UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10−Q
 (Mark One)
 
 x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended: March 31, 2011
 
  ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from ____________ to _____________
 
 Commission File Number: 333-151148
 
 CHINA POLYPEPTIDE GROUP, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 
 Delaware

20-8731646(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)
 
 No. 11 Jiangda Road
 Jianghan Economic Development Zone
 Wuhan 430023
 People’s Republic of China
 (Address of principal executive offices, Zip Code)
 
 (86) 27 8351-8396
 (Registrant’s telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report)
 
 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. Yes  x  No   ̈
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ̈ No   ̈
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer   ̈

Accelerated filer   ̈Non-accelerated filer   ̈
(Do not check if a smaller reporting company)
Smaller reporting company  x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ̈  No x
 
 The number of shares outstanding of each of the issuer’s classes of common stock, as of May 15, 2011 is as follows:
 
 Class of Securities

Shares OutstandingCommon Stock, $0.0001 par value

11,939,967
 
 
 
 
 CHINA POLYPEPTIDE GROUP, INC.
 
 Quarterly Report on Form 10-Q
 Six Months Ended March 31, 2011
 
 
 TABLE OF CONTENTS
 
 PART IFINANCIAL INFORMATIONItem 1.
Unaudited Consolidated Financial Statements
1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22Item 4.
Controls and Procedures
22PART IIOTHER INFORMATIONItem 1.
Legal Proceedings
23Item 1A.
Risk Factors
23Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
23Item 3.
Defaults Upon Senior Securities
23Item 4.
(Removed and Reserved)
23Item 5.
Other Information
23Item 6.
Exhibits
23
 
 i
  PART I
 FINANCIAL INFORMATION
 
 ITEM 1.
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
 
 CHINA POLYPEPTIDE GROUP, INC.
 CONSOLIDATED FINANCIAL STATEMENTS
 
 Page(s)Financial Statements (Unaudited)Consolidated Balance Sheets


2Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)


3Consolidated Statements of Cash Flows (Unaudited)


4Notes to Unaudited Consolidated Financial Statements


5-14
 
 
 1
  China Polypeptide Group, Inc.
 Consolidated Balance Sheets
  March 31,


September 30,2011


2010(Unaudited)AssetsCurrent assetsCash and cash equivalents (including assets of consolidated variable interest entities of $7,381 at March 31, 2011and $7,135 at September 30, 2010 available only to settle obligations of the consolidated variable interest entity)

$
15,233,895


$
14,421,012Accounts receivable, net


4,419,120



5,956,039Inventories, net


769,206



525,319Prepayments and other receivables, net


1,378,074



2,659,871Amounts due from staff


4,463,268



7,993,826Deferred tax assets


1,522,266



782,355Other assets


426,125



419,111Total Current Assets


28,211,954



32,757,533Property, plant and equipment, net


11,624,449



11,867,665Deposit for land use rights(including assets of consolidated variable interest entities of $5,340,231 at March 31, 2011 and $5,162,215 at September 30, 2010 available only to settle obligations of the consolidated variable interest entity)


5,643,749



5,552,160Prepayments for long-live assets(including assets of consolidated variable interest entities of $303,518 at March 31, 2011 and $nil at September 30, 2010 available only to settle obligations of the consolidated variable interest entity)


1,365,830



-Land use rights, net


284,060



279,450Investment in equity affiliates


224,292



227,351Intangible assets, net


33,861



42,829Total assets

$
47,388,195


$
50,726,988Liabilities and Shareholders’ EquityCurrent liabilitiesAccounts payable

$
1,763,037


$
2,199,212Accrued expenses and other liabilities


1,643,930



1,525,934Taxes payable


5,106,658



5,597,799Short-term loans


525,086



519,550Amounts due to related parties


450,417



442,689Total Current Liabilities


9,489,128



10,285,184Shareholders’ equityCommon stock: 120,000,000 shares authorized, $0.0001 par value, 11,939,967 shares issued and outstanding as of March 31,2011 and September 30, 2010, respectively


