China Pediatric Pharmaceuticals (LHSI) 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: 000-52007

CHINA PEDIATRIC PHARMACEUTICALS, INC.

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

Nevada	20-2718075
(State or other jurisdiction of incorporation or organization)	(IRS Employer identification No.)

9th Floor, No. 29 Nanxin Street

 Xi'an, Shaanxi Province

People’s Republic of China 710004

(Address of principal executive offices)

86-29-8727-1818

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was

required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate

Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o Noo

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

Large accelerated filero	Accelerated filer o	Non-accelerated filer o	Smaller reporting company x
	(Do not check if a smaller reporting company)

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes □ No □

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

11,950,288 shares of common stock, $.001 par value, were outstanding as of November 15, 2010.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.	Controls and Procedures	13
	PART II
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	(Removed and Reserved)	15
Item 5.	Other Information	15
Item 6.	Exhibits	15
SIGNATURES		16

2 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA PEDIATRIC PHARMACEUTICALS, INC

 CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

TABLE OF CONTENTS

Consolidated Balance Sheets	F-1
Consolidated Statements of Income	F-2
Consolidated Statements of Cash Flows	F-3
Consolidated Statements of Stockholders’ Equity	F-4
Notes to Consolidated Financial Statements	F-5 - F-16

3 

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

	9/30/2010		12/31/2009
	(Unaudited)		(Audited Restated)
ASSETS
Current Assets
Cash and cash equivalents	$	9,395,036	$	905,874
Accounts receivable		7,154,740		5,666,307
Other receivable		656,081		43,305
Inventory, net		3,310,822		886,082
Prepaid expenses		1,994,819		2,487,493
Total Current Assets		22,511,498		9,989,061
Long-term prepaid expenses		1,791,553		1,755,104
Property & equipment, net		732,825		797,790
Goodwill		612,745		612,745
Intangible Assets		1,606,333		1,856,718
Total Assets	$	27,254,954	$	15,011,418
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	381,604	$	254,097
Accrued expenses and other payables		3,166,649		1,592,440
Trade deposit received		6,439		6,308
Short-term bank loan		447,888		438,776
VAT tax payable		340,611		321,521
Income tax payable		315,274		194,386
Derivative liability		7,211,250		5,950,000
Total Current Liabilities		11,869,715		8,757,528
Stockholders' Equity
Common stock, $ 0.001 per value, 75,000,000 share authorized,
10,280,171 and 8,305,171 shares issued and outstanding
at September 30, 2010 and December 31, 2009		10,280		8,305
Additional paid in capital		6,212,183		1,494,158
Statutory reserve		810,540		810,540
Other comprehensive income		945,625		328,567
Retained earnings		7,406,611		3,612,320
Total Stockholders' Equity		15,385,239		6,253,890
Total Liabilities and Stockholders' Equity	$	27,254,954	$	15,011,418

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

F-1

CHINA PEDIATRIC PHARMACEUTICAL, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	9/30/2010			9/30/2009			9/30/2010			9/30/2009
Sales, net	$	7,182,905		$	4,180,368		$	20,400,566		$	11,323,142
Cost of sales		2,953,021			1,589,853			8,462,252			4,376,540
Gross profit		4,229,884			2,590,515			11,938,314			6,946,602
Selling, general and administrative expense		2,065,382			1,427,671			6,110,371			3,930,235
Income from operations		2,164,502			1,162,844			5,827,943			3,016,367
Other Income (Expense)
Interest income		92			61			92			61
Other income		-			16			825			304
Derivative expense		(740,000	)		-			(1,261,250	)		-
Interest expense		(11,945	)		(10,525	)		(11,945	)		(10,525	)
Other expense		(115	)		(69	)		(12,407	)		(100	)
Total Other Income (Expense)		(751,968	)		(10,517	)		(1,284,685	)		(10,260	)
Income before income taxes		1,412,534			1,152,327			4,543,258			3,006,107
Provision for income taxes		(305,388	)		(154,734	)		(748,967	)		(422,715	)
Net income	$	1,107,146		$	997,593		$	3,794,291		$	2,583,392
Net income for common share
Earnings per share - Basis	$	0.11		$	0.12		$	0.40		$	0.31
Earnings per share - Diluted	$	0.11		$	0.12		$	0.40		$	0.31
Weighted average common shares outstanding
Basis		10,205,171			8,228,571			9,423,486			8,228,571
Diluted		10,205,171			8,228,571			9,423,486			8,228,571
Net income	$	1,107,146		$	997,593		$	3,794,291		$	2,583,392
Foreign currency transaction adjustment		248,839			8,059			617,058			14,941
Comprehensive income	$	1,355,985		$	1,005,652		$	4,411,349		$	2,598,333

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

F-2

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	9/30/2010			9/30/2009
Current Assets
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	3,794,291		$	2,583,391
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and Amortization		315,350			330,823
Net impairment loss on accounts and other receivables		-			44,413
Written off of prepayment		-			71,860
Derivative expense		1,261,250			-
(Increase) / decrease in assets:
Accounts receivables		(1,348,274	)		(629,530	)
Inventory		(2,367,332	)		(1,165,656	)
Prepaid expense		541,337			(465,243	)
Other receivable		(594,253	)		(1,966	)
Due from a related party		-			512
Increase / (decrease) in current liabilities:
Accounts payable		117,395			(21,140	)
Accrued expenses and other payables		1,753,727			915,020
Due to a related party		-			93,011
Trade deposit received		-			357
Value-added tax payable		14,344			(131,270	)
Income tax payable		114,914			(58,627	)
Net cash provided by operating activities		3,602,749			1,565,955
Net cash from financing activities
Proceeds from issuance of common stock		4,720,000			-
Inception of new bank loans		-			438,526
Effect of exchange rate changes on cash and cash equivalents		166,413			3,454
Net change in cash and cash equivalents		8,489,162			2,007,935
Cash and cash equivalents, beginning balance		905,874			813,252
Cash and cash equivalents, ending balance	$	9,395,036		$	2,821,187
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Income tax payments	$	634,052		$	481,342
Interest payments	$	11,945		$	10,525

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

F-3

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

					Additional		Other							Total
	Capital Stock				Paid-in		Comprehensive		Statutory		Retained			Stockholders
	Shares		Amount		Capital		Income		Reserves		Earnings			Equity
Balance December 31, 2009		8,305,171	$	8,305	$	1,494,158	$	328,567	$	810,540	$	3,612,320		$	6,253,890
Foreign currency translation adjustments								617,058							617,058
Issuance of common stock		1,975,000		1,975		4,718,025									4,720,000
Income for the nine months ended
September 30, 2010												3,794,291			3,794,291
Balance September 30, 2010		10,280,171	$	10,280	$	6,212,183	$	945,625	$	810,540	$	7,406,611		$	15,385,239
Balance December 31, 2008		8,228,571	$	8,229	$	1,478,134	$	313,429	$	721,553	$	6,493,979		$	9,015,324
Foreign currency translation adjustments								15,138							15,138
Transferred to Statutory reserve										88,987		(88,987	)		-
Stock-based compensation		76,600		76		16,011									16,087
Recapitalization						13									13
Loss for the year ended December 31, 2009												(2,792,672	)		(2,792,672	)
Balance December 31, 2009		8,305,171	$	8,305	$	1,494,158	$	328,567	$	810,540	$	3,612,320		$	6,253,890

