China Pharmaceuticals Inc - FORM 10-K/A

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - China Pharmaceuticals Inc	ex321.htm
EX-32.2 - EXHIBIT 32.2 - China Pharmaceuticals Inc	ex322.htm
EX-31.1 - EXHIBIT 31.1 - China Pharmaceuticals Inc	ex311.htm
EX-31.2 - EXHIBIT 31.2 - China Pharmaceuticals Inc	ex312.htm
EX-10.23 - EXHIBIT 10.23 - China Pharmaceuticals Inc	ex1023.htm
EX-10.25 - EXHIBIT 10.25 - China Pharmaceuticals Inc	ex1025.htm
EX-10.24 - EXHIBIT 10.24 - China Pharmaceuticals Inc	ex1024.htm
EX-10.22 - EXHIBIT 10.22 - China Pharmaceuticals Inc	ex1022.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

FORM 10-K /A

Amendment No. 1

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, 2010

o	TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)

Nevada	20-2638087
State or other jurisdiction of Incorporation or organization	(I.R.S. 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) (Zip Code)

Registrant’s telephone number, including area code: 029-82098912-8038

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class

Name of each exchange on which registered

Securities registered pursuant to section 12(g) of the Act:

Common Stock

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. oYes þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes þ No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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

þYes o 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).

o Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Ac t). o Yes þ No

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $15,521,545.

As of April 12, 2011, there are presently 11,399,662 shares of common stock, par value $0.001 issued and outstanding.

EXPLANATORY NOTE

This Amendment No. 1 (“Amendment No. 1”) amends the Annual Report on Form 10-K of China Pharmaceuticals, Inc. (the “Company”) for the year ended December 31, 2010, originally filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2011 (the “Original Filing”). The Company is filing this Amendment No. 1 solely to:

●	revise its disclosure in Item 9A. Controls and Procedures; and

●	to file Exhibits 10.22-10.25, which were inadvertently omitted from the Original Filing.

In connection with filing this Amendment No. 1, the Company is also filing currently dated certifications of the Company's principal executive officer and principal financial officer pursuant to Rules 13a-14(a) and 13a-14(b) under the Securities Exchange Act of 1934, as amended. Except as described above, no other amendments are being made to the Original Filing. This Amendment No.1 does not reflect events occurring after the filing of the Original Filing or modify or update the disclosure contained therein in any way other than as required to reflect the amendments discussed above.

TABLE OF CONTENTS

		Page

PART I

Item 1.	BUSINESS	5
Item 1A.	RISK FACTORS	18
Item 1B.	UNRESOLVED STAFF COMMENTS	30
Item 2.	PROPERTIES	30
Item 3.	LEGAL PROCEEDINGS	31
Item 4.	REMOVED AND RESERVED	31

PART II

Item 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	32
Item 6.	SELECT FINANCIAL DATA	32
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	37
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	38
Item 9A.	CONTROLS AND PROCEDURES	38

Item 9B.	OTHER INFORMATION	38

PART III

Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	39
Item 11.	EXECUTIVE COMPENSATION	43
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	44
Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	45
Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	46

PART IV

Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	47

SIGNATURES		48

FORWARD LOOKING STATEMENTS

In this annual report, references to “China Pharmaceuticals,” “CFMI,” “the Company,” “we,” “our,” “us,” and the Company’s wholly owned subsidiary, “China Qinba,” “Xi’an Development,” and “Xi’an Pharmaceuticals” refer to China Pharmaceuticals, Inc.

This Annual Report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the headings “Risks Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Annual Report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

PART I

Item 1. Business.

Corporate History

China Pharmaceuticals, Inc. was incorporated in the State of Nevada on December 22, 2004, under the name “Nextar Properties, Inc.” On March 30, 2005, the company’s name was changed to “Allstar Restaurants.”

The Company was originally established to pursue opportunities in the family style full-service casual dining segment of the restaurant industry. Allstar Restaurants, through a wholly-owned subsidiary called China Doll Foods Ltd. (f/k/a Fastserve Foods Inc.), acquired on July 1, 2005, owned and operated an established restaurant and licensed lounge called China Doll Restaurant and Lounge located in the city of Regina, in the province Saskatchewan, Canada. Prior to February 12, 2010, China Doll Foods Ltd. acted as the operating company for all business activities relating to the company’s restaurant business(s) in Western Canada.

Allstar Restaurants incorporated a wholly-owned subsidiary under the laws of the State the Delaware under the name Allstar Acquisitions Co. on February 3, 2010. Through the steps described in the section entitled “the Merger Transaction” below, on February 12, 2010, the Company acquired control of Xi’an Qinba Pharmaceuticals, Co., Ltd. (“Xi’an Pharmaceuticals”), a pharmaceuticals manufacturer in China, by way of the Company’s acquisition of China Qinba Pharmaceuticals, Inc., a Delaware corporation (“China Qinba”).

In connection with the Merger Transaction and in order to more accurately describe our business, the Company undertook a number of steps to change its name to China Pharmaceuticals, Inc. (the “Name Change Transaction”). On February 4, 2010, Allstar Restaurants incorporated a wholly-owned subsidiary under the laws of the State of Nevada under the name China Qinba Pharmaceuticals, Inc. Allstar Restaurants filed an amendment to the articles of China Qinba Pharmaceuticals Inc. with the State of Nevada to change its name to China Pharmaceuticals, Inc. on February 16, 2010. Effective March 3, 2010, the Company entered into a plan of merger and reorganization with its subsidiary China Pharmaceuticals, Inc., pursuant to which China Pharmaceuticals, Inc. merged into the Company, and the Company thereby changed its name from “Allstar Restaurants” to “China Pharmaceuticals, Inc.”

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

On September 10, 2010, the Company effected a 3 for 1 reverse split of issued and outstanding shares of common stock of the Company without changing the par value of the stock. The shares outstanding after reverse split were 11,399,662. The shares after the reverse split were retroactively restated from the beginning of the period for all the periods presented. Effective September 10, 2010, the Company filed a Certificate of Change to the Articles of Incorporation, which decreases the total number of authorized shares of common stock, par value $.001 per share, from 75,000,000 shares to 25,000,000 and sets forth the terms of a corresponding three-for-one reverse split of the Company’s issued and outstanding common stock. All information contained in this Form 10-K reflect such post-split share adjustments.

Corporate History of Xi’an Pharmaceuticals

China Qinba Pharmaceuticals, Inc. was incorporated on May 29, 2008 under the laws of Delaware. On August 18, 2008, China Qinba formed Xi’an Development Co., Ltd. as a wholly foreign-owned enterprise (“WFOE”) organized under the laws of the People’s Republic of China (“PRC”) (“Xi’an Development”).

Xi’an Pharmaceuticals, our operating entity, was incorporated in the PRC on October 15, 1969. Xi’an Pharmaceuticals is in the business of manufacturing, marketing and sales of pharmaceuticals in China

As described below, Xi’an Development entered into a series of agreements with Xi’an Pharmaceuticals which we believe give us effective control over the operations and business of Xi’an Pharmaceuticals, the entity through which we now operate our business.

On October 28, 2008, Xi’an Development entered into a Management Entrustment Agreement with Xi’an Pharmaceuticals and the shareholders of Xi’an Pharmaceuticals (the “Management Entrustment Agreement”), pursuant to which Xi’an Qinba and its shareholders agreed to transfer control, or entrust, the operations and management of its business to Xi’an Development. Under the agreement, Xi’an Development manages the operations and assets of Xi’an Pharmaceuticals, controls all of the cash flows of Xi’an Pharmaceuticals through a bank account controlled by Xi’an Development, is obligated to pay all payables and loan payments of Xi’an Pharmaceuticals, and is entitled to 100% of earnings before tax of Xi’an Pharmaceuticals, a management fee. This management fee is payable on a monthly basis and is comprised of 100% of the earnings, before tax, of Xi’an Pharmaceuticals. In the year ended December 31, 2010, the amount of management fee owed to Xi’an Development totaled $10,706,091, however as of the date hereof, Xi’an Pharmaceuticals has not satisfied this obligation.

In addition, under the terms of the Management Entrustment Agreement, Xi’an Development has been granted certain rights which include, in part, the right to appoint and terminate members of Xi’an Pharmaceuticals’ Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments. We anticipate that Xi’an Pharmaceuticals will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Xi’an Development exercises its option. The agreement does not terminate unless the business of Xi’an Pharmaceuticals is terminated or Xi’an Development exercises its option to acquire all of the assets or equity of Xi’an Pharmaceuticals under the terms of the Exclusive Option Agreement as more fully described below and completes the acquisition of Xi’an Pharmaceuticals.

As consideration for Xi’an Pharmaceuticals to enter into the Management Entrustment Agreement, Xi’an Development, through its parent company China Qinba, issued an aggregate of 25,000,000 shares of China Qinba’s common stock to the shareholders of Xi’an Pharmaceuticals which was allocated based on their respective pro rata ownership of Xi’an Pharmaceuticals.

In order to give Xi’an Development further control over Xi’an Pharmaceuticals, the Xi’an Pharmaceuticals shareholders and Xi’an Development, a wholly owned subsidiary of China Children in the PRC, entered into a shareholders’ Voting Proxy Agreement (the “Voting Proxy Agreement”) whereby the Xi’an Pharmaceuticals shareholders irrevocably and exclusively appointed the members of Xi’an Development’s board of directors, as their proxies to vote on all matters that require shareholder approval from Xi’an Pharmaceuticals, including, without limitation, the right to appoint members of the board of directors of Xi’an Pharmaceuticals. The agreement further provides that Xi’an Pharmaceuticals will appoint all of the board of directors of Xi’an Development as its board of directors and must remove and appoint new members to its board to reflect any changes to the board of Xi’an Development. The agreement terminates upon the exercise of the option by Xi’an Development to purchase the shares of Xi’an Pharmaceuticals as described below.

In connection with the Entrustment Management Agreement and the Voting Proxy Agreement, Xi’an Pharmaceuticals and the Xi’an Pharmaceuticals shareholders entered into an exclusive option agreement (the “Exclusive Option Agreement”) whereby the Xi’an Pharmaceuticals shareholders granted Xi’an Development an irrevocable and exclusive purchase option (the “Option”) to acquire Xi’an Pharmaceuticals’ equity and/or remaining assets, but only to the extent that the acquisition does not violate limitations imposed by PRC law on such transactions. Current PRC law does not specifically provide for the equity of a non-PRC entity to be used as consideration for the purchase of a PRC entity’s assets or equity unless the value of the shares are equal to or greater than the value of the enterprise acquired. In addition, there is a lengthy appraisal process which must be approved by the provincial PRC government entities. The consideration for the exercise of the Option is to be determined by the parties and memorialized in future definitive agreements setting forth the kind and value of such consideration. Accordingly, we will consider exercising the Option under such circumstances we believe will be in our best interests and our shareholders and the Exclusive Option Agreement has been drafted to give us such flexibility. In considering whether or not we will exercise the Option we may consider such factors as (1) if the exercise price can be lower than the appraised value under current PRC law (2) availability of funds, (3) any relevant tax considerations at the time, (4) any other relevant PRC laws that may exist at the time, (5) the value of our shares that were previously paid to shareholders of Xi’an Pharmaceuticals, and (6) whether or not the exercise of the Option will provide any other additional benefits to us or our shareholders. Upon exercise of the Option, the parties will prepare transfer documents to be submitted for governmental approval and work together to obtain all approvals and permits. This Agreement may not be terminated without the unanimous consent of all the parties except that Xi’an Pharmaceuticals Development Co., Ltd. may, by giving a thirty (30) days prior notice to terminate this agreement.

In order to further solidify Xi`an Development`s rights, benefits and control of Xi’an Pharmaceuticals under the Entrusted Management Agreement, Voting Proxy Agreement and Exclusive Option Agreement, Xi’an Development and the Xi’an Pharmaceuticals shareholders entered into a share pledge agreement (the “Share Pledge Agreement”) whereby the Xi’an Pharmaceuticals shareholders pledged all of their equity interests in Xi’an Pharmaceuticals, including the proceeds thereof, to guarantee the performance by the shareholders of all of the agreements they entered into with Xi’an Development. Upon breach by any of the shareholders of any of the Management Entrustment Agreement, Voting Proxy Agreement, the Exclusive Option Agreement or the Share Pledge Agreement, Xi’an Development is entitled by operation of law to become the beneficial owner of the shares of Xi’an Pharmaceuticals. Prior to termination of the Share Pledge Agreement, the pledged equity interests of Xi’an Pharmaceuticals cannot be transferred without Xi’an Development’s prior written consent. The provisions of the Share Pledge Agreement and the Voting Proxy Agreement work together to give the board of directors of Xi’an Development control over transfers by the shareholders of Xi’an Pharmaceuticals. The agreement will not terminate until agreed to by all of the parties in writing.

As a result of the above-mentioned contractual agreements between Xi’an Development and Xi’an Pharmaceuticals, the Company treats Xi’an Pharmaceuticals as its variable interest entity (“VIE”), for which the Company is the primary beneficiary, and has consolidated its financial statements include the accounts of the Company, Xi’an Development and Xi’an Pharmaceuticals. All inter-company accounts and transactions have been eliminated in consolidation. The Company has adopted FIN 46R 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.

The following indicators, among others, contributed to the Company’s determination and classification of Xi’an Pharmaceuticals as its VIE:

●

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

●

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

●

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

●

Xi’an Development should be paid a management fee equal to 100% of earnings before tax of Xi’an Pharmaceuticals and should assume all operation risks of Xi’an Pharmaceuticals and bear all losses of Xi’an Pharmaceuticals. Therefore, Xi’an Development is the primary beneficiary of Xi’an Pharmaceuticals.

The Merger Transaction

On February 12, 2010, Allstar Restaurants executed and consummated a Merger Agreement and Plan of Reorganization (the “Merger Agreement”) with Allstar Acquisitions Co., a wholly-owned subsidiary of Allstar Restaurants (“Acquisition Subsidiary”), China Qinba Pharmaceuticals, Inc., a Delaware corporation (“China Qinba”), Terry G. Bowering (the “Parent Controlling Shareholder”), and the majority shareholders of China Qinba (the “Majority Qinba Shareholders”). Guozhu Wang, Guiping Zhang, Xiu’e Xing, Yong Xu, Xiling Gao, Xianhong Xue, Congge Wei and Xiulan Kang comprised the Majority Qinba Shareholders.

Pursuant to the Merger Agreement, China Qinba Pharmaceuticals merged with and into the Acquisition Subsidiary, and all of the shareholders of China Qinba Pharmaceuticals exchanged their shares for an aggregate of 9,333,333 shares of newly issued common stock of the Company. Immediately after the Closing, the Company had a total of 10,680,556 shares of common stock outstanding, with all of the China Qinba shareholders (and their assignees) owning approximately 87.39 % of the Company’s outstanding common stock, and the balance held by those who held the Company’s common stock prior to the Closing. In addition, pursuant to a share exchange agreement dated February 12, 2010, the Parent Controlling Shareholder transferred 1,416,667 shares of the Company’s common stock for cancellation in exchange for 100% of the issued and outstanding shares of China Doll Foods Ltd., a wholly owned subsidiary of the Company.

Our board of directors (the “Board”) as well as the directors and the Majority Qinba Shareholders each approved the Merger Agreement. Following the Closing Date, Allstar Acquisitions Co. merged with and into China Qinba, which became the surviving entity and our wholly-owned subsidiary.

Also pursuant to the Merger Agreement, the Parent Controlling Shareholder transferred 1,416,667 shares of common stock of Allstar Restaurants for cancellation in exchange for 100% of the issued and outstanding shares of China Doll Foods Ltd. a wholly-owned subsidiary, d/b/a China Doll Restaurant and Lounge. The Parent Controlling Shareholder and Allstar Restaurants entered into a binding agreement with respect to such transaction on February 12, 2010.

As a result of the above-mentioned merger transactions, (i) China Qinba became a wholly-owned subsidiary of the Company, (ii) the Company acquired the business of Xi’an Pharmaceuticals as its sole business, and (iii) China Doll Foods Ltd. was spun off from the Company.

The following diagram sets forth the current corporate structure of China Pharmaceuticals, Inc., giving effect to the Name Change Transaction consummated on March 3, 2010:

	China Pharmaceuticals, Inc. (a Nevada company)
		100%
	China Qinba Pharmaceuticals, Inc. (a Delaware company)
		100%
	Xi’an Development Co., Ltd. (a PRC company)
		Contractual agreements
	Xi’an Qinba Pharmaceuticals, Co., Ltd. (a PRC company)

Subsidiaries

As a result of the Merger Transaction, China Qinba and Xi’an Development are our wholly-owned subsidiaries. Xi’an Qinba Pharmaceuticals, the entity through which we operate our business, currently has no subsidiaries, either wholly-owned or partially-owned.

The following individuals were shareholders of Xi’an Qinba Pharmaceuticals, Co. Ltd. (“Xi’an Pharmaceuticals”) who subsequently entered into a series of contractual agreements to transfer control of the operations and management of the business of Xi’an Pharmaceuticals to Xi’an Development Co., Ltd.:

Name of Shareholder	Title		Amount of Contribution (RMB)	Percent of Capital Contribution
Guozhu Wang	Chief Executive Officer		14,500,000		29	%(1)
Guiping Zhang	President		13,500,000		27	%(2)
Weidong Yan			1,000,000		2	%
Yong Zhang			2,300,000		4.6	%
Xiu’e Xing			2,200,000		4.4	%
Yong Xu			2,200,000		4.4	%
Wei Wang			2,300,000		4.6	%
Xiling Gao			2,000,000		4	%
Chenglin Guo			2,000,000		4	%
Weiping Wu			1,500,000		3	%
Rong Bai			1,300,000		2.6	%
Jin Wu			1,000,000		2	%
Zhibo Ding			2,000,000		4	%
Feng Pu			1,000,000		2	%
Zheng Guan			600,000		1.2	%
Aifang Yang			600,000		1.2	%
Total		RMB	50,000,000		100	%

Guozhu Wang and Guiping Zhang are Chief Executive Officer and President of Xi’an Pharmaceuticals, respectively, and own 29 percent and 27 percent of Xi’an Qinba Pharmaceuticals, Co. Ltd., respectively. Other than disclosed above, no individuals in the table are officers/directors of Xian Pharmaceuticals or are related to such officers/directors.

Our Business

Xi’an Pharmaceuticals was formed in October 15, 1969 under the laws of the PRC and is engaged in the research, development, manufacture, packaging, marketing and distribution of pharmaceutical and medical products in China for human use for a variety of diseases and conditions. All of our operations are conducted in the People’s Republic of China where our two manufacturing facilities are located, one in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone. We manufacture pharmaceutical products in the form of capsules, oral solutions, tablets, granules, syrups, medicinal teas, tincture and solutions for injection that are either small volume parenteral solutions that are freeze dried powders or large volume parenteral solutions. Certain of the pharmaceutical products we manufacture are used in the treatment of viral pneumonia, hypotonicity dehydration, viral influenza and many other diseases and indications.

