(5,411	)
Inventory		(811,068	)		(142,220	)
Cash pledged		-			193,770
Prepayment and other receivables		(993,448	)		(49,721	)
Trade deposit paid		2,996,099			(1,025,886	)
Increase (decrease) in current liabilities:
Accounts payable		355,234			(681,652	)
Due to shareholders		-			698,304
Trade deposit received		(84,007	)		165,295
Accrued liabilities and other payables		178,410			-
Taxes payable		74,118			430,578
Bank acceptance payable		-			(193,770	)
Net cash provided by (used in) operating activities		(94,451	)		3,502,763
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property & equipment		(8,155	)		(9,982	)
Construction in progress		-			(3,363,557	)
Net cash used in investing activities		(8,155	)		(3,373,539	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term loan		-			2,193,624
Repayment of short-term loan		(2,497,502	)		(914,047	)
Issuance of common stock		789,775			-
Warrants exercised		992,189			9,000
Net cash (used in) provided by financing activities		(715,538	)		1,288,577
EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS		102,766			8,151
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS		(715,378	)		1,425,952
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		6,685,630			5,049,188
CASH & CASH EQUIVALENTS, END OF PERIOD	$	5,970,252		$	6,475,140
Supplemental Cash flow data:
Income tax paid	$	1,974,895		$	1,149,051
Interest paid	$	28,830		$	257,852

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

5

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010 (UNAUDITED) AND DECEMBER 31, 2009

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 l egal 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.

6

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 issued 1,157,143 shares of common stock. On September 10, 2010, the Company effected a 3 for 1 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 unaudited financial statements included herein were prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“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”) omitted pursuant to such rules and regulations. The results for the nine and three months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full year ending on December 31, 2010. 

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.

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.

7

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 nine months ended September 30, 2010 and 2009, the foreign currency translation adjustment to the Company’s comprehensive income was $394,471 and $16,213 respectively. For the three months ended September 30, 2010 and 2009, the foreign currency translation adjustment to the Company’s comprehensive income was $302,124 and 9,812, respectively.

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.

8

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 September 30, 2010. The allowance for doubtful account as of September 30, 2010 and December 31, 2009 was $97,266 and $ 508,041, respectively.

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.   Management compares the cost of inventories with the market value and allowances are made to reduce their inventories to market value, if lower.  As of September 30, 2010 and December 31, 2009, inventories consisted of the following:

	September 30, 2010		December 31, 2009
Raw materials	$	1,146,221		370,253
Finished goods		81,023		26,260
	$	1,227,244		396,513

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:

	September 30, 2010			December 31, 2009
Building and improvements	$	4,067,306		$	4,067,306
Machinery		5,495,654			5,494,904
Fixture, furniture and equipment		185,487			178,071
Motor vehicles		111,834			111,834
		9,860,281			9,852,115
Less: Accumulated depreciation		(2,476,750	)		(2,165,870	)
	$	7,383,531		$	7,686,245

9

Depreciation expense for the nine months ended September 30, 2010 and 2009 was approximately $310,900 and $ 316,800, respectively. Depreciation expense for the three months ended September 30, 2010 and 2009 was approximately $104,400 and $ 104,600, 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 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 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

As of September 30, 2010 and December 31, 2009, the components of intangible assets were as follows:

	September 30, 2010			December 31, 2009
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		(1,341,639	)		(965,859	)
		8,682,864			9,058,644
Less: Impairment provision		(737,315)			(737,315	)
	$	7,945,549		$	8,321,329

Amortization expense for nine months ended September 30, 2010 and 2009 was approximately $375,780 and $283,250, respectively. Amortization expense for three months ended September 30, 2010 and 2009 was approximately $125,000 and $95,000, respectively. The estimated future yearly amortization expenses related to intangible asset as of September 30, 2010 are as follows:

2011	$	502,000
2012		502,000
2013		502,000
2014		502,000
2015		502,000
Thereafter	$	5,435,549

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 360requires 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 September 30, 2010 and December 31, 2009, there were no significant impairments of its long-lived assets.

10

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.

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 September 30, 2010 and December 31, 2009, 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.  For the nine months ended September 30, 2010 and 2009, the Company incurred approximately $1,100,000 and 41,000 advertising expense, respectively; for the three months ended September 30, 2010 and 2009, the Company incurred approximately $1,100,000 and $0 advertising expense, respectively.

11

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.

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 pr ovides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

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.

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 nine and three months ended September 30, 2010:  

	Nine Months Ended				Three Months Ended
	2010		2009		2010		2009
Net income	$	6,967,556	$	6,309,887	$	952,003	$	2,763,182
Weighted average shares  outstanding - basic		10,687,133		9,333,333		11,177,425		9,333,333
Effect of dilutive securities:
Warrants issued		288,612		-		330,837		-
Weighted average shares outstanding – diluted		10,975,745		9,333,333		11,508,262		9,333,333
Earnings per share – basic	$	0.65	$	0.68	$	0.09	$	0.30
Earnings per share – diluted	$	0.63	$	0.68	$	0.08	$	0.30

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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.