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

F-4

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 1 – ORGANIZATION

China Pediatric Pharmaceuticals, Inc. ("the Company") was incorporated on April 20, 2005 in the state of Nevada.  The Company was originally incorporated under the name Belford Enterprises, Inc. and changed its name to Lid Hair Studios International Inc. on August 15, 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 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 receives 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 of Shaanxi Jiali and, a management fee before tax, and is obligated to pay all payables and loan payments of Shaanxi Jiali.  In addition, under the terms of the Management Entrustment Agreement, Xi'an Coova has been granted certain rights which include, in part, the right to appoint and terminate members of Shaanxi Jiali's Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments.  We anticipate that Shaanxi Jiali will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Xi'an Coova exercises its option.  The agreement does not terminate unless the business of Shaanxi Jiali is terminated or Xi'an Coova exercises its option to acquire all of the assets or equity of Shaanxi Jiali under the terms of the Exclusive Option Agreement.

The contractual arrangements completed on August 4, 2008 provide that Xi'an Coova has controlling interest in Shaanxi Jiali as defined by FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), an Interpretation of Accounting Research Bulletin No. 51, which requires Xi'an Coova to consolidate the financial statements of Shaanxi Jiali and ultimately consolidate with its parent company, China Children since that date.

The outstanding stock of the Company prior to the Share Exchange Transaction will be accounted for at their net book value and no goodwill will be recognized.  Details of the shares outstanding upon completion of the Merger are as follows:

Pre-Exchange Transaction Common Shares Outstanding:	9,300,000
Re-purchase of the Company's shares:	(5,000,000	)
Reverse stock split (7 pre-shares for 2 post-shares):	(3,071,429	)
Issuance of the Company's shares for all outstanding shares of China Children:	7,000,000
Post-Exchange Transaction Common Shares Outstanding:	8,228,571

The Company, through its subsidiary, and exclusive contractual arrangement with Shaanxi Jiali, is engaged in the business of manufacturing and marketing over-the-counter ("OTC") and prescription pharmaceutical products for the Chinese marketplace as treatment for a variety of diseases and conditions.

F-5

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  The Company's functional currency is the Chinese Renminbi; however the accompanying consolidated financial statements have been translated and presented in United States Dollars.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary.  All inter-company accounts and transactions have been eliminated in consolidation.  The Company has adopted the Consolidation Topic of the FASB Accounting Standards Codification (“ASC 810”) which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.

In determining Shaanxi Jiali is the VIE of Xi'an Coova, the Company considered the following indicators, among others:

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

l   Xi'an Coova was assigned all voting rights of Shaanxi Jiali and has the right to appoint all directors and senior management personnel of Shaanxi Jiali.  The equity holders of Shaanxi Jiali possess no substantive voting rights.

l   Xi'an Coova will provide financial support if Shaanxi Jiali requires additional funds to maintain its operations and to repay its debts.

l   Xi'an Coova should be paid a management fee equal to Shaanxi Jiali's earning before taxes.  If there are no earnings before taxes and other cash expenses, then no fee shall be paid.  If Shaanxi Jiali sustains losses, they will be carried over to the next period and deducted from the next management fee.  Xi'an Coova should assume all operation risks of Shaanxi Jiali and bear all losses of Shaanxi Jiali.  Therefore, Xi'an Coova is the primary beneficiary of Shaanxi Jiali.

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, &# 8220;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 $617,058 and $14,941 respectively.  For the three months ended September 30, 2010 and 2009, the foreign currency translation adjustment to the Company’s comprehensive income was $248,839 and $8,059, 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.

F-6

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income

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

Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur.  The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment.  In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements.  If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed.

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

There were no contingencies at September 30, 2010 and December 31, 2009.

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.  These are no allowances for doubtful accounts as of September 30, 2010 and December 31, 2009.

F-7

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Prepaid Expenses

Prepaid account is primarily comprised of two factors: advance payments suppliers for goods purchased, and advance payments to R&D organizations for new medicines to be developed and purchased.

In December 2007, the Company signed a Medicine Research and Development Agreement with Shaanxi Research Institution of Chinese Traditional Medicine (SRICTM).  Pursuant to the terms of the agreement and Supplemental Agreement between the Company and SRICTM, SRICTM must successfully develop and obtain governmental approval for production of five new pediatric medicines, otherwise, the Company is entitled to a full refund of fees.  Therefore, the costs paid in connection with these services were not classified as research and development costs, but rather as prepaid expenses.  Such advance payments will not be expensed if we do not receive the desired results from SRICTM.

A table of the outstanding prepaid expenses as of September 30, 2010 and December 31, 2009 are as follows:

	Payee	Nature		9/30/2010		12/31/2009
		Advanced payment to
		Shaanxi Research
		Institution of Chinese
	Shaanxi Research	Traditional Medicine
Advance payment to	Institution of Chinese	for five new pediatric
R & D organization	Traditional Medicine	cold medicines	$	1,791,553	$	1,755,104
		Advance payments to
Advance payment to		suppliers for goods
Suppliers	Suppliers	purchased		1,994,819		2,487,493
Total			$	3,786,372	$	4,242,597

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market.  The Management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower.  As of September 30, 2010 and December 31, 2009, inventories consist of the following:

	9/30/2010		12/31/2009
Raw materials	$	2,451,290	$	1,163,589
Finished goods		859,532		214,450
Provision for obsolescence		-		(491,957	)
Total	$	3,310,822	$	886,082

Property, Plant & Equipment

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

Buildings	30 years
Plant and equipment	5-14 years
Transportation equipment	5-10 years
Office equipment	5-10 years

F-8

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

As of September 30, 2010 and December 31, 2009, Property, Plant & Equipment consist of the following:

	9/30/2010			12/31/2009
Buildings	$	445,845		$	445,845
Plant and equipment		859,665			859,665
Transportation equipment		5,609			5,609
Office equipment		40,354			40,354
Total		1,351,473			1,351,473
Accumulated depreciation		(618,648	)		(553,683	)
	$	732,825		$	797,790

Depreciation expense for the three months ended September 30, 2010 and 2009 were $21,761 and $24,079, respectively.  Depreciation expense for the nine months ended September 30, 2010 and 2009 were $64,965 and $81,390, respectively.

Goodwill

Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired.  In accordance with the Intangibles, Goodwill and other topic of the FASB Accounting Standard Codification (“ASC 350”), indefinite-life identifiable intangible assets and goodwill are not amortized.  Under the provisions of ASC 350, we are required to perform an annual impairment test of our goodwill.  Goodwill impairment is determined using a two-step process.  The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit, which we define as our business segments, with its net book value or carrying amount including goodwill.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.  The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.  Goodwill as of September 30, 2010 and December 31, 2009 is $612,745.