We currently manufacture 85 pharmaceutical products which are sold to numerous distributors who distribute our products pursuant to distribution agreements to licensed healthcare providers such as hospitals, clinics and pharmacies. We currently have 35 active distribution agreements. The raw materials used to manufacture our products include various medicinal herbs such as tumeric and zedoary, which we obtain from specified and qualified suppliers with national qualifications, and sulfamethoxazole, an antibiotic, which is primarily used in the manufacture of Fufang Qiguanyan Pian. We also enter into trading agreements for the supply of many of the materials used to manufacture and package our products including aluminum foil, which we use as the inner packing materials used in tablets production. Xi’an Pharmaceuticals has written agreements with substantially all of its suppliers. Xi’an Tianyi Biotechnology Co., Ltd, Shaanxi Daxin Plastics Co., Ltd. and Shaanxi Qiangli Technology Co., Ltd. are the three biggest suppliers of Xi’an Pharmaceuticals. A brief description of the material terms of the Company’s agreements with these suppliers is as follows:

●

On December 28, 2007, Xi’an Pharmaceuticals entered into a drug procurement agreement with Shaanxi Qiangli Technology Co., Ltd. (“Qiangli”), pursuant to which Xi’an Pharmaceuticals shall purchase 43 specific types of medicine exclusively from Qiangli, provided that Qiangli makes the delivery in time. Delivery must be made within one or two business days upon receiving the order. Urgently needed medicine must be delivered in four hours. Payment for goods should be made within 60 days after acceptance, which is from January 1, 2008 to December 31, 2010. The term of the agreement with Qiangli commenced on January 1, 2008 and terminated on December 31, 2010. The agreement may be terminated if Qiangli dissolves, or mergers with another corporation, or cannot fulfill its obligations under the agreement.

●

On December 24, 2007, Xi’an Pharmaceuticals entered into a drug procurement agreement with Xi’an Tianyi Biotechnology Co., Ltd. (“Tianyi”). The agreement sets forth the rights and obligations of both parties, among which, Xi’an Pharmaceuticals shall purchase 73 specific types of medicine from Tianyi. Tianyi agreed to deliver goods upon receiving the orders from Xi’an Pharmaceuticals within the term of this agreement, which is from January 1, 2008 to December 31, 2010. Payment of goods must be made within 60 days after acceptance. If Xi’an Pharmaceuticals fails to make the payment on time, it shall notify Tianyi immediately for consent. Without consent, Xi’an Pharmaceuticals is obligated to pay a penalty, the amount of which will be determined by prime loan interest rate at the time of the breach. The agreement can separately be terminated by Xi’an Pharmaceuticals without notice when upon breach by Tianyi of the agreement.

●

On December 26, 2007, Xi’an Pharmaceuticals entered into a purchase agreement with Shaanxi Daxin Plastics Co., Ltd. (“Daxin”) concerning the purchase of 66 kinds of medicine packaging materials. Daxin makes delivery upon receiving purchase orders from Xi’an Pharmaceuticals within the term of this agreement, which is from January 1, 2008 to December 31, 2010. If Daxin fails to make timely delivery, it shall pay a penalty charge of 0.3% of the total sales value per day, and in the event that such delay exceeds five days, Xi’an Pharmaceuticals has the right to terminate the agreement. If Daxin delivers unsatisfactory materials, Daxin is subject to a penalty charge of 5% of the total sales price. Payment of the materials must be made within 60 days after acceptance, or else Xian Pharmaceuticals is subject to a 5% penalty charge. Daxin also provides a 30-day warranty on the materials supplied under the agreement. In the event that any third party claims ownership of the subject matter or infringement of intellectual property in the agreement, Xi’an Pharmaceuticals has the right to terminate the agreement and may hold Daxin liable for breaching the agreement.

Our focus has been on the development and sale of pharmaceutical products based on traditional Chinese medicines designed to address numerous diseases and indications, with an emphasis on sales to community hospitals and rural medical institutions.

Principal Products

In the fiscal year ended December 31, 2010, our revenues were principally derived from sales of products listed below. We have SFDA1 approval for all medicines and active pharmaceutical ingredients that we market. Detailed information is provided in the table of products below.

_____________________

1The Chinese government agency, SFDA, is analogous to the Food and Drug Administration (“FDA”) in the United States. Unlike the FDA, however, the SFDA provides intellectual property and competitive protection to certain classes of approved drugs.

We market our pharmaceutical products under numerous brand names, including “Xiaonengren” for our pediatric series of drugs. The following is a list of some of our approved pharmaceutical products and their intended uses.

Table of Products Manufactured by Xi’an Pharmaceuticals

Product No.	Product Name	Indications
1	Metronidazole and Glucose Injection	Varieties of tract infections caused by Anaerobion, trichomoniasis and amebic dysentery.
2	Sodium Chloride Injection	Hypotonicity dehydration solvent or thinner for injection.
3	Glucose and Sodium Chloride Injection	Body fluid loss; supply body fluid, electrolyte, energy preoperation, intraoperation and postoperation.
4	Glucose Injection	Supply energy and body fluid, total, total parenteral nutrition, hypoglycemia, hypertonic solution for dehydrating agent.
5	Compound Sodium Chloride Injection	Hypotonicity dehydration solvent or thinner for injection.
6	Mannitol Injection	Hydrocephalus, glaucoma, edema caused by deep burning or scald, acute renal failure and ascites.
7	Heartleaf Houttuynia Herb Injection	Clear heat, detoxification, promote diuresis. Used for lung abscess, phlegm, cough, urinary tract infections.
8	Sterilized Water for Injection	Solvent of sterilized powder for injection, thinner of injection, or wash solution for operation endoscope in urology Surgery.
9	Zedoary Turmeric Oil and Glucose Injection	Viral pneumonia, viral influenza, encephalitis, myocarditis, viral enteritis, mumps, stomatitis.
10	Zedoary Turmeric Oil and Glucose Injection	Anti-viral drug for children’s viral pneumonia.
11	Citicoline Sodium and Glucose Injection	Irritable neurocranium trauma, disturbance of consciousness after brain operation.
12	Fluconazole Injection	Mycotic infections by candida, cryptococcosis, coccidioidomycosis.
13	Fructose Sodium Diphosphate Injection	Hypophosphataemia angina, acute myocardial infarction and arrhythmia of coronary heart disease and myocardial ischemia of cardiac failure.
14	Matrine and Sodium Chloride Injection	Chronic active hepatitis, chronic prolonged hepatitis.
15	Glycerin Sodium Chloride Injection	High osmosis dehydrant. Reduce high cranial pressure caused by intracerebral hemorrhage, cerebral infarction, trauma, meningitis and brain tumor.
16	Xylitol and Sodium Chloride Injection	Supply heat, improve glycometabolism and remove ketonemia, used as substitute of sugar for diabetics.
17	Ligustrazine Hydrochloride Glucose Injection	Insufficient blood supply, cerebral embolism, angiitis, coronary heart disease, angina.
18	Levofloxacin and Glucose Injection	Respiratory tract infections, urinary tract infections, genital tract infections, skin soft tissue infections, enteral infections, septicemia.
19	Dexamethasone Sodium Phosphate Injection	Hypoadrenocorticism, rheumatoid arthritis, cerebral edema, congenital adrenal cortical hyperplasia.
20	Atropine Sulfate Injection	Toxic shock caused by serious infection, internal organs angina, preanesthetic medication, antiarrhythmic.
21	Kanamycin Sulfate	Systemic infections caused by various gram negative bacteria.
22	Gentamycin Sulfate	Urinary tract infection, septicemia, skin soft tissue infection, enteral infection caused by ordinary pathogen and preoperative prophylactic medication.
23	Hydrocortisone Injection	Toxic symptom caused by various infections, hypocorticoidism caused by various infections, anaphylactic shock.
24	Lappaconitine Hydrobromide for Injection	Non-addictive analgesics, strong analgesic effect, have effect of local anaesthesia, temperature reduction, antifebrile and detumescence.
25	Vitamin B12 Injection	Pernicious anemia, megaloblastic anemia, anemia caused by antifolate drugs, stearrhea.
26	Procaine Hydrochloride Injection	Local anesthetics, used for infiltration anesthesia, mental conduction block.
27	Bupleurum injection	Clear heat, relieve exterior syndrome, for cold treatment. Fever of influenza and malaria.
28	Lidocaine hydrochloride Injection	Local anesthetics, antiarrhythmic.
29	Analgin Tablets	Clear heat and kill pain.
30	Compound Sulfamethoxazole Tablets	Sulfa antibacterial drug.
31	Inosine Tablets	Coenzyme drug, improve metabolism, for various liver and heart diseases, leukocytopenia, central retinitis, optic atrophy.
32	Metronidazole Tablet	Amebicide, antitrichomonal agent, Anti-anaerobic bacteria.
	Vitamin C Tablets	Vitamin C, prevent and treat scurvy.
34	Occrycetin Tablets	Broad spectrum antibiotics. Used for rickettsiosis, brucellosis, mycoplasmalpneumonia, Chlamydia infection, sensitive Gram-positive cocci, subinfection caused by coccus-negative.
35	Lidan Paishi Pian	Clear heat and promote diuresis, cholagogue and remove calculi, biliary tract infection, cholecystitis.
36	Rhubarb Sodium Bicarbonate Tablets	Stomachic and acid making. Used for inappetence and hyperchlorhydria.
37	Dried Yeast Tablets	Vitamin medicine.
38	Berberine Hydrochloride Tablets	Antibacterial drug, used for intestinal infection of dysentery bacillus.
39	Compound Tablet of Fritillary Bulb	Clear lung heat, eliminate phlegm, and relieve cough and asthma. Used for wind cold cough and asthma, chest distress, acute and chronic bronchitis.
40	compound tablet of red sage root	Activate blood and dissolve stasis, regulate vital energy and alleviate pain, used for chest distress and angina.
41	Qinghuo Zhimai Pian	Clear heat, detoxification and purgation.
42	Xanthinol Nicotinate Tablets	Ischemic cerebrovascular diseases like cerebral infarction and thrombosis, brain damages like apoplectic sequela, cerebral trauma, brain surgery sequela, also used for thromboangitis obliterans and phlebitis.
43	Tolperisone Hydrochloride Injection	Central muscle relaxant, vasodilatation. Increase blood volume, used for atherosclerosis and apoplexy sequela.
44	Fufang Huzhang Anmin Pian	Clear heat and detoxification, used for fever, rhinorrhoea, headache, faucitis.
45	Berberine Hydrochloride and Trimethoprim Tablets	Gastroenteropathy caused by sensitive bacteria, intestinal infection like bacillary dysentery.
46	Fufang Qiguanyan Pian	Relieve inflammation, reduce phlegm, relieve asthma, for acute and chronic bronchitis.
47	Qinggan Pian	Clear heat and detoxification, cholagogue and remove calculi. Used for cold and fever, throat irritation, parotitis, muggy jaundice.
48	Paracetamol,Caffein,Atificial Cow-bezoar and chlorphenamine Maleate Tablets	Relieve fever, headache, blocked nose, sore throat and sneezing caused by common cold and influenza.

49	Sanhuang Pian	Clear heat and detoxification, purge pathogenic fire, purgation. Used for body heat, conjunctival congestion, ulcers in mouth and nose, throat irritation, bleeding gum, upset and thirsty, yellow urine, constipation, acute gastroenteritis, and dysentery.
50	Norfloxacin Capsules	Urinary tract infections, gonorrhoea, prostatitis, enteral infections, typhia, salmonella bacteria infections.
51	Paracetamol,Caffein,Atificial Cow-bezoar and chlorphenamine Maleate capsules	Relieve fever, headache, blocked nose and sore throat caused by common cold and influenza.
52	Compound Rifampicin Capsules	Various tuberculosis, improve tolerance with other anti-tuberculosis drugs, shorten treatment period, reduce adverse reaction, defer occurrence of antibiotic-resistant bacteria. Used for extrapulmonary tuberculosis, lepriasis, common bacterial infections.
53	Pediatric Paracetamol Atificial Cow-bezoar and Chlorphenamine Maleate Granules	Relieve headache, fever, sore throat and blocked nose caused by cold.
54	Isatis Root Granules	Clear heat and detoxification, cool blood, relieve sore throat, detumescence. Used for body heat, sore throat, tonsillitis and parotitis.
55	Yinhua Ganmao Chongji	Clear heat, relieve exterior syndrome, relieve sore throat, cold, fever, headache, throat irritation.
56	Ganmao Tuire Keli	Clear heat and detoxification. Used for respiratory tract infection, acute tonsillitis and faucitis.
57	Runhou Yaocha	Good for lung and can reduce internal heat, smooth throat, purge, engender saliva, relieve sore throat, clear throat, invigorate spleen, nourish kidney and revive energy. Used for dry throat, sore throat, foreign body sensation.
58	Inosine Oral Solution	Coenzyme drug, improve metabolism, for various liver and heart diseases, leukocytopenia, thrombocytopenia central retinitis, optic atrophy.
59	Compound Guaiacol Potassium Sulfonale Oral Solution	Relieve cough and phlegm.
60	Xiao’aiping Koufuye	Anticancer, relieve asthma, diminish inflammation. Used for esophageal cancer, gastric cancer, lung cancer, liver cancer, Lymphoma, colon cancer, Cervical cancer, septicemia. Also for radiation treatment, chemotherapy, post-operation treatment, chronic bronchitis, bronchial asthma.
61	Qiangli Pipa Lu	Nourish yin and clear lung heat, relieve cough, eliminate phlegm, repeated cough, bronchitis.
62	Xiao’er Zhike Tangjiang	Clear phlegm and relieve cough. Used for pediatric cough caused by cold.
63	Zhike Pipa Lu	Clear lung heat, relieve cough, eliminate phlegm. cough, phlegm, xerostomia caused by wind-heat. Used for bronchitis cough and pediatric cold.
64	Banxia Tangjiang	Clear cough and reduce phlegm, and bronchitis.
65	Fritillary and Loquat Syrup	Clear heat and ventilate lung, clear phlegm and relieve cough. Used for cough and phlegm, sore and swelling throat, chest distress, cold, chronic bronchitis caused by wind heat invading lung and internal heat.
66	Fei’er Tangjiang	Pediatric nutrient, hypofunction of spleen and stomach, do not feel like eating.
67	Sufei Ke Tangjiang	Cough and phlegm, bronchitis.

68	Zinc Sulfate Syrup	Anti zinc deficiency drug, used for pediatric slow growth, malnutrition, anorexia, oral ulcer, post-surgery wound healing caused by zinc deficiency.
69	Orange Tincture	Fragrant and promote digestion.
70	Weiling Heji	Nourish yin and blood, soothe nerves. Used for over fatigue, neurasthenia, amnesia and insomnia.
71	Methylrosanilinium Chloride Solution	Sterilization and antisepsis. Used for superficial injury, anabrosis, ulcer and skin infection.
72	Merbromin Solution	Skin mucosa ulcer and injury sterilization.
73	Iodine Tincture	Sterilization and antisepsis.
74	Zingiberis Tincture	Promote digestion and dispel cold.
75	Weiling Heji	Promote digestion, acid-making, kill pain. Used for gastritis, gastric ulcer and duodenal ulcer.
76	Baixuanxiatare Pian	Clear unusual mucilaginous substance, bile, sepsis, detumescence, antipruritics. Used for tinea manuum, tinea corporis, tinea pedis, tinea versicolor, psoriasis, allergic dermatitis, shingles and acne.
77	Isosor Bide Mononitrate Injection	Long term treatment of coronary heart disease, prevent angina, continuous angina treatment of post myocardial infarction, treat chronic congestive heart disease with digitalis or diuretics.
78	Azithromycin for Injection	Used for infection caused by sensitive strains, like intravenous drip of community-acquired pneumonia caused by Chlamydia pneumoniae, mycoplasma pneumoniae, staphylococcus aureus, streptococcus pneumoniae.
79	Clindamycin Phosphate Injection	Serious infection caused by staphyloccus aureus and anaerobic bacteria. Ideal effect of osteomyelitis caused by sensitive bacteria.
80	Fleroxacin	Mainly used for systematic infection treatment, like acute respiratory infection, urinary infection, gynecological infection, ordinary otolaryngology infection and skin soft tissue infection.
81	Naoxinqing Capsule	Increase pipe, vein and brain blood, improve blood and oxygen supply status of heart and brain tissue, and increase electrophoretic mobility of erythrocyte. Used for coronary heart disease, angina, cerebral arteriosclerosis, ischemic cerebrovascular disease.
82	Weili Capsule	Kill pain and promote circulation, digestion and gall. Used for improper diet, phlegm, vomit, stomachache, bad appetite, constipation, acute gastritis and cholecystitis.
83	Zhiyanxiao Capsule	Clear heat and detoxification, promote circulation, stop bleeding, kill pain and swelling. Used for old patients’ hemorrhoids symptom like dyschizia, hematochezia hemorrhoids inflammation and anal fissure.
84	Yinyangsuo Capsule	Treat renal and impotence, promote body fluid production. Used for impotence, ache and weak at waist and knee, body fluid deficiency, and dizziness.
85	Stanch Capsule	Clear heat and cool blood. Used for menorrhagia, nose bleed, hemoptysis, hematemesis and emptysis caused by blood heat.

Marketing and Sales

We have a trained marketing team and maintain sales offices or agents in approximately 30 provinces throughout China. The sales network covers approximately 146 cities and is staffed by approximately 168 sales representatives with an average per representative of a decade of pharmaceuticals sales experience.

In accordance with the Drug Control Law of the Peoples Republic of China, we use a distribution system comprised of independent regional distributors. In our typical distribution contract, a distributor will be provided with certain sales targets (an annual sales income level) for the term of the agreement according to a set retail price. We are responsible for guaranteeing the quality of the products. At the end of the term, we pay the distributor a commission based upon the annual sales made by the distributor. The distributor is provided a rebate for each product sold, which rebate increases as the sales volume increases. If the distributor completes the sales minimum within the prescribed period, the distributor will be given greater economic incentives and future distribution opportunities. If the distributor fails to complete the sales task within the prescribed period, we will not renew our contract with the distributor and instead will sign with other competent distributors. We also sell pharmaceutical products via the Internet and deliver product information on certain professional websites.

In the fiscal years ended December 31, 2010 and 2009, no product accounted for more than 10% of Xi’an Pharmaceuticals’ total revenue. Sales of Qiangli pipalu 100ml, the produce with the highest sales volume during this period, accounted for approximately 4.4% of total revenue, respectively.

