China Pharmaceuticals Inc - FORM 10-Q

Attached files

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2010

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

For the transition period from _______ to _______

Commission file number: 000-52763

CHINA PHARMACEUTICALS, INC.

______________________________________________________

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

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

24th Floor, Building A, Zhengxin Mansion

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

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

(Address of principal executive offices)

011 - (86) 29-8406-7215

(Registrant’s telephone number, including area code)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No □

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

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

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

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

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 o No o

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: 38,450,000 shares of common stock, $.001 par value, were outstanding as of May 1, 2010.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4T.	Controls and Procedures	24
	PART II
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	(Removed and Reserved)	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURES		26

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA PHARMACEUTICALS, INC.

INDEX TO FINANCIAL STATEMENTS

MARCH 31, 2010, AND 2009

(Unaudited)


Financial Statements-

Report of Independent Registered Public Accounting Firm	F-2

Balance Sheets as of March 31, 2010, and December 31, 2009	F-3

Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2010, and 2009	F-4

Statements of Cash Flows for the Three Months Ended March 31, 2010, and 2009	F-6

Notes to Financial Statements March 31, 2010, and 2009	F-6

F - 1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of

China Pharmaceuticals, Inc.

We have reviewed the accompanying balance sheet of China Phamaceutical Inc. (the “Company”) as of March 31, 2010, and the related statements of income, stockholders’ equity and comprehensive income, and cash flows for the three-month period ended March 31, 2010. These financial statements are the responsibility of the company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2009 and the related consolidated statements of income, retained earnings and comprehensive income, and consolidated statement of cash flows for the year then ended; and in our report dated March 30, 2010 we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31 2009, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Acquavella, Chiarelli, Shuster, Berkower & Co., LLP

Certified Public Accountants

New York, N.Y.

May 11, 2010

F - 2

CHINA PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2010

ASSETS
	3/31/2010			12/31/2009
Current Assets	Unaudited			Audited
Cash and cash equivalents	$	5,518,587		$	6,685,630
Accounts receivable		5,538,987			3,525,544
Due from officer		5,420			5,427
Inventories		1,014			396,513
Prepayments and other receivables		652,327			708,761
Trade deposit paid		1,256,280			2,991,628
Total Current Assets		12,972,615			14,313,403

Property and equipment, net		7,584,281			7,686,245
Construction in progress		3,368,965			3,373,819
Intangible assets, net		8,194,203			8,321,329
Total Assets	$	32,120,064		$	33,694,796

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	515,229		$	744,880
Accrued expenses and other payables		351,827			778,290
Trade deposit received		12,092			83,879
Short-term bank loans		-			2,493,692
Value-added tax payable		545,329			318,142
Income tax payable		541,481			651,399
Total Current Liabilities		1,965,958			5,070,282

Long-term Liabilities		-			-
Total Liabilities		1,965,958			5,070,282
Stockholders’ Equity Preferred stock, par value, $0.0001 per share 20,000,000 shares authorized, none outstanding Common stock, par value, $0.0001 per share, 100,000,000 shares authorized, 31,675,000 and 31,450,000 shares issued and outstanding		3,168			3,168
Common stock subscribed, par value, $0.0001 per share, 25,000 and 250,000 shares issued		2			2
Paid-in capital		6,580,780			6,580,780
Subscriptions receivable		(1,000	)		(1,000	)
Statutory reserves		2,292,585			2,137,797
Accumulated other comprehensive loss		54,259			72,543
Retained earnings		21,224,312			19,831,224
Total Stockholders’ Equity		30,154,106			28,624,514
Total Liabilities and Stockholders’ Equity	$	32,120,064		$	33,694,796

The accompanying notes are an integral part of these financial statements

F - 3

CHINA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

	2010			2009

Sales, net	$	7,053,199		$	4,693,433

Cost of sales		(2,820,178	)		(1,929,294	))

Gross profit		4,233,021		$	2,764,139

Selling, general and administrative expenses		(2,114,086	)		(574,985	)

Income from operations		2,118,935			2,189,154

Other Income (Expense)
Interest income		120			12,401
Other income		-			591
Interest expense		(29,653	)		(81,241	)
Total other Income (Expense)		(29,533	)		(68,249	)

Income before income taxes		2,089,402			2,120,905

Provision for income taxes		(541,526	)		(318,136	)