Intangible Assets

The Company has four proprietary technologies: propriety technology for antioxidant technique, proprietary technology for “liren” capsule, patent-Chinese medicine and production method for skin and gyhecology disease and patent: Chinese medicine and production method for tracheitis.  Propriety technology for antioxidant technique was contributed by a shareholder in exchange for shares of the Company’s common stock.  Proprietary technology for “liren” capsule was purchased from third party at the price agreed by the Company and the third party.  Two patents were purchase from the shareholders at the prices determined by an independent appraiser.  These proprietary technologies were acquired for the future use of the Company.  We capitalized them as intangibl e assets as acquired.

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from ten to fifty years.  Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.  No impairments of intangible assets have been identified during any of the periods presented.  The land use rights will expire in 2056 and 2058.  All of the Company’s intangible assets are subject to amortization with estimated lives of:

Land use right	50 years
Proprietary technologies	10 years

                                                                                                                               & #160;                                 

F-9

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The components of finite-lived intangible assets are as follows:

	September 30			December 31,
	2010			2009
Land use right	$	264,625		$	264,625
Proprietary technologies		2,966,355			2,966,355
Total		3,230,980			3,230,980
Less: Accumulated amortization		(1,624,647	)		(1,374,262	)
	$	1,606,333		$	1,856,718

Amortization expense for the three months ended September 30, 2010 and 2009 were $83,907 and $83,162, respectively.

Amortization expense for the nine months ended September 30, 2010 and 2009 were $250,385 and $249,433, respectively.

The estimated future amortization expenses related to intangible asset as of September 30, 2010 are as follows:-

2011	$	333,369
2012		333,369
2013		333,369
2014		333,369
2015	$	272,857

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 accordanc e 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.

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.

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.

F-10

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

The Company’s revenue recognition policies are in compliance with the Revenue Recognition Topic of the FASB Accounting Standards Codification ("ASC 605").

Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured.  Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

Advertising

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

Advertising costs for the three months ended September 30, 2010 and 2009 were $442,457 and $363,977, respectively.  Advertising costs for the nine months ended September 30, 2010 and 2009 were $1,320,324 and $802,365, respectively.

Customer rebates

Rebates are paid to customers every quarter and we recorded customer rebates as customers earned.  They are classified as a reduction of revenue according to ASC 605-55-64.  The Company paid rebates to customers for the three months ended September 30, 2010 and 2009 were $840,400 and $489,103 respectively.  The Company paid rebates to customers for the nine months ended September 30, 2010 and 2009 were $2,183,941 and $1,324,661 respectively.

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 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 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.

F-11

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Basic and Diluted Earnings 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.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities.  The Company places its cash in what it believes to be credit-worthy financial institutions.  The Company has a diversified customer base, most of which are in China.  The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures.  The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Recent Accounting Pronouncements

No new accounting pronouncements issued or effective during the fiscal year has had, or is expected to have a material impact on these consolidated financial statements.

Note 3 – OTHER RECEIVABLES

Other receivables consist of cash advances to employees.  As of September 30, 2010 and December 31, 2009, other receivables were $656,081 and $43,305, respectively.

Note 4 – COMPENSATED ABSENCES

Regulation 45 of the local labour law of the People’s Republic of China (“PRC”) entitles employees to annual vacation leave after 1 year of service.  In general, all leave must be utilized annually, with proper notification.  Any unutilized leave is cancelled.

Note 5 – SHORT-TERM BANK LOAN

As of September 30, 2010, the Company had debt as follows:

	Amount		Interest rate	Due
Short term bank loan	$	447,888	0.85845% /per month	June 25, 2010,
				extended until
				June 25, 2011

The Company uses these loans for working capital purposes.  The loan is secured by the factory building of Shaanxi Jiali's Baoji production base.  Our anticipated needs for the future are to be negotiated in accordance with manufacturing and operation needs, and market conditions of next year.

F-12

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 6 – INCOME TAXES

Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory rate of 25%.  The Company is a high tech enterprise and under PRC Income Tax Laws, it is entitled to a discounted rate of 15%.  If the Company were subject to the standard 25% enterprise income tax rate, it would have incurred an additional income tax expense of approximately $702,000 and $328,000 for the nine months ended September 30, 2010 and 2009, respectively.  The standard income tax rate would have caused the Company to incur an additional expense of $0.07 and $0.04 per share for the nine months ended September 30, 2010 and 2009, respectively.

The following is a reconciliation of income tax expense:

For the nine months ended September 30, 2010	International		Total
Current	$	748,967	$	748,967
Deferred		-		-
Total	$	748,967	$	748,967
For the nine months ended September 30, 2009	International		Total
Current	$	422,715	$	422,715
Deferred		-		-
Total	$	422,715	$	422,715

Note 7 – COMMITMENTS

The Company is committed to pay $447,888, for advertising through November 2010.

Note 8 – COMMON STOCK AND WARRANTS

Common stock

On October 2, 2009, the Company granted 76,600 shares of common stock to employees for services rendered having a fair market value on that date of $16,087 or $0.21 per share, which was the closing price of our common stock on that date.

On February 11, 2010, the Company closed a private placement issued 375,000 shares common stock at $4 per share to several investors for total cash consideration of $1,500,000.

On April 29, 2010, the Company issued 1,200,000 shares common stock at $2 per share to several investors for total cash consideration of $2,400,000.

On June 23, 2010, the Company issued 300,000 shares common stock at $2 per share to several investors for total cash consideration of $600,000.

On September 8, 2010, the Company issued 100,000 shares common stock at $2.2 per share to an investor for cash consideration of $220,000.

Warrants

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.  As consideration for the services provided by Kang Xiulan (and in accordance with a warrant placement agreement dated September 30, 2009 between the Company and Kang Xiulan), the Company agreed to issue to Kang Xiulan warrants to acquire 250,000 shares of the Company’s common stock with an exercis e price of $3.00 with piggyback warrants to purchase 250,000 shares of the Company’s common stock with an exercise price of $5.00.  The warrants will expire on September 30, 2011 and September 30, 2012, respectively.