In the fiscal year ended December 31, 2010 Xi’an Pharmaceuticals’ five largest customers were:

Name		%
Xi’an Ruihua Pharmaceutical Co Ltd,		7.93%
Xi’an Xin xi bei Pharmaceutical Co Ltd,		5.71%
Shaan xi Xinxing Pharmaceutical Co Ltd,		5.10%
Hanzhong Hospital Wangjiang Branch		4.64%
Shaan xi Province Hanzhong City Pharmaceutical head office		4.24%

In the fiscal year ended December 31, 2009, Xi’an Pharmaceuticals’ five largest customers were Shen Yang Zhn Ying Pharmaceuticals Co Ltd, Beijing Shan Lin Hai Trading Co. Ltd, Da Tong Zhen Hva Pharmaceutical Co Ltd, Xin Jiang Pharmaceutical Stock Co Ltd., and Bao Ji City Medical Station, accounting for 6.10%, 5.59%, 5.59%, 5.13% and 14.88% of total revenue, respectively.

During the fiscal years ended December 31, 2010 and 2009, we spent $4,620,959 and $834,355 on marketing, respectively.

Production

We manufacture and package our products at two factories, one located in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone, China. Both facilities are in compliance with Good Manufacturing Practice (GMP) standards and have three GMP certificates dated March 9, 2006 (Certificate No. H0192 for Xi’an Production Base), January 8, 2007 (Certificate No. H4109 for Xi’an Production Base) and January 8, 2007 (Certificate No. H4119 for Hanzong Production Base), respectively. The certificates remain valid until March 8, 2011, January 7, 2012 and January 7, 2012, respectively. All of the complete production lines at each facility meet international food and drug safety guidelines. With respect to the certificate that expired on March 8, 2011, we have submitted the application to renew such certificate. While that certificate is pending renewal, we will not produce the products pertaining to that certificate.

The Hanzhong factory, which was built in 1970, is approximately 12,000 square meters with 800 square meters of sterilized area. This production facility has two production lines for high-volume injection and produces 38 pharmaceutical products with different specifications. This production facility primarily manufactures products of infusion kind. This production facility has 87 sets of machines and supporting parts for pharmaceutical production from domestic and foreign suppliers.

The Xi’an Jinghe factory, which was built in 2006, is approximately 21,000 square meters with 7,000 square meters sterilized area and 15,000 square meters verdurization area. This facility primarily produces low-volume injection, troches, capsules, granules, species, syrups, oral solutions, tincture mixture and lyophilized powder injections. This production facility has 567 sets of machines.

Each facility is an independent production base that can process all stages of production, from raw materials to finished goods, including packaging. We obtain our packing materials from Xi’an No. 1 Printing Factory and we obtain the aluminum foil used in tablet production from Xi’an Haoyu Packing Co., Ltd.

We purchase our raw materials from approximately 100 suppliers. We generally utilize more than three suppliers for each raw material.

Quality Control

Our production facilities are designed and maintained with a view towards conforming with good practice standards. To comply with GMP operational requirements, we have implemented a quality assurance plan setting forth our quality assurance procedures. Our Quality Control department is responsible for maintaining quality standards throughout the production process. Quality Control executes the following functions:

	●	setting internal controls and regulations for semi-finished and finished products;
	●	implementing sampling systems and sample files;

	●	maintaining quality of equipment, instruments, reagents, test solutions, volumetric solutions, culture media and laboratory animals;
	●	auditing production records to ensure delivery of quality products;

	●	monitoring the number of dust particles and microbes in the clean areas;
	●	evaluating stability of raw materials, semi-finished products and finished products in order to generate accurate statistics on storage duration and shelf life;

	●	articulating the responsibilities of Quality Control staff; and
	●	on-site evaluation of supplier quality control systems.

Competition

The pharmaceutical industry within China is intensely competitive and is characterized by rapid and significant technological progress, and our operating environment is increasingly competitive. Our competitors include large pharmaceutical companies, including Xi’an Jingxi Shuanghe Pharmaceuticals Co., Ltd., that currently engage in or may engage in efforts related to the discovery and development of new pharmaceuticals.

Western pharmaceutical products have more than half of the market share of medications used in China to treat the medical indications that our pharmaceutical products treat, with Chinese pharmaceutical products making up the next largest part of the market. Western medicine is all made from chemosynthesis products, while Chinese medicine is made from botanical, animal and mineral components.

There are certain opportunities for growth through the following growth strategies:

Rapidly growing Chinese pharmaceutical market. With approximately one-fifth of the world’s population and a fast-growing gross domestic product, China represents a significant potential market for the pharmaceutical industry. We believe the significant expected growth of the pharmaceutical market in China is due to factors such as robust economic growth and increased pharmaceutical expenditure, aging population and increased lifestyle-related diseases, government support of the pharmaceutical industry, the relatively low research and development and clinical trial costs in China as compared to developed countries, as well as the increased availability of funding for medical insurance and industry consolidation in China.

Currently China has about 3,500 drug companies, falling from more than 5,000 in 2004, according to government figures. The number is expected to drop further due to trends in the industry’s consolidation. The domestic companies compete in the $10 billion market without a dominant leader. Most often cited adverse factors include a lack of protection of intellectual property rights, a lack of visibility for drug approval procedures, a lack of effective governmental incentives, poor corporate support for drug research and differences in the treatment in China accorded to local and foreign firms. The profile of the pharmaceutical industry in China remains very low. China accounts for 20% of the world’s population but only 1.5% of the global drug market. As of 2010, China is the world's fifth largest drug market.

New Product Development. 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 commercialized.

Focus on brand development. 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 its existing brand names with the intent on it becoming a leading medicine brand in China.

Marketing and Sales Function. We intend to grow our internal marketing and sales function and increase our relationships with other 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 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 growth. In seeking additional employees, sales representatives, and distributors, we will compete with many other established pharmaceutical manufacturers that may have greater resources than we do.

Low cost producer. Our continuing success in optimizing our manufacturing processes and minimizing our production costs provides us with a competitive advantage.

Government sponsored industry consolidation presents opportunities for acquisitions. China’s thousands of domestic companies account for 70 percent of the pharmaceutical market as of 2010. Anticipating the effects of WTO entry and in an effort to compete with foreign firms, the Chinese government has decided to nurture its own large pharmaceutical companies, by encouraging the consolidation of its government-owned companies which, even though the company is not government-owned, may also present the company with acquisition opportunities. To this end, the Chinese State Economic and Trade Commission (SETC) announced plans to consolidate the industry and support the development of 10 to 15 largest pharmaceutical firms. According to government statistics China currently has about 3,500 drug companies, down from over 5,000 in 2004. The number is expected to drop further. As the industry undergoes further consolidation, the Company may have the opportunity to grow by acquisition.

Raw Materials and Principal Suppliers

The raw materials used to manufacture our products include various medicinal herbs, which we obtain from numerous qualified suppliers with national qualifications. We also enter into trading agreements for the supply of many of the materials used to manufacture and package our products. Xi’an Pharmaceuticals Jinghe Branch has written agreements with substantially all of its suppliers.

The five largest suppliers of Xi’an Pharmaceuticals (Jinghe Branch) in 2010 are as follows:

	Supplier	Product	%
1	Shaanxi Daxin Plastics Co., Ltd.	Packaging Materials	17%
2	Xi’an Tianyi Bio-Tech Co. Ltd.	Raw Material	17%
3	Shaan xi Qiangli Technology Co., Ltd	Raw Material	9%
4	Shaan xi Huabo Machinary Company	Packaging Materials	9%
5	Bao ji City Chenchang District Jieli Carton Plant	Packaging Materials	7%

The five largest suppliers of Xi’an Pharmaceuticals (Hanzhong Branch) in 2010 are as follows:

	Supplier	Product	%
1	Xi'an Xihu Glass Co., Ltd	Raw Materials and Packaging Materials	28%
2	Xi’an Tianyi Bio-Tech Co. Ltd.	Raw Material and Packaging Materials	22%
3	Shaanxi Daxin Plastics Co., Ltd..	Raw Material and Packaging Materials	19%
4	Xixiang County Fang zheng Carton Plant	Raw Material and Packaging Materials	7%
5	Proportion of Purchase from Shandong Zibo Maosheng Pharmaceutical Package Co. Ltd.	Raw Material and Packaging Materials	6%

Intellectual Property

We regard our service marks, trademarks, trade secrets, patents and similar intellectual property as critical factors to our success. We rely on patent, trademark and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights.

We have numerous trademarks evidenced by Trademark Registration Certificates for our pharmaceutical products, including all kinds of injections tablets, capsules, syrups, oral solutions, medicinal liquor and tincture. These trademarks distinguish our pharmaceutical products from those of our competitors. We regard our trademarks, copyrights domain names, trade dress, trade secrets, proprietary technologies and similar intellectual property as important to our success, and we rely on trademark and copyright law, trade-secret protection, and confidentiality and \or license agreements with our employees, customers, partners, suppliers and others to protect or proprietary rights. In an effort to protect our intellectual property, all of our employees are required to follow our confidentiality principles. We have received trademark registration certificates for the following marks: XiaoNengRen, ShuangTu, JiaYi, LuoYiShu, JunLiQing, Qinba DouJing and ZhuoQing.

Research and Development

Research and development costs are related primarily to the development of new drugs by the Company. The Company also develops new products through arrangements and cooperation with several research institutes to develop new pharmaceutical products. The Company only pays these institutes for their research expenses if the research goals are accomplished, including certification of the product and approval for production, and these achievements are then transferred to the Company and recorded as intangible assets. There was no Research and Development expense in 2010 and 2009.

Compliance With Government Regulations

Environmental Laws

Xi’an Pharmaceuticals’ operations and facilities are subject to environmental laws and regulations stipulated by the national and the local environment protection bureaus in China. Relevant laws and regulations include provisions governing air emissions, water discharges and the management and disposal of hazardous substances and wastes. The PRC regulatory authorities require pharmaceutical companies to carry out environmental impact studies before engaging in new construction projects to ensure that their production processes meet the required environmental standards.

Xi’an Pharmaceuticals maintains controls at its production facilities to facilitate compliance with environmental rules and regulations. Xi’an Pharmaceuticals is not aware of any investigations, prosecutions, disputes, claims or other proceedings in respect of environmental protection, nor has it been subject to any action made by any environmental administration authorities of the PRC. To management’s knowledge, Xi’an Pharmaceuticals’ operations meet or exceed the existing requirements of the PRC.

During the last two years, Xi’an Pharmaceuticals spent $0 on environmental compliance.

Advertising Laws

Advertisement Law of the People’s Republic of China and Rules of Medicine Advertisements Management from State Admission for Industry and Commerce, Regulations on Control of Advertisements (tentative) from State Council provide guidelines for advertising prescription and OTC drugs and nutrients made by Xi’an Pharmaceuticals. The rules limit where advertisements may be place and govern the claims that may be made by the manufacturer.

Insurance Catalogue

Pursuant to the Decision of the State Council on the Establishment of the State Basic Medical Insurance System for Urban Employees and the Implementation Measures for the Administration of the Scope of Medical Insurance Coverage for Pharmaceuticals for Urban Employees, the Ministry of Labor and Social Security in China established the Insurance Catalogue. The Insurance Catalogue is divided into Parts A and B. The medicines included in Part A are designated by the Chinese governmental authorities for general application. Local governmental authorities may not adjust the content of medicines in Part A. Although the medicines included in Part B are designated by Chinese governmental authorities in the first instance, provincial level authorities may make limited changes to the medicines included in Part B, resulting in some regional variations in the medicines included in Part B from region to region.

Patients purchasing medicines included in Part A are entitled to reimbursement of the costs of such medicines from the social medical fund in accordance with relevant regulations in China. Patients purchasing medicines included in Part B are required to pay a predetermined proportion of the costs of such medicines.

The medicines included in the Insurance Catalogue are selected by the Chinese government authorities based on various factors including treatment requirements, frequency of use, effectiveness and price. Medicines included in the Insurance Catalogue are subject to price control by the Chinese government. The Insurance Catalogue is revised every two years. In connection with each revision, the relevant provincial drug authority collects proposals from relevant enterprises before organizing a comprehensive appraisal. The SFDA then makes the final decision on any revisions based on the preliminary opinion suggested by the provincial drug administration. Approximately 40% of our revenues are derived from pharmaceutical products listed in the Insurance Catalogue so that purchasers can receive reimbursement on these products. Removal of a significant portion of these products from the Insurance Catalogue would adversely affect our total revenue.

Price Controls

The prices of approximately 1,500 pharmaceuticals are presently set by the PRC government. These constitute approximately 10% of all distributed drugs. The prices for the other 90%, or approximately 12,000 pharmaceuticals, are established by the market (by the companies themselves). Corporations typically establish these prices based on operating costs, and market supply and demand. The Supervision Department of the PRC government will intervene only if there is a significant fluctuation in prices or a monopoly develops in a particular drug. We have not had any products subject to specific pricing control and production and trading of none of our pharmaceutical products constitutes a monopoly.

Employees

We have approximately 486 full-time, salaried employees who receive labor insurance. These employees are organized into a union under the labor laws of China and can bargain collectively with us. In addition, we employ over 168 sales representatives who are paid on a commission basis. These representatives are not part of the union. We maintain good relations with our employees.

Executive Offices

Our principal executive offices are located at 24th Floor, Building A, Zhengxin Mansion, No. 5 of 1st Gaoxin Road, Xi’an, the People’s Republic of China 710075. Our telephone number is 86-29-84067215. Our website is located at http://www.chinapharmaceuticalsinc.com. Information on our website or any other website is not a part of this report.

Item 1A. Risk Factors.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this report before deciding to invest in our common stock.

Risks Related To Our Business

Our operating history may not serve as an adequate basis to judge our future prospects and results of operations.

Xi’an Pharmaceuticals commenced its current line of business operations in October 15, 1969 and received its Good Manufacturing Practices (“GMP”) certifications in March 2006 and January 2007. These certifications must be renewed every five years for Xi’an Pharmaceuticals to stay in business. Xi’an Pharmaceuticals’ operating history may not provide a meaningful basis on which to evaluate its business. We cannot assure you that Xi’an Pharmaceuticals will maintain its profitability or that we will not incur net losses in the future. We expect that Xi’an Pharmaceuticals’ operating expenses will increase as it expands. Any significant failure to realize anticipated revenue growth could result in significant operating losses. We will continue to encounter risks and difficulties frequently experienced by companies at a similar stage of development, including our potential failure to:

●	raise adequate capital for expansion and operations;

●	implement our business model and strategy and adapt and modify them as needed;

●	increase awareness of our brand name, protect our reputation and develop customer loyalty;

●	manage our expanding operations and service offerings, including the integration of any future acquisitions;

●	maintain adequate control of our expenses;

●

anticipate and adapt to changing conditions in the medical over the counter, pharmaceutical and nutritional supplement markets in which we operate as well as the impact of any changes in government regulations, mergers and acquisitions involving our competitors, technological developments and other significant competitive and market dynamics

If we are not successful in addressing any or all of these risks, our business may be materially and adversely affected.

The loss of Xi’an Pharmaceuticals as our operating business would have a material adverse effect on our business and the price of our common stock.

We have no equity ownership interest in Xi’an Pharmaceuticals. Our ability to control Xi’an Pharmaceuticals and consolidate its financial results is through a series of contractual agreements between Xi’an Pharmaceuticals and our wholly-owned subsidiary Xi’an Development. The management of Xi’an Pharmaceuticals is an affiliate of us and of Xi’an Development and the stockholders of Xi’an Pharmaceuticals are also our shareholders. Thus the Management Entrustment Agreement was not entered into as a result of arms’ length negotiations because the parties to the agreement are under common control. Mr. Wang, our CEO and Chairman, and Mr. Guiping Zhang, our President, hold in the aggregate approximately 56% of the shares of Xi’an Pharmaceuticals and approximately 30.81% of our common stock. The Management Entrustment Agreement may be terminated upon the termination of the business of Xi’an Pharmaceuticals or upon the date upon which Xi’an Development completes the acquisition of Xi’an Pharmaceuticals. Any other termination would be a breach of the agreement. While the Company has been advised by its PRC counsel that the Management Entrustment Agreement is legal and enforceable under PRC law, these affiliates control the parties to the Management Entrustment Agreement and it could be possible for them to cause Xi’an Pharmaceuticals to breach the Management Entrustment Agreement and our unaffiliated investors would have little or no recourse because of the inherent difficulties in enforcing their rights since all our assets are located in the PRC. (See, Risk Factor “The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may harm its business.”) In the event that management of Xi’an Pharmaceuticals decides to breach the Management Entrustment Agreement, the risk of loss of the affiliated shareholders of Xi’an Pharmaceuticals could be lower than unaffiliated investors and the interests of the management and shareholders of Xi’an Pharmaceuticals would be in conflict with the interest of our other stockholders.

Xi’an Pharmaceuticals’ failure to compete effectively may adversely affect our ability to generate revenue.

Xi’an Pharmaceuticals competes with other companies, many of whom are developing or can be expected to develop products similar to Xi’an Pharmaceuticals. Xi’an Pharmaceuticals’ market is a large market with many competitors. Many of its competitors are more established than Xi’an Pharmaceuticals is, and have significantly greater financial, technical, marketing and other resources than it presently possess. Some of Xi’an Pharmaceuticals’ competitors have greater name recognition and a larger customer base. These competitors may be able to respond more quickly to new or changing opportunities and customer requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to customers, and adopt more aggressive pricing policies. We cannot assure you that Xi’an Pharmaceuticals will be able to compete effectively with current or future competitors or that the competitive pressures it faces will not harm it business.

We may not be able to effectively control and manage the growth of Xi’an Pharmaceuticals.

If Xi’an Pharmaceuticals’ business and markets grow and develop, it will be necessary for us to finance and manage expansion in an orderly fashion. An expansion would increase demands on existing management, workforce and facilities. Failure to satisfy such increased demands could interrupt or adversely affect its operations and cause delay in production and delivery of its pharmaceutical prescription, over the counter and medical nutrient products as well as administrative inefficiencies.

We may require additional financing in the future and a failure to obtain such required financing will inhibit Xi’an Pharmaceuticals’ ability to grow.

The continued growth of Xi’an Pharmaceuticals’ business may require additional funding from time to time, which we expect to raise in private placements of our equity or debt securities with accredited investors or by offering our securities for sale pursuant to an effective registration statement on a market where our common stock is traded. The proceeds of these funding will be forwarded to Xi’an Pharmaceuticals and accounted for as a loan to Xi’an Pharmaceuticals and eliminated during consolidation. The proceeds would be used for general corporate purposes of Xi’an Pharmaceuticals, which could include acquisitions, investments, repayment of debt and capital expenditures among other things. We may also use the proceeds to repurchase our capital stock or for our corporate overhead expenses. If we borrow funds we expect to be the primary obligor on any debt. Obtaining additional funding would be subject to a number of factors including market conditions, operating performance and investor sentiment, many of which are outside of our control. These factors could make the timing, amount, terms and conditions of additional funding unattractive or unavailable to us. Our management believes that we currently have sufficient funds from working capital to meet our current operating costs over the next 12 months.

The terms of any future financing may adversely affect your interest as stockholders.

