CHINA PEDIATRIC PHARMACEUTICALS, INC. - FORM 10-Q

Attached files

file	filename
EX-31.01 - EXHIBIT 31.01 - CHINA PEDIATRIC PHARMACEUTICALS, INC.	ex3101.htm
EX-31.02 - EXHIBIT 31.02 - CHINA PEDIATRIC PHARMACEUTICALS, INC.	ex3102.htm
EX-32.01 - EXHIBIT 32.01 - CHINA PEDIATRIC PHARMACEUTICALS, INC.	ex3201.htm
EXCEL - IDEA: XBRL DOCUMENT - CHINA PEDIATRIC PHARMACEUTICALS, INC.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

ACT OF 1934

For the quarterly period ended September 30, 2011

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

ACT OF 1934

For the transition period from

Commission file number: 000-52007

CHINA PEDIATRIC PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

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

9th Floor, No. 29 Nanxin Street

Xi'an, Shaanxi Province

People’s Republic of China 710004

(Address of principal executive offices) (zip code)

86-29-8727-1818

(Registrant’s telephone number, including area code)

Copy of Communications to:

Bernard & Yam, LLP

Attn: Man Yam, Esq.

401 Broadway Suite 1708

New York, NY 10013

Phone: 212-219-7783

Fax: 212-219-3604

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o

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

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

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

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

Yes o Nox.

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

As of September 30, 2011 and November 15, 2011, there were 12,730,288 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

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

Item 1. Financial Statements

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

Consolidated Balance Sheets	F-2

Consolidated Statements of Operations and Comprehensive Income	F-3

Consolidated Statements of Cash Flows	F-4

Consolidated Statements of Stockholders’ Equity	F-5

Notes to Consolidated Financial Statements	F-6

F-1

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2011			December 31, 2010
	(Unaudited)			(Audited)

ASSETS

Current Assets
Cash	$	5,029,149		$	10,992,141
Bills receivable		104,766			-
Accounts receivable		12,890,460			8,179,234
Other receivable (note 3)		118,376			69,257
Inventories (note 4)		2,131,366			2,804,751
Prepaid expenses (note 5)		2,854,028			4,396,836
Total Current Assets	$	23,128,145		$	26,442,219

Other prepaid expenses (note 5)		1,876,407			1,814,937
Property, plant & equipment, net (note 6)		896,085			711,951
Goodwill		773,538			612,745
Intangible assets, net (note 7)		1,768,083			1,527,563

Total Assets	$	28,442,258		$	31,109,415

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Accounts payable	$	212,824		$	390,021
Accrued expenses and other payables		1,103,458			1,057,227
Trade deposit received		6,744			6,524
Short-term bank loan (note 9)		-			453,734
VAT tax payable		324,613			270,553
Income tax payable (note 10)		-			284,763
Derivative liability (note 12)		-			5,762,500
Total Current Liabilities	$	1,647,639		$	8,225,322

Stockholders' Equity
Common stock, $0.001 per value, 75,000,000 share authorized, 12,730,171 and 12,630,171 shares issued and outstanding at September 30, 2011 and December 31, 2010 (note 11)	$	12,730		$	12,630
Additional paid in capital		14,134,333			13,759,433
Deferred compensation		(62,500	)		(2,704,800	)
Statutory reserve (note 13)		810,540			810,540
Other comprehensive income		3,047,391			1,422,351
Accumulated retained earnings		8,852,125			9,583,939
Total Stockholder's Equity	$	26,794,619		$	22,884,093

Total Liabilities and Stockholder's Equity	$	28,442,258		$	31,109,415

The accompanying notes are an integral part of these financial statements

F-2

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Sales	$	6,505,088		$	6,342,505		$	19,901,666		$	18,216,625
Cost of sales		3,705,012			2,953,021			10,455,484			8,462,252
Gross profit		2,800,076			3,389,484			9,446,182			9,754,373

Advertising expense		2,525,678			442,457			5,984,090			1,320,324
Selling, general and administrative expense		5,031,332			782,525			9,730,963			2,606,106
Income (Loss) from operations		(4,756,934	)		2,164,502			(6,268,871	)		5,827,943

Interest income		6,177			92			14,120			92
Other income		-			-			-			825
Derivative income (expense) (note 12)		241,250			(740,000	)		5,762,500			(1,261,250	)
Interest (expense)		-			(11,945	)		(24,266	)		(11,945	)
Other (expense)		(150	)		(115	)		(14,472	)		(12,407	)
Total Other Income (Expense)		247,277			(751,968	)		5,737,882			(1,284,685	)

Income (Loss) before income taxes		(4,509,657	)		1,412,534			(530,989	)		4,543,258

Provision for income taxes		-			(305,388	)		(200,825	)		(748,967	)

Net income (loss) (note 10)	$	(4,509,657	)		1,107,146		$	(731,814	)		3,794,291

Foreign currency transaction adjustment		322,054			248,839			1,625,040			617,058

Comprehensive income (loss)	$	(4,187,603	)	$	1,355,985		$	893,226		$	4,411,349


Net income (loss) per common share
Earnings per share - basic and diluted	$	(0.35	)	$	0.11		$	(0.06	)	$	0.40
Weighted average common shares outstanding		12,730,171			10,205,171			12,713,259			9,423,486