F-13

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 8 – COMMON STOCK, STOCK OPTION AND COMPENSATION - CONTINUED

During the above-mentioned reverse merger process, the Company obtained certain consulting services from IFG Investments Services, Inc., including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested from IFG.  In consideration for the consulting services to be performed by IFG (and in accordance with a warrant placement agreement dated September 30, 2009 between the Company and IFG), the Company agreed to issue to IFG warrants to acquire 600,000 shares of the Company’s common stock with an exercise price of $3.00 with piggyback warrants to purchase 600,000 shares of the Company’s comment stock with an exercise price of $5.00.  The warrants will expire on September 30, 2011 and September 30, 2012, respectively

The Company also obtained certain public company sector services, including investor relations advisory services.  In consideration for the investor relation services provided by China National Information Network (and in accordance with a warrant placement agreement dated September 30, 2009 between the Company and China National Information Network), the Company agreed to issue to China National Information Network the warrants to acquire 400,000 shares of the Company’s common stock with an exercise price of $3.00 with piggyback warrants to purchase 400,000 shares of the Company’s comment stock with an exercise price of $5.00.  The warrants will expire on September 30, 2011 and September 30, 2012, respectively

						Aggregate
	Total		Exercise Price		Remaining Life	Intrinsic Value
Outstanding, December 31, 2009		2,500,000	$	3.00 - 5.00	1.0 - 2.0 yrs
Outstanding, September 30, 2010		2,500,000

Note 9 – DERIVATIVE FINANCIAL INSTRUMENTS

The balance sheet caption derivative liabilities consist of the Warrants, issued in to consultants and investor relations in connection with the merger agreements.  These derivative financial instruments are indexed to an aggregate of 2,500,000 and 1,250,000 shares of the Company's common stock as of September 30, 2010 and December 31, 2009, respectively, and are carried at fair value.  The following tabular presentations set forth information about the derivative instruments for the nine months ended September 30, 2010 and December 31, 2009:

	For the nine
	months ended			Year ended
Derivative income (expense)	September 30, 2010			December 31, 2009
Warrant derivative	$	(1,261,250	)	$	5,950,000
	As of			As of
Liabilities	September 30, 2010			December 31, 2009
Warrant derivative	$	(7,211,250	)	$	(5,950,000	)

F-14

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 9 – DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

Freestanding derivative instruments, consisting of warrants are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments.  Significant assumptions used in the Black Scholes models included: conversion or strike prices ranging from $3.00 - $5.00; volatility 105.1 - 128.3% based upon forward terms of instruments; terms-remaining of 1.00 and 2.00 life at September 30 and 1.75 at December 31, 2009; and a risk free rate ranging from 1.61%.

Note 10 – STATUTORY RESERVE

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund.  Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund.  The public welfare fund reserve was limited to 50 percent of the registered capital.  Effective January 1, 2006, there is now only one fund requirement.  The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company.  Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees.  These reserves are not transferable to the Company in the form of cash dividends, loans or advances.  These reserves are therefore not available for distribution except in liquidation.  As of September 30, 2010 and December 31, 2009, the Company had allocated $810,540 to these non-distributable reserve funds.

Note 11 – NET INCOME PER SHARE

In accordance with FASB ASC Topic 260-1-50, “Earnings per Share”, and SEC Staff Accounting Bulletin No. 98, basic net income or loss per common share is computed by dividing net income or loss for the period by the weighted - average number of common shares outstanding during the period.  Under FASB ASC 260-10-50, diluted income or loss per share is computed by dividing net income or loss for the period by the weighted - average number of common and common equivalent shares, such as stock options, warrants and convertible securities outstanding during the period.

The following table sets forth the computation of basic and diluted earnings per share of common stock:

	Three Months Ended				Nine Months Ended
	9/30/2010		9/30/2009		9/30/2010		9/30/2009
Basic earnings from continuing operations per share:
Numerator:
Income from operations used in computing basic earnings per share	$	1,107,146	$	997,593	$	3,794,291	$	2,583,392
Income from operations applicable to common shareholders	$	1,107,146	$	997,593	$	3,794,291	$	2,583,392
Denominator:
Weighted average common shares outstanding		10,205,171		8,228,571		9,423,486		8,228,571
Basic earnings per share from continuing operations	$	0.11	$	0.12	$	0.40	$	0.31
Diluted earnings per share from operations:
Numerator:
Income from operations used in computing diluted earnings per share	$	1,107,146	$	997,593	$	3,794,291	$	2,583,392
Income from operations applicable to common shareholders	$	1,107,146	$	997,593	$	3,794,291	$	2,583,392
Denominator:
Weighted average common shares outstanding		10,205,171		8,228,571		9,423,486		8,228,571
Weighted average effect of dilutive securities:
Shares used in computing diluted net income per share		10,205,171		8,228,571		9,423,486		8,228,571
Diluted earnings per share from operations	$	0.11	$	0.12	$	0.40	$	0.31

F-15

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(UNAUDITED)

Note 12 – OTHER COMPREHENSIVE INCOME

Balances of related after-tax components comprising accumulated other comprehensive income, included in stockholders’ equity, at of September 30, 2010, are as follows:

	Foreign		Accumulated
	Currency		Other
	Translation		Comprehensive
	Adjustment		Income
Balance at December 31, 2009	$	328,567	$	328,567
Change for 2010		617,058		617,058
Balance at September 30, 2010	$	945,625	$	945,625

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:

l   The Company may not be able to adequately protect and maintain its intellectual property.

l   The Company may not be able to obtain regulatory approvals for its products.

l   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.

l   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.

l   Changes in the laws and regulations in the PRC may adversely affect the Company's ability to conduct its business.

l   The Company may experience barriers to conducting business due to governmental policy.

l   Capital outflow policies in the PRC may hamper the Company's ability to remit income to the United States.

l   Fluctuation of the Renminbi could materially affect the Company's financial condition and results of operations.

l   The Company may face obstacles from the communist system in the PRC.

l   The Company may have difficulty establishing adequate management, legal and financial controls in the PRC.

l   Trade barriers and taxes may have an adverse affect on the Company's business and operations.

l   There may not be sufficient liquidity in the market for the Company's securities in order for investors to sell their securities.

Note 14 – MAJOR CUSTOMERS AND CREDIT RISK

Five and Three customers accounted for more than 10% of accounts receivable at September 30, 2010 and December 31, 2009 totalling 53% and 33%, respectively.  As of September 30, 2010 and December 31, 2009, five and four vendors were greater than 10% of accounts payable, totalling 75% and 71%, respectively.

Three and three customer(s) accounted for 29% and 34% of sales for the three months ended September 30, 2010 and 2009, respectively.  Four and four vendors accounted for 59% and 55% of purchases for the three months ended September 30, 2010 and 2009, respectively.

One and six customer(s) accounted for 10% and 73% of sales for the nine months ended September 30, 2010 and 2009, respectively.  Four and five vendors accounted for 62% and 76% of purchases for the nine months ended September 30, 2010 and 2009, respectively.

Note 15 – RESTATEMENT

The accompanying consolidated balance sheet and statement of stockholders’ equity for December 31, 2009 have been restated for the following matter:

(i) We have restated our financial statements to treat the warrants issued as a derivative liability, see note 9.  We previously accounted for the warrants as a component of equity. This restatement had the effect of decreasing our net income by $5,308,274 or $(0.65) per common share.

The following table illustrates the restatement.