If we require additional financing in the future, we may be required to incur indebtedness or issue equity securities, the terms of which may adversely affect your interests in us. For example, the issuance of additional indebtedness may be senior in right of payment to your shares upon our liquidation. In addition, indebtedness may be under terms that make the operation of Xi’an Pharmaceuticals’ business more difficult because the lender's consent could be required before we take certain actions. Similarly the terms of any equity securities we issue may be senior in right of payment of dividends to your common stock and may contain superior rights and other rights as compared to your common stock. Further, any such issuance of equity securities may dilute your interest in us.

We, through our subsidiaries/affiliated companies China Qinba, Xi’an Development or Xi’an Pharmaceuticals, may engage in future acquisitions that could dilute the ownership interests of our stockholders, cause us to incur debt and assume contingent liabilities.

We, through our subsidiaries/affiliated companies China Qinba, Xi’an Development or Xi’an Pharmaceuticals, may review acquisition and strategic investment prospects that we believe would complement the current product offerings of Xi’an Pharmaceuticals, augment its market coverage or enhance its technical capabilities, or otherwise offer growth opportunities. From time to time Xi’an Pharmaceuticals reviews investments in new businesses and we, through our subsidiaries/affiliated companies China Qinba, Xi’an Development or Xi’an Pharmaceuticals, expect to make investments in, and to acquire, businesses, products, or technologies in the future. We expect that when we raise funds from investors for any of these purposes we will be either the issuer or the primary obligor while the proceeds will be forwarded to Xi’an Pharmaceuticals and accounted for as a loan to Xi’an Pharmaceuticals and eliminated during consolidation. In the event of any future acquisitions, we could:

·	issue equity securities which would dilute current stockholders’ percentage ownership;

·	incur substantial debt;

·	assume contingent liabilities; or

·	expend significant cash.

These actions could have a material adverse effect on our operating results or the price of our common stock. Moreover, even if through our subsidiary, Xi’an Development or Xi’an Pharmaceuticals, we do obtain benefits in the form of increased sales and earnings, there may be a lag between the time when the expenses associated with an acquisition are incurred and the time when we recognize such benefits. Acquisitions and investment activities also entail numerous risks, including:

·	difficulties in the assimilation of acquired operations, technologies and/or products; and

·	unanticipated costs associated with the acquisition or investment transaction.

We may not have adequate internal accounting controls. While we have certain internal procedures in our budgeting, forecasting and in the management and allocation of funds, our internal controls may not be adequate.

We are constantly striving to improve our internal accounting controls. We expect to continue to improve our internal accounting control for budgeting, forecasting, managing and allocating our funds and to better account for them as we grow. There is no guarantee that such improvements will be adequate or successful or that such improvements will be carried out on a timely basis. If we do not have adequate internal accounting controls, we may not be able to appropriately budget, forecast and manage our funds, we may also be unable to prepare accurate accounts on a timely basis to meet our continuing financial reporting obligations and we may not be able to satisfy our obligations under US securities laws.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our company's independent registered public accountants. While the Dodd-Frank Wall Street Reform and Consumer Protection Act exempts smaller reporting companies with respect to the attestation by their independent registered public accountants as to our financial controls, this exception does not affect the requirement that we include a report of management on our internal controls over financial reporting and will not affect the requirement to include the auditor's attestation if our public float exceeds $75 million and we cease to be smaller reporting company. Existing standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. As of December 31, 2010, management has detected a material weakness and certain deficiencies in our internal control with respect to the assessment of the internal control for the year then ended due to our lack of accounting personnel with U.S. GAAP proficiency, and we cannot guarantee the implementation of controls and procedures in future years to be without any significant deficiency or material weakness.

We are dependent on certain key personnel and loss of these key personnel could have a material adverse effect on our business, financial condition and results of operations.

Our success is, to a certain extent, attributable to the management, sales and marketing, and pharmaceutical factory operational expertise of key personnel. Guozhu Wang, our Chief Executive Officer and Chairman of the Board, Guiping Zhang, our President, and Tao Lei, our Chief Financial Officer, perform key functions in the operation of our and Xi’an Pharmaceuticals’ business. There can be no assurance that Xi’an Pharmaceuticals will be able to retain these officers after the term of their employment contracts expire. The loss of these officers could have a material adverse effect upon our business, financial condition, and results of operations. Xi’an Pharmaceuticals must attract, recruit and retain a sizeable workforce of technically competent employees. We do not carry key man life insurance for any of our key personnel or personnel nor do we foresee purchasing such insurance to protect against a loss of key personnel and the key personnel.

We are dependent upon the services of Mr. Wang and Mr. Zhang for the continued growth and operation of our company because of their experience in the industry and their personal and business contacts in the PRC. Although we have entered into two-year employment agreements with Mr. Wang and Mr. Zhang and we have no reason to believe that they will discontinue their services with the Company or Xi’an Pharmaceuticals, the interruption or loss of his services would adversely affect our ability to effectively run our business and pursue our business strategy as well as our results of operations.

We may not be able to hire and retain qualified personnel to support its growth and if it is unable to retain or hire these personnel in the future, its ability to improve its products and implement its business objectives could be adversely affected.

Competition for senior management and senior personnel in the PRC is intense, the pool of qualified candidates in the PRC is very limited, and we may not be able to retain the services of our senior executives or senior personnel, or attract and retain high-quality senior executives or senior personnel in the future. This failure could materially and adversely affect our future growth and financial condition. We expect to hire additional sales and plant personnel throughout fiscal year 2011 in order to accommodate its growth.

If we fail to increase our brand recognition, we may face difficulty in obtaining new customers and business partners.

We believe that establishing, maintaining and enhancing our brand in a cost-effective manner is critical to achieving widespread acceptance of our current and future products and services and is an important element in our effort to increase our customer base and obtain new business partners. We believe that the importance of brand recognition will increase as competition in our market develops. Some of our potential competitors already have well-established brands in the pharmaceutical promotion and distribution industry. Successful promotion of our brand will depend largely on our ability to maintain a sizeable and active customer base, our marketing efforts and ability to provide reliable and useful products and services at competitive prices. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we will incur in building our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, in which case our business, operating results and financial condition, would be materially adversely affected.

Our operating results may fluctuate as a result of factors beyond our control.

Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include:

·	the costs of pharmaceutical products and development;

·	the relative speed and success with which we can obtain and maintain customers, merchants and vendors for our products;

·	capital expenditure for equipment;

·	Marketing and promotional activities and other costs;

·	changes in our pricing policies, suppliers and competitors;

·	the ability of our suppliers to provide products in a timely manner to their customers;

·	changes in operating expenses;

·	Increased competition in the pharmaceutical markets; and

·	other general economic and seasonal factors.

We face risks related to product liability claims.

We presently do not maintain product liability insurance. We face the risk of loss because of adverse publicity associated with product liability lawsuits, whether or not such claims are valid. We may not be able to avoid such claims. Although product liability lawsuits in the PRC are rare, and we have not, to date, experienced significant failure of our products, there is no guarantee that we will not face such liability in the future. This liability could be substantial and the occurrence of such loss or liability may have a material adverse effect on our business, financial condition and prospects.

We face marketing risks.

Newly developed drugs and technology may not be compatible with market needs. Because markets for drugs differentiate geographically inside the PRC, we must develop and manufacture our products to accurately target specific markets to ensure product sales. If we fail to invest in extensive market research to understand the health needs of consumers in different geographic areas, we may face limited market acceptance of our products, which could have material adverse effect on our sales and earnings.

We face risks relating to difficulty in defending intellectual property rights from infringement.

Our success depends on protection of our current and future technology and products and our ability to defend our intellectual property rights. Xi’an Pharmaceuticals has filed for trademark protection for the various names and brands of its products sold in the PRC. However, it is possible for its competitors to develop similar competitive products even thought it has taken steps to protect its intellectual property. If we fail to protect Xi’an Pharmaceuticals’ intellectual property adequately, competitors may manufacture and market products similar to Xi’an Pharmaceuticals. We expect to file patent applications seeking to protect newly developed technology and products in various countries, including the PRC. Some patent applications in the PRC are maintained in secrecy until the patent is issued. Because the publication of discoveries tends to follow their actual discovery by many months, we may not be the first to invent, or file patent applications on any of our discoveries. Patents may not be issued with respect to any of our patent applications and existing or future patents issued to or licensed by us may not provide competitive advantages for our products. Patents that are issued may be challenged, invalidated or circumvented by our competitors. Furthermore, our patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products.

We also rely on trade secrets, non-patented proprietary expertise and continuing technological innovation that we shall seek to protect, in part, by entering into confidentiality agreements with licensees, suppliers, employees and consultants. These agreements may be breached and there may not be adequate remedies in the event of a breach. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Moreover, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors. If patents are not issued with respect to products arising from research, we may not be able to maintain the confidentiality of information relating to these products.

We face risks relating to third parties that may claim that we infringe on their proprietary rights and may prevent us from manufacturing and selling certain of our products.

There has been substantial litigation in the pharmaceutical industry with respect to the manufacturing, use and sale of new products. These lawsuits relate to the validity and infringement of patents or proprietary rights of third parties. We may be required to commence or defend against charges relating to the infringement of patents or proprietary rights. Any such litigation could:

·	require us to incur substantial expense, even if covered by insurance or are successful in the litigation;
·	require us to divert significant time and effort of our technical and management personnel;
·	result in the loss of our rights to develop or make certain products; and
·	require us to pay substantial monetary damages or royalties in order to license proprietary rights from third parties.

Although intellectual property disputes within the pharmaceutical industry have often been settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include the long-term payment of royalties. These arrangements may be investigated by regulatory agencies and, if improper, may be invalidated. Furthermore, the required licenses may not be made available to us on acceptable terms. Accordingly, an adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing and selling some of our products or increase our costs to market these products.

In addition, when seeking regulatory approval for some of our products, we may be required to certify to regulatory authorities, including the SFDA, that such products do not infringe upon third party patent rights. Filing a certification against a patent gives the patent holder the right to bring a patent infringement lawsuit against us. Any lawsuit would delay the receipt of regulatory approvals. A claim of infringement and the resulting delay could result in substantial expenses and even prevent us from manufacturing and selling certain of our products.

Our launch of a product prior to a final court decision or the expiration of a patent held by a third party may result in substantial damages to us. If we are found to infringe a patent held by a third party and become subject to such damages, these damages could have a material adverse effect on the results of our operations and financial condition.

If we are subject to legal claims, and/or government enforcement actions and are held liable for such legal claims and/or government enforcement actions, it could materially harm our business and damage our reputation.

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

On March 11, 2011, the Company filed its Answer and Counterclaims. ValueRich has not yet filed a response to the Company’s Counterclaims. As this matter is at its inception, it is difficult to estimate the likelihood of an adverse award. The Company’s management has indicated that it intends to vigorously defend the claim. No arbitration hearing dates have yet been scheduled. See “Item 3 – Legal Proceedings” for more details.

Any legal claims against us could be costly and divert management's attention, and the outcome of such claims could harm our reputation and our business.

We face risks related to research and the ability to develop new drugs.

Our growth and survival depends on our ability to consistently discover, develop and commercialize new products and find new and improve on existing technology and platforms. As such, if we fail to make sufficient investments in research, be attentive to consumer needs or does not focus on the most advanced technology, our current and future products could be surpassed by more effective or advanced products of other companies.

Risk Related To the PharmaceuticalIndustry

Our certificates, permits, and licenses related to our pharmaceutical operations are subject to governmental control and renewal and failure to obtain renewal will cause all or part of our operations to be terminated.

Xi’an Pharmaceuticals is subject to various PRC laws and regulations pertaining to the pharmaceutical industry. Xi’an Pharmaceuticals has attained certificates, permits, and licenses required for the operation of a pharmaceutical enterprise and the manufacturing of pharmaceutical products in the PRC.

In 1998, the SFDA introduced the Good Manufacturing Practice (GMP) Certificate in order to promote quality and safety of pharmaceutical production. The Good Manufacturing Practices were revised in July and October, 2004. We and our competitors are required to meet GMP standards in order to continue manufacturing pharmaceutical products and health foods. For each new product, Xi’an Pharmaceuticals prepares documentation of pharmacological, toxicity, pharmacokinetics and drug metabolism studies in addition to providing samples of the drug. The documentation and samples are then submitted to provincial food and drug administration. This process typically takes approximately three months. After the documentation and samples have been approved by the provincial food and drug administration, the provincial administration submits the approved documentation and samples to the SFDA. The SFDA examines the documentation and tests the samples and presents the findings to the New Drug Examination Committee for approval. If the application is approved by the SFDA, the SFDA will issue a clinical trial license to the applicant for clinical trials. This clinical trial license approval typically takes one year, followed by approximately two years of trials, depending on the category and class of the new drug. The SFDA then examines the documentation from the trial and, if approved, issues the new drug license to the applicant. This process usually takes eight months. The entire process takes anywhere from three to four years

Xi’an Pharmaceuticals initially obtained pharmaceutical products and health food production permits by submitting its manufacturing processes and product tests to the SFDA who verified that its production processes and products met the standards by onsite inspections, review of test results and a determination that the market was not saturated by its products. The production permits are permanent once issued as long as they are renewed by the expiration date.

The GMP certificate is valid for a term of five years, the pharmaceutical products production permits are subject to renewal every five years, and each must be renewed before its expiration, if applicable. We manufacture and package our products at two factories, one located in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone, China. Both facilities are in compliance with Good Manufacturing Practice (GMP) standards and have three GMP certificates for its 85 products, dated March 9, 2006 (Certificate No. H0192 for Xi’an Production Base), January 8, 2007 (Certificate No. H4109 for Xi’an Production Base) and January 8, 2007 (Certificate No. H4119 for Hanzong Production Base), respectively. The certificates remain valid until March 8, 2011, January 7, 2012 and January 7, 2012, respectively. All of the complete production lines at each facility meet international food and drug safety guidelines. If the GMP certificates expire without renewal, Xi’an Pharmaceuticals will not be able to continue medicine production, which will cause its operations to be terminated. Xi’an Pharmaceuticals intends to apply for renewed GMP certificates for its two production facilities before its current certificates expire. With respect to the certificate that expired on March 8, 2011, we have submitted the application to renew such certificate. While that certificate is pending renewal, we will not produce the products pertaining to that certificate.

According to Drug Administration Law of the PRC and its implementing rules, the SFDA approvals, including Pharmaceutical Manufacturing Permit and Drug Approval Numbers, may be suspended or revoked prior to the expiration date under circumstances that include:

·	producing counterfeit medicine;
·	producing inferior quality products;
·	failing to meet the drug GMP standards;
·	purchasing medical ingredients used in the production of products sources that do not have Pharmaceutical Manufacturing Permit or Pharmaceutical Trade Permit;
·	fraudulent reporting of results or product samples in application process;
·	failing to meet drug labeling and direction standards;
·	bribing doctors or hospital personnel to entice them to use products,
·	producing pharmaceuticals for use or resale by companies that are not approved by the SFDA, or
·	the approved drug has a serious side effect.

If our pharmaceutical products fail to receive regulatory approval or are severely limited in these products' scope of use, we may be unable to recoup considerable research and development expenditures.

Our research and development of pharmaceutical products is subject to the regulatory approval of the SFDA in the PRC. The regulatory approval procedure for pharmaceuticals can be quite lengthy, costly, and uncertain. Depending upon the discretion of the SFDA, the approval process may be significantly delayed by additional clinical testing and require the expenditure of resources not currently available; in such an event, it may be necessary for us to abandon our application. Even where approval of the product is granted, it may contain significant limitations in the form of narrow indications, warnings, precautions, or contra-indications with respect to conditions of use. If approval of our product is denied, abandoned, or severely limited in terms of the scope of products use, it may result in the inability to recoup considerable research and development expenditures. During the fiscal year ended December 31, 2008, we obtained certificates and approvals of drug production for thirteen new drug batches, ten of which we have begun to sell. During the year ended December 31, 2009, we obtained certificates and approvals for two new drug batches, and webegan production of these two new drug batches in October 2009. During the year ended December 31, 2010, because we did not have any new drugs for production, we did not need to obtain any such certificates or approvals. If we do not receive timely approval for any of our drugs, then production will be delayed and sales of the products cannot be planned for.

Price control regulations may decrease our profitability.

The laws of the PRC provide for the government to fix and adjust prices. The prices of certain medicines we distribute, including those listed in the Chinese government's catalogue of medications that are reimbursable under the PRC’s social insurance program, or the Insurance Catalogue, are subject to control by the relevant state or provincial price administration authorities. The PRC establishes price levels for products based on market conditions, average industry cost, supply and demand and social responsibility. In practice, price control with respect to these medicines sets a ceiling on their retail price. The actual price of such medicines set by manufacturers, wholesalers and retailers cannot historically exceed the price ceiling imposed by applicable government price control regulations. Although, as a general matter, government price control regulations have resulted in drug prices tending to decline over time, there has been no predictable pattern for such decreases.

For the years ended December 31, 2010 and December 31, 2009, we have not had any products subject to specific pricing control and production and trading of none of our pharmaceutical products constitutes a monopoly. However, it is possible that our products may be subject to price control in the future. To the extent that our products are subject to price control, our revenue, gross profit, gross margin and net income will be affected since the revenue we derive from our sales will be limited and we may face no limitation on our costs. Further, if price controls affect both our revenue and costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC.

If the medicines we produce are replaced by other medicines or are removed from the PRC's insurance catalogue in the future, our revenue may suffer.

Under PRC regulations, patients purchasing medicine listed by the PRC's state and/or provincial governments in the Insurance Catalogue may be reimbursed, in part or in whole, by a social medicine fund. Accordingly, pharmaceutical distributors prefer to engage in the distribution of medicine listed in the Insurance Catalogue. Currently, our main prescription products are listed in the Insurance Catalogue. The content of the Insurance Catalogue is subject to change by the PRC Ministry of Labor and Social Security, and new medicine may be added to the Insurance Catalogue by provincial level authorities as part of their limited ability to change certain medicines listed in the Insurance Catalogue. If the medicine we produce are replaced by other medicines or removed from the Insurance Catalogue in the future, our revenue may suffer.

Adverse publicity associated with our products, ingredients or network marketing program, or those of similar companies, could harm our financial condition and operating results.

The results of our operations may be significantly affected by the public's perception of our product and similar companies. This perception is dependent upon opinions concerning:

·	the safety and quality of our products and ingredients;
·	the safety and quality of similar products and ingredients distributed by other companies; and
·	our sales force.

Adverse publicity concerning any actual or purported failure to comply with applicable laws and regulations regarding product claims and advertising, good manufacturing practices, or other aspects of our business, whether or not resulting in enforcement actions or the imposition of penalties, could have an adverse affect on our goodwill and could negatively affect our sales and ability to generate revenue.