The accompanying notes are an integral part of these financial statements

F-3

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
	2011			2010

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	(731,814	)	$	3,794,291
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization		270,622			315,350
Stock-based compensation		3,017,300			-
Derivative (income) expense		(5,762,500	)		1,261,250
(Increase) decrease in current assets
Bills receivables		(103,692	)		-
Accounts receivables		(4,495,373	)		(1,348,274	)
Inventory		718,986			(2,367,332	)
Prepaid expense		1,674,106			541,337
Other receivable		(46,808	)		(594,253	)
Increase (decrease) in current liabilities
Accounts payable		(180,219	)		117,395
Accrued expenses and other payables		(124,810	)		1,753,727
Value-added tax payable		49,339			14,344
Income tax payable		(288,204	)		114,914
Net cash provided by (used in) operating activities		(6,003,067	)		3,602,749

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment		(4,167	)		-
Repayment of loan		(461,012	)		-
Net cash used in investing activities		(465,179	)		-

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sales of common stock		-			4,720,000

Effect of exchange rate changes on cash and cash equivalents		505,254			166,413

Net change in cash and cash equivalents		(5,962,992	)		8,489,162
Cash and cash equivalents, beginning balance		10,992,141			905,874
Cash and cash equivalents, ending balance	$	5,029,149		$	9,395,036

SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Income tax payments	$	479,258		$	634,052
Interest payments	$	12,342		$	11,945

The accompanying notes are an integral part of these financial statements

F-4

CHINA PEDIATRIC PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SEPTEMBER 30, 2011

(UNAUDITED)

Description	Common Share		Amount			Additional Paid-in Capital			Other Comprehensive Income

Balance, December 31, 2009		8,305,171	$	8,305		$	1,494,158		$	328,567
Foreign currency translation adjustments		-		-			-			1,093,784
Stock-based compensation		1,470,000		1,470			5,408,130			-
Sales of common stock		2,855,000		2,855			6,857,145			-
Income for the year		-		-			-			-
Balance, December 31, 2010		12,630,171		12,630			13,759,433			1,422,351
Foreign currency translation adjustments		-		-			-			1,625,040
Stock-based compensation		100,000		100			374,900
Income (loss) for the nine months		-		-			-			-
Balance, September 30, 2011		12,730,171	$	12,730		$	14,134,333		$	3,047,391

Description	Statutory Reserves		Retained Earnings			Deferred Compensation			Total Stock-holders' Equity

Balance, December 31, 2009	$	810,540	$	3,612,320		$	-		$	6,253,890
Foreign currency translation adjustments		-		-			-			1,093,784
Stock-based compensation		-		-			(2,704,800	)		2,704,800
Sales of common stock		-		-			-			6,860,000
Income for the year		-		5,971,619			-			5,971,619
Balance, December 31, 2010		810,540		9,583,939			(2,704,800	)		22,884,093
Foreign currency translation adjustments		-		-			-			1,625,040
Stock-based compensation		-		-			2,642,300			3,017,300
Income (loss) for the nine months		-		(731,814	)		-			(731,814	)
Balance, September 30, 2011	$	810,540	$	8,852,125		$	(62,500	)	$	26,794,619

The accompanying notes are an integral part of these financial statements

F-5

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 1 - ORGANIZATION

China Pediatric Pharmaceuticals, Inc. ("the Company") was incorporated on April 20, 2005 in the state of Nevada. The Company was originally incorporated under the name Belford Enterprises, Inc. and changed its name to Lid Hair Studios International Inc. on August 15, 2005. Asia-Pharm Holding Inc. ("Asia-Pharm") was incorporated in British Virgin Islands on June 20, 2008. China Children Pharmaceuticals Co. Limited ("China Children") a wholly owned subsidiary of Asia-Pharm Holdings Inc. was formed on June 27, 2008 under the laws of Hong Kong. Xi'an Coova Children Pharmaceuticals Co., Ltd. ("Xi'an Coova" or "WOFE") is a "wholly owned foreign enterprise" incorporated in People's Republic of China ("PRC"). Xi'an Coova is a wholly owned subsidiary of China Children.

On September 30, 2009 the Company completed its merger with China Children, a Hong Kong based pharmaceutical manufacturer company in accordance with the Share Exchange Agreement. The Share Exchange Transaction is being accounted for as a reverse acquisition. In accordance with the Accounting and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission, the Company (the legal acquirer) is considered the accounting acquiree and China Children (the legal acquiree) is considered the accounting acquirer for accounting purposes. Subsequent to the Share Exchange Transaction, the financial statements of the combined entity will in substance be those of China Children. The assets, liabilities and historical operations prior to the share exchange transaction will be those of China Children. Subsequent to the date of Share Exchange Transaction, China Children is deemed to be a continuation of the business of the Company. Therefore post-exchange financial statements will include the combined balance sheet of the Company and China Children, the historical operations of China Children and the operations of the Company and China Children from the closing date of the Share Exchange Transaction forward.

On August 4, 2008, an Entrustment Management Agreement was entered into between Xi'an Coova and Shaanxi Jiali Pharmaceuticals Co., Ltd. ("Shaanxi Jiali") to which China Children exercises control over the operations and business of Shaanxi Jiali through Xi'an Coova. Pursuant to the Entrustment Management Agreement, China Children shall receive all net profits and assume all operational losses of Shaanxi Jiali through Xi'an Coova.

Xi'an Coova entered into a Management Entrustment Agreement with Shaanxi Jiali and the shareholders of Shaanxi Jiali (the "Management Entrustment Agreement"), in which Shaanxi Jiali and its shareholders agreed to transfer control, or entrust, the operations and management of its business to Xi'an Coova. Under the agreement, Xi'an Coova manages the operations and assets of Shaanxi Jiali, controls all of the cash flows of Shaanxi Jiali through a bank account controlled by Xi'an Coova, is entitled to 100% of earnings before tax of Shaanxi Jiali, a management fee, and is obligated to pay all payables and loan payments of Shaanxi Jiali. In addition, under the terms of the Management Entrustment Agreement, Xi'an Coova has been granted certain rights which include, in part, the right to appoint and terminate members of Shaanxi Jiali's Board of Directors, hire management and administrative personnel and control decisions relating to entering and performing customer contracts and other instruments. We anticipate that Shaanxi Jiali will continue to be the contracting party under its customer contracts, bank loans and certain other instruments unless Xi'an Coova exercises its option. The agreement does not terminate unless the business of Shaanxi Jiali is terminated or Xi'an Coova exercises its option to acquire all of the assets or equity of Shaanxi Jiali under the terms of the Exclusive Option Agreement.