	Year Ended December 31, 2009
	Net Income			Income Per Common Share
Net income, as reported	$	2,515,603		$	0.31
Correction for warrant accounting		(5,308,274	)		(0.65	)
Net income, as restated	$	(2,792,671	)	$	(0.34	)

Note 16 – SUBSEQUENT EVENT

For the nine months ended September 30, 2010, the Company has evaluated subsequent events for potential recognition and disclosure.  Except for the following, no significant events occurred subsequent to the end of the reporting period but prior to the filing of this report that would have a material impact on our consolidated financial statements.

Subsequent to September 30, 2010, the Company issued 1.47 million shares of common stock to employees as compensation.  The Company will record the related compensation expense in the fourth quarter of 2010.

Subsequent to September 30, 2010, the Company issued 200,000 shares of common stock for gross proceeds of $440,000.

F-16

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

The following discussion of the financial condition and results of operation of the Company for the six months ended September 30, 2010, and 2009, should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Quarter Report.

Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties.  You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Cautionary Note Regarding Forward-Looking Statements

In this quarterly report, references to "China Pediatric," "CPDU," "the Company,", "we," "our," "us," and the Company's variable interest entity, "Shaanxi Jiali," refer to China Pediatric Pharmaceuticals, Inc.

We make certain forward-looking statements in this report.  Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," as well as captions elsewhere in this document, are forward-looking statements.  In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would," and similar expressions.  ; We intend such forward-looking statements to be covered by the safe harbour provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").  The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements.  Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.  Indeed, it is likely that some of our assumptions will prove to be incorrect.  Our actual results and financial position will vary from those projected or implied in the forward-looking statements and the variances may be material.  You are cautioned not to place undue reliance on such forward-looking statements.  These risks and uncertainties, together with the other risks described from time to time in reports and documents that we file with the SEC should be considered in evaluating forward-looking statements.

The nature of our business makes predicting the future trends of our revenue, expenses and net income difficult.  Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain.  The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual 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:

l   the effect of political, economic, and market conditions and geopolitical events;

l   legislative and regulatory changes that affect our business;

l   the availability of funds and working capital;

l   the actions and initiatives of current and potential competitors;

l   investor sentiment; and

l   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.

BUSINESS OVERVIEW

Our operations are headquartered in Xi'an, Shaanxi Province, China.  We are a profitable, mid-sized Chinese pharmaceutical company that identified, discovers, develops manufactures and distributes both prescription and over-the counter, including both conventional and Traditional Chinese Medicines ("TCMs"), for the treatment of some of the most common ailments and diseases, with pediatric medicine as its focus.

4

We currently have one operating company: Shaanxi Jiali identifies, discovers, develops manufactures and distributes both prescription and over-the counter, including both conventional and Traditional Chinese Medicines ("TCMs"), for the treatment of some of the most common ailments and diseases, with pediatric medicine as its focus.  We distribute our high value, branded medicines, both prescription and OTC, through exclusive territory agents who sell our products directly to local pharmacies who in turn sell them to their retail customers.

We currently have 26 products that are manufactured by both our in-house production facility and through OEM companies.

We intend to further develop the series of products based on the Cooers Brand and designed to target the pediatric medicine market.  These products will continue be sold through exclusive territory agents who in turn distribute to local pharmacies in their assigned territories.  Shaanxi Jiali intents to further expand its distribution channels by increasing the number of exclusive territory agents.  These additional exclusive territory agents will be contracted to distribute Shaanxi Jaili products to local pharmacies in several additional provinces or regions throughout China.

We will continue to evaluate and develop additional product candidates, both through our in-house research and development department and working with our research and development partners, to expand our pipeline where we perceive an unmet need and commercial potential.  We will face the risk that in developing new products we may spend substantial sums of money and the new products developed may not effectively meet the perceived need or may not be successfully commercialised.

With intense price competition among many similar or identical products in the industry, we believe that building brand equity is the primary means to generate and sustain profitable growth in the future.  The company intends to focus its brand development efforts on building the Cooers brand name with the intent on it becoming a leading pediatric medicine brand in China.

We intend to grow our internal marketing and sales function and increase our relationships with other exclusive territory distributors to expand the distribution and presence of our pharmaceutical products.  In expanding market share of our products, we intend to take advantage of our large manufacturing scale and reasonable cost control mechanisms, and our strong sales network.  In addition, our goal is to establish our products as a preferred choice for children's medicines in local pharmacies.  We hope to add other pharmaceutical products into this channel over the next few years.  We may face risks in obtaining adequate quantities of raw materials at reasonable prices in order to meet increased demand for our products that result from any growt h.  In seeking additional employees, sales representatives, and exclusive territory agents, we will compete with many other established pharmaceutical manufacturers that may have greater resources than we do.

RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES

Results of Operations

NET SALES

	Three Months Ended September 30,									% of
	2010				2009					change
"Xianzhi" Series	$	458,088	6.38	%		$	381,967	9.14	%		20	%
"Cooer" Series		5,849,537	81.44	%			3,248,809	77.72	%		80	%
"Qingsongling" Series		875,281	12.19	%			549,592	13.15	%		59	%
Others		-	-				-	-			-
Total net sales	$	7,182,906	100	%		$	4,180,368	100	%		72	%
	Nine Months Ended September 30,										% of
		2010					2009
"Xianzhi" Series	$	868,144	4.26	%		$	1,219,210	10.77	%		(29	) %
"Cooer" Series		17,098,619	83.81	%			8,364,376	73.87	%		104	%
"Qingsongling" Series		1,450,910	7.11	%			1,739,556	15.36	%		(17	) %
Others		982,893	4.82				-	-			-
Total net sales	$	20,400,566	100	%		$	11,323,142	100	%		80	%

During the three and nine months ended September 30, 2010, total net sales increased by approximately $3 million or 72% and $9.1 million or 80% respectively, compared to the same periods of 2009.

5

A significant portion of the increase in sales is derived from an increase in sales for the "Cooer" Series by $2.6 million or 80% and $8.7 million or 104%in the three and nine months ended September 30, 2010, respectively.  This was mainly due to the increase in sales volume as demand from customers increased as well as a result of the intensive promotion in 2010.

COST OF SALES

	Three Months Ended September 30,								% of
	2010				2009				change
"Xianzhi" Series	$	52,467	1.78	%	$	38,885	2.45	%		35	%
"Cooer" Series		2,485,443	84.17	%		1,190,237	74.86	%		109	%
"Qingsongling" Series		415,111	14.06	%		360,731	22.69	%		15	%
Others		-				-	-			-
Total cost of sales	$	2,953,021	100	%	$	1,589,853	100	%		86	%
	Nine Months Ended September 30,									% of
		2010				2009
"Xianzhi" Series	$	99,377	1.17	%	$	188,149	4.30	%		(47	) %
"Cooer" Series		7,029,413	83.07	%		3,160,176	72.21	%		122	%
"Qingsongling" Series		687,780	8.13	%		1,028,215	23.49	%		(33	) %
Others		645,682	7.63	%		-	-			100	%
Total cost of sales	$	8,462,252	100	%	$	4,376,540	100	%		93	%

Compared to the same periods of 2009, the total cost of sales increased about $1.4 million or 86% and $4.1 million or 93%, in the three and nine months ended September 30, 2010, respectively.  This was primarily due to the increase in cost of sales for "Cooer" Series, which is in line with the increase in this product's net sales.  The decreases in cost of sales for "Xianzhi" Series and "Qingsongling" Series were mainly due to decreases in these products' net sales.  The increase in total cost of sales was primarily due to the increase in average unit costs as a result of an increase in statutory minimum wages for our employees.