Net income	$	1,547,876		$	1,802,769

Net income per common share
Basic		0.05		$	0.06
Diluted		0.05		$	0.06

Weighted average common shares outstanding
Basic		31,675,000			31,662,637
Diluted		31,675,000			31,662,637

Net income	$	1,547,876		$	1,802,769
Other comprehensive income (loss)		(18,284	)		6,401
Comprehensive income (loss)	$	1,529,592		$	1,809,170

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

F - 4

CHINA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THREE MONTHS ENDED MARCH 31, 2010



	Common Stock				Stock subscribed						Paid- in		Subscription			Statutory		Comprehensive Income			Retained			Total Shareholders’
	Shares		Amount		Shares			Amount			Capital		receivable			Reserves		(Loss)			Earnings			Equity
Balance 12/31/2008		31,450,000	$	3,145		250,000			25		$	6,580,780		(10,000	)	$	1,247,175	$	41,266		$	11,814,467		$	19,676,858
Transfer Reserves																	890,622					(890,622	)		-
Capital Contribution		225,000		23		(225,000	)		(23	)				9,000											9,000
Comprehensive income																			31,277						31,277
Net Income																						8,907,379			8,907,379
Balance 12/31/2009		31,675,000	$	3,168		25,000		$	2		$	6,580,780	$	(1,000	)	$	2,137,797	$	72,543		$	19,831,224		$	28,624,514
Transfer Reserves																	154,788					(154,788	)		-
Capital Contribution																									-
Comprehensive income																			(18,284	)					(18,284	)
Net Income																						1,547,876			1,547,876
Balance 3/31/2010		31,675,000	$	3,168		25,000		$	2		$	6,580,780	$	(1,000	)	$	2,292,585	$	54,259		$	21,224,312		$	30,154,106

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

F - 5

CHINA PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,547,876		$	1,802,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		230,072			201,427
Provision for impairment loss on intangible assets		1,630,846			-
Loss on assets disposed		-			-
Changes in operating assets and liabilities:
Cash pledged		-			193,770
Accounts receivable		(3,644,289	)		(166,311	)
Due from officer		7			(5,411	)
Prepaid and other receivables		56,434			27,613
Trade deposit paid		(1,735,248	)		3,176
Inventory		395,499			(86,573	)
Accounts payable and accrued expenses		(656,114	)		(39,331	)
Bank acceptance payable		-			(193,770	)
Trade deposit received		(71,787	)		(18,826	)
Due to shareholers		-			-
VAT tax payable		227,187			16,622
Income tax payable		(109,918	)		3,504
Total adjustment		(206,815	)		(64,110	)

Net cash provided by (used in) operating activities		1,341,061			1,738,659
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment		(981	)		(22,222	)
Construction in progress		4,853			-
Intangible assets		-			-
Proceeds of assets disposed		-			-
Net cash used in Investing activities		3,872			(22,222	)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from short-term bank loan		-			731,208
Repayment of short-term bank loan		(2,493,692	)		(877,450	)
Proceeds of issuance of stock		-			9,000
Net cash provided by (used in) financing activities		(2,493,692	)		(137,242	)

Effect of exchange rate changes on cash and cash equivalents		(18,284	)		25,821

Net Increase (Decrease) in cash and cash equivalents		(1,167,043	)		1,605,016

Cash and cash equivalents, beginning balance		6,685,630			5,049,188
Cash and cash equivalents, ending balance		5,518,587		$	6,654,204
SUPPLEMENTAL DISCLOSURES:
Interest payments	$	29,653		$	81,241
Income tax payments	$	651,399		$	314,632

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

F - 6

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 1 - ORGANIZATION

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

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

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

On February 12, 2010, the Company completed its merger with China Qinba in accordance with a Merger Agreement (the “Merger Transaction”). The Merger 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 Qinba (the legal acquiree) is considered the accounting acquirer for accounting purposes. Subsequent to the Merger Transaction, the financial statements of the combined entity will in substance be those of China Qinba. The assets, liabilities and historical operations prior to the Merger Transaction will be those of China Qinba. Subsequent to the date of the Merger Transaction, China Qinba is deemed to be a continuation of the business of the Company. Therefore, post-merger financial statements will include the combined balance sheet of the Company and China Qinba, the historical operations of the Company and China Qinba from the closing date of the Merger Transaction forward.