1,194



1,194Additional paid-in capital


16,231,912



16,231,912Deferred compensation


-



(77,355
)Unappropriated retained earnings


19,398,083



22,194,795Appropriated retained earnings


1,283,484



1,283,484Accumulated other comprehensive income


984,394



807,774Total Shareholders’ Equity


37,899,067



40,441,804Total Liabilities and Shareholders’ Equity

$
47,388,195


$
50,726,988
  See notes to unaudited consolidated financial statements
 
 2
 
 China  Polypeptide Group, Inc.
 Consolidated Statements of Operationsand Comprehensive Income (Loss)
 (Unaudited)
  Three Months Ended March 31,


Six Months Ended March 31,2011


2010


2011


2010(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Revenues

$
4,466,807


$
8,357,079


$
7,787,563


$
14,103,669Cost of sales


997,914



820,309



1,406,963



1,096,883Gross profit


3,468,893



7,536,770



6,380,600



13,006,786Operating expensesSelling and administrative expenses


6,331,408



5,090,424



10,018,940



9,393,262Operating (loss) Income


(2,862,515
)


2,446,346



(3,638,340
)


3,613,524Other (expense) incomeInterest (expense) income


40,344



(18,504
)


11,129



(36,064
)Equity loss in affiliates


(99
)


(8,636
)


(6,830
)


(16,473
)Other income


45,681



25,816



89,810



19,64785,926



(1,324
)


94,109



(32,890
)(Loss) income before income tax (benefit) expense


(2,776,589
)


2,445,022



(3,544,231
)


3,580,634Income tax (benefit) expense


(630,639
)


225,887



(747,519
)


472,348Net (loss) income


(2,145,950
)


2,219,135



(2,796,712
)


3,108,286Other comprehensive incomeForeign currency translation (loss) gain


(318,511
)


(3,430
)


176,620



(75,348
)Comprehensive (loss) income

$
(2,464,461
)

$
2,215,705


$
(2,620,092
)

$
3,032,938(Loss) earnings per shareBasic and diluted

$
(0.18
)

$
0.21


$
(0.23
)

$
0.31Weighted average number of common shares outstanding:Basic and diluted


11,939,967



10,621,985



11,939,967



10,020,755
 
 See notes to unauditedconsolidated financial statements
 
 3
  China Polypeptide Group, Inc.
 Consolidated Statements of Cash Flows
 (Unaudited)
  Six Months EndedMarch 31,2011


2010(Unaudited)


(Unaudited)Cash flow from operating activitiesNet (loss) income

$
(2,796,712
)

$
3,108,286Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization


555,138



199,418Bad debts provision


1,519,168



173,773Amortization of stock-based compensation


78,167



7,965Equity loss in affiliates


6,830



16,473Changes in operating assets and liabilitiesAccounts receivable


1,642,854



5,534,146Inventories


(235,912
)


245,784Prepayments and other receivables


(192,478
)


(1,098,287
)Amounts due from staff


3,673,185



(4,292,798
)Deferred tax assets


(729,140
)


42,678Accounts payable


158,720



(169,475
)Accrued expenses and other current liabilities


93,097



(1,584,637
)Taxes payable


(585,198
)


214,976Net cash provided by operating activities


3,187,719



2,398,302Cash flow from investing activitiesPurchases of property, plant and equipment


(737,721
)


(241,002
)Prepayment for long-live assets


(1,369,842
)


(877,702
)Cash paid to acquire land use rights


-



(5,588,039
)Net cash used in investing activities


(2,107,563
)


(6,706,743
)Cash flow from financing activitiesProceeds from private placements, net


-



3,600,000Proceeds from (repayment of) related parties loans


426



(48,202
)Repayment on short-term bank loan


(3,044
)


(39,843
)Net cash (used in) provided by financing activities


(2,618
)


3,511,955Effect of exchange rate fluctuation on cash and cash equivalents


(264,655
)