GROSS PROFIT

	Three Months Ended September 30,
	2010					2009
			gross profit					gross profit			% of
			margin					margin			change
"Xianzhi" Series	$	405,621		89	%	$	343,082		90	%		18	%
"Cooer" Series		3,364,094		58	%		2,058,572		63	%		63	%
"Qingsongling" Series		460,170		53	%		188,861		34	%		144	%
Others		-		-			-		-			-
Total	$	4,229,885		59	%	$	2,590,515		62	%		63	%
	Nine Months Ended September 30,
		2010					2009
								gross profit			% of
								margin			change
"Xianzhi" Series	$	768,767		89	%	$	1,031,061		85	%		(25	) %
"Cooer" Series		10,069,206		59	%		5,204,200		62	%		93	%
"Qingsongling" Series		763,130		53	%		711,341		41	%		7	%
Others		337,211		34	%		-		-			-
Total	$	11,938,314		59	%	$	6,946,602		61	%		72	%

Gross profit increased about $1.6 million or 63% and $5 million or 72% in the three and nine months ended September 30, 2010, respectively, compared to the same periods of 2009.  The increase in gross profit was due primarily to the increase in net sales of "Cooer" Series that was achieved through an expansion of the customer base, as mentioned above.

The overall gross profit margin decreased 3 percentage points and 2 percentage points in the three and nine months ended September 30, 2010, respectively, compared to the same periods of 2009.

6

For the three months ended September 30, 2010, the slight decrease in overall gross profit margin was primarily due to the increase in cost of sales offset against slight increase in selling price of finished goods.  Cost of sales increased mainly due to the increase in average unit cost of finished goods, as direct labour costs increased following the increase in statutory minimum wages in the PRC.  The slight increases in selling prices of finished goods were due to inflation and increase in cost of sales.

As a result of GMP inspection, production was been temporarily suspended in the first quarter of 2010.  During this time, raw materials on hand for production became excessive. To adjust for this, the Company sold all the excessive raw materials with a carrying value of US$645,682 (i.e. at cost US$1,136,898 net of impairment brought forward US$491,216) included in “Others” back to the suppliers at US$982,894 (i.e. at a discount around 86% of the original costs US$1,136,898).  Consequently, the overall gross profit ratio slightly decreased for the first nine months of 2010 compared with the same period in 2009.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

	Three Months Ended September 30,
	2010					2009
			% of total					% of total			% of
			net sales					net sales			change
Selling, general and
administrative expenses	$	2,065,382		29	%	$	1,427,672		34	%		45	%
	Nine Months Ended September 30,
		2010					2009
			% of total					% of total			% of
			net sales					net sales			change
Selling, general and
administrative expenses	$	6,110,371		30	%	$	3,930,235		35	%		55	%

The increases in dollar amount for the three and nine months ended September 30, 2010 were mainly due to the increase in promotional and advertising expenditures of around $78,000 and $518,000, respectively, increase in sales commissions expenses of around $176,000 and $430,000, respectively, increase in sales rebate to customers of around $351,000 and $859,000, respectively, all resulting from the ongoing marketing expansion.  Other items contributing to the increase in selling, general and administrative expenses for the three and nine months ended September 30, 2010 included an increase in operating expenses in the nature of IPO expenses of around $79,000 and $480,000, respectively.

PROVISION FOR INCOME TAXES

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Provision for income taxes	$	305,388		$	154,734		$	748,967		$	422,715
Effective tax rate		15	%		15	%		15	%		15	%

The amount of Enterprise Income Tax payable is computed on the basis of the taxable income and by applying the tax rate of 25%.  The Company enjoyed a reduced rate to 15% from the Enterprises Income Tax in 2010 and 2009 because the Company is "High Technology Business" under PRC Income Tax Laws.

The Increase in the amount of provision for income taxes for the three and nine months ended September 30, 2010 was mainly due to the increase in assessable income as compared to the same period of 2009.

NET INCOME

As a result of the above, in the three and nine months ended September 30, 2010, the net income was $1,107,146 and $3,794,291, respectively compared to the net income of $997,593 and $2,583,392 for the three and nine months ended September 30, 2009.

7

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2010, we had cash and cash equivalents of approximately $9.4 million.  We believe our existing cash and cash equivalents will be sufficient to maintain our operations at present level for at least the next twelve months.

Net cash provided by operating activities for the nine months ended September 30, 2010 was $3,602,749.  This was primarily due to the net income of $3,794,291, adjusted by non-cash related expenses including depreciation of $64,965, amortization of $250,385, derivative expenses of $1,261,250 and a net decrease in working capital items of $1,768,142.  The net decrease in working capital items was mainly due to increase in accounts payable, accrued expenses and other payables, VAT tax payable and income tax payable.  The net increase in working capital items was partially offset by the increase in accounts receivable, increase in other receivables and increase in inventories to prepare for the ongoing sales promotion.

Net cash provided by operating activities for the nine months ended September 30, 2009 was $1,565,955.  This was primarily due to the net income of $2,583,391, adjusted by non-cash related expenses, including depreciation of $81,390, amortization of $249,433, prepayment write-off of $71,860, net impairment loss on accounts and other receivables of $44,413, and a net decrease in working capital items of $1,464,532.  The net decrease in working capital items was mainly due to increase in accounts receivable, increase in other receivables, increase in prepayments, increase in inventories, decrease in accounts payables, and decrease in value-added tax liability and income tax payable.  The net decrease in working capital items was partially offset by the increas e in accrued expenses and other payables and amount due to a related party.

Net cash flow provided by financing activities for the nine months ended September 30, 2010 was $4,720,000.  The increase of net cash inflow from financing activities for the nine months ended September 30, 2010 was due to the proceeds from issuance of common stock of 1,975,000 shares.

Net cash flow provided by financing activities for the nine months ended September 30, 2009 was $438,526.  The increase of net cash inflow from financing activities for the nine months ended September 30, 2009 was due to the proceeds from the inception of new bank loan.

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 trend, prices increase, the Company’s procurement prices are also affected, resulting in an 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 in the PRC.

Off-Balance Sheet Commitments and Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

Short-Term Loans

As of September 30, 2010, the Company had short-term debt as follows:

	Amount		Interest rate	Due
Short term bank loan	$	447,888	0.85845% /per month	June 25, 2010, extended
				until June 25, 2011

The Company uses these loans for working capital purposes.  The loan is secured by the Company’s factory building at Shaanxi Jiali's Baoji production base.