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

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

F - 7

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiary and variable interest entity (“VIE”) for which the Company is the primary beneficiary. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted FIN 46R, ASC 810, Consolidation, which requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE’s residual returns.

In determining Xi’an Qinba Pharmaceutical is the VIE of Xi’an Pharmaceuticals Development Co., Ltd., the Company considered the following indicators, among others:

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

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

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

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

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

Foreign Currency

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.

F - 8

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Dollars (USD) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, included in the Codification as ASC 830, Foreign Currency Matters. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’ equity, included in the Codification as ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the income statement. For the year ended March 31, 2010 and 2009, the foreign currency translation adjustment to the Company’s comprehensive income (loss) was $(18,284) and $ 6,401.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

Contingencies

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

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

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

Cash and Cash Equivalents

Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

F - 9

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis.

The standard credit period of the Company’s most of client is three months. Within the medical industry in China, the collection period is generally longer than for other industries. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of March 31, 2010. The allowance for doubtful account as of March 31, 2010 and December 31, 2009 are $2,138,887 and $ 508,041 respectively.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowances are made to reduce their inventories to market value, if lower. As of March 31, 2010 and December 31, 2009, inventories consist of the following:

	3/31/2010		12/31/2009

Raw materials	$	1,014		370,111
Finished goods		-		26,260
	$	1,014		396,513

Property, Plant & Equipment

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

Building and improvements	20-32 years
Machinery	8-42 years
Fixture, furniture and equipment	5-15 years
Motor vehicles	5-7 years

F - 10

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property, Plant & Equipment consist of the following:

		3/31/2010			12/31/2009
Building and improvements	$	3,723,080		$	3,723,080
Machinery		5,839,694			5,839,130
Fixture, furniture and equipment		178,489			178,071
Motor vehicles		111,834			111,834
		9,853,097			9,852,116
Less: Accumulated depreciation		(2,268,816	)		(2,165,870	)
	$	7,584,281		$	7,686,245

Depreciation expense for the year ended March 31, 2010 and 2009 was $102,946 and $ 107,090, respectively.

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated period of benefit, ranging from one to fifty years. Management evaluate the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented. The land rights purchased in 2003 will expire in 2053. All of the Company’s intangible assets are subject to amortization with estimated lives of:

Land use right	50 years
Proprietary technologies	20 years

As of March 31, 2010 and December 31, 2009, the components of finite-lived intangible assets are as follows:

	3/31/2009			12/31/2009

Land use right	$	1,058,965		$	1,058,965
Proprietary technologies		8,228,223			8,965,538
		9,287,188			10,024,503
Less: Accumulated amortization		(1,092,985	)		(965,859	)
		8,194,203			9,058,644
Less: Impairment provision		-			(737,315	)
	$	8,194,203		$	8,321,329

F - 11

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Amortization expense for the year ended March 31, 2010 and 2009 were $127,126 and $94,337, respectively. The estimated future amortization expenses related to intangible asset as of December 31, 2009 are as follows:

12/31
2010	$	508,504
2011		508,504
2012		508,504
2013		508,504
2014		508,504
Thereafter	$	5,651,683

Long-Lived Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of 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 - 12

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition

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

The Company does not allow its customers to return products. The Company’s customers can exchange products only if they are damaged in transportation.

Stock-Based Compensation

In October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based Compensation”, included in the Codification as ASC 718, Compensation-Stock Compensation. ASC 718 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights.

In December 2004, the FASB issued FASB Statement No. 123R ("ASC 718"), "Share-Based Payment, an Amendment of FASB Statement No. 123." SFAS 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. SFAS 123R is effective beginning in the Company's first quarter of fiscal 2006.

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.

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.

F - 13

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

Comprehensive Income

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

Statement of Cash Flows

In accordance with SFAS No. 95, “Statement of Cash Flows”, included in the Codification as ASC 230, Statement of Cash Flows, cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

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.