The contractual arrangements completed in August 4, 2008 provide Xi'an Coova with controlling interest in Shaanxi Jiali as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation”, Section 10-15, “Variable Interest Entities” and SFAS 167, which requires the Company to consolidate the financial statements of Shaanxi Jiali. The Company, as an entity that consolidates a Variable Interest Entity is called the primary beneficiary of the VIE. Accordingly, the Company is the primary beneficiary of Shaanxi Jiali.

F-6

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 1 - ORGANIZATION (CONT’D)

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

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

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Principles of Consolidation

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

Foreign Currency Translation

The Company’s reporting currency is the U.S. dollar. The Company’s operation in China uses Chinese Yuan Renminbi (CNY) as its functional currency. The financial statements of the subsidiary are translated into 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 three months ended September 30, 2011 and 2010, the foreign currency translation adjustment to the Company’s comprehensive income was $322,054 and $248,839 respectively. For the nine months ended September 30, 2011 and 2010, the foreign currency translation adjustment to the Company’s comprehensive income was $1,625,040 and $617,058.

F-7

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

Use of Estimates

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

Comprehensive Income

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

Contingencies

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

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

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

There were no contingencies at September 30, 2011 and December 31, 2010.

Cash

Cash 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

Management periodically reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate potential credit losses on accounts receivable. The Company grants 90 days payment terms to all credit sales customers. Historically all accounts receivable relating to credit sales are collected within the 90 days period. Therefore, no provisions are made for doubtful accounts as of September 30, 2011 and December 31, 2010.

F-8

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

Inventories

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

Property, Plant & Equipment

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

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

Goodwill

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

Goodwill as of September 30, 2011 and December 31, 2010 are $773,538 and $612,745 respectively. Goodwill was arisen from acquisition of assets and liabilities of Baoji facility in fiscal year 2000. The Company believes that as of September 30, 2011 and December 31, 2010, no indication of impairment existed.

Intangible Assets

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

F-9

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

Land use right	50 years
Proprietary technologies	10 years

Land in PRC China is not freely transferable. However the right to use land could be transferred by the local Government to users. The Company acquired the land use right for its factory premises from the former owner of the same land use right in the year 2000.

Long-Lived Assets

The Company accounts for long-lived assets in accordance with Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), included in the Codification as ASC 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business”, included in the Codification as ASC 225, Income Statement. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of September 30, 2011 and December 31, 2010, there were no significant impairments of its long-lived assets.

Fair Value of Financial Instruments

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

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

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

	Level 1 -	inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	Level 2 -	inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

Level 3 -

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

F-10

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

As of September 30, 2011 and December 31, 2010, the derivative liabilities amounted to Nil and $5,762,500. In accordance with the accounting standards the Company determined that the carrying value of these derivatives approximated the fair value using the level 2 inputs.

Derivative Financial Instruments

Derivative financial instruments, as defined in Financial Accounting Standard, consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets. The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. The Company issued warrants in connection with the September, 2009 share exchange agreement and determined that the warrants did not qualify for a scope exception under ASC 815 as they were determined to not be indexed to the Company’s stock as prescribed by ASC 815. Under ASC 815, the warrants will be carried at fair value as derivative liability and market to market at each reporting period.

Accordingly, the Company adjusts the fair value of these derivative components at each reporting period through a charge to income until such time as the instruments acquire classification in stockholders’ equity.

Value Added Tax Payable

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

Revenue Recognition

The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition."

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

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

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

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

Advertising

Advertising expenses consist primarily of costs of promotion for corporate image and product marketing, costs of direct advertising. The Company expenses all advertising costs as incurred. Advertising costs for the three months ended September 30, 2011 and 2010 were $2,522,678 and $442,457 respectively. Advertising costs for the nine months ended September 30, 2011 and 2010 were $5,948,090 and $1,330,324 respectively.

F-11

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

Customer rebates

Rebates are paid to customers every quarter and we recorded customer rebates as customers earned. They are classified as a reduction of revenue according to ASC 605-55-64. Rebates to customers for the three months ended September 30, 2011 and 2010 were $1,384,649 and $840,400 respectively. Rebates to customers for the nine months ended September 30, 2011 and 2010 were $3,153,701 and $2,183,941 respectively.

Shipping and handling costs

The Company incurs certain expenses related to preparing, packaging and shipping its products to its customers, mainly third-party transportation fees. All costs related to these activities are included as a component of selling, general and administrative expenses in the consolidated statement of operations.

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

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

Statement of Cash Flows

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

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

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

Segment Reporting

FASB ASC 280-10-50, “Disclosure about Segments of an Enterprise and Related information” requires us of the “management approach” model for segment reporting. The management approach model is based on the way a Company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company operates in one segment during the nine months ended September 30, 2011 and 2010.