In addition, our consumers' perception of the safety and quality of products and ingredients as well as similar products and ingredients distributed by other companies can be significantly influenced by media attention, publicized scientific research or findings, widespread product liability claims and other publicity concerning our products or ingredients or similar products and ingredients distributed by other companies. Adverse publicity, whether or not accurate or resulting from consumers' use or misuse of our products, that associates consumption of our products or ingredients or any similar products or ingredients with illness or other adverse effects, questions the benefits of our or similar products or claims that any such products are ineffective, inappropriately labeled or have inaccurate instructions as to their use, could negatively impact our reputation or the market demand for our products.

If we fail to develop new products with high profit margins, and our high profit margin products are substituted by competitor's products, our gross and net profit margins will be adversely affected.

There is no assurance that we will be able to sustain our profit margins in the future. The pharmaceutical industry is very competitive, and there may be pressure to reduce sale prices of products without a corresponding decrease in the price of raw materials. In addition, the medical industry in the PRC is highly competitive and new products are constantly being introduced to the market. In order to increase our sales and expand our market share, we may be forced to reduce prices in the future, leading to a decrease in gross profit margin. The research and development of new products and technology is costly and time consuming, and there are no assurances that our research and development of new products will either be successful or completed within the anticipated timeframe, if ever at all. There is no assurance that our competitors' new products, technology, and processes will not render our existing products obsolete or non-competitive. To the extent that we fail to develop new products with high profit margins and our high profit margin products are substituted by competitors' products, our gross profit margins will be adversely affected.

The commercial success of our products depends upon the degree of market acceptance among the medical community and failure to attain market acceptance among the medical community may have an adverse impact on our operations and profitability.

The commercial success of our products depends upon the degree of market acceptance among the medical community, such as hospitals and physicians. Even if our products are approved by the SFDA, there is no assurance that physicians will prescribe or recommend our products to patients. Furthermore, a product's prevalence and use at hospitals may be contingent upon its relationship with the medical community, particularly products that are only available by medical prescription. The acceptance of our products among the medical community may depend upon several factors, including but not limited to, the product's acceptance by physicians and patients as a safe and effective treatment, cost effectiveness, potential advantages over alternative treatments, and the prevalence and severity of side effects. Failure to attain market acceptance among the medical community may have an adverse impact on our operations and profitability.

We enjoy certain preferential tax concessions and loss of these preferential tax concessions will cause its tax liabilities to increase and its profitability to decline.

Xi’an Pharmaceuticals enjoys preferential tax concessions in the PRC as a high-tech enterprise because of the research and development methodologies it employs to develop new products. Pursuant to the State Council's Regulations on Encouraging Investment in and Development, Xi’an Pharmaceuticals was granted a reduction in its income tax rate under which it paid no income taxes from January 1, 2005 to December 31, 2006 and had had an income tax rate of 16.5% since January 1, 2007 which is a 50% reduction on the current effective income tax rate. This favorable 50% tax exemption treatment expired on December 31, 2009. There is no assurance that the preferential tax treatment in the PRC will remain unchanged and effective. Its tax liabilities will increase and its profits may accordingly decline if its reduced income tax rate is no longer applicable and/or the tax relief on investment in PRC is no longer available.

Additionally, as a company organized in the PRC, Xi’an Pharmaceuticals is subject to the PRC Enterprise Income Tax Law (the "EIT Law"), which was enacted on March 16, 2007. Under the EIT Law, effective January 1, 2008, the PRC adopted a uniform tax rate of 25.0% for all enterprises (including foreign-invested enterprises) and cancelled several tax incentives enjoyed by foreign-invested enterprises. However, for foreign-invested enterprises established before the promulgation of the EIT Law, a five-year transition period is provided during which reduced rates will apply but gradually be phased out. As a high-tech enterprise and under the EIT Law, Xi’an Pharmaceuticals enjoyed a two-year tax exemption for 2006 through 2007, and since 2008, it has received the statutory rate of 15%. Since the PRC government has not announced implementation measures for the transitional policy with regards to such preferential tax rates, we cannot reasonably estimate the financial impact of the new tax law to Xi’an Pharmaceuticals at this time. Further, any future increase in the enterprise income tax rate applicable to it or other adverse tax treatments, such as the discontinuation of preferential tax treatments for high and new technology enterprises, would have a material adverse effect on its results of operations and financial condition.

Risks Related to Doing Business in the PRC

Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.

Our business operations may be adversely affected by the current and future political environment in the PRC. The PRC has operated as a socialist state since the mid-1900s and is controlled by the PRC’s Communist Party. The Chinese government exerts substantial influence and control over the manner in which we and it must conduct our business activities. The PRC has only permitted provincial and local economic autonomy and private economic activities since 1988. The government of the PRC has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy, particularly the pharmaceutical industry, through regulation and state ownership. Our ability to operate in the PRC may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under current leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.

The PRC's economy is in a transition from a planned economy to a market oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, there can be no assurance that this will be the case.

A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation thereof, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, there is no assurance that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.

The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may harm its business.

The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. The PRC’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the United States. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We are considered a foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on its businesses. If the relevant authorities find that we are in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:

·	levying fines;
·	revoking Xi’an Pharmaceuticals’ business and other licenses;

·	requiring that we restructure our ownership or operations; and
·	requiring that we discontinue any portion or all of our business.

Among the material laws that we are subject to are the Medicine Management Law, governing the management of pharmaceutical companies, medicine production procedure, packaging, prices, Advertisement Law of the People’s Republic of China and Rules of Medicine Advertisements Management from State Admission for Industry and Commerce, Regulations on Control of Advertisements from State Council, governing rules on advertising, Standardization of the Management on the Quality of Medicine Production issued by SFDA, providing standards for staff, plants, equipment, materials, environment, production management, products laws, and the Price Law of The People’s Republic of China, Measurement Law of The People’s Republic of China, Tax Law, Environmental Protection Law, Contract Law, Patent Law, Accounting Laws and Labor Law.

A slowdown, inflation or other adverse developments in the PRC economy may harm our customers and the demand for our services and products.

All of our operations are conducted in the PRC and all of our revenue is generated from sales in the PRC. Although the PRC economy has grown significantly in recent years, we cannot assure you that this growth will continue. A slowdown in overall economic growth, an economic downturn, a recession or other adverse economic developments in the PRC could significantly reduce the demand for our products and harm our business.

While the PRC economy has experienced rapid growth, such growth has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth could lead to growth in the money supply and rising inflation. If prices for our products rise at a rate that is insufficient to compensate for the rise in the costs of supplies, it may harm our profitability. In order to control inflation in the past, the PRC government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. Such an austere policy can lead to a slowing of economic growth. In October 2004, the People's Bank of China, the PRC's central bank, raised interest rates for the first time in nearly a decade and indicated in a statement that the measure was prompted by inflationary concerns in the Chinese economy. Repeated rises in interest rates by the central bank would likely slow economic activity in the PRC which could, in turn, materially increase its costs and also reduce demand for its products.

Governmental control of currency conversion may affect the value of your investment.

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. We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. 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 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 loans denominated in foreign currencies.

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 come due.

The fluctuation of the Renminbi may harm your investment.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. According to the currency website xe.com, as of December 31, 2010, $1 = 6.591Renminbi. As we rely entirely on revenue earned in the PRC, any significant revaluation of the Renminbi may materially and adversely affect our cash flows, revenue and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for Xi’an Pharmaceuticals’ operations, appreciation of the Renminbi against the U.S. dollar would diminish the value of the proceeds of the offering and this could harm Xi’an Pharmaceuticals’ business, financial condition and results of operations because it would reduce the proceeds available to us for capital investment in proportion to the appreciation of the Renminbi. Thus if we raise 1,000,000 dollars and the Renminbi appreciates against the U.S. dollar by 15%, then the proceeds will be worth only RMB 5,602,350 as opposed to RMB 6,591,000 prior to the appreciation. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes and the U.S. dollar appreciates against the Renminbi; the U.S. dollar equivalent of the Renminbi we convert would be reduced in proportion to the amount the U.S. dollar appreciates. In addition, the depreciation of significant RMB denominated assets could result in a charge to our income statement and a reduction in the dollar value of these assets. Thus if Xi’an Pharmaceuticals has RMB 1,000,000 in assets and Renminbi is depreciated against the U.S. dollar by 15%, then the assets will be valued at $ 128,963 as opposed to $151,722prior to the depreciation.

On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in an approximately 17.5% appreciation of the Renminbi against the U.S. dollar as of December 31, 2009. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the Renminbi against the U.S. dollar.

PRC state administration of foreign exchange ("SAFE") regulations regarding offshore financing activities by PRC residents which may increase the administrative burden we face. The failure by our shareholders who are PRC residents to make any required applications and filings pursuant to such regulations may prevent us from being able to distribute profits and could expose us and our PRC resident shareholders to liability under PRC law.

SAFE issued a public notice ("SAFE #75") effective from November 1, 2005, which requires registration with SAFE by the PRC resident shareholders of any foreign holding company of a PRC entity. Without registration, the PRC entity cannot remit any of its profits out of the PRC as dividends or otherwise.

In October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE notice, which requires PRC residents, including both legal persons and natural persons, to register with the competent local SAFE branch before establishing or controlling any company outside of the PRC, referred to as an "offshore special purpose company," for the purpose of overseas equity financing involving onshore assets or equity interests held by them. In addition, any PRC resident that is the shareholder of an offshore special purpose company is required to amend its SAFE registration with the local SAFE branch with respect to that offshore special purpose company in connection with any increase or decrease of capital, transfer of shares, merger, division, equity investment or creation of any security interest over any assets located in the PRC. Moreover, if the offshore special purpose company was established and owned the onshore assets or equity interests before the implementation date of the SAFE notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC shareholder of any offshore special purpose company fails to make the required SAFE registration and amendment, the PRC subsidiaries of that offshore special purpose company may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the offshore special purpose company. Moreover, failure to comply with the SAFE registration and amendment requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

It is unclear whether our other PRC resident shareholders must make disclosure to SAFE. While our PRC counsel has advised us that only PRC resident shareholders who receive ownership of the foreign holding company in exchange for ownership in the PRC operating company are subject to SAFE #75, there can be no assurance that SAFE will not require our other PRC resident shareholders to register and make the applicable disclosure. In addition, SAFE #75 requires that any monies remitted to PRC residents outside of the PRC be returned within 180 days; however, there is no indication of what the penalty will be for failure to comply or if shareholder non-compliance will be considered to be a violation of SAFE #75 by us or otherwise affect us.

In the event that the proper procedures are not followed under SAFE #75, Xi’an Development could lose the ability to remit monies outside of the PRC and would therefore be unable to pay dividends or make other distributions. Our PRC resident shareholders could be subject to fines, other sanctions and even criminal liabilities under the PRC Foreign Exchange Administrative Regulations promulgated January 29, 1996, as amended.

The PRC's legal and judicial system may not adequately protect our business and operations and the rights of foreign investors.

The PRC legal and judicial system may negatively impact foreign investors. In 1982, the National People's Congress amended the Constitution of the PRC to authorize foreign investment and guarantee the "lawful rights and interests" of foreign investors in the PRC. However, the PRC's system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in the PRC lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the PRC judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC's legal system is based on the civil law regime, that is, it is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the PRC's political, economic or social life, will not affect the PRC government's ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.

The practical effect of the PRC legal system on our business operations in the PRC can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are qualitatively different from the general corporation laws of the United States. Similarly, the PRC accounting laws mandate accounting practices, which are not consistent with U.S. generally accepted accounting principles. PRC's accounting laws require that an annual "statutory audit" be performed in accordance with PRC accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a wholly foreign-owned enterprise to submit certain periodic fiscal reports and statements to designated financial and tax authorities, at the risk of business license revocation. While the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Any award rendered by an arbitration tribunal is enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could harm our operations.

A renewed outbreak of SARS or another widespread public health problem (such as bird flu) in the PRC, where all of our revenue is derived, could significantly harm our operations. Our operations may be impacted by a number of health-related factors, including quarantines or closures of some of our offices that would adversely disrupt our operations. Any of the foregoing events or other unforeseen consequences of public health problems could significantly harm our operations.

Because our principal assets are located outside of the United States and most of our directors and all of our officers reside outside of the United States, it may be difficult for you to enforce your rights based on U.S. Federal Securities Laws against us and our officers or to enforce U.S. Court Judgments against us or them in the PRC.

Most of our directors and all of our officers reside outside of the United States. In addition, our operating company is located in the PRC and substantially all of our assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the U.S. Federal securities laws against us in the courts of either the U.S. or the PRC and, even if civil judgments are obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and directors of criminal penalties, under the U.S. Federal securities laws or otherwise.

The relative lack of public company experience of our management team may put us at a competitive disadvantage.

Our management team lacks public company experience, which could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute our senior management have never had responsibility for managing a publicly traded company. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. Our senior management may not be able to implement programs and policies in an effective and timely manner that adequately responds to such increased legal, regulatory compliance and reporting requirements. Our failure to comply with all applicable requirements could lead to the imposition of fines and penalties and distract our management from attending to the growth of our business.

Risks Related to our Common Stock

Our officers and directors control us through their positions and stock ownership and their interests may differ from other stockholders.

As of April 12, 2011, there were 11,399,662 shares of our common stock issued and outstanding. Our officers and directors own approximately 27.6% of our common stock. As a result, they are able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions including business combinations. Yet our officers’ and directors’ interests may differ from those of other stockholders. Furthermore, ownership of 27.6% of our common stock by our officers and directors reduces the public float and liquidity, and may affect the market price, of our common stock which are currently quoted on the Over-The-Counter Bulletin (“OTCBB”)

We are not likely to pay cash dividends in the foreseeable future.

We intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate. Should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.

Our common stock is illiquid and subject to price volatility unrelated to our operations.

If a market for our common stock does develop, its market price could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting us or our competitors. In addition, the stock market itself is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

Investors may have difficulty liquidating their investment because our common stock is subject to the penny Stock" rules, which require delivery of a schedule explaining the penny stock market and the associated risks before any sale.

Our common stock may be subject to regulations prescribed by the SEC relating to "penny stocks." The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price (as defined in such regulations) of less than $5 per share, subject to certain exceptions. These regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 and individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 (individually) or $300,000 (jointly with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

Legal remedies, which may be available to the investor, are as follows:

·	If penny stocks are sold in violation of the investor's rights listed above, or other federal or state securities laws, the investor may be able to cancel his purchase and get his money back;
·	If the stocks are sold in a fraudulent manner, the investor may be able to sue the persons and firms that caused the fraud for damages;

·	If the investor has signed an arbitration agreement, however, s/he may have to pursue a claim through arbitration.

If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the SEC's rules may limit the number of potential purchasers of the shares of our common stock and stockholders may have difficulty selling their securities.

A large number of shares will be eligible for future sale and may depress our stock price.

We may be required, under terms of future financing arrangements, to offer a large number of common shares to the public, or to register for sale by future private investors a large number of shares sold in private sales to them.

Sales of substantial amounts of common stock, or a perception that such sales could occur, and the existence of options or warrants to purchase shares of common stock at prices that may be below the then-current market price of our common stock, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities, either of which would decrease the value of any earlier investment in our common stock.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our headquarters are located at 24th Floor, Building A, Zhengxin Mansion, No. 5 of 1st Gaoxin Road, Hi-Tech Development Zone, Xi’an City, People’s Republic of China. Our building that houses our headquarters was purchased by Xi’an Pharmaceuticals on November 8, 2002 and occupies approximately 751 square meters of space.

We manufacture and package our products at two factories, one located in Xixiang County in Hanzhong and one in Xi’an Jinghe Industrial Zone, China. The Hanzhong factory, which was built in 1970, is approximately 12,000 square meters with 800 square meters purified. This production facility has two production lines for high-volume injection and produces 38 pharmaceutical products with different specifications. This production facility primarily manufactures products of infusion kind. This production facility has 87 sets of machines and supporting parts for pharmaceutical production from domestic and foreign suppliers.

The Xi’an Jinghe factory, which was built in 2006, is approximately 21,000 square meters with 7,000 square meters purified and 15,000 square meters verdurization area. This facility primarily produces low-volume injection, troches, capsules, granules, species, syrups, oral solutions, tincture mixture and lyophilized powder injections. This production facility has 567 sets of machines.

Each facility is an independent production base that can process raw materials to finished goods, including packaging. We obtain our packing materials from Xi’an Printing Factory and we obtain the aluminum foil used in tablet production from Xi’an Haoyu Packing Co., Ltd.

All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants landholders a "land use right" after a purchase price for such "land use right" is paid to the government. The "land use right" allows the holder the right to use the land for a specified long-term period of time and enjoys all the incidents of ownership of the land. The following are the details regarding HBOP’s land use rights with regard to the land that it uses in its business.

We have land use rights to the parcels of land on which our two production bases are located. The Hanzhong production base covers an area of 28 mu with building area of 12,000 square meters. The Xi’an Jinghe production base covers an area of 42,000 square meters, and building area of 21,000 square meters. The land use rights for the parcel in Xi’an Jinghe expires on September 30, 2053, and the land use right for the parcel in Hanzhong expires on April 27, 2053.

Item 3. Legal Proceedings.

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

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

Item 4. (Removed and Reserved).

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock, having $0.001 par value per share, is traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “CFMI”. Prior to March 30, 2010, we traded under the symbol “AREN”.

The following table sets forth the reported high and low closing bid quotation for CMFI’s common stock by quarter for the fiscal years 2009 and 2010 reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail mark-up, markdowns or commissions and do not necessarily reflect actual transactions.

The range of high and low bid quotations by quarter from January 1, 2009 through December 31, 2010 is listed below. The quotations are taken from the OTC Bulletin Board. They reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

Period Ended:	High		Low
October 1, 2010 to December 31, 2010		6.00		4.90
July 1, 2010 to September 30, 2010		5.70		1.01
April 1, 2010 to June 30, 2010		1.92		0.85
January 1, 2010 to March 31, 2010		1.44		0.51
October 1, 2009 to December 31, 2009		1.05		0.12
July 1, 2009 to September 30, 2009		1.05		0.12
April 1, 2008 to June 30, 2009		0.12		0.12
January 1, 2009 to March 31, 2009		0.20		0.12

Holders

As of April 12, 2011, we had 107 shareholders of record of our common stock and 11,399,662 shares of our common stock outstanding.

Penny Stock Regulations

The SEC has adopted regulations which generally define "penny stock" to be an equity security that has a market price of less than $5.00 per share. Our common stock, falls within the definition of penny stock and subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000, together with their spouse).

For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser's prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability of investors to sell their common stock in the secondary market.

Dividends

Our Board of Directors has not declared a dividend on our common stock during the last two fiscal years and we do not anticipate the payments of dividends in the near future as we intend to reinvest our profits to grow operations.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities during the fiscal year ended December 31, 2010 other than those transactions previously reported to the SEC on the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K.

Securities Authorized for Issuance Under Equity Compensation Plan Information

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. Selected Financial Data.

Not applicable.

Item 7. 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 years ended December 31, 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 Annual Report.