Segment Reporting

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

F - 14

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), included in the Codification as ASC 810. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”), included in the Codification as ASC 855, Subsequent Events. This topic establishes the period in which management of a reporting entity should evaluate events and transactions for recognition or disclosure in the financial statements. It also describes the circumstances under which an entity should recognize events or transactions that occur after the balance sheet date. This topic is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not expect the adoption of this topic to have a material effect on its financial statements and related disclosures.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“SFAS No. 166”), expected to be included in the FASB Accounting Standards Codification (‘Codification’) as Accounting Standards Codification (‘ASC 860”), Transfers and Servicing. This topic improves the comparability of information that a reporting entity provides regarding transfers of financial assets and the effects on its financial statements. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that this topic will have on its financial statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS No. 167”), expected to be included in the Codification as ASC 810, Consolidation. This topic changes the consolidation guidance applicable to a variable interest entity. Among other things, it requires a qualitative analysis to be performed in determining whether an enterprise is the primary beneficiary of a variable interest entity. This topic is effective for interim and annual reporting periods ending after November 15, 2009. The Company is currently evaluating the effect that SFAS No. 167 will have on its financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On DECEMBER 31, 2009, the Company adopted this topic, which has no effect on the Company’s financial statements as it is for disclosure purposes only.

F - 15

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 3 – SHORT-TERM BANK LOAN

The following summarizes short-term bank loan as of March 31, 2010 and December 31, 2009:

		3/31/2010			12/31/2009
Agricultural Bank of China	$		Agricultural Bank of China	$	2,484,653
Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009		-	Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009
		-
Industrial and Commercial Bank of China -Xixiang Branch		-	Industrial and Commercial Bank of China -Xixiang Branch		1,760,253
Term of the loans call for interest at 5.31% per annum to a floating rate, with principal due in 2010		-	Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009		-

Xixiang rural cooperative bank		-	Xixiang rural cooperative bank		733,439
Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010		-	Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010		-


Total		-			$2,493,692
Current Portion		-			2,493,692
Long term Portion	$	-		$	-

Note 4 – COMPENSATED ABSENCES

Regulation 45 of local labor law entitles employees to annual vacation leave after 1 year of service. In general all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.

Note 5- COMMITMENTS

The Company is committed to pay an additional $2,197,152 under an agreement of construction in process with Shaanxi Kai Da Air Purification Co., Ltd.

Note 6 – INCOME TAX

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

The Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007. Starting from 2008, the Enterprise Income Tax (EIT) is at a statutory rate of 15%. The Company expensed $ 541,526 and $ 318,136 for income tax for the three months ended March 31, 2010 and 2009.

F - 16

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 7 – MAJOR CUSTOMERS AND CREDIT RISK

Thirteen and twelve customer represented 81.42% and 90.1% of sales for the three months ended March 31, 2010 and 2009 respectively. Eleven and twelve customer represented 89.71% and 95.27% of the Company’s accounts receivable for the three months ended March 31, 2010 and 2009 respectively. The Company had three and three vendors at March 31, 2010 and 2009 who accounted for 63.3% and 63.92% of the total purchases. Two and two vendors at March 31, 2010 and 2009 accounted for 47% and 46% of the Company’s accounts payable.

Note 8 - STATUTORY RESERVES

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

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or crease in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of March 31, 2010 and December 31, 2009, the Company had allocated $ 2,292,585 and $ 2,137,797 to these non-distributable reserve funds.

Note 9 - OTHER COMPREHENSIVE INCOME

Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in stockholders’ equity at March 31, 2010 is as follows:

	Accumulated Other Comprehensive Income (loss)
Balance at December 31, 2008		41,266
Change for 2009		31,277
Balance at December 31, 2009	$	72,543
Change for three months ended March 31, 2010		(18,284	)
Balance at March 31, 2010	$	54,259

F - 17

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

Note 10- CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

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

§	The Cony may not be able to adequately protect and maintain its intellectual property.

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

§	The Company may have difficulty competing with larger and better financed companies in the same sector. New legislative or regulatory requirements may adversely affect the Company’s business and operations. The Company is dependant on certain key existing and future personnel.

§	The Company’s growth is dependent on its ability to successfully develop, market, or acquire new drugs. The Company may be subject to product liability claims in the future.

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

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

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

§	Fluctuation of the Renminbi could materially affect the Company’s financial condition and results of operations.

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

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

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

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

Note 11– SUBSEQUENT EVENTS

For the three months ended March 31, 2010, the Company has evaluated subsequent events for potential recognition and disclosure through May 11, 2010, the date of the financial statement issuance.