Concentration of Credit Risk

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

Reclassification

Certain items have been reclassified in the accompanying consolidated Financial Statements and Notes for prior periods to be comparable with the classification for the period ended September 30, 2011. The reclassifications had no effect on previously reported net income.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends the current fair value measurement and disclosure guidance of ASC Topic 820, Fair Value Measurement, to include increased transparency around valuation inputs and investment categorization. The guidance provided in ASU No. 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of these provisions to have a material impact on its consolidated statements of income and balance sheets.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income (ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Instead, ASU 2011-05 requires entities to report all non-owner changes in stockholders’ equity in either a single continuous statement of comprehensive income, or in two separate, but consecutive statements. ASU 2011-05 does not change the items that must be reported in other comprehensive income, or when an item must be reclassified to net income. ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Other than the presentational changes that will be required by ASU 2011-05, the adoption of ASU 2011-05 is not expected to have any impact on its consolidated financial statements.

F-13

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

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

In September 2011, the FASB has issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 is intended to simplify how entities, both public and nonpublic, test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has not yet determined the impact of the adoption of ASU 2011-08 on its consolidated financial statements.

NOTE 3 - OTHER RECEIVABLES

Other receivables mainly consist of cash advances to employees. As of September 30, 2011 and December 31, 2010, other receivables were $118,376 and $69,257, respectively.

NOTE 4 - INVENTORIES

As of September 30, 2011 and December 31, 2010, inventories consist of the following:

	September 30, 2011		December 31, 2010
Raw materials	$	804,816	$	2,367,332
Finished goods		1,326,550		437,419
Total	$	2,131,366	$	2,804,751

NOTE 5 - PREPAID EXPENSES

Prepaid expenses

Prepaid expenses as at September 30, 2011 and December 31, 2010 represent the following components:

Advance payments to OEM manufacturers for goods purchased: we are normally required by our vendors to pay 40% of the consigned processing contract in advance and these payments are recorded as "prepaid expenses" accordingly. They are reclassified to "Inventory-finished goods" when the purchases are received and then charged to COGS as revenue is recognized.

Advance payments to suppliers for raw materials and packing materials: we are normally required to pay 30% of the purchasing agreement in advance and these payments are recorded as "prepaid expenses" accordingly. They are reclassified to "Inventory-raw materials" when the materials are received and then included in the "production cost" when these raw materials are used to produce finished goods, which finally charged to COGS as revenue is recognized.

Advance payments to advertising companies for promotion: our advertising contracts are normally for up to twelve months. Payment terms require us to make two to four payments during the first several months of contractual period. These payments are recorded as "prepaid expense" when made and charged against "Selling and Distribution expenses" when advertisement first takes place.

	Payee	Nature	September 30, 2011		December 31, 2010
Advance payment to advertisement co.	Advertisement Companies (c)	Advance payments to advertising companies for promotion		1,071,507		---

Advance payment to Suppliers	Suppliers (a), (b)	Advance payments to OEM manufactures for goods purchased & suppliers for raw Materials and packing materials		1,782,521		4,396,836
Total			$	2,854,028	$	4,396,836

F-14

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 5 - PREPAID EXPENSES (CONT’D)

Other prepaid expenses

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

We submitted our SFDA application for four new medicines on November 28, 2007 and one new medicine on April 29, 2008. We received first round of comments from SFDA in June, 2010. Approval is not expected before 2012.

Other prepaid expenses as of September 30, 2011 and December 31, 2010 are $1,876,407 and $1,814,937 respectively.

NOTE 6 - PROPERTY, PLANT AND EQUIPMENT

As of September 30, 2011 and December 31, 2010, Property, Plant & Equipment consist of the following:

	September 30, 2011			December 31, 2010
Buildings	$	562,841		$	445,845
Plant and equipment		1,084,916			859,665
Transportation equipment		7,082			5,609
Office equipment		55,537			41,608
Total		1,710,376			1,352,727
Accumulated depreciation		(814,291	)		(640,776	)
	$	896,085		$	711,951

Depreciation expense for the three months ended September 30, 2011 and 2010 were $22,971 and $21,761, respectively. Depreciation expense for the nine months ended September 30, 2011 and 2010 were $69,616 and $64,965, respectively.

F-15

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 7 - INTANGIBLE ASSETS

The Company has four proprietary technologies: propriety technology for antioxidant technique, proprietary technology for “liren” capsule, patent-Chinese medicine and production method for skin and gyhecology disease and patent: Chinese medicine and production method for tracheitis. Propriety technology for antioxidant technique was contributed by a shareholder in exchange for shares of the Company’s common stock. Proprietary technology for “liren” capsule was purchased from third party at the price agreed by the Company and the third party. Two patents were purchase from the shareholders at the prices determined by an independent appraiser. These proprietary technologies were acquired for the future use of the Company. We capitalized them as intangible assets as acquired. Land use rights will expire in 2056 and 2058.

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

	September 30, 2011			December 31, 2010
Land use right	$	333,129		$	264,625
Proprietary technologies		3,586,506			2,966,355
Total		3,919,635			3,230,980
Less : Accumulated amortization		(2,151,552	)		(1,703,417	)
	$	1,768,083		$	1,527,563

Amortization expense for the three months ended September 30, 2011 and 2010 were $67,935 and $83,907, respectively. Amortization expense for the nine months ended September 30, 2011 and 2010 were $201,006 and $250,385, respectively.

The estimated future amortization expenses related to intangible asset as of September 30, 2011 are as follows:-

Years ending December 31,	$
2011, three months		68,126
2012		272,506
2013		272,506
2014		272,506
2015		272,506
Thereafter		609,933

NOTE 8 - COMPENSATED ABSENCES

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

NOTE 9 - SHORT TERM BANK LOAN

The loan was repaid in June, 2011 in full by Shaanxi Jiali Pharmaceutical Ltd.