(1,596
)Net increase (decrease) in cash and cash equivalents


812,883



(798,082
)Cash and cash equivalents, beginning of period


14,421,012



4,439,732Cash and cash equivalents, end of period

$
15,233,895


$
3,641,650Supplemental disclosure of cash flow information:Income taxes paid

$
58,140


$
115,774Interest paid

$
23,647


$
23,432
 
 See notes to unauditedconsolidated financial statements
  4
 
 China Polypeptide Group, Inc.
 Notes to Consolidated Financial Statements (Unaudited)
 
 Note 1 - Principal Activities and Organization
 
 The consolidated financial statements include the financial statements of China Polypeptide Group, Inc. (“CPGI” or the “Company”), its subsidiaries and variable interest entity (“VIE”), Cantix International Limited (“Cantix”), Moneyeasy Industries Limited (“Moneyeasy”), Wuhan Tallyho Biological Product Co., Limited (“Tallyho”), Guangdong Hopsun Polypeptide Biological Technology Co., Limited (“Hopsun”), Wuhan Polypeptide Anti-Aging Research & Development Co., Limited (“Anti-Aging”), and Guangdong Xingpu Polypeptide Research Co., Limited (“Xingpu”). The Company, its subsidiaries and VIE are collectively referred to as the “Group”.
 
 Principal Activities
 
 The Company, formerly known as Hamptons Extreme, Inc., was incorporated under the laws of the State of Delaware in March 2007. The Company was formed to engage in the design, manufacturing, distribution and marketing of surfboards and related equipment.  After the Exchange (as defined below), the Company, through its operating subsidiaries in the People’s Republic of China (the “PRC”), is principally engaged in research, development, manufacturing, marketing and sales of polypeptide-based nutritional supplements, health foods, functional foods and related ingredient products.
 
 Cantix, a wholly owned subsidiary of the Company, was incorporated in British Virgin Islands (the “BVI”) on January 29, 2007.  Cantix is a holding company with minimum activities.
 
 Moneyeasy, a wholly owned subsidiary of Cantix, was incorporated in Hong Kong on August 25, 2006, and is a holding company with minimum activities.
 
 Tallyho was founded on December 2, 1996 in the PRC with a paid-in capital of $5,854,361 (RMB40,230,000) and has been engaged in research, production and sales of polypeptide-based nutritional supplements, health food products and related ingredient products. Tallyho is a wholly owned subsidiary of Moneyeasy.
 
 Hopsun was founded on November 13, 2007 in the PRC. It is a wholly owned subsidiary of Tallyho with $1,424,055 (RMB10,000,000) initial paid-in capital which was later increased to $2,008,227 (RMB14,000,000) and specializes in service-based sales of health and anti-aging products.
 
 Anti-Aging was founded on June 13, 2007 in the PRC, with $1,045,246 (RMB8,000,000) paid-in capital and specialized in research and development of polypeptide-based health products and provision of related technological services. Anti-Aging is a wholly owned subsidiary of Moneyeasy.
 
 Xingpu is a development stage company established on March 2, 2010. Its registered capital is approximately $29,255,164 (RMB200,000,000) of which $5,851,033 (RMB40,000,000) was paid up as of March 31, 2011. The equity holders of Xingpu are Mr. Dongliang Chen, the Company’s Chief Executive Officer and the Chairman of the Board, and Mr. Shengfan Yan, the President and a director of the Company, with each holding a 50% equity interest of Xingpu. Xingpu’s business scope includes polypeptide product development, real estate investment, technology transfer, technical consultation, import and export, with its current purpose being to develop the Group’s regional headquarter and its research and development center.
 