F - 18

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

Cautionary Notice Regarding Forward-Looking Statements

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

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

The nature of our business makes predicting the future trends of our revenue, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements include, without limitation, the following:

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

·	legislative and regulatory changes that affect our business;

·	the availability of funds and working capital;

·	the actions and initiatives of current and potential competitors;

·	investor sentiment; and

·	our reputation.

We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.

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

Results of Operations

Comparison of the Three Months Ended March 31, 2010 and 2009

Net Sales

In the three months ended March 31, 2010, we had net sales of $ 7,053,199, an increase of 50% as compared with $ 4,693,433 sold in the same period ended on March 31, 2009. This increase was primarily due to increased sales and manufacturing efforts.

Gross Profit

Gross profit increased 53% to $4,233,021 for the three months ended March 31, 2010, as compared to $$2,764,139 for the three months ended March 31, 2009. Our gross profit margin rose from 59% as of the three months ended March 31, 2009 to 60% as of the same period of 2010, mainly due to a decrease in raw material expenses.

Income from Operations

Operating income decreased 3% to $2,118,935 for the three months ended March 31, 2010, as compared with $2,189,154 for the three months ended March 31, 2009. The decrease was primarily a result of an increase of selling and administrative expenses.

Cost of Sales

Cost of sales increased to $2,820,178 for the three months ended March 31, 2010, representing a 46% increase as compared with $1,929,294 for the same period of 2009. This increase is due primarily to sales increase.

Operating Expenses

Operating expenses were $2,114,086 for the three months ended March 31, 2010, an increase 268% as compared to $574,985 for the same period of 2009. This increase was due primarily to an increase of sales cost due to an increase of selling and administrative expenses resulting from an increase in provision for impairment of intangible assets.

Net Income

Net income was $1,547,876 for the three months ended March 31, 2010, a decrease of 14% from $1,802,769 for the same period of 2009. This decrease is primarily attributable to an increase of operating expenses. Our net profit margin dropped 16% from 38% as of the three months ended March 31, 2009 to 22% as of the three months ended March 31, 2010. This decrease was primarily attributable to an increase of operating expenses.

Accounts Receivable

Accounts Receivable increased 3% to $5,538,987 as of March 31, 2010, compared with $5,376,919 as of March 31, 2009. This increase in accounts receivable was primarily attributable to an increase of sales.

Inventory

Inventory consists of raw materials and finished goods as of March 31, 2010. During this period, the recorded value of our inventory decreased 100% to $1,014 from $336,632 as of March 31, 2009. In addition, direct raw materials decreased from $311,358 as of March 31, 2009 to $1014 as of March 31, 2010, an decrease of 100%. These decreases were mainly due to preparations to move the Company’s headquarters to its Xian factory location in Jingwei Development Zone, as a result of which most of the Company’s raw material inventory was depleted so as to reduce administrative and moving expenses associated with the anticipated move. In the beginning of April 2010, the Company resumed purchasing raw materials for regular manufacturing.

Accounts payable

Accounts payable amounted to $515,229 as of March 31, 2010, a decrease of 67% from $1,560,221 as of March 31, 2009. This decrease is mainly due to prompt payment.

Liquidity and Capital Resources

Overview

We had net working capital surplus $11,006,657 at March 31, 2010, an increase of $4,235,342 over a net working capital deficit of $6,771,315 at March 31, 2009.

We incurred a gain from operations of $2,118,935 for the three months ended March 31, 2010; a decrease of $70,219 compared to a gain from operations of $2,189,154 for the three months ended March 31, 2009. We generated a net gain for the three months ended March 31, 2010 and 2009 of $1,547,876 and $1,802,769, respectively.

Cash and Cash Equivalent

Our cash and cash equivalents were $6,685,630 at the beginning of the three months ended March 31, 2010 and decreased to $5,518,587 by the end of such period, a decrease of $1,167,043 or 17%. The net change in cash and cash equivalents represented an increase of 27% or $1,411,359 from $5,242,845 for the comparable period in 2009. The decrease was primarily attributable to repayment of short-term bank loans.

Net cash provided by operating activities

Net cash provided by operating activities was $1,341,061 for the three months ended March 31, 2010, a decrease of $ 397,598 or 23% from $1,738,659 for the comparable period in 2009. The decrease was primarily attributable to a decrease of net income.

Net cash used in investing activities

Net cash used in investing activities was $3,872 for the three months ended March 31, 2010, a decrease of $26,094 or 117% from $22,222 for the comparable period in 2009. The increase was primarily attributable to a decrease of purchase of equipment.