Our anticipated needs for the future are to be negotiated in accordance with manufacturing and operation needs, and market conditions of next year.

8

Restrictions on Currency Exchange

We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency.  The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC.  Cash and cash equivalents as of September 30, 2010 are mainly held by the Company's subsidiaries and variable interest entities.  Although cash balances cannot be transferred to the Company by loan or advance according to existing PRC laws and regulations, these cash balances can be utilized by the company for its normal operations pursuant to the Management Entrustment Agreements.

Notwithstanding the above, shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations.  Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange ("SAFE") by complying with certain procedural requirements.  However, approval from appropriate governmental authorities is required where Renminbi is to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loa ns denominated in foreign currencies.

In August 2008, SAFE promulgated Circular 142, a notice regulating the conversion by Foreign Invested Enterprises, or "FIEs," of foreign currencies into Renminbi by restricting how the converted Renminbi may be used.  Circular 142 requires that Renminbi converted from the foreign currency denominated capital of a FIE may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC unless specifically provided for otherwise.  In addition, SAFE strengthened its oversight over the flow and use of Renminbi funds converted from the foreign currency denominated capital of an FIE.  The use of such Renminbi may not be changed without approval from SAFE, and may not be us ed to repay Renminbi loans if the proceeds of such loans have not yet been used.  Violations of Circular 142 may result in severe penalties, including substantial fines as set forth in the SAFE rules.

As such, PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent the Company from using any proceeds received in future financings to make additional capital contributions to the Company’s PRC subsidiaries and affiliated entity, Shaanxi Jiali.  If we fail to complete such registrations or obtain such approvals, our ability to capitalize or otherwise fund its PRC operations may be negatively affected, which could adversely and materially affect the Company’s liquidity and its ability to fund and expand our business.

The PRC government may also in the future restrict access to foreign currencies for current account transactions.  If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they become due.

Foreign Currency Risk

The value of the Renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China's political and economic conditions.  Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar.  Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term.  Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.

As of September 30, 2010, Shaanxi Jiali, our PRC operating entity, had net assets of $17,538,881.  Because substantially all of our earnings and cash assets are denominated in Renminbi and the net proceeds from any future offering will be denominated in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of future proceeds and our balance sheet and earnings per share in U.S. dollars following such transaction.  In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.  Fluctuations in the exchange rate will also affect the relative value of any dividend we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

We do not believe that we currently have any significant foreign currency exchange risk and we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk.

CRITICAL ACCOUNTING POLICIES

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("US GAAP").  US GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expenses amounts reported.  These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition.  We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied.  We base our estimates on historical experience and on various other a ssumptions that we believe to be reasonable under the circumstances.  Actual results may differ materially from these estimates under different assumptions or conditions.  We continue to monitor significant estimates made during the preparation of our financial statements.

9

We believe the following is among the most critical accounting policies that impact our consolidated financial statements.  We suggest that our significant accounting policies, as described in our condensed consolidated financial statements in the Summary of Significant Accounting Policies, be read in conjunction with this Management's Discussion and Analysis of Financial Condition and Results of Operations.  See also Note 2 to our consolidated financial statements for further discussion of our accounting policies.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104, included in the Codification as ASC 605, Revenue Recognition.

We recognize revenue at the date of shipment to customers as the sales price is either fixed or determinable at the date of shipment to customers, and the management deems no other significant obligations such as warranties or product returns of the Company exist.  The Company signs general Annual Sales Cooperation Agreements with its distributors each year and also signs specific purchase orders for each sale.  All sales proceeds can be collected reasonably.

Allowance for Doubtful Accounts

The Company maintains reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves.  Reserves are recorded primarily on a specific identification basis.

The following table sets out the aging of our accounts receivable for each of the two balance sheet periods presented.

Accounts				1-30		31-60		61-90		91-180		181-365	> 365
Receivable Aging	Total		days		days		days		days		days		days
As of September 30, 2010	$	7,154,740	$	3,112,606	$	2,312,844	$	1,725,365	$	-	$	1,163	$	2,762
As of December 31, 2009	$	5,666,307	$	2,320,203	$	1,635,568	$	956,329	$	414,810	$	336,691	$	2,706

The following presents the days sales outstanding calculated based on sales and accounts receivables in RMB term for the three and nine months ended September 30, 2010 and 2009.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Days sales outstanding		82		79		86		88

Prepaid expenses

A table of the outstanding prepaid expenses as of September 30, 2010, June 30, 2010, March 31, 2010 and December 31, 2009 are as follows:

	Payee	Nature	9/30/2010		6/30/2010		3/31/2010		12/31/2009
		Advanced payment to
		Shaanxi Research
		Institution of Chinese
	Shaanxi Research	Traditional Medicine
Advance payment to	Institution of Chinese	for five new pediatric
organization	Traditional Medicine	cold medicines	$	1,791,553	$	1,762,477	$	1,755,387	$	1,755,104
		Advance payments to
Advance payment to		suppliers for goods
Suppliers	Suppliers	purchased		1,994,819		2,938,561		2,926,740		2,487,493
Total			$	3,786,372	$	4,701,038	$	4,682,127	$	4,242,597

Prepayments to suppliers are primarily comprised of two types of expenses: (i) an advertising fee (the term of service which is generally one year), which will be expensed in the third and fourth quarters of 2010; and (ii) prepaid deposits for purchasing raw materials and packaging materials required for our manufacturing and operations, which is typically expensed with three months.  Although a portion of prepayments for the raw materials and packaging materials have been expensed, due to the purchasing behaviour of our customers in 2010 which has caused a slightly higher demand for raw materials and packaging materials, as of September 30, 2010, such prepayments have not reduced but have in fact increased.  In the fourth quarter of 2010, when our advertising fees ar e expensed, our prepayment will be reduced.

10

Inventory

Management compares the cost of inventories with the market value.  We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, future pricing and market conditions.

Property, plant and Equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and amortization.  Expenditures for maintenance and repairs are charged to earnings as incurred, additions, renewals and betterments are capitalised.  When property and equipment are retired or otherwise disposal of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss in included in operations.  Depreciation is computed using the straight-line method over the estimated useful lives of the assets.  Judgment is required to determine the estimated useful lives of assets, especially for plant and equipment and transportation equipment, including determining how long existing equipment can function and when n ew technologies will be introduced at cost-effective price points to replace existing equipment.  Changes in these estimates and assumptions could materially impact the financial position and results of operations.

Accounting for Stock-Based Compensation

The account for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", as amended by the Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation."  Accounting Principles Board Opinion No. 25 and Financial Accounting Standards Board Interpretation No. 44 state that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the company’s common stock on the grant date.  We adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Sto ck-Based Compensation" which requires compensation expense to be disclosed based on the fair value of the options granted at the date of the grant.

In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires companies to recognize in the statement of operations the grant date fair value of stock options and other equity-based compensation issued to employees.  FAS No. 123R is effective beginning in the first quarter of fiscal 2006.