 Effective September 28, 2010, Hopsun entered into a contractual arrangement with Xingpu and its equity holders consisting of a series of agreements, including an Exclusive Business Cooperation Agreement, through which Hopsun has the right to advise, consult with, manage and operate Xingpu, and to collect fees based on its profits. Xingpu's equity holders have also granted their voting rights over Xingpu to Hopsun. In order to further reinforce Hopsun's rights to control and operate Xingpu, Xingpu and its equity holders have granted Hopsun the exclusive right and option to acquire all of their equity interests in Xinpu. Further, Xingpu’s equity holders have pledged all of their rights, titles and interests in Xingpu to Hopsun. As both companies are under common control, Xingpu is consolidated as a VIE and the financial statements have been prepared as if the VIE arrangement had occurred from the beginning of the periods presented. CPGI consolidates Xingpu’s results, assets and liabilities in its financial statements.
 
 5
 On November 13, 2009, the Company, Cantix and the shareholders of Cantix entered into a stock exchange agreement (the “Stock Exchange Agreement”), pursuant to which the Company acquired all of the issued and outstanding shares of common stock of Cantix from the Cantix shareholders in exchange for 8,800,000 shares of common stock of the Company, representing approximately 88% of the issued and outstanding shares of common stock of the Company (the “Exchange”). After the Exchange, Cantix became a wholly-owned subsidiary of the Company.
 
 Under accounting principles generally accepted in the United States of America (“U.S. GAAP”), the Exchange is treated as a reverse acquisition, and the consolidated financial statements of the Company have been retroactively adjusted to reflect the Exchange from the beginning of the periods presented. The Exchange has been accounted for as a reverse acquisition and recapitalization (the “Reorganization”) of the Company, whereby Cantix is deemed to be the accounting acquirer (legal acquiree) and the Company to be the accounting acquiree (legal acquirer). The historical consolidated financial statements for the periods prior to November 13, 2009 are solely of Cantix except that the equity section and earnings per share have been retroactively restated to reflect the Exchange.
 
 All shares and per share numbers set forth in this Note 1 reflect an 8-for-1 forward stock split effectuated by the Company on December 1, 2009, pursuant to which each one (1) share of the Company’s common stock issued and outstanding on that date automatically converted into eight(8) shares of the Company’s common stock.
 
 Note 2 - Summary of Significant Accounting Policies and Practices
 
 (a) Basis of Presentation
 
 The consolidated financial statements have been prepared in accordance with U.S. GAAP.
 
 Variable Interest Entities - A VIE is an entity that either (i) has insufficient equity to permit the entity to finance its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the VIE.
 
 If the Company determines that it has operating power and the obligation to absorb losses or receive benefits, the Company consolidates the VIE as the primary beneficiary, and if not, does not consolidate. The Company’s involvement constitutes power that is most significant to the entity when it has unconstrained decision making ability over key operational functions within the entity.
 
 Assets recognized as a result of consolidating VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the consolidated VIEs.
 
 The Company has concluded that Xingpu is a VIE and that the Company is the primary beneficiary and loss absorber as of March 31, 2011. Under the requirements of ASC Topic 810 the Company consolidated the financial statements of Xingpu.
 
 Summary information regarding Xingpu is as follows:
 
 March  31,2011AssetsCash and cash equivalents

$
7,381Deposit for land use rights


5,340,231Prepayment for long-lived assets


303,518Total assets

$
5,651,130Total liabilities

$
-
 
 The financial performance of Xingpu reported in the consolidated statements of operations for the six months ended March 31, 2011 includes revenues of $nil, net loss of $nil.
 
 6
  In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of consolidated financial position as of March 31, 2011, and consolidated results of operations, and cash flows for the six month periods ended March 31, 2011 and 2010, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
 
 The consolidated financial statements include the financial statements of the Company, its subsidiaries and VIE. All significant inter-company transactions and balances have been eliminated in consolidation.
 
 (b) Use of Estimates
 
 The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions relating to the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include revenues; the allowance for doubtful receivables; deposit for land use rights; recoverability of the carrying amount of property and equipment and intangible assets; fair values of financial instruments; and the assessment of contingent obligations.  These estimates are often based on complex judgments and assumptions that management believes to be reasonable but are inherently uncertain and unpredictable.  Actual results could differ from those estimates.
 