Net cash used in financing activities

Net cash used in financing activities was 2,493,692 for the three months ended March 31, 2010, compared to $137,242 for the same period in 2009. The difference was primarily attributable to repayment of short-term bank loans.

Contractual Obligations and Off-Balance Sheet Arrangements.

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

To date, our business has been dependent upon short- to mid-term bank loans. We have paid in full our outstanding loans and at March 31, 2010, we had total outstanding bank loans of $0.

The following summarizes short-term bank loan as of March 31, 2010 and December 31, 2009:

		3/31/2010			12/31/2009
Agricultural Bank of China	$		Agricultural Bank of China	$	2,484,653
Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009		-	Terms of these loans call for interest from 9.3375% to 9.711% per annum, with principal due in 2009
		-
Industrial and Commercial Bank of China -Xixiang Branch		-	Industrial and Commercial Bank of China -Xixiang Branch		1,760,253
Term of the loans call for interest at 5.31% per annum to a floating rate, with principal due in 2010		-	Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009		-

Xixiang rural cooperative bank		-	Xixiang rural cooperative bank		733,439
Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010		-	Term of these loans call for interest from 11.46% to 12,24% per annum with principal due in 2009 and 2010		-


Total		-			$2,493,692
Current Portion		-			2,493,692
Long term Portion	$	-		$	-

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

Critical accounting policies and estimates

The financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates (See Note 2 in the Notes to Financial Statements).

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 assumptions, including regulatory approvals, patents being granted, and the type and nature of competing products. If regulatory approvals or patents are not obtained or are substantially delayed, or other competing technologies are developed and obtain general market acceptance or market conditions otherwise change, our intangibles may have a substantially reduced value, which could be material.

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

The Fair Value Option for Financial Assets and Financial Liabilities

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

Income Taxes

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

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

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 March 31, 2010 and March 31, 2009, the Company had allocated $ 2,137,797 and $1,247,175, respectively, to these non-distributable reserve funds.

Inflation

Inflation in recent years has affected the business results of the Company. First of all, on the global economic expansion, supply has been restricted and coupled with the fact that USA has adopted a relaxed currency policy etc., these increase inflation risks. Secondly, GNP increases in China also elevates consumption ability and production cost, prices increase as a natural tendency. Finally, as a result of the macro economic trends and price increases, the Company’s procurement prices are also affected resulting in increase in cost of sales.

The Company operates in China and as such, the Company’s business activities, financial position and operational results will be affected by PRC politics, economic and legal environments and also affected by the overall economic situation of China. The business of the Company may be affected by the relevant laws, regulations, anti-inflation measures, currency conversion and overseas remittance and exchange rates issues etc that are related to China politics.

New Financial Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), included in the Codification as ASC 810-10-65-1. This topic establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This topic also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This topic is effective for fiscal years beginning October 1, 2009. The Company does not expect the impact of the adoption of SFAS 160 to be material.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification ™ and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS No. 168”), included in the Codification as ASC 105, Generally Accepted Accounting Principles. This topic is the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in accordance with generally accepted accounting principles. This topic is effective for interim and annual reporting periods ending after September 15, 2009. On September 30, 2009, the Company adopted this topic, which has no effect on the Company’s financial statements as it is for disclosure purposes only.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

N/A.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Guozhu Wang, the Company’s Chief Executive Officer (“CEO”), and Lei Tao, the Company’s Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the three months ended March 31, 2010. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required to be filed or submitted under the Exchange Act is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Changes in internal controls

Our management, with the participation of our CEO and CFO, performed an evaluation as to whether any change in our internal controls over financial reporting occurred during the quarter ended March 31, 2010. Based on that evaluation, our CEO and CFO concluded that no change occurred in the Company's internal controls over financial reporting during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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.

None.

Item 3. Defaults Upon Senior Securities.

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

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6.

Exhibits.

(a)

Exhibits

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

SIGNATURE

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


	CHINA PHARMACEUTICALS, INC.

Dated: May 17, 2010	By:	/s/ Guozhu Wang
		Name: Guozhu Wang
		Title: Chief Executive Officer


Dated: May 17, 2010	By:	/s/ Tao Lei
		Name: Tao Lei
		Title: Chief Financial Officer

Attached files

China Pharmaceuticals Inc Reports

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