F-16

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 10 - INCOME TAXES

For the period ended September 30, 2011 and 2010, the local ("United States of America") and foreign components of income (loss) before income taxes were comprised of the following.

	Nine Months Ended September 30,
	2011			2010
Tax Jurisdiction From
- Local	$	2,745,200		$	(1,261,250	)
- Foreign		(3,276,189	)		5,804,508
Income (Loss) before income taxes	$	(530,989	)	$	4,543,258

The Company’s effective tax rate reflected the combined results for both. The following table reconciles the Company’s statutory tax rates to its effective tax rate for the nine months ended September 30, 2011 and 2010.

	Nine Months Ended September 30,
	2011			2010

Income (Loss) before taxes from PRC operation	$	( 3,276,189	)	$	5,804,508
Tax rate		15	%		15	%
Income tax at statutory tax rate		(491,428	)		870,676
Tax effect of non-taxable items		-			(121,709	)
Tax loss		692,253			-
Income tax at effective rate	$	-		$	748,967

Since the year 2008, the Company’s China operation is subject to PRC standard enterprise income tax rate of 25% based on its taxable net profit. However, due to its “High Technology Business” status, the National Tax Bureau in Xi’an High-Tech Industries Development Zone granted Shaanxi Jiali a reduced tax rate of 15% as long as Shaanxi Jiali meets the high-tech enterprise qualification. The company has determined they have met these qualifications. Currently the Company is not subject to examination by major tax jurisdictions, but the tax authority in PRC has the right to examine the Company’s tax position in all past years.

NOTE 11 - SHARE CAPITAL

Common Shares

The total authorized capital is 75,000,000 common shares with a par value of $0.001 per share. During the nine months ended September 30, 2011 and year ended December 31, 2010, the Company:

For the nine months ended September 30, 2011			Number of Shares		Value
	i.	On February 16, 2011, the Company granted 50,000 shares common stock to an employee, valued at $187,500 and expensed March, 2011.		50,000	$	187,500
ii.		On February 16, 2011, the Company granted 50,000 shares common stock to a consulting company in consideration for providing the Company and its affiliates consulting services over the next year. Total stock base compensation was valued at $187,500, $125,000 was expensed in the nine months ended September 30, 2011, and $62,500 is deferred over the next four months.		50,000		187,500
		Total common shares issued during the nine months		100,000	$	375,000

F-17

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 11 - SHARE CAPITAL (CONT’D)

For year ended December 31, 2010			Number of Shares		Value
iii.		On February 11, 2010, the Company closed a private placement, and issued 375,000 shares of common stock at $4 per share to several investors for total cash consideration of $1,500,000.		375,000	$	1,500,000
iv.		On April 29, 2010, the Company issued 1,200,000 shares of common stock at $2 per share to several investors for total cash consideration of $2,400,000.		1,200,000		2,400,000
	v.	On June 23, 2010, the Company issued 300,000 shares of common stock at $2 per share to several investors for total cash consideration of $600,000.		300,000		600,000
vi.		On September 8, 2010, the Company issued 100,000 shares of common stock at $2.2 per share to an investor for cash consideration of $220,000.		100,000		220,000
vii.		On October 9, 2010, the Company entered into consultancy service agreements with four individuals to identify and refer a target company to consummate an acquisition, with a contract period of 6 months. The Company issued 1,470,000 shares of common stock valued at $5,409,600 to these individuals as considerations for the service provided. These shares were fully vested and not subject to forfeiture when issued. $2,704,800 was recognized as stock-based compensation and $2,704,800 was recorded as deferred compensation in the year ended December 31, 2010.		1,470,000		5,409,600
viii.		On November 12, 2010, the Company issued 200,000 shares of common stock at $2.2 per share to several investors for total cash consideration of $440,000.		200,000		440,000
ix.		On December 31, 2010, the Company issued 680,000 shares of common stock at $2.5 per share to an investor for cash consideration of $1,700,000.		680,000		1,700,000
		Total common shares issued during the year		4,325,000	$	12,269,600

As at September 30, 2011 and December 31, 2010, total issued and outstanding common stock is 12,730,171 and 12,630,171

F-18

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 11 - SHARE CAPITAL (CONT’D)

Warrants

The Company entered into several warrant placement agreements dated September 30, 2009, whereby the Company agreed to issue warrants to acquire shares of the Company’s common stock with an exercise price of $3.00, expiring September 30, 2011, with piggy back warrants to purchase additional shares of the Company’s common stock with an exercise price of $5.00, expiring on September 30, 2012, as consideration for services in connection with:

			Warrants with an exercise price of $3.00, expiring September 30, 2011		Piggy back warrants with an exercise price of $5.00, expiring September 30, 2012
	i.	On August 15, 2009, Kang Xiulan referred a public shell company（Lid Hair Studios International, Inc.）to China Children Pharmaceutical Inc. China Children Pharmaceutical Inc. came to be quoted on the OTCBB successfully through the reverse merger with Lid Hair Studios International, Inc. on September 30, 2009 and changed its name into China Pediatric Pharmaceuticals, Inc.		250,000		250,000
ii.		During the above-mentioned reverse merger process, the Company obtained certain consulting services from IFG Investments Services, Inc., including advising on a merger/acquisition transaction and regulatory filings, and other services and support as requested from IFG.		600,000		600,000
iii.		The Company also obtained certain public company sector services, including investor relations advisory services.		400,000		400,000
		Total warrants issued		1,250,000		1,250,000

The following is a summary of share purchase warrants information:

	Warrants with an exercise price of $3.00, expiring September 30, 2011			Piggy back warrants with an exercise price of $5.00, expiring September 30, 2012				Total
Outstanding, December 31, 2009		1,250,000			1,250,000				2,500,000
-		-			-				-
Outstanding, December 31, 2010		1,250,000			1,250,000				2,500,000
Expired		(1,250,000	)		(1,250,000	)	a		(2,500,000	)
Outstanding, September 30, 2011		-			-				-

a The piggy back warrants expired as the original warrants with an exercise price of $3.00, expired September 30, 2011 were not exercised.