 (c) Inventories
 
 Inventories are stated at the lower of cost or market value. Cost is determined using the weighted average cost method. Inventories embraces raw materials, low-value consumables, packaging materials, work in process and finished goods. Cost of finished goods comprises direct material, direct production cost and an allocated portion of production overheads based on normal operating capacity.
 
 The Group evaluates the need for reserves associated with obsolete, slow-moving and non-salable inventories by reviewing the net realizable value on a periodic basis. Where there is evidence that the utility of inventories, in their disposal in the ordinary course of business, will be less than cost, whether due to physical deterioration, obsolescence, changes in price levels, or other causes, a provision is accrued for the difference with charges to cost of sales.
 
 (d) Revenue Recognition
 
 The Group recognizes revenue in accordance with ASC Topic 605. All of the following criteria must exist in order for the Group to recognize revenue: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and (4) collectability is reasonably assured.
 
 Revenue is recognized when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
 
 
 (e) Income Taxes
 
 The Group adopted ASC Topic 740  ”Accounting for Income Taxes” that requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes.
 
 The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
 
 7
  Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
 
 (f) Fair Value of Financial Instruments
 
 Financial instruments include cash and cash equivalents, accounts and notes receivable, prepayments and other receivables, short-term loans, accounts and notes payable, other payables and amounts due to related party. The carrying amounts of these financial instruments approximate their fair value due to the short term maturities of these instruments.
 
 The Group adopted ASC Topic 820-10  ”Fair Value Measurements” on January 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). ASC Topic 820-10 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Group has not adopted ASC Topic 820-10 for non-financial assets and non-financial liabilities, as these items are not recognized at fair value on a recurring basis.
 
 ASC Topic 820-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
 
 ASC Topic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC Topic 820-10 establishes three levels of inputs that may be used to measure fair value:
 
 -
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.-
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.-
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
 
 (g) Recently Issued Accounting Pronouncements
 
 In the quarter ending March 31, 2011, The Financial Accounting Standards Board (“FASB”) has issued ASU No. 2011-01 through ASU 2011-3, which is not expected to have a material impact on the consolidated financial statements upon adoption.
 
 Note 3 – Earnings (Loss) per Share
 
 The Group reports earnings (loss) per share in accordance with ASC Topic 260  ”Earnings per Share”.  ASC Topic 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share.  Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
 
 8
  March 31, 2011


March 31, 2010(Unaudited)


(Unaudited)For the six months ended March 31, 2011 and 2010Net income (loss) for basic and diluted earnings (loss) per share

$
(2,796,712
)

$
3,108,286Weighted average number of common shares outstanding – basic and diluted *


11,939,967



10,020,755Earnings (loss) per share – basic and diluted

$
(0.23
)

$
0.31For the three months ended March 31, 2011 and 2010Net income (loss) for basic and diluted earnings (loss) per share

$
(2,145,950
)


2,219,135Weighted average number of common shares outstanding – basic and diluted *


11,939,967



10,621,985Earnings (loss) per share – basic and diluted

$
(0.18
)

$
0.21
 
 * All the outstanding warrant shares do not have dilutive effect on earnings per share. As of March, 31 2011 and 2010, the number of the outstanding warrants was 502,150 and 333,333, respectively
 
 Note 4 - Accounts Receivable, net
 
 March 31,


September 30,2011


2010(Unaudited)Accounts receivable

$
6,012,914


$
7,526,793Allowance for doubtful accounts


(1,593,794
)


(1,570,754
)$
4,419,120


$
5,956,039
 
 Note 5 – Inventories, net
 
 March 31,

2011


September 30,

2010(Unaudited)Raw materials

$
229,813


$
179,993Work in progress


302,508



226,844Finished goods


82,915



29,541Low-value consumables and packaging materials


153,970



88,941Total


769,206


$
525,319
 
 Note 6 - Prepayments and Other Receivables
 
 March 31,


September 30,2011


2010(Unaudited)ERA Bio-Technology (Shenzhen) Co., Ltd. (a)