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

Cautionary Note Regarding Forward-Looking Statements

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

These forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that we cannot predict. Any assumptions, upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this Report. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. In evaluating these forward-looking statements, you should consider various factors, including the following: (a) those risks and uncertainties related to general economic conditions, (b) whether we are able to manage our planned growth efficiently and operate profitable operations, (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations, (d) whether we are able to successfully fulfill our primary requirements for cash. Please refer to Part II, Item 7 under “Liquidity and Capital Resources” and Part I, Item 1A under “Risk Factors” contained in this Report for additional discussion. Please also refer to our other filings with the Securities and Exchange Commission. We assume no obligation to update forward-looking statements, except as otherwise required under the applicable federal securities laws.

Results of Operations

Comparison of the Year Ended December 31, 2010 and 2009

Net Sales

The following table sets forth the results of our operations for the years ended December 31, 2010 and 2009 indicated as a percentage of net sales:


	2010					2009
	$		% of Sales			$			% of Sales
Sales		34,184,906					26,708,285
Cost of Goods Sold		14,748,241		43	%		12,408,035			46	%
Gross Profit		19,436,665		57	%		14,300,250			54	%
Operating Expenses		9,014,084		26	%		3,386,961			13	%
Income from Operations		10,422,581		31	%		10,913,289			41	%
Other Income (Expenses), net		(19,377)		-	%		(207,198	)		(1	)%
Income Tax Expense		1,994,046		6	%		1,798,712			7	%
Net Income		8,409,158		25	%		8,907,379			33	%

Net Sales

In the year ended December 31, 2010, we had net sales of $34,184,906, an increase of 28% as compared with $26,708,285 in 2009. This increase was primarily due to increased demand for our products as a result of our successful marketing and promotion strategies.

Cost of Goods Sold

Cost of goods sold consisted of cost of raw materials, workers’ salary, fuel and energy, workshop, etc. Cost of goods sold increased to $14,748,241 for the year ended December 31, 2010, representing a 19% increase as compared with $12,408,035 for 2009. This increase was primarily due to an increase in sales and production volume; the cost of goods sold as a percentage to the sales was 43% for 2010 as compared to 46% for 2009. The decrease in cost of goods sold as a percentage to the sales was attributable to decreased material prices of our certain major raw materials as a result of our successful price negotiation with the major suppliers.

Gross Profit

Gross profit increased 36% to $19,436,665 for 2010, as compared to $14,300,250 for 2009. Our gross profit margin increased from 54% for 2009 to 57% for 2010; the increase in gross margin was a result of decreased cost of goods sold.

Operating Expenses

Operating expenses consisted of selling, general and administrative expenses. Operating expenses were $9,014,084 for 2010, an increase of 166% as compared to $3,386,961 for 2009. This increase was primarily due to increased marketing, advertising and travelling expenses for expanding our market share of our products, as well as increased auditing and legal expenses in associated with being a U.S. public company since February 2010. In addition, during 2010, we recorded approximately $2,222,622 stock compensation expense for warrants issued as consulting and referral fees.

Other Income

Other expense was $19,377 for 2010, compared with other expenses of $207,198 for 2009, a decrease of $187,821. The decrease in other expense was primarily due to decreased interest expense as a result of payment in full for all the short term loans.

Net Income

Net income was $8,409,158 for 2010, a decrease of 6% from $8,907,379 for 2009. Our net profit margin decreased 8% from 33% for 2009 to 25% for 2010. This decrease was primarily attributable to an increase in operating expenses.

Liquidity and Capital Resources

Overview

We had net working capital of $20,556,811 at December 31, 2010, an increase of $11,313,690 over a net working capital of $9,243,121 at December 31, 2009. The ratio of current assets to current liabilities was 10:1 at December 31, 2010.

The following is a summary of cash provided by or used in each of the indicated types of activities during the years ended December 31, 2010 and 2009:


	2010			2009
Cash provided by (used in):
Operating Activities	$	1,075,214		$	8,924,102
Investing Activities		(3,297,694	)		(5,729,259)
Financing Activities		133,559			(1,589,678)

Net cash provided by operating activities

Net cash provided by operating activities was $1,075,214 for 2010, a decrease of $ 7,848,888 or 88% from $8,924,102 cash provided for 2009. The decrease in cash inflow was primarily attributable to an increase in accounts receivable outstanding, prepayment for purchase of two medicine patents, and increased payment for purchase of raw material and inventory.

Net cash used in investing activities

Net cash used in investing activities was $3,297,694 for 2010, a decrease of $2,431,565 or 42% from $5,729,259 for 2009. In 2010, we paid $3.3 million for acquisition of property; while in 2009, we paid $3.4 million for construction in progress for a comprehensive air purification system, and $2.3 million on intangible assets.

Net cash used in financing activities

Net cash provided by financing activities was $133,559 for 2010, compared to $1,589,678 cash used in financing activity in 2009. The difference was primarily attributable to repayment of short-term bank loans of $2,511,265 partially offset by cash inflow of approximately $1 million from warrants exercised and $1,579,483 from the stock issuance during 2010, as compared to 2009, in which we had $2,903,036 proceeds from bank loans and $4,501,714 from repayment of such loans.

Contractual Obligations and Off-Balance Sheet Arrangements.

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

We signed a contact with Xi’an Keli, a local pharmaceutical company to purchase two patents of medicine formulation from them; the total contracted amount was approximately $4,530,000 (RMB 30 million). As of December 31, 2010, we paid $3,774,895 (RMB 25,000,000), and the remaining $755,000 (RMB 5 million) will be paid upon the Company obtaining the registration certificate of the medicine.

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

Critical Accounting Policies

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

Use of Estimates

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

Accounts Receivable

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.

Property, Plant & Equipment

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

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

Intangible Assets

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

Land use right	50 years
Proprietary technologies	20 years

Revenue Recognition

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

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

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

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

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.

Recently Issued Accounting Pronouncements Not Yet Adopted

In April 2010 the FASB issued Accounting Standards Update (ASU) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This Update provides amendments to Accounting Standards Codification (ASC) Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted. This standard will be adopted effective January 1, 2011.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this Update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this Update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. This standard will be adopted effective January 1, 2011.

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

Recently Adopted Accounting Pronouncements

In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. This standard is not currently applicable to the Company.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.

In January 2010, FASB issued ASU N0. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. The update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected prospectively in earnings per share and is not considered a stock dividend for purposes of ASC Topic 505 and Topic 260, Earnings Per Share. This standard is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 8. Financial Statements and Supplementary Data.

Our audited financial statements for the fiscal years ended December 31, 2010 and 2009, together with the report of the independent certified public accounting firm thereon and the notes thereto, are presented beginning at page F-1.

ACSB	Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
	C e r t i f i e d P u b l i c A c c o u n t a n t s a n d A d v i s o r s
517 Route One		330 7th Avenue
Iselin, New Jersey 08830		Suite 202
732. 855.9600		New York, NY 10001
Fax:732.855.9559		212.867.1319

REPORT ON INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

China Pharmaceutical Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of China Pharmaceutical Inc. and Subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of income and other comprehensive income, stockholders' equity and cash flows for the two years ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Pharmaceuticals Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/S/ ACQUAVELLA, CHIARELLI, SHUSTER, BERKOWER & CO., LLP

New York, New York

April 15, 2011

New York	● New Jersey	● San Francisco	● Los Angeles	● Cayman Islands

F-1

CHINA PHARMACEUTICAL INC.

COMBINED BALANCE SHEET

AS OF DECEMBER 31, 2010 AND 2009


	2010		2009
ASSETS

CURRENT ASSETS
Cash & cash equivalents	$	4,729,149	$	6,685,630
Accounts receivable		12,673,111		3,525,444
Inventory		1,019,393		396,513
Deposits and other receivables		4,374,525		708,761
Trade deposit paid		-		2,991,628
Due from officer		5,587		5,427

Total current assets		22,801,765		14,313,403

NONCURRENT ASSETS
Property and equipment, net		14,173,718		7,686,245
Construction in progress		-		3,373,819
Intangible assets		7,802,346		8,321,329

Total noncurrent assets		21,976,064		19,381,393

TOTAL ASSETS	$	44,777,829	$	33,694,796


LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	446,462	$	744,880
Trade deposit received		-		83,879
Short-term bank loans		-		2,493,692
Accrued liabilities and other payables		952,651		778,290
Value-added tax payable		435,614		318,142
Income tax payable		410,227		651,399

Total current liabilities		2,244,954		5,070,282

CONTINGENCIES AND COMMITMENT

STOCKHOLDERS' EQUITY
Common stock, par value, $0.001 per share; 25,000,000 shares authorized, 11,399,662 and 9,333,333 shares issued and outstanding at December 31, 2010 and 2009, respectively		11,400		9,333
Common stock subscribed, par value, $0.001 per share, 25,000 shares issued		-		25
Paid in capital		11,438,995		6,574,592
Statutory reserve		3,274,593		2,137,797
Stock subscription		-		(1,000	)
Accumulated other comprehensive income		704,301		72,543
Retained earnings		27,103,586		19,831,224

Total stockholders' equity		42,532,875		28,624,514

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	44,777,829	$	33,694,796

The accompanying notes are an integral part of these financial statements 

F-2

CHINA PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31,


	2010			2009

Net sales	$	34,184,906		$	26,708,285

Cost of goods sold		14,748,241			12,408,035

Gross profit		19,436,665			14,300,250

Operating expenses
Selling, general and administrative expenses		9,014,084			3,386,961

Income from operations		10,422,581			10,913,289

Non-operating income (expenses)
Interest income		21,636			12,531
Interest expense		(29,565	)		(350,211	)
Financial expense		(435	)		-
Other income		(11,013	)		130,482

Total non-operating expenses, net		(19,377	)		(207,198	)

Income before income tax		10,403,204			10,706,091

Income tax		1,994,046			1,798,712

Net income		8,409,158			8,907,379

Other comprehensive item
Foreign currency translation		631,758			31,277

Comprehensive Income	$	9,040,916		$	8,938,656

Weighted average common shares outstanding
Basic		10,866,730			9,333,333

Diluted		11,157,000			9,333,333

Basic earnings per share	$	0.77		$	0.95

Diluted earnings per share	$	0.75		$	0.95

The accompanying notes are an integral part of these financial statements 

F-3

CHINA PHARMACEUTICAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2010


	Common Stock				Stock subscribed
	Shares		Amount		Shares			Amount			Paid- in capital			Subscription receivable			Statutory reserves		Accumulated comprehensive income (loss)		Retained earnings			Total shareholders’ equity

Balance at January 1, 2009		9,333,333	$	9,333		250,000		$	250		$	6,574,367		$	(10,000	)	$	1,247,175	$	41,266	$	11,814,467		$	19,676,858

Transfer to statutory reserves		-		-		-			-			-			-			890,622		-		(890,622	)		-

Capital Contribution		-		-		(225,000	)		(225	)		225			9,000			-		-		-			9,000

Foreign currency translation gain		-		-		-			-			-			-			-		31,277		-			31,277

Net Income		-		-		-			-			-			-			-		-		8,907,379			8,907,379

Balance at December 31, 2009 (Restated)		9,333,333		9,333		25,000			25			6,574,592			(1,000	)		2,137,797		72,543		19,831,224			28,624,514

Capital Contribution		-		-		(25,000	)		(25	)		64,365			1,000			-		-		-			65,340

Recapitalization on reverse acquisition		1,347,226		1,347		-			-			(1,347	)		-			-		-		-			-

Warrants exercised		333,334		333		-			-			999,667			-			-		-		-			1,000,000

Issuance of common stock		385,769		386		-			-			1,579,097			-			-		-		-			1,579,483

Stock based compensation		-		-		-			-			2,222,622			-			-		-		-			2,222,622

Net income		-		-		-			-			-			-			-		-		8,409,158			8,409,158

Transfer to statutory reserves		-		-		-			-			-			-			1,136,796		-		(1,136,796	)		-

Foreign currency translation gain		-		-		-			-			-			-			-		631,758		-			631,758

Balance at December 31, 2010		11,399,662	$	11,400		-		$	-		$	11,438,995		$	-		$	3,274,593	$	704,301	$	27,103,586		$	42,532,875

The accompanying notes are an integral part of these financial statements 

F-4

CHINA PHARMACEUTICAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010 and 2009


		2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	8,409,158		$	8,907,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock based compensation expense			2,222,622			-
Provision for impairment loss on intangible assets			-			737,315
Loss on assets disposed			-			6,649
Depreciation and amortization			841,089			818,446
(Increase) decrease in current assets:
Accounts receivable			(8,847,902	)		1,678,874
Inventory			(597,980	)		(146,797	)
Cash pledged			-			193,657
Deposits and other receivables			(3,565,907	)		20,472
Trade deposit paid			3,012,607			(2,670,748	)
Increase (decrease) in current liabilities:
Accounts payable			(313,348	)		(719,578	)
Trade deposit received			(84,470	)		(95,605	)
Accrued liabilities and other payables			148,219			(32,885	)
Taxes payable			(148,874	)		420,580
Bank acceptance payable			-			(193,657	)

Net cash provided by operating activities			1,075,214			8,924,102

CASH FLOWS FROM INVESTING ACTIVITIES:
	Acquisition of property & equipment		(3,297,694	)		(12,697	)
	Intangible assets		-			(2,342,743	)
	Construction in progress		-			(3,373,819	)

Net cash used in investing activities			(3,297,694	)		(5,729,259	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from short-term bank loans		-			2,903,036
	Repayment of short-term bank loans		(2,511,264	)		(4,501,714	)
	Warrants exercised		1,000,000			-
	Increase in paid in capital		65,340			-
	Sale of common stock		1,579,483			9,000

Net cash used in financing activities			133,559			(1,589,678	)

EFFECT OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS			132,440			31,277

NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS			(1,956,481	)		1,636,442

CASH & CASH EQUIVALENTS, BEGINNING OF YEAR			6,685,630			5,049,188

CASH & CASH EQUIVALENTS, END OF YEAR		$	4,729,149		$	6,685,630


Supplemental Cash flow data:
Income tax paid		$	2,248,704		$	1,147,313
Interest paid		$	28,989		$	345,490

F-5

CHINA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010 AND 2009

Note 1 - ORGANIZATION

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

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

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

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

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

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

F-6

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

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

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of Consolidation

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

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

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

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

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

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

F-7

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

Reclassifications

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

Foreign Currency Translation

The Company’s reporting currency is the U.S. dollar. The Company’s operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial statements of the subsidiary are translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation”, included in the Codification as ASC 830, Foreign Currency Matters. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’ equity, included in the Codification as ASC 220, Comprehensive Income. Foreign exchange transaction gains and losses are reflected in the income statement. For the years ended December 31, 2010 and 2009, the foreign currency translation adjustment to the Company’s comprehensive income was $633,439 and $31,277 respectively.

Use of Estimates

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

Risks and Uncertainties

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

Contingencies

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

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

F-8

Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantee, 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.

Accounts Receivable

The standard credit period of the Company’s most of client is three months. Within the medical industry in China, the collection period is generally longer than for other industries. Management evaluates the collectability of the receivables at least quarterly. The estimated average collection period was 90 days as of December 31, 2010. The allowance for doubtful account as of December 31, 2010 and 2009 was $1,115,319 and $ 508,041, respectively.

Inventories

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Costs that are capitalized to inventory primarily include direct manufacturing overhead such as labor costs and packing materials. As of December 31, 2010 and 2009, inventories consisted of the following:

	2010		2009

Raw materials	$	909,240		370,253
Finished goods		110,153		26,260
	$	1,019,393		396,513

Property, Plant & Equipment

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

Property, Plant & Equipment consisted of the following:

	2010			2009
Building and improvements	$	8,866,674		$	4,067,306
Machinery		6,812,716			5,494,904
Fixture, furniture and equipment		867,416			178,071
Motor vehicles		111,834			111,834
		16,658,640			9,852,115
Less: Accumulated depreciation		(2,484,922	)		(2,165,870	)
	$	14,173,718		$	7,686,245

F-9

Depreciation expense for the years ended December 31, 2010 and 2009 was approximately $319,000 and $ 421,200, respectively.

Intangible Assets

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

Land use right	50 years
Proprietary technologies	20 years

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

	2010			2009

Land use right	$	1,058,965		$	1,058,965
Proprietary technologies		8,965,538			8,965,538
		10,024,503			10,024,503
Less: Accumulated amortization		(1,484,842	)		(965,859	)
		8,539,661			9,058,644
Less: Impairment		(737,315)			(737,315	)
	$	7,802,346		$	8,321,329

Amortization expense for years ended December 31, 2010 and 2009 was approximately $518,980 and $397,240, respectively. The estimated future yearly amortization expenses related to intangible asset as of December 31, 2010 are as follows:


2011	$	573,000
2012		573,000
2013		573,000
2014		573,000
2015		573,000
Thereafter	$	4,937,346

Long-Lived Assets

The Company accounts for long-lived assets in accordance with Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2010 and 2009, there were no significant impairments of its long-lived assets.

F-10

Fair Value of Financial Instruments

Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments”, included in the Codification as ASC 820, Fair Value Measurements and Disclosures, requires that the Company discloses estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Fair Value Measurements and Disclosures

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

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

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

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

As of December 31, 2010 and 2009, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

Value Added Tax Payable

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

Revenue Recognition

Advertising

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred. For the years ended December 31, 2010 and 2009, the Company incurred approximately $2,217,000 and $2,000 advertising expense, respectively.

F-11

Income Taxes

The Company utilizes SFAS No. 109, “Accounting for Income Taxes”, included in the Codification as ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. There were no deferred tax provision in 2010 and 2009.

Interest associated with unrecognized tax benefits is classified as interest expense and penalties are classified as selling, general and administrative expense in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements. At December 31, 2010 and 2009, the Company had not taken any significant uncertain tax position on its tax return for 2009 and prior years or in computing its tax provision for 2009.

Comprehensive Income

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

Statement of Cash Flows

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

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

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

F-12

The following table presents a reconciliation of basic and diluted earnings per share for the years ended December 31, 2010 and 2009:

	Years Ended
	2010		2009
Net income	$	8,409,158	$	8,907,379
Weighted average shares outstanding - basic		10,866,730		9,333,333
Effect of dilutive securities:
Warrants issued		290,270		-
Weighted average shares outstanding – diluted		11,157,000		9,333,333
Earnings per share – basic	$	0.77	$	0.95
Earnings per share – diluted	$	0.75	$	0.95

Concentration of Credit Risk

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

Research and Development

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

The Company also develops new products through arrangements and corporation with several research institutes to develop new pharmaceutical products. The Company only pays these institutes for their research expenses if the research goals are accomplished, including certification of the product and approval for production, and these achievements are then transferred to the Company and recorded as intangible assets. There was no Research and Development expense in 2010 and 2009.

Segment Reporting

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

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

F-13

Recently Issued Accounting Pronouncements Not Yet Adopted

As of December 31, 2010, there are no other recently issued accounting standards not yet adopted which would have a material effect on the Company’s financial statements.