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.

Recently Issued Accounting Pronouncements Not Yet Adopted

As of September 30, 2010, there are no recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

Note 3– PREPAYMENT

At September 30, 2010, the Company had prepayment of $1,178,698 including $1,119,219 (RMB 7,500,000) prepaid advertisement fee and $59,479 for prepaid raw material.

Note 4 – SHORT-TERM BANK LOAN

The Company did not have any bank loans at September 30, 2010.  The following summarizes short-term bank loans as of December 31, 2009:

	December 31, 2009
Industrial and Commercial Bank of China -Xixiang Branch. Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009.  The loan was repaid upon maturity.		1,760,253
Xixiang rural cooperative bank. Term of these loans call for interest from 11.46% to 12.24% per annum with principal due in 2009 and 2010. The loan was repaid upon maturity.		733,439
	$	2,493,692

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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 – CONSTRUCTION IN PROGRESS AND COMMITMENTS

Construction in progress represented the construction and installation of a comprehensive air purification system. The Company paid approximately $3,432,000 as of September 30, 2010 and December 31, 2009, and is committed to pay an additional $2,200,000 under an agreement with Shaanxi Kai Da Air Purification Co., Ltd.

Note 7 – INCOME TAX

The Company’s subsidiary 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 approximately 1,891,400 and $ 1,148,000 for income tax for the nine months ended September 30, 2010 and 2009. The Company expensed approximately $358,000 and $488,000 for income tax for the three months ended September 30, 2010 and 2009.

Note 8 – MAJOR CUSTOMERS AND CREDIT RISK

For the nine months ended September 30, 2010, one customer accounted for approximately 12% of sales. For the nine months ended September 30, 2009, no customer accounted for 10% or more of sales. For the three months ended September 30, 2010 and 2009, no customer accounted for 10% or more of sales.   At September 30, 2010, the total receivable due from this customer was approximately $1,081,000.

Three vendors provided 22%, 20% and 11% of the Company’s purchases of raw materials for the nine months ended September 30, 2010; two vendors provided 23% and 10% of the Company’s purchase of raw materials for the nine months ended September 30, 2009. Three vendors provided 23%, 15% and 15% of the Company’s purchases of raw materials for the three months ended September 30, 2010; two vendor provided 13%, and 11% of the Company’s purchase of raw materials for the three months ended September 30, 2009. At September 30, 2010, the total payable due to these vendors was approximately $274,000.

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 crease 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 September 30, 2010 and December 31, 2009, the Company had allocated $3,092,334 and $2,137,797 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 Drago n Link .  The warrants will expire on February 11, 2013. The warrants were fully exercised in May of 2010.  The Company received $1 million proceeds from exercise of the warrants.

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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.& #160; 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 nine months ended September 30, 2010:

	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 September 30, 2010		833,333	$	3		2.36
Exercisable at September 30, 2010		833,333	$	3

The Company recorded $2,222,622 compensation expense for warrants during the nine months ended September 30, 2010, and $1,069,991 for three months ended September 30, 2010 with a corresponding increase to additional paid-in capital.

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Note 11 – COMMON STOCK

In August 2010, the Company entered into four stock subscription agreements with four individuals for issuing them 1,157,142 (pre-reverse split which was effected on September 10, 2010) the Company’s shares at $1.4 per share (pre-reverse split effected September 10, 2010).  At September 30, 2010, the Company issued 385,769 shares (post-reverse split) and received $789,775 from issuance of the stock, and had subscription receivable of $830,224, which was collected in October 2010.

Note 12- 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.

Note 13- 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 14– SUBSEQUENT EVENTS

For the nine months ended September 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosure through the date of the financial statement issuance.

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Item 2.             Management’s Discussion and Analysis or Plan of Operation

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,” “can̶ 1;, “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 forwar d-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 Three Months Ended September 30, 2010 and 2009

The following table sets forth the results of our operations for the three months ended September 30, 2010 and 2009 indicated as a percentage of net sales:

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	Three Months Ended September 30,
	2010					2009
	$		% of Sales			$			% of Sales
Sales		7,884,881					8,617,377
Cost of Goods Sold		3,194,085		41	%		4,643,008			54	%
Gross Profit		4,690,796		59	%		3,974,369			46	%
Operating Expenses		4,001,583		50	%		610,952			7	%
Income from Operations		689,213		9	%		3,363,417			39	%
Other Income (Expenses), net		620,606		8	%		(112,611	)		(1	)%
Income Tax Expense		357,816		5	%		487,624			6	%
Net Income		952,003		12	%		2,763,182			32	%

Net Sales

In the three months ended September 30, 2010, we had net sales of $7,884,881, a decrease of 9% as compared with $8,617,377 in the same period of 2009.  This decrease was primarily due to shrinkage of market’s overall demand for our products. We expect that demand will increase in the remainder of the year as we have been strengthening our sales force.