$
4,146,053


$
4,078,769Other receivables and prepaid expenses


1,173,004



1,360,730Advance to suppliers


773,962



365,8406,093,019



5,805,339Allowance for doubtful accounts


(4,714,945
)


(3,145,468
)$
1,378,074


$
2,659,871
 
 (a)
As of March 31, 2011, the Group lent $4,146,053 in aggregate to ERA Biotech.  $2,352,263 of such loans was due on August 11, 2009 and was extended to July 28, 2010 on July 28, 2009. $1,793,790 of such loans matured on June 9, 2010. The Company evaluated the collectability of such loan balance and determined to provide a bad debt allowance of $4,146,053 and $2,628,464 as of March 31, 2011 and September 31, 2010, respectively.
  9
  Note 7 – Amounts Due from Staff
 
 Amounts due from staff represent various advances to certain employees for business purposes and receivables from sales managers due to certain amounts of funds collected from customers by sales managers of Hopsun and kept at respective bank accounts for working capital purposes,pursuant to cash advance custody agreements between Hopsun and such managers . Hopsun has entered into a cash advance custody agreement with each sales manager which stipulates the ownership and all the other rights related to such funds belong to Hopsun and each sales manager bears legal responsibility for such funds including safeguarding of such funds. In addition to other control measures, these bank accounts are operated by Hopsun instead of sales managers. Amounts due from staff amounted to $4,463,268 and $7,993,826 as of March 31, 2011 and September 30, 2010, respectively.
  Note 8 – Property, Plant and Equipment
 
 March 31,


September 30,2011


2010(Unaudited)Buildings and improvement

$
9,999,123


$
9,885,136Machinery and equipment


2,641,504



2,315,357Furniture and office equipment


526,040



517,850Motor vehicles


793,928



786,50113,960,595



13,504,844Accumulated depreciation


(2,336,146
)


(1,637,179
)$
11,624,449


$
11,867,665
 
 As of September 30, 2010, a building owned by the Group with net book value of $1,078,824 was subject to a renewed pledged by the Group to Wuhan Rural Commercial Bank for a loan of $515,980, borrowed by Wuhan Pan-Asia Peptide Material Research Co. Limited (“Wuhan Pan-Asia”), an unrelated third party. Wuhan Pan-Asia entered into an agreement with the Group for a loan facility of $758,794 to the Group in exchange for this pledge. As of March 31, 2011, the balance due to Wuhan Pan-Asia was nil.
 
 Depreciation expense for the six months ended March 31, 2011 and 2010 was $545,435 and $199,418, respectively. Depreciation expense for the three months ended March 31, 2011 and 2010 was $142,524 and $126,488, respectively.
 
 
 Note 9 – Deposit for Land Use Rights
 
 Deposit for land use rights represents the payments that are made to the government to secure the land use rights of the land lot in Guangzhou Science Park reserved for the Company’s future regional headquarters and research and development center and of the land lot in Wuhan for future expansion of the Company\s manufacturing. The Group has paid a deposit for land use rights, aggregating $5,643,749 and $5,552,160 as of March 31, 2011 and September 30, 2010, respectively. The relevant certificates of land use right are to be issued, and if not, such amount will be refunded.
 
 
 Note 10 - Taxation
 
 The Company, its subsidiaries and VIE each file tax returns separately.
 
 1) VAT
 
 Pursuant to the Provisional Regulation of the PRC on the VAT and its implementing rules, all entities and individuals (“Taxpayers”) that are engaged in the sale of products in the PRC are generally required to pay the VAT at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or incurred. VAT Taxpayers can be divided into two categories, i.e., General VAT Taxpayer and Small Scale VAT Taxpayer. The Small Scale VAT Taxpayer is subject to a simplified VAT rate on the gross sales proceeds while all VAT previously paid, or input VAT, cannot be deductible for tax payment purpose. This simplified VAT tax rate was reduced to 3% effective January 1, 2009. Some of Hopsun’s branch offices are Small Scale VAT Taxpayers and are therefore subject to the simplified VAT rate of 3%,
 
 10
  2) Income tax
 
 United States
 
 CPGI is incorporated in Delaware and is subject to U.S. federal income tax with a system of graduated tax rates ranging from 15% to 35%. As CPGI does not conduct any business in Delaware, it is not subject to Delaware state corporate income tax.
 