Recently Adopted Accounting Pronouncements

F-14

Note 3– DEPOSITS AND OTHER RECEIVABLES

At December 31, 2010, the Company had deposits and other receivables of $4,374,525, mainly including $3,774,895 (RMB 25,000,000) prepayment for purchasing two patents of medicine formulation from Xi’an Keli, a local pharmaceutical company (see Note 7).

Note 4 – SHORT-TERM BANK LOAN

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

	December 31, 2009
Industrial and Commercial Bank of China -Xixiang Branch. Term of these loans called for interest from 7.956% to 8.541% per annum, with principal due in 2009. The loan was repaid upon maturity.		1,760,253

Xixiang rural cooperative bank. Term of these loans call for interest from 11.46% to 12.24% per annum with principal due in 2009 and 2010. The loan was repaid upon maturity.		733,439
	$	2,493,692

Note 5 – ACCRUED LIABILITIES AND OTHER PAYABLES

Accrued liabilities and other payables consisted of the following at December 31, 2010 and 2009:

	2010		2009
Accrued salaries	$	5,122	$	6,819
Accrued welfare		33,799		43,397
Other payables		20,463		117,635
Accrued expense		877,733		610,439
Other levies		15,534
Total	$	952,651	$	778,290

Note 6 – 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 7 – COMMITMENTS

F-15

Purchasing Agreement

The Company signed a contact with Xi’an Keli, a local pharmaceutical company to purchase two patents of medicine formulation from them; the total contracted amount was approximately $4,530,000 (RMB 30 million). As of December 31, 2010, the Company paid $3,774,895 (RMB 25,000,000), and the remaining $755,000 (RMB 5 million) will be paid upon the Company obtaining the registration certificate of the medicine.

Lease Agreement

As of December 31, 2010, the Company had rental commitment of approximately $1,200, which will be paid in 2011.

Employment Agreements

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

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

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

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

Note 8 – INCOME TAX

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

The Company’s VIE is a high-tech enterprise and under PRC Income Tax Laws, it is entitled to a two-year tax exemption for 2006 through 2007. Starting from 2008, the Enterprise Income Tax (EIT) was at a statutory rate of 15%. The Company expensed $1,994,046 and $ 1,798,712 for income tax for the years ended December 31, 2010 and 2009.

The following table reconciles the U.S. statutory rates to the Company’s consolidated effective tax rate for the years ended December 31, 2010 and 2009:

	2010			2009
US statutory rates		34.0	%		34.0	%
Tax rate difference		(10.9	)%		(9.0	)%
Effect of tax holiday		(12.2	)%		(10.0	)%
Others		0.9	%		1.8	%
Valuation allowance		7.4	%		0	%
Tax per financial statements		19.2	%		16.8	%

F-16

Note 9 – MAJOR CUSTOMERS AND CREDIT RISK

For the year ended December 31, 2010 and 2009, no customer accounted for 10% or more of the Company’s sales.

Three vendors provided 12%, 10% and 10% of the Company’s purchases of raw materials for the year ended December 31, 2010; one vendors provided 12% of the Company’s purchase of raw materials for the year ended December 31, 2009. At December 31, 2010, the total payable due to these vendors was approximately $79,500.

Note 10 – STATUTORY RESERVES

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

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2010 and 2009, the Company had allocated $3,274,593 and $2,137,797 to these non-distributable reserve funds.

Note 11 – STOCK-BASED COMPENSATION PLAN

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

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

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

F-17

Based on the fair value method under ASC Topic 505, the fair value of each warrant granted is estimated on the date of the grant using the Black-Scholes option pricing model and is recognized as compensation expense over the service period of each warrants issued. The Black-Scholes option pricing model has assumptions for risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based upon market yields for US Treasury debt securities at a maturity near the term remaining on the warrant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the historical volatility of the Company’s stock price. The fair value was estimated at the date of grant using the following range of assumptions: average risk-free interest rate – 1.89%; expected life – 3 years; expected volatility – 219%; and expected dividends – nil. No estimate of forfeitures was made as the Company has a short history of granting warrants.

The following table summarizes activities of these warrants (post-reverse split) for the year ended December 31, 2010:

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

The Company recorded $2,222,622 compensation expense for warrants during the year ended December 31, 2010 with a corresponding increase to additional paid-in capital.

Note 12 – COMMON STOCK

In August 2010, the Company entered into four stock subscription agreements with four individuals for issuing them 1,157,142 (pre-reverse split which was effected on September 10, 2010) the Company’s shares at $1.4 per share (pre-reverse split effected September 10, 2010). At December 31, 2010, the Company received approximately $1,600,000 from issuance of 385,769 (post-reverse split) shares.

Note 13- CONTINGENCY

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

F-18

Note 14- CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

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

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

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

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

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

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

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

Note 15– SUBSEQUENT EVENTS

For the year ended December 31, 2010, the Company has evaluated subsequent events for potential recognition and disclosure through the date of the financial statement issuance.

F-19

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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 the Company’s CEO and CFO (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of December 31, 2010. Based upon that evaluation, the Company’s CEO and CFO noted a material weakness (see Management’s Report on Internal Control over Financial Reporting below) and concluded that the Company’s disclosure controls and procedures were not effective. The Company’s material weakness in its internal control over financial reporting is related to the lack of accounting personnel with U.S. GAAP proficiency. The Company’s internal accounting department has primarily engaged in ensuring compliance with PRC accounting and reporting requirements for our operating affiliates. As a result, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although the Company’s accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. In order to mitigate this material weakness to the fullest extent possible, external consultants were used and the Company’s review process was strengthened.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and for assessing the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission (Rule 13a-15(f) under the Exchange Act of 1934, as amended), internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by its Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.

Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Report”). Based on that evaluation and the criteria set forth in the COSO Report, management concluded that at December 31, 2010 there was a material weakness and therefore, the internal control over financial reporting was not effective. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company’s material weakness in its internal control over financial reporting is related to the lack of accounting personnel with U.S. GAAP proficiency. The Company’s internal accounting department has primarily engaged in ensuring compliance with PRC accounting and reporting requirements for our operating affiliates. As a result, our current internal accounting department responsible for financial reporting of the Company, on a consolidated basis, is relatively new to U.S. GAAP and the related internal control procedures required of U.S. public companies. Although the Company’s accounting staff is professional and experienced in accounting requirements and procedures generally accepted in the PRC, management has determined that they require additional training and assistance in U.S. GAAP matters. In order to mitigate this material weakness to the fullest extent possible, external consultants were used and the Company’s review process was strengthened. Therefore, management believes that the consolidated financial statements and other information presented herewith are materially correct. Management believes that the weakness did not have any effect on the accuracy of the Company’s consolidated financial statements for the current reporting period.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

This annual report does not include an attestation report issued by our registered independent accounting firm regarding our internal control over financial reporting. The management’s report was not subject to attestation by our registered independent public accounting firm pursuant to rules of the Securities and Exchange Commission that permantly exempt smaller reporting comapnies.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the fiscal year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Set forth below is certain information regarding our directors and executive officers.

Name	Age	Position/Title
Guozhu Wang	46	Chief Executive Officer and Chairman of the Board
Guiping Zhang	43	President and Director
Tao Lei	40	Chief Financial Officer
Zaizhi Cheng	56	Director
Xiaogang Zhu	57	Director
Michael Segal	68	Director

Our directors hold office until the next annual meeting of our shareholders and until their successors have been qualified after being elected or appointed. Our officers serve at the discretion of our Board of Directors.

Set forth below is biographical information about our current directors and executive officers:

GUOZHU WANG – Chief Executive Officer. Mr. Wang was appointed Chief Executive Officer of the Company on February 12, 2010. Mr. Wang has been China Qinba Pharmaceuticals’ CEO since November 5, 2008 and its Chairman since November 15, 2008. He has also been Chairman of Xi’an Pharmaceuticals since August 2007. Mr. Wang served as Chairman of the Board at Shandong Cide Pharmaceuticals, Inc., where he was in charge of overall operations of the company from May 2004 until August 2007. Mr. Wang was also employed at Jilin Aodong Medicine Industry Group Co., Ltd., Shandong Sales Company as General Manager in charge of sales from May 2003 until May 2004.

GUIPING ZHANG – President, Director. Mr. Zhang was appointed President of the Company on February 12, 2010 and a director of the Company on March 29, 2010. Mr. Zhang has been the China Qinba Pharmaceuticals’ General Manager since November 5, 2008 and a Director of China Qinba Pharmaceuticals since November 15, 2008. Since August 2007, Mr. Zhang has been General Manager and Vice President with Xi’an Pharmaceuticals and responsible for the overall operations and management of the Xi’an Pharmaceuticals. He was Chairman of the Board of Xi’an Pharmaceuticals from 2001 through August 2007. Mr. Zhang attended Shandong University majoring in Micro-Organism Engineering and graduated in July 1989.

TAO LEI – Chief Financial Officer. Mr. Lei was appointed Chief Financial Officer of the Company on February 12, 2010. Mr. Lei has also served as CFO of Xi’an Pharmaceuticals since May of 2009. Previous to Mr. Lei’s employment with Xi;an Pharmaceuticals, Mr. Lei was employed with Shaanxi Baifu Investment Company from April 2006 to May 2009 as CFO. Mr. Lei was the Finance Manager of Xi’an Zhonghui Shopping Mall from June 2000 to March 2006. After completing his Accounting degree in 1996 from Xi’an Union University, Mr. Lei obtained his Auditor designation in 1997and his Accountant designation in 1998.

ZAIZHI CHENG – Director. Mr. Cheng was appointed a Director of the Company effective March 4, 2010. From January 2005 to December 2009, Mr. Cheng was employed with Shandong Tianyue Pharmaceuticals Co., Ltd., as Chief Financial Officer. From January 2003 to December 2004, Mr. Cheng was employed with Shandong Fangzhou Mi Co., Ltd., as Chief Financial Officer. From May 2001 to December 2002, Mr. Cheng was employed with Guangdong Zhongshan Xiaoya Jinglin Air Conditioner Factory, as Executive Vice President. From May 1997 to May 2001, Mr. Cheng was employed with Shandong Yinchu Industry Co., Ltd., as Chief Financial Officer. Mr. Cheng majored in accounting and received his diploma from Shandong University.

XIAOGANG ZHU – Director. Mr. Zhu was appointed a Director of the Company effective March 4, 2010. Mr Zhu is currently employed with China Recycling Energy Corp (CREG.OB) as General Manager and is also employed with Xi’an TCH Energy Technology Co. Ltd. as Chief Executive Officer. Mr Zhu has held these positions since December 2007. From September 2005 to December 2007, Mr. Zhu was employed with China Natural Gas, Inc. (CHNG.OB) as Chief Financial Officer as well as the Chief Financial Officer of Xi’an Xilan Natural Gas Co., Ltd. From September 2000 to September 2005, Mr. Zhu was employed with Xi’an Dapeng Biological Technology Co., Ltd. as Vice General Manager. Mr. Zhu was graduated from Shaanxi Institute of Finance and Economics, whose major was Accounting, with a designation of Senior Accountant.

MICHAEL SEGAL – Director. Mr. Segal was appointed a Director of the Company effective March 4, 2010. He is President, General Securities Principal, an Options Compliance Principal and an Investment Banking Representative of Halcyon Cabot Partners LTD., a member of the Financial Industry Regulatory Authority (FINRA) since January 2010. From 2006 to 2009 and 2003 to 2005 Mr. Segal was a Principal, Option Compliance Principal and Branch Manager of Whitaker Securities LLC. Mr. Segal is also individually registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is a founding member of the Managed Funds Association. Mr. Segal received a B.B.A. in marketing and economics from the University of Miami in Florida. Mr. Segal sits on the board of directors of the following privately held companies: China Chanfang Pharmaceuticals Inc.; International American Capital Inc. and Segal Cirone Services Inc. Mr. Segal also sits on the board of directors of the following publicly held company: Asia Carbon Industries Inc. (ACRB.BB); China Agri-Business Inc. (CHBU.BB); China Printing &Packaging Inc. (CHPI.BB); China Pharmaceuticals Inc. (CFMI.BB); China Power Equipment Company Inc. (CPQQ.BB); and DK Sinopharma Inc. (DKSP.BB). From March 2007 until December 2009, Mr. Segal was a member of the board of directors of Biostar Pharmaceuticals Inc. (BSPM) Mr. Segal brings to our Board of Directors his expertise in the financial and equity markets and his years of experience providing strategic and financial advisory services to complex international organizations. Mr. Segal also provides unique perspective as our only U.S. director.

Director Experience

The Board believes that each of the Company’s directors should possess the highest personal and professional ethics, integrity and values, and be committed to representing the long-term interests of the Company’s shareholders. When evaluating candidates for election to the Board, the Corporate Governance and Nominating Committee seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. The Board has also considered the fact that all of our directors have worked for, or served on the boards of directors of, a variety of companies in a range of industries. The Board believes that through their varying backgrounds, the Company’s directors bring a wealth of experiences, new ideas and solutions to the Board. Specifically, the Board has noted that our directors have the following skills and qualifications that, among others, have made them particularly suited to serve as a director of China Pharmaceuticals:

·	Mr. Guozhu Wang has extensive knowledge of the pharmaceuticals industry and has served in leadership positions in various pharmaceuticals companies since 2003.

·	Mr. Guiping Zhang has been a key member of Xian Pharmaceuticals’ management since 2001 and processes an extensive knowledge of the pharmaceuticals industry and the Company’s products.

·	Mr. Zaizhi Cheng has significant experience leading the financial divisions of several companies in the PRC.

·	Mr. Michael Segal has significant experience in the U.S. financial industry and the corporate governance of U.S. public companies.

·	Mr. Xiaogang Zhu is an “audit committee financial expert” with over 10 years of experience in managing the financial, and accounting, and operational activities of various U.S. public companies located in the PRC.

Except as otherwise reported above, none of our directors have held directorships in other reporting companies and registered investment companies at any time during the past five years.

Family Relationship

There are no family relationships among our directors and executive officer.

Involvement in Certain Legal Proceedings

To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:

Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.

Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.

Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.

Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Audit Committee and Audit Committee Financial Expert

Our board of directors established an audit committee on March 5, 2010. The audit committee is responsible for (i) recommending independent accountants to the Board, (ii) reviewing our financial statements with management and the independent accountants, (iii) making an appraisal of our audit effort and the effectiveness of our financial policies and practices and (iv) consulting with management and our independent accountants with regard to the adequacy of internal accounting controls. The Company’s Audit Committee comprises three independent board members, namely, Xiaogang Zhu (Chairman), Michael Segal, and Zaozhi Cheng.

Our board of directors has determined that it has an "audit committee financial expert" as defined by Item 401(h) of Regulation S-K as promulgated by the Securities and Exchange Commission. Our audit committee financial expert is Xiaogang Zhu. The directors who serve on the audit committee are "independent" directors based on the definition of independence in the listing standards of the National Association of Securities Dealers. Our Board of Directors has adopted a written charter for the Audit Committee. The Charter is currently available on our website: http://www.chinapharmaceuticalsinc.com.

Compensation Committee

Our board of directors established a compensation committee on March 5, 2010.

The compensation committee of the board of directors is responsible for (i) determining the general compensation policies, (ii) establishing compensation plans, (iii) determining senior management compensation and (iv) administering our stock option plans. The Company’s Compensation Committee similarly comprises three independent board members, namely, Michael Segal (Chairman), Zaizhi Cheng, and Xiaogang Zhu.

Our board of directors has adopted a written compensation committee charter. The charter is currently available on our website. The directors who serve on the compensation committee are "independent" directors based on the definition of independence in the listing standards of the National Association of Securities Dealers.

Corporate Governance and Nominating Committee

Our board of directors established a corporate governance and nominating committee in March 5, 2010.

The purpose of the corporate governance and nominating committee of the board of directors is to assist the board of directors in identifying and recruiting qualified individuals to become board members and select director nominees to be presented for board and/or stockholder approval. The Company’s Nominating Committee is similarly comprised of three independent board members, namely, Zaozhi Cheng (Chairman), Michael Segal, and Xiaogang Zhu.

The directors who serve on the nominating committee are "independent" directors based on the definition of independence in the listing standards of the National Association of Securities Dealers. The nominating committee has a written charter. The charter is currently available on our website.

The corporate governance and nominating committee assists the board of directors in identifying individuals qualified to become our directors and in determining the composition of the board and its committees. The corporate governance and nominating committee is responsible for, among other things:

·	determining the skills and qualifications in accordance with search criteria required of potential directors, identify, screen potential candidates and make recommendations to the Board of Directors to fill vacancies on the Board.

·	evaluating candidates to be nominated to serve on the Board and recommend the slate of nominees to stand for election at the annual meeting of the shareholders and independence, relevant experience, leadership qualities, diversity and ability to represent shareholders should be considered.

·	reviewing and recommending to the Board for approval the appointment of directors to Board committees and the selection of the chair for each committee.

·	developing and recommending to the Board for approval a set of corporate governance principles and practices applicable to the Company and review such principles annually and recommend amendments as necessary.

·	overseeing the evaluation of the Board and its committees, which may include developing and recommending an annual review process.

At this time, no additional specific procedures to propose a candidate for consideration by the nominating committee, nor any minimum criteria for consideration of a proposed nomination to the board, have been adopted.

Changes in Nominating Process

There are no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

Code of Ethics

On December 19, 2008, we adopted a code of ethics to apply to all of our executive officers, including our principal executive, financial and accounting officers, our directors, our financial managers and all employees are expected to adhere and promote regarding individual and peer responsibilities, and responsibilities to other employees, the Company, the public and other stakeholders. There were no amendments of waivers to this code in fiscal 2010. Our code of ethics is available for review on our website at http://www.chinapharmaceuticalsinc.com. We will provide a copy of our code of ethics free of charge to any person who so requests. Requests should be directed to Mr. Yufei Qiao, our Corporate Secretary, at qiaoyufeiok@yahoo.com.cn, by mail to China Pharmaceuticals, Inc., 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 or by telephone at 029-82098912-8038.

The board and its committees held the following number of meetings during the fiscal year of 2010:

Board of Directors
Audit Committee			(1)
Compensation Committee			(2)
Corporate Governance and Nominating Committee			(3)

The meetings include meetings that were held by means of a conference telephone call, but do not include actions taken by unanimous written consent.

Each director attended at least 75% of the total number of meetings of the board and those committees on which he served during the year. Our non-management directors did not meet in executive session during 2010.