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 decreased to $3,194,085 for the three months ended September 30, 2010, representing a 31% decrease as compared with $4,643,008 for the same period of 2009. This decrease was primarily due to sales and production volume decrease. The cost of goods sold as a percentage to the sales was 41% for the three months ended September 30, 2010 as compared to 54% for the same period of 2009; the decrease was mainly attributable to decreased raw material prices for certain of our major raw materials as a result of our successful price negotiations with major suppliers.

Gross Profit

Gross profit increased 13% to $4,690,796 for the three months ended September 30, 2010, as compared to $3,974,369 for the three months ended September 30, 2009. Our gross profit margin increased from 46% for the three months ended September 30, 2009 to 59% for the same period of 2010 for the reasons described above.

Operating Expenses

Operating expenses mainly consisted of selling, general and administrative expenses.  Operating expenses were $4,001,583 for the three months ended September 30, 2010, an increase of 555% as compared to $610,952 for the same period of 2009. This increase was primarily due to significantly increased advertisement fees, increased sales commission and promotional meeting fees, as well as increased audit, legal and consulting fees as a result of being a U.S. public company  since the beginning of 2010.

Other Income

Other income was $620,606 for the three months ended September 30, 2010, compared with other expenses of $112,611 for the same period of 2009, an increase of $733,217.  The increase in other income was primarily due to a reversal and recovery of bad debt allowance of approximately $620,000 which was recorded in three months ended September 30, 2009.

Net Income

Net income was $952,003 for the three months ended September 30, 2010, a decrease of 66% from $2,763,182 for the same period of 2009. This decrease was primarily attributable to an increase of operation expenses. Our net profit margin decreased 20% from 32% for the three months ended September 30, 2009 to 12% for the three months ended September 30, 2010.

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Comparison of Nine Months Ended September 30, 2010 and 2009

The following table sets forth the results of our operations for the nine months ended September 30, 2010 and 2009 indicated as a percentage of net sales:

	Nine Months Ended September 30,
	2010					2009
	$		% of Sales			$			% of Sales
Sales		25,385,668					18,394,922
Cost of Goods Sold		10,380,853		41	%		8,439,397			46	%
Gross Profit		15,004,815		59	%		9,955,525			54	%
Operating Expenses		6,744,602		27	%		2,313,604			12	%
Income from Operations		8,260,213		33	%		7,641,921			42	%
Other Income (Expenses), net		598,753		2	%		(183,962	)		(1	)%
Income Tax Expense		1,891,410		8	%		1,148,072			6	%
Net Income		6,967,556		27	%		6,309,887			34	%

Net Sales

In the nine months ended September 30, 2010, we had net sales of $25,385,668, an increase of 38% as compared with $18,394,922 in the same period of 2009.  This increase was primarily due to increased demand for our products as a result of our successful marketing and promotion strategies despite our slower third quarter.

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 $10,380,853 for the nine months ended September 30, 2010, representing a 23% increase as compared with $8,439,397 for the same period of 2009. 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 41% for the nine months ended September 30, 2010 as compared to 46% for the same period of 2009.  The decrease in cost of goods sold as a percentage to the sales was attributable to decreased material prices of our certain major raw materials as a result of our successful price negotiation with the major suppliers.

Gross Profit

Gross profit increased 5% to $15,004,815 for the nine months ended September 30, 2010, as compared to $9,955,525 for the nine months ended September 30, 2009. Our gross profit margin increased from 54% for the nine months ended September 30, 2009 to 59% for the same period of 2010; the increase in gross margin was a result of decreased cost of goods sold.

Operating Expenses

               Operating expenses consisted of selling, general and administrative expenses. Operating expenses were $6,744,602 for the nine months ended September 30, 2010, an increase of 192% as compared to $2,313,604, for the same period of 2009. This increase was primarily due to increased marketing and travelling expenses incurred to try to expand our sales reach and increase the market share of our products, as well as increased auditing and legal expenses in associated with being a U.S. public company since February 2010.  In addition, during the nine months ended September 30, 2010, we recorded approximately $2,222,622 stock compensation expense for warrants issued as consulting and referral fees.

Other Income

Other income was $598,753 for the nine months ended September 30, 2010, compared with other expenses of $183,962 for the same period of 2009, an increase of $782,715.  The increase in other income was primarily due to a reversal and recovery of bad debt allowance of approximately $620,000 which was recorded in 2009.