We did not issue any stock options to employees during the three months ended September 30, 2010, therefore disclosures are not required.

Accounting for Defined Benefit Pensions and Other Postretirement Plans

In September 2006, FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”).  SFAS No. 158 improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded statues in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization.  This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.  An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006.  An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007.  However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements.

a.	A brief description of the provisions of this Statement
b.	The date that adoption is required
c.	The date the employer plans to adopt the recognition provisions of this Statement, if earlier.

11

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.  The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Valuation of Intangibles

From time to time, we acquire intangible assets that are beneficial to our product development processes. Management periodically evaluates the carrying value of intangibles, including the related amortization periods. In evaluating acquired intangible assets, management determines whether there has been impairment by comparing the anticipated undiscounted cash flows from the operation and eventual disposition of the product line with its carrying value. If the undiscounted cash flows are less than the carrying value, the amount of the impairment, if any, will be determined by comparing the carrying value of each intangible asset with its fair value. Fair value is generally based on either a discounted cash flows analysis or market analysis. Future operating income is based on various as sumptions, including regulatory approvals, patents being granted, and the type and nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.

In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.”  This Staff Position is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  Early adoption is prohibited. The adoption of this new FSP did not have a material impact on the Company’s financial position, results of operations or cash flows.

The Fair Value Option for Financial Assets and Financial Liabilities

In February, 2007, FASB issued SFAS 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The adoption of this new standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

Income Taxes

The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for uncertainty in Income Taxes." FIN 48 clarifies the accounting for Income Taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition and clearly scopes income taxes out of SFAS 5, "Accounting for Contingencies."FIN 48 is effective for fiscal years beginning after December 15, 2006. As a result of implementing FIN 48, there have been no adjustments to the Company's financial statements.

Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") through December 31, 2007 is at a statutory rate of 33%, which is comprised of 30% national income tax and 3% local income tax.  As of January 1, 2008, the EIT is at a statutory rate of 25%.  The Company is a high technology business and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007.  Starting from January 1, 2008, the EIT is at a reduced rate of 15% to the Company.

Foreign Currency

Our functional currency is the U.S. dollar and our subsidiary and our operating company in China use their respective local currencies as their functional currencies, i.e. the Chinese Yuan Renminbi (CNY). An entity's functional currency is the currency of the primary economic environment in which the entity operates. Management must use judgment in determining an entity's functional currency, assessing economic factors including cash flow, sales price, sales market, expense, financing and inter-company transactions and arrangements. Impact from exchange rate changes related to transactions denominated in currencies other than the functional currency is recorded as a gain and loss in the statements of operations, while impact from exchange rate changes related to translating a foreign ent ity's financial statements from the functional currency to its reporting currency, the U.S. dollar, is disclosed and accumulated in a separate component under the equity section of the balance sheets. Different judgments or assumptions resulting in a change of functional currency may materially impact our financial position and results of operations.

12

Statutory Reserve

In accordance with the laws and regulations of the PRC, a wholly-owned Foreign Invested Enterprises income, after the payment of the PRC income taxes, shall be allocated to the statutory surplus reserves and statutory public welfare fund.  Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent of the profit after tax to the surplus reserve fund and additional 5-10 percent to the public affair fund.  The public welfare fund reserve was limited to 50 percent of the registered capital.  Effective January 1, 2006, there is now only one fund requirement.  The reserve is 10 percent of income after tax, not to exceed 50 percent of registered capital.

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of September 30, 2010 and December 31, 2009, the Company had allocated $810,540 and $810,540, respectively, to these non-distributable reserve funds.

CONTRACTUAL OBLIGATIONS

As of September 30, 2010 and December 31, 2009, the Company had contractual obligations of $447,888 and $1,524,812 respectively as follows:

	As of		As of
Within one year	September 30, 2010		December 31, 2009
Advertisement expenses	$	447,888	$	1,524,016
Operating lease rental		-		796
	$	447,888	$	1,524,812

Recent Accounting Pronouncements

No new accounting pronouncements issued or effective during the fiscal year has had, or is expected to have a material impact on these consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

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 Jun Xia, the Company’s Chief Executive Officer (“CEO”), and Minggang Xiao, 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 period ended September 30, 2010. Based upon that evaluation, and in response to comments raised by the SEC, the Company’s CEO and CFO concluded that, as of the date of evaluation, there was a material weakness in the Company’s internal controls, and therefore the Company’s internal control over financial reporting was not effective. The material weakness was relate d to a lack of technical accounting expertise due to the lack of a sufficient number of personnel with an appropriate level of knowledge of and experience in generally accepted accounting principles in the United States of America (U.S. GAAP) that are appropriate to the Company's financial reporting requirements. As a result of such evaluation, the Company's CEO concluded that, as of the date of evaluation, the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, or that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

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During the course of internal evaluation, the Company determined that accounting errors were made in connection with the Company’s classification of certain warrants as a derivative liability as well its disclosure of certain other accounting policies.

Based on the impact of the aforementioned accounting errors, the Company determined to restate its consolidated financial statements as of December 31, 2009, March 31, 2010, and June 30, 2010.

The Company plans to take the following steps to remediate the deficiencies in disclosure controls and procedures that are identified above:

1. Hire additional accounting and operations personnel, as needed, to ensure that accounting personnel with adequate experience, skills and knowledge relating to complex, non-routine transactions are directly involved in the review and accounting evaluation of our complex, non-routine transactions.

2. Require senior accounting personnel and the principal accounting officer to review complex, non-routine transactions to evaluate and approve the accounting treatment for such transactions.

We believe that the foregoing steps will help strengthen the general internal control process, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate.

Changes in internal controls

The Company’s management, with the participation of its CEO and CFO, performed an evaluation as to whether any change in the Company’s internal controls over financial reporting occurred during the quarter ended September 30, 2010. Based on that evaluation, the Company’s CEO and CFO concluded that, other than as disclosed above, 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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

To our knowledge, there is no material litigation pending or threatened against us.

Item 1A. Risk Factors.

N/A.

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

On September 8, 2010, the Company issued 100,000 shares of common stock at $2.20 per share to one investor for a total cash consideration of $220,000.

On October 15, 2010, the Company issued an aggregate of  1,470,000 shares of common stock to four individuals in contemplation of certain consulting services to be rendered by such individuals.

On November 12, 2010, the Company issued 200,000 shares of common stock at $2.20 per share to two investors for a total cash consideration of $440,000.

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, 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.

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 906 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 PEDIATRIC PHARMACEUTICALS, INC.
Dated: November 22, 2010	By:	/s/ Jun Xia
		Name: Jun Xia
		Title: Chief Executive Officer
		(principal executive officer)
Dated: November 22, 2010
	By:	/s/ Minggang Xiao
		Name: Minggang Xiao
		Title: Chief Financial Officer
		(principal financial and accounting officer)

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