Board Leadership and Risk Oversight

Our Chief Executive Officer also serves as Chairman of the Board. We have four other directors, three of whom are independent. Xiaogang Zhu, the chairman of the Audit Committee, is our lead independent director. The Board has three standing committees, each of which is comprised solely of independent directors with a committee chair. We believe that this leadership structure has served China Pharmaceuticals well. The Board believes that the Company’s Chief Executive Officer is best situated to serve as Chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having one person serve as both Chairman and Chief Executive Officer eliminates potential for confusion and demonstrates to our employees, suppliers, customers, shareholders and other stakeholders that China Pharmaceuticals has clear leadership with a single person setting the tone and managing our operations. The Board has delegated responsibility for the oversight of specific risks to Board committees as follows:

	•	appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;
	•	approving all auditing and non-auditing services permitted to be performed by the independent auditors;

•

reviewing annually the independence and quality control procedures of the independent auditors;

•

Reviewing, approving, and overseeing risks arising from proposed related party transactions;

•

discussing the annual audited financial statements with the management;

	•	meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management; and
	•	monitoring the risks associated with management resources, structure, succession planning, development and selection processes, including evaluating the effect the compensation structure may have on risk decisions.

Shareholder Communications

Shareholders requesting communication with Directors can do so by writing to China Pharmaceuticals, Inc., c/o Corporate Secretary, Mr. Yufei Qiao, 24th Floor, Building A, Zhengxin Mansion, No. 5 of 1st Gaoxin Rd, Hi-Tech Development Zone, Xi’an City, People’s Republic of China, or emailing to qiaoyufeiok@yahoo.com.cn. At this time we do not screen communications received and would forward any requests directly to the named Director. If no Director was named in a general inquiry, the Secretary would contact either the Chairman or the Chairman of a particular committee, as appropriate. We do not provide the physical address, email address, or phone numbers of Directors to outside parties without a Director's permission.

Compliance with Section 16(a) of the Securities Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of the our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.

Based solely on our review of the copies of such reports received by us, and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended December 31, 2010, our officers and directors, and all of the persons known to us to own more than 10% of our common stock, filed all required reports on a timely basis, except that Michael S. Segal; Xiaogang Zhu; Cheng Zaizhi; Zhang Guiping; Wang Guozhu; and Tao Lei were each late in filing a Form 3.

Item 11. Executive Compensation.

The following is a summary of the compensation we paid to our CEO and CFO for the two years ended December 31, 2010 and 2009. No executive officer received compensation in excess of $100,000 for any of those years.

Summary Compensation Table

Name and Principal Position	Fiscal Year		Salary ($)	Bonus ($)			Stock Awards ($)		Option Awards (3) ($)			Non-equity Incentive Plan Compensation ($)		Nonqualified Deferred Compensation Earnings ($)			All Other Compensation ($)		Total ($)
Terry Bowering, Former CEO and Director (1)		2010	0		0		0			0		0			0		0			0
		2009	63,140		0		0			0		0			0		0			63,140

Guozhu Wang, Director and CEO(2)		2010	5,,242		0		0			0		0			0		0			5,242
		2009	5,242		0		0			0		0			0		0			5,242
Guiping Zhang, President(2)		2010	5,769																	5,769
		2009	5,769		0		0				0	0			0		0

		2010	1,581																	1,581
Teo Lei, CFO(2)		2009	1,581			0		0			0		0			0		0

(1) Terry Bowering resigned as our Chief Executive Officer, on February 12, 2010, and resigned as a Director, effective March 4, 2010.

(2) These amounts represent compensation paid by China Qinba Pharmaceuticals and its subsidiaries. China Qinba Pharmaceuticals executed employment agreements with our CEO, President and CFO as of January 1, 2010. The employment agreements are for a term of two years. The employment agreements will provide for annual salaries and annual bonuses in amounts not less than the amounts set forth in the table above.

Employment Agreements

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

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

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

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

Compensation of Directors

On January 19, 2010, the Company entered into a letter agreement (the “Letter Agreement”) with its director, Michael Segal, for his services to the Company as a director. Pursuant to the Letter Agreement, Mr. Segal is entitled to receive (i) 0.9% Common Stock based upon the total number of shares issued and outstanding as of the date of the Letter Agreement. (ii) a fee of $24,000 annually, and (iii) Common Stock equal to $24,000 based on the closing price of the Company’s stock on December 31st of each year.

Notwithstanding the foregoing, generally, we pay no compensation to the directors for serving as a director. There are no other elements of compensation paid to our directors but it is expected that in the future, we may create a remuneration and expense reimbursement plan.

Outstanding Equity Awards at Fiscal Year-End

There were no option exercises or options outstanding in fiscal year of 2010.

Pension and Retirement Plans

Currently, we do not offer any formal annuity, pension or retirement benefits to be paid to any of our officers or directors. There are also no compensatory plans or arrangements with respect to any individual named above which results or will result from the resignation, retirement or any other termination of employment with our company, or from a change in our control.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our Chief Executive Officer, President and Chief Financial Officer, and (iv) all executive officers and directors as a group as of April 12, 2011.

Amount and Nature of Beneficial Ownership

Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership		Percentage of Common Stock

Directors and Executive Officers

Common Stock	Guozhu Wang CEO and Director		1,642,667		14.4	1%

Common Stock	Guiping Zhang President and Director		1,452,000		12.74	%

Common Stock	Tao Lei Chief Financial Officer		0		0	%

Common Stock	Zaizhi Cheng Director 102 Unit 2, Building 24, Yingshi Street, Huaiyin District, Ji’nan, Shandong, People’s Republic of China 250022		0		0	%

Common Stock	Michael Segal Director 11 East 86th Street, Suite 19B New York, NY 10028		48,854		0.5	%

Common Stock	Xiaogang Zhu Director 513 Unit 1, Building 7 of 3546 Factory, Xinwenxiang, Beilin District, Xi’an, People’s Republic of China 710061		0		0	%

Common Stock
All Directors and Executive Officers as a Group (6 persons)			3,143,521		27.6	%

(1) Except as otherwise indicated, the address of each beneficial owner is c/o China Pharmaceuticals, Inc., 24th Floor, Building A, Zhengxin Mansion, No. 5 of 1st Gaoxin Rd, Hi-Tech Development Zone, Xi’an City, PRC.

(2) Information with respect to beneficial ownership is based upon information furnished by each shareholder or contained in filings made with the Securities and Exchange Commission. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.

In determining the percent of common stock owned by a person or entity on April 12, 2011, (a) the numerator is the number of shares of the class beneficially owned by such person and includes shares which the beneficial owner may acquire within 60 days upon conversion or exercise of a derivative security, and (b) the denominator is the sum of (i) the shares of that class outstanding on April 12, 2011 (11,399,662 shares of Common Stock) and (ii) the total number of shares that the beneficial owner may acquire upon conversion or exercise of a derivative security within such 60 day period. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

In May 2008 China Qinba Pharmaceuticals issued 1,736,111 shares of our common stock to our three founders in consideration for services in connection with our formation and organization. China Qinba Pharmaceuticals issued Ms. Chen Xi Huang Wong 268,403 shares, ValueRich, Inc., a consultant with whom China Qinba Pharmaceuticals has a consulting arrangement 390.625 shares and Bo Chen, a principal shareholder 954,861 shares, which represents 10.84% of our outstanding common shares.

In 2008, in exchange for executing the Management Entrustment Agreement, the shareholders of Xi’an Pharmaceuticals received 6,944,444 shares of China Qinba Pharmaceuticals, Inc. common stock and some of the China Qinba Pharmaceuticals officers and directors are officers and directors of Xi’an Pharmaceuticals. Guozhu Wang and Guiping Zhang received 2,013,889 and 1,875,000 shares of China Qinba Pharmaceuticals common stock in connection with such transaction, which represented 22.87% and 21.29% of China Qinba Pharmaceuticals outstanding shares of common stock.

In November 2008 China Qinba Pharmaceuticals issued 55,556shares of China Qinba Pharmaceuticals common stock to Ms. Chen Xi Huang Wong in exchange for her capital contribution of $138,889.

As part of a private placement that was conducted from September 2008 and ending December 2008 China Qinba Pharmaceuticals issued 69,444 shares of China Qinba Pharmaceuticals common stock at $.04 per share to 36 investors. Lap Keung Wong, the husband of Ms. Chen Xi Huang Wong was issued 12,153 shares in connection with the offering. Joseph Visconti, the CEO and President of ValueRich, Inc. was issued 1,389 shares in connection with such offering and his son and father were each issued 694shares in connection with such offering.

In December 2009, China Qinba Pharmaceuticals cancelled 1,027,778 shares of our common stock that had been issued to China Qinba Pharmaceuticals three founders in consideration for services not performed in the following amounts: ValueRich Inc. 390,625 shares, Ms. Chen Xi Huang Wong, 268,403shares, and Mr. Bo Chen 340,972 shares.

Pursuant to a share exchange agreement dated February 12, 2010, Terry Bowering transferred 1,416,667 shares of common stock of Allstar Restaurants to Allstar Restaurants in exchange for 100% of the issued and outstanding shares of Allstar Restaurants’ wholly-owned subsidiary, China Doll Foods Ltd., d/b/a China Doll Restaurant and Lounge. Allstar Restaurants cancelled the shares of common stock received from Terry Bowering on February 12, 2010. Terry Bowering and Allstar Restaurants entered into a binding agreement with respect to such transaction on February 12, 2010.

Pursuant to the merger agreement of February 12, 2010, through our wholly-owned subsidiary Allstar Acquisitions Co., we acquired control of China Qinba Pharmaceuticals, Inc. a Delaware corporation and the parent company of Xi-an Development Co., Ltd., a wholly foreign-owned enterprise organized under the laws of the People’s Republic of China by issuing to the China Qinba Pharmaceutical Shareholders shares our of Common Stock as consideration for all of the outstanding capital stock of China Qinba Pharmaceuticals. The Majority Qinba Shareholders with whom we consummated the merger included Guozhu Wang, Guiping Zhang, Xiu’e Xing, Yong Xu, XiLing Gao, Xianhong Xue, Congge Wei and Xiulan Kang. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after 3 years from its date, unless the proxy provides for a longer period.

At the closing of the merger agreement, the Company issued 9,333,333 shares of common stock to the China Qinba Pharmaceuticals Shareholders as merger consideration for 100% of the common stock of China Qinba Pharmaceuticals. Immediately after the closing, we had a total of 10,680,556 shares of common stock outstanding, with the China Qinba Pharmaceuticals Shareholders (and their assignees) owning approximately 87.39 % of our outstanding common stock, and the balance held by those who held our common stock prior to the closing.

Name of Shareholder	Title		Amount of Contribution (RMB)		Percent of Capital Contribution
Guozhu Wang	Chief Executive Officer			14,500,000		29	%(1)
Guiping Zhang	President			13,500,000		27	%(2)
Weidong Yan				1,000,000		2	%
Yong Zhang				2,300,000		4.6	%
Xiu’e Xing				2,200,000		4.4	%
Yong Xu				2,200,000		4.4	%
Wei Wang				2,300,000		4.6	%
Xiling Gao				2,000,000		4	%
Chenglin Guo				2,000,000		4	%
Weiping Wu				1,500,000		3	%
Rong Bai				1,300,000		2.6	%
Jin Wu				1,000,000		2	%
Zhibo Ding				2,000,000		4	%
Feng Pu				1,000,000		2	%
Zheng Guan				600,000		1.2	%
Aifang Yang				600,000		1.2	%
Total		RMB		50,000,000		100	%

There have been no other transactions since the beginning of our last fiscal year or any currently proposed transactions in which we are, or plan to be, a participant and the amount involved exceeds $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which any related person had or will have a direct or indirect material interest.

We do not currently have a policy or set of procedures for the review, approval or ratification of transactions required to be reported as related party transactions. However, our bylaws provide that no contract or transaction between us and one or more of our directors or officers, or between us and any other corporation, partnership, association or other organization in which one or more of our directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or her or their votes are counted for such purpose, if: (1) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to us as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the stockholders.

Procedures for Approval of Related Party Transactions

Our Board of Directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.

Director Independence

The Company currently has three independent directors, Zaizhi Cheng, Michael Segal, and Xiaogang Zhu, as that term is defined under the National Association of Securities Dealers Automated Quotation system.

Item 14. Principal Accounting Fees and Services

The following table sets forth the fees that the Company accrued or paid to Acquavella, Chiarelli, Shuster, Berkower & Co., LLP during fiscal 2010 and fiscal 2009.

	2010		2009
Audit Fees(1)	$	47,700	$	44,051
Audit-Related Fees(2)	$	394		-
Tax Fees(3)	$	0		-
All Other Fees	$	78,143	$	230,128
Total	$	126,237	$	274,179

(1) Audit fees relate to professional services rendered in connection with the audit of the Company’s annual financial statements and internal control over financial reporting, quarterly review of financial statements included in the Company’s Quarterly Reports on Form 10-Q, and audit services provided in connection with other statutory and regulatory filings.

(2) Audit-related fees relate to professional services rendered in connection with assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements, including due diligence.

(3) Tax fees relate to professional services rendered for tax compliance, tax advice and tax planning for the Company. The Company does not engage Marcum LLP to perform personal tax services for its executive officers.

Pre-Approval Policies and Procedures

The Audit Committee pre-approves all audit and non-audit services performed by the Company’s auditor and the fees to be paid in connection with such services in order to assure that the provision of such services does not impair the auditor’s independence.

PART IV

Item 15. Exhibits , Financial Statements Schedules

Exhibit Number		Description

2.1		Merger Agreement and Plan of Reorganization by and among Allstar Restaurants, Allstar Acquisitions Co., Terry Bowering, and China Qinba Pharmaceuticals, Inc. and the Controlling Shareholders of China Quinba dated February 12, 2010 (1)
2.2		Share Exchange Agreement between Allstar Restaurants and Terry Bowering dated February 12, 2010 (1)
3.1		Charter and Articles of Incorporation of Allstar Restaurants. (1)
3.2		Amended Articles of Incorporation of Allstar Restaurants (1)
3.3		Amended Articles of Incorporation of Allstar Restaurants (Name Change) (1)
3. 4		Articles of Merger of Allstar Restaurants and China Pharmaceuticals, Inc. (6)
3. 5		Certificate of Change to the Articles of Incorporation of China Pharmaceuticals, Inc. (4)
10.1		Medical Materials Contract – Xi’an Tianyi Biotechnology Co. Ltd, (1)
10.2		Medicine Packaging Material Contract – Shaanxi Daxin Plastics Co. Ltd. (1)
10.3		Medicine Materials Contract – Shaanxi Qiangli Technology Co. Ltd. (1)
10.4		Employment Agreement with Tao Lei, Chief Financial Officer (1)
10.5		Employment Agreement with Gouzhu Wang, Chief Executive Officer (1)
10.6		Employment Agreement with Guiping Zhang, President (1)
10.7		Warrant Placement Agreement – IFG Investments Services, Inc. (1)
10.8		Warrant Placement Agreement – HACG Investor Relations Services Inc. (1)
10.9		Warrant Placement Agreement – Dragon Link Investments Ltd. (1)
10.10		Consulting Agreement IFG Investment Services, Inc. January 5, 2010 (1)
10.11		Investor Relations Agreement HACG Investor Relations Services Inc. January 27, 2010 (1)
10.12		Referral Agreement Dragon Link Investments Ltd. December 17, 2009 (1)
10.13		Agreement on Entrustment for Operation and Management (1)
10.14		Agreement on Share Pledge (1)
10.15		Exclusive Option Agreement (1)
10.16		Current Fund Loan Agreement, dated January 20, 2009, by and between Industrial and Commercial Bank of China, Hanzhong Sub-branch, and Xi’an Qinba Pharmaceuticals Co., Ltd.(3)
10.17		Current Fund Loan Agreement, dated April 28, 2009, by and between Industrial and Commercial Bank of China, Hanzhong Sub-branch, and Xi’an Qinba Pharmaceuticals Co., Ltd.(3)
10.18		Mortgage & Guarantee & Borrowing Contract, dated April 28, 2007, and extension agreement dated April 6, 2009, by and between Rural Cooperative Bank of Xixiang, Shaanxi, and Xi’an Qinba Pharmaceuticals Co., Ltd. (3)
10.19		Mortgage & Guarantee & Borrowing Contract, dated July 9, 2008, by and between Rural Cooperative Bank of Xixiang, Shaanxi, and Xi’an Qinba Pharmaceuticals Co., Ltd.(3)
10.20		Factoring Agreement, dated April 28, 2009, by and between Industrial and Commercial Bank of China, Hanzhong Sub-branch, and Xi’an Qinba Pharmaceuticals Co., Ltd.(3)
10.21		Shareholder Voting Proxy Agreement (5)
10.22		Purchase Contract of Medicine Packaging Materials with Shaanxi Daxin Plastics Co, Ltd. *
10.23		Drug Procurement Contract with Shaanxi Qiangli Technology Co., Ltd. *
10.24		Drug Procurement Contract with Xi’an Tianyi Biotechnology Co., Ltd *
10.25		The Consulting Agreement between ValueRich Inc. and Xi’an Qin Ba Pharmacy Co Ltd.* ( 7)
10.26		The Letter Agreement, dated January 19, 2010, by and between the Company and Michael Segal .(5)
14.1		Code of Ethics (2)
16.1		Allstar Letter to HJ & Associates – Termination Letter (1)
16.2		HJ & Associates Letter – Item 4.01 (1)
21.1		List of Subsidiaries (5)
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended*
31.2		Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended*
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopt pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopt pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*filed herewith.

(1)	Incorporated by reference to the exhibit to our Current Report on Form 8-K filed with the SEC on February 19, 2010.
(2)	Incorporated by reference to the exhibit to our Annual Report on Form 10-KSB filed with the SEC on July 1, 2008.
(3)	Incorporated by reference to the exhibit to our Annual Report on Form 10-K filed with the SEC on April 15, 2010
(4)	Incorporated by reference to the exhibit to our Current Report of Form 8-K filed with the SEC on September 17, 2010.
(5)	Incorporated by reference to the exhibit to our Annual Report on Form 10-K for the fiscal year ended December, 31, 2010, filed with the SEC on April 15, 2011.
(6)	Incorporated by reference to the exhibit to our Current Report on Form 8-K filed with the SEC on April 1, 2010.
(7)	The Consulting Agreement between ValueRich Inc. and Xi’an Qin Ba Pharmacy Co Ltd. was initially filed with the SEC as Exhibit 10.18 to Amendment No. 1 to Form S-1 of China Qinba Pharmaceuticals, Inc. on June 18, 2009, but a complete copy of the agreement is being filed herewith.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: September 1, 2011

	CHINA PHARMACEUTICALS, INC.


	By:	/s/ Guozhu Wang
		Guozhu Wang
		Chief Executive Officer

In accordance with the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ Guozhu Wang	Chief Executive Officer and Director (principal executive officer)	September 1, 2011
Guozhu Wang

/s/ Tao Lei	Chief Financial Officer (principal financial and accounting officer)	September 1, 2011
Tao Lei

/s/ Guiping Zhang	President and Director	September 1, 2011
Guiping Zhang

/s/ Zaizhi Cheng	Director	September 1, 2011
Zaizhi Cheng

/s/ Michael Segal		Director		September 1, 2011
Michael Segal

/s/ Xiaogang Zhu		Director		September 1 , 2011
Xiaogang Zhu

Attached files

China Pharmaceuticals Inc Reports

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