F-19

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 12 - DERIVATIVE FINANCIAL INSTRUMENTS

The balance sheet caption derivative liabilities consist of the Warrants, issued in to consultants and investor relations in connection with the merger agreements (note 11). These derivative financial instruments are indexed to an aggregate of 2,500,000 shares of the Company's common stock as of September 30, 2011 and December 31, 2010, respectively, and are carried at fair value. The following tabular presentations set forth information about the derivative instruments for the nine months ended September 30, 2011 and December 31, 2010:

	Three months ended					Nine months ended
	September 30,					September 30,
Derivative income (expense)	2011		2010			2011			2010
Warrant derivative	$	241,250	$	(740,000	)	$	5,762,500		$	(1,261,250	)

	As of					As of
Liabilities	September 30, 2011					December 31, 2010
Warrant derivative	$	-				$	(5,762,500	)

As at September 30, 2011, all outstanding warrants have expired, thus were valued at nil. As at September 30, 2010, freestanding derivative instruments, consisting of warrants were valued using the Black-Scholes-Merton valuation methodology using these assumptions: conversion or strike prices ranging from $3.00 - $5.00; volatility 105.1 - 128.3% based upon forward terms of instruments; terms-remaining of 1.0 and 2.0 years as at September 30, 2010.

NOTE 13 - STATUTORY RESERVE

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

Statutory Reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of September 30, 2011 and December 31, 2010, the Company had allocated $810,540 to these non-distributable reserve funds.

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:

F-20

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 14 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS (CONT’D)

●	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 effect 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 - MAJOR CUSTOMERS AND CREDIT RISK

One and Nil customer accounted for more than 10% of accounts receivable at September 30, 2011 and December 31, 2010, totaling 10% and 0% respectively. As of September 30, 2011 and December 31, 2010, three and two vendors were greater than 10% of accounts payable, totaling 68% and 25%, respectively.

Nil and one customers accounted for more than 10% of total sales for the three months ended September 30, 2011 and 2010, totaling 0% and 10% of respectively. Three and two vendors accounted for more than 10% of purchases for the three months ended September 30, 2011 and 2010, totaling 81% and 36% respectively.

Four and three vendors accounted for more than 10% of purchases for the nine months ended September 30, 2011 and 2010, totaling 61% and 57% respectively.

NOTE 16 - EMPLOYMENT AGREEMENTS

On September 30, 2009, we entered into a two year Employment Agreement with Jun Xia to serve as our Chief Executive Officer. The agreement provides for an annual salary of USD$10,553 and an annual bonus of up to 50% of the executive’s annual salary.

On September 1, 2010, we entered into a one year Employment Agreement with Minggang Xiao to serve as our Chief Financial Officer. The agreement provides for an annual salary of USD$7,036 and an annual bonus of up to 50% of the executive’s annual salary.

F-21

CHINA PEDIATRIC PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011

(UNAUDITED)

NOTE 17 – COMMITMENT

On August 12, 2011, the Company entered into a 2 year lease for its office location in Xi’an, Shaanxi Province, the People’s Republic of China. Lease payment is $2,646 per month until August 11, 2013

NOTE 18 - SUBSEQUENT EVENT

For the nine months ended September 30, 2011, the Company has evaluated subsequent events for potential recognition and disclosure. No significant events occurred subsequent to the end of the reporting period but prior to the filing of this report that would have a material impact on our consolidated financial statements.

F-22

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

The following discussion of the financial condition and results of operation of the Company for the three months ended September 30, 2011, and 2010, should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Quarter Report.

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

Cautionary Note Regarding Forward-Looking Statements

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

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

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

●	the effect of political, economic, and market conditions and geopolitical events;
●	legislative and regulatory changes that affect our business;

●	the availability of funds and working capital;
●	the actions and initiatives of current and potential competitors;

●	investor sentiment; and
●	Our reputation.

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

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

BUSINESS OVERVIEW

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

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

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

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

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

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

We intend to take advantage of our large manufacturing scale and reasonable cost control mechanisms, and our strong sales network to expand market share of our products. In addition, our goal is to establish our products as a preferred choice for children's medicines in local pharmacies.

During the changing process of Chinese pharmaceutical industry, we have gradually established our own marketing team to develop our internal marketing and sales capabilities, strengthen cooperation partnership with other exclusive distributor in other regions to expand distribution and coverage of our pharmaceutical products, and increase television advertising-based branding strengths, so as to lay a good foundation for company’s sustainable development in the next three to five years.

In the future, the company's sales strategy will be changed and improved. Company will build our "brand department “instead of current “exclusive distributor agency”. Our sales staff will assist the dealers to promote products. In this case, company could control the sales market more effectively.

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 exclusive territory agents, we will compete with many other established pharmaceutical manufacturers that may have greater resources than we do.

RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES

Results of Operations

NET SALES

	Three Months Ended September 30,								% of
	2011				2010				change
"Xianzhi" Series	$	175,351	2.7	%	$	404,491	6.38	%		(57	) %
"Cooer" Series		5,753,867	88.45	%		5,165,141	81.44	%		11	%
"Qingsongling" Series		575,870	8.85	%		772,873	12.19	%		(25	) %
Others		-				-	-	%		-	%
Total net sales	$	6,505,088	100	%	$	6,342,505	100	%		3	%

	Nine Months Ended September 30,								% of
		2011				2010			change
"Xianzhi" Series	$	753,140	3.78	%	$	766,767	4.21	%		(2	) %
"Cooer" Series		16,842,120	84.63	%		15,185,381	83.36	%		11	%
"Qingsongling" Series		2,306,406	11.59	%		1,281,583	7.04	%		80	%
Others		-	-			982,894	5.40	%		(100	) %
Total net sales	$	19,901,666	100	%	$	18,216,625	100	%		9	%

During the three months ended September 30, 2011, total net sales increased by approximately $162,583 or 3%, compared to the same periods of 2010. These were primarily due to the sales increase of “Cooer” Series by $588,726 or 11%, offset by decrease of "Xianzhi" Series by $229,140 or 57% and decrease of “Qingsongling” series by 197,003 or 25%, in the three months ended September 30, 2011. This was mainly due to the changes in consumer demand.

During the nine months ended September 30, 2011, total net sales increased by approximately $1,685,041 or 9%, compared to the same periods of 2010. This was primarily due to the sales increases of "Qingsongling" Series by $1,024,823 or 80%, and increase of “Cooer” series by $1,656,739 or 11% in the nine months ended September 30, 2011. This was mainly due to the changes in consumer demand and results of intensive promotion campaigns in 2011. Net sales were affected by an increase of rebates from 10% to 15%.

COST OF SALES

	Three Months Ended September 30,								% of
	2011				2010				change
"Xianzhi" Series	$	34,887	0.94	%	$	52,467	1.75	%		(34	) %
"Cooer" Series		3,279,137	88.51	%		2,485,443	88.20	%		32	%
"Qingsongling" Series		390,988	10.55	%		415,111	10.05	%		(6	) %
Others		-				-		%		-	%
Total cost of sales	$	3,705,012	100	%	$	2,953,021	100	%		25	%

	Nine Months Ended September 30,								% of
		2011				2010			change
"Xianzhi" Series	$	116,564	1.11	%	$	99,377	1.17	%		17	%
"Cooer" Series		8,982,178	85.91	%		7,029,413	83.07	%		28	%
"Qingsongling" Series		1,356,742	12.98	%		687,780	8.13	%		97	%
Others		-	-			645,682	7.63	%		(100	) %
Total cost of sales	$	10,455,484	100	%	$	8,462,252	100	%		24	%

Compared to the same periods of 2010, the total cost of sales increased about $751,991or 25% in the three months ended September 30, 2011. This was primarily due to increase in cost of sales for "Cooer" Series which is in line with the increase in these products' net sales and offset by decrease in cost of sales of other products.

Compared to the same periods of 2010, the total cost of sales increased about $1,993,232 or 24% in the nine months ended September 30, 2011. This was primarily due to increase in cost of sales for "Qingsongling" Series which is in line with the increase in these products' net sales and offset by decrease in cost of sales of other products.

GROSS PROFIT


	Three Months Ended September 30,
	2011					2010
			gross profit					gross profit			% of
			margin					margin			change
"Xianzhi" Series	$	140,464		80	%	$	352,024		87	%		(60	) %
"Cooer" Series		2,474,730		43	%		2,679,698		52	%		(8	) %
"Qingsongling" Series		184,882		32	%		357,762		46	%		(48	) %
Others		-					-		-	%		-	%
Total	$	2,800,076		43	%	$	3,389,884		55	%		(17	) %

	Nine Months Ended September 30,
		2011					2010
			gross profit					gross profit			% of
			margin					margin			change
"Xianzhi" Series	$	636,576		85	%	$	667,846		87	%		(4	) %
"Cooer" Series		7,859,942		46	%		8,155,463		54	%		(4	) %
"Qingsongling" Series		949,664		41	%		593,852		46	%		60	%
Others		-		-			337,212		34	%		(100	) %
Total	$	9,446,182		50	%	$	9,754,373		54	%		(3	) %

During the three and nine months ended September 30, 2011, gross profit decreased about $589,808 and $308,191 or 17% and 3% compared to the same periods of 2010. As selling price of our products remained the same, the decrease in gross profits was due to the increase in rebates paid to distributors from 10% to 15%, pervasive increase in costs of raw increase in wages of workers due to an increase in the statutory minimum wage.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


	Three Months Ended September 30,
	2011					2010
			% of total					% of total			% of
			net sales					net sales			change
Advertising expenses	$	2,525,678		39	%	$	442,457		7	%		471	%
Selling, general and administrative expense		5,031,332		77	%		782,252		12	%		543	%

Total	$	7,557,010		116	%	$	1,224,982		19	%		517	%

	Nine Months Ended September 30,
		2011					2010
			% of total					% of total			% of
			net sales					net sales			change
Advertising expenses	$	5,984,090		30	%	$	1,320,324		7	%		353	%
Selling, general and administrative expense		9,730,963		49	%		2,606,106		14	%		273	%

Total	$	15,715,053		79	%	$	3,926,430		22	%		300	%

The increases in dollar amounts for the three and nine months ended September 30, 2011 were mainly due to the increase in promotional and advertising expenditures $2,083,221 and $4,663,766 We are also in the process of expanding our sales network by increasing sales employees. As at September 30, 2011, we have over 300 sales employees as compare to 50 during the same period in 2010.

PROVISION FOR INCOME TAXES

	Three Months Ended
	September 30,
	2011			2010
Provision for income taxes	$	-		$	305,388
Effective tax rate		15	%		15	%

	Nine Months Ended
	September 30,
		2011			2010
Provision for income taxes	$	200,825		$	748,967
Effective tax rate		15	%		15	%

Pursuant to the State Council's Regulations on Encouraging Investment in and Development, Shaanxi Jiali was granted a reduction in its income tax rate under which it paid no income taxes from January 1, 2006 to December 31, 2007 and had an income tax rate of 15% since January 1, 2008 which is a 50% reduction on the current effective income tax rate. This favorable 50% tax exemption treatment expired on December 31, 2010.