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Net Income

Net income was $6,967,556 for the nine months ended September 30, 2010, an increase of 10% from $6,309,887 for the same period of 2009. This increase was primarily attributable to an increase of sales. Our net profit margin decreased 7% from 34% for the nine months ended September 30, 2009 to 27% as compared to the nine months ended September 30, 2010. This decrease was primarily attributable to an increase in operating expenses.

Liquidity and Capital Resources

Overview

We had net working capital of $22,067,816 at September 30, 2010, an increase of $12,824,695 over a net working capital of $9,243,121 at December 31, 2009. The ratio of current assets to current liabilities was 8:1 at September 30, 2010.

The following is a summary of cash provided by or used in each of the indicated types of activities during the nine months ended September 30, 2010 and 2009:

	Nine Months Ended September 30,
	2010			2009
Cash provided by (used in):
Operating Activities	$	(94,451)		$	3,502,763
Investing Activities		(8,155	)		(3,373,539)
Financing Activities		(715,538)			1,288,577

Net cash provided by operating activities

Net cash used by operating activities was $94,451 for the nine months ended September 30, 2010, an increase of $ 3,597,214 or 103% from $3,502,763 cash provided for the comparable period in 2009. The increase in cash outflow was primarily attributable to an increase in accounts receivable outstanding, prepayment for advisement and raw material, and inventory.

Net cash used in investing activities

Net cash used in investing activities was $8,155 for the nine months ended September 30, 2010, a decrease of $3,365,384 or 100% from $3,373,539 for the comparable period in 2009. The decrease was primarily attributable to a decrease of expenditures on construction in progress for the construction and installation of a comprehensive air purification system during the nine months ended September 30, 2010 as compared to the same period of last year.

Net cash used in financing activities

Net cash used in financing activities was 715,538 for the nine months ended September 30, 2010, compared to $1,288,577 cash provided by financing activity for the same period in 2009. The difference was primarily attributable to repayment of short-term bank loans of $2,497,502 partially offset by cash inflow of approximately $1 million from warrants exercised and approximately $789,000 from the stock issuance during the nine months ended September 30, 2010, as compared to the same period of 2009, in which we had $2,193,624 proceeds from bank loans and $914,047 from repayment of such loans.

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.

20

The Company paid approximately $3,432,000 as of September 30, 2010 and December 31, 2009, and is committed to pay an additional $2,200,000 under an agreement with Shaanxi Kai Da Air Purification Co., Ltd., for the construction and installation of a comprehensive air purification system.

To date, our business has been dependent upon short- to mid-term bank loans. We have paid in full our outstanding loans at September 30, 2010; we had total outstanding bank loans of $0 at September 30, 2010.

The following summarizes our short-term bank loans as of December 31, 2009, which we have since paid in full:

	12/31/2009
Industrial and Commercial Bank of China -Xixiang Branch. Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009.  The loan was repaid upon maturity.		1,760,253
Xixiang Rural Cooperative Bank. Term of these loans call for interest from 11.46% to 12.24% per annum with principal due in 2009 and 2010. The loan was repaid upon maturity.		733,439
	$	2,493,692

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

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.

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

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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

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.

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.

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.

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.

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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 nine months ended September 30, 2010. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are 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 per iods specified in the SEC’s rules and forms.  Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required to be filed or submitted under the Exchange Act is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, 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 September 30, 2010.  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 September 30, 2010 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.

On May 17, 2010, ValueRich, Inc., commenced litigation against us, at the 11th judicial circuit in Miami-Dade County, Florida, alleging breach of contract and other related claims.  ValueRich alleges ownership of 20% of the outstanding shares of our common stock pursuant to a May 2008 consulting agreement between ValueRich and Xian Pharmaceuticals, our operating VIE.   It is our opinion that the litigation has no merit and we will defend it with our full resources. 

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.

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

In August 2010, the Company issued an aggregate of 385,715 (post-three-for-one reverse split) shares of common stock at $4.20 per share to four investors for a total cash consideration of $1,620,000. 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, a nd 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.

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

Item 4.                      (Removed and Reserved).

Item 5.                      Other Information.

Effective September 10, 2010, the Company filed a Certificate of Change to the Articles of Incorporation, which decreases the total number of authorized shares of common stock, par value $.001 per share, from 75,000,000 shares to 25,000,000 and sets forth the terms of a corresponding three-for-one reverse split of the Company’s issued and outstanding common stock.  On September 22, 2010, the reverse split took effect in the marketplace.

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.

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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:   November 15, 2010	By:	/s/ Guozhu Wang
		Name: Guozhu Wang
		Title: Chief Executive Officer

Dated:   November 15, 2010	By:	/s/ Tao Lei
		Name: Tao Lei
		Title: Chief Financial Officer

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