The Company’s China operation is subject to PRC standard enterprise income tax rate of 25% based on its taxable net profit. However, started from the beginning of 2011, due to its “High Technology Business” status, the National Tax Bureau in Xi’an High-Tech Industries Development Zone granted Shaanxi Jiali a reduced tax rate of 15% for the year 2011 as long as Shaanxi Jiali meets the high-tech enterprise qualification.

Decrease in the amount of provision for income taxes for the three and nine months ended September 30, 2011 are mainly due to the increase in selling, general and administrative expenses compared to the same period of 2010.

NET INCOME

As a result of the above, in the three months ended September 30, 2011, the net loss was $4,509,657 compared to the net income of $1,107,146 for the three months ended September 30, 2010. In the nine months ended September 30, 2011, the net loss was $731,814 compared to the net income of $3,794,291 for the nine months ended September 30, 2010

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2011, the Company had cash and cash equivalents of approximately $5.03 million. Management believes that the existing cash and cash equivalents will be sufficient to maintain operations at the present level for at least the next twelve months.

Net cash used in operating activities for the nine months ended September 30, 2011 was $6,003,067. This was primarily due to the net loss of $731,814, adjusted by non-cash related expenses including depreciation and amortization of $270,622, stock based compensation cost of $3,017,300 offset by a net decrease in working capital items of $2,796,675 and a non-cash related derivative income of $5,762,500. The net decrease in working capital items was mainly due to increase in accounts receivable, increase in bills receivable, decrease in prepaid expense, decrease in accrued expenses and other payables, and a decrease in income tax payable.

Net cash provided by operating activities for the nine months ended September 30, 2010 was $3,602,749. This was primarily due to the net income of $3,794,291, adjusted by non-cash related expenses including depreciation and amortization of $315,350 and offset by derivative income of $1,261,250 and a net decrease in working capital items of $1,768,142. The net decrease in working capital items was mainly due to the increase in accounts receivable, other receivables and increase in inventories to prepare for the ongoing sales promotion and decrease in value-added tax payable. Also contributing to the overall decrease in working capital is the overall increase in current liabilities such as accrued expenses and other payables. The net decrease in working capital items was partially offset by the decrease in prepaid expenses.

Net cash used in investing activities for the nine months ended September 30, 2011 was $465,179, and is attributable to the repayment of a loan and acquisition of property, plant and equipment. There was no cash outflow from investing activities for the nine months ended September 30, 2010.

There were no financing activities for the nine months ended September 30, 2011. For the comparative period in 2010, the company issued $4,720,000 in common stock.

Commitment

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 macroeconomic trend, prices increase, 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.

Off-Balance Sheet Commitments and Arrangements

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

Restrictions on Currency Exchange

We receive substantially all of our revenue in Renminbi, which is currently not a freely convertible currency. The PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC. Cash and cash equivalents as of September 30, 2011 are mainly held by the Company's subsidiaries and variable interest entities. Although cash balances cannot be transferred to China Pediatric by loan or advance according to existing PRC laws and regulations, these cash balances can be utilized by the company for its normal operations pursuant to the Management Entrustment Agreements.

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

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

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

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

Foreign Currency Risk

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

As of September 30, 2011, Shaanxi Jiali, our PRC operating entity, had net assets of $19,247,514. Because substantially all of our earnings and cash assets are denominated in Renminbi and the net proceeds from any future offering will be denominated in U.S. dollars, fluctuations in the exchange rate between the U.S. dollar and the Renminbi will affect the relative purchasing power of future proceeds and our balance sheet and earnings per share in U.S. dollars following such transaction. In addition, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend we issue after this offering that will be exchanged into U.S. dollars and earnings from, and the value of, any U.S. dollar-denominated investments we make in the future.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin ("SAB") 104, "Revenue Recognition."

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

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

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

Property, plant and Equipment

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

Accounting for Stock-Based Compensation

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

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

We did not issue any stock options to employees during the three months ended September 30, 2011, therefore disclosures are not required.

Valuation of Intangibles

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

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

The Fair Value Option for Financial Assets and Financial Liabilities

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

Income Taxes

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

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

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

Foreign Currency

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

Statutory Reserve

Recent Accounting Pronouncements

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

a) Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2011. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of September 30, 2011, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

a)	We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. We have limited experience in the areas of financial reporting and disclosure controls and procedures. As a result, there is a lack of monitoring of the financial reporting process and there is a reasonable possibility that material misstatements of the consolidated financial statements, including disclosures, will not be prevented or detected on a timely basis; and

b)	Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis.

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

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

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

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

(b) Changes in internal control over financial reporting.

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

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

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

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

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

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

Item 3. Defaults Upon Senior Securities.

None.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits.

31.01

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

31.02

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

32.01	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	CHINA PEDIATRIC PHARMACEUTICALS, INC.

Dated: November 17, 2011	By:	/s/ Jun Xia
		Name: Jun Xia
		Title: Chief Executive Officer
		(principal executive officer)

Dated: November 17, 2011
	By:	/s/ Minggang Xiao
		Name: Minggang Xiao
		Title: Chief Financial Officer
		(principal financial and accounting officer)

CHINA PEDIATRIC PHARMACEUTICALS, INC. - FORM 10-Q - November 17, 2011

Attached files

CHINA PEDIATRIC PHARMACEUTICALS, INC. Reports