 BVI
 
 Cantix, incorporated in BVI, is governed by the income tax law of BVI. According to current BVI income tax law, the applicable income tax rate for Cantix is nil.
 
 Hong Kong
 
 Moneyeasy, incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.
 
 PRC
 
 In accordance with the relevant tax laws and regulations of the PRC, a company registered in the PRC is subject to income taxes within the PRC at the applicable tax rate on the taxable income. The statutory tax rate is 25%.
 
 Tallyho, registered in the City of Wuhan in the PRC, has qualified as a New and High-Tech Enterprise ("NHTE") by relevant governmental authorities since December 2010. As such, Tallyho is eligible to enjoy a preferential tax rate of 15% for the calendar year of 2010, in accordance with the PRC income tax law.
 
 Hopsun, registered in the City of Guangzhou in the PRC, was qualified as a NHTE by relevant governmental authorities in December 2009. According to the PRC income tax law and its NHTE certificate, so long as Hopsun’s NHTE status remains valid, Hopsun is subject to income tax at a preferential tax rate of 15% for 3 years, commencing with the 2009 calendar year,
 
 Anti-Aging, registered in the City of Wuhan in the PRC, is subject to the income tax at tax rate of 25%.
 
 Xingpu, registered in the City of Guangzhou in the PRC, is subject to the income tax at tax rate of 25%.
 
 a)
Tax payable
 
 Taxes payable consist of the following:
 
 March 31,


September 30,2011


2010(Unaudited)VAT payable

$
2,786,164


$
3,113,658Income tax payable


2,094,378



2,250,810Other taxes payable


226,116



233,331$
5,106,658


$
5,597,799
 
 11
  (b) Deferred tax assets
 
 Deferred tax assets and deferred tax liabilities reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purpose and the tax bases used for income tax purpose. The following represents the tax effect of  each major type of temporary difference.
 
 March 31,


September 30,2011


2010(Unaudited)Allowance for doubtful receivables

$
946,312


$
707,433Allowance for inventory obsolescence


25,278



24,868Difference in depreciation


50,879



50,054Tax loss carried-forward


509,130



85,6391,531,599



867,994Valuation allowance


(9,333
)


(85,639
)Deferred tax assets, net

$
1,522,266


$
782,355
 
 The tax loss carried-forward incurred by Tallyho, Hopsun and Anti-Aging amounted to $509,130 for the period ended March 31, 2011. For the year ended September 30, 2010, the tax loss carried-forward incurred by Anti-Aging amounted to $85,639. Management believes that the tax loss carried-forward amounts incurred by Tallyho and Hopsun for the period ended March 31, 2011amounted to $509,130 may be recovered for the respective future 5 years’ taxable income, and the realization of the benefits arising from the tax loss carried-forward incurred by Anti-Aging amounted to $9,333 and $85,639 for the period ended March 31, 2011 and the year ended September 30, 2010, respectively, appear to be remote due to the research and development nature of Anti-Aging’s operation and its continuing losses for PRC income tax purpose, and therefore, full provision has been provided for the tax loss carried-forward amounts occurred by Anti-Aging.
  Note 11 - Related Party Transactions
 
 The transactions with the following entities and individuals were made in the ordinary course of business and were negotiated on an arm’s length basis.  A summary of balances and transactions with related parties is as follows:
 
 March 31,


September 30,2011


2010(Unaudited)Due to related partiesWuhan Inspection (a)

$
450,417


$
442,689
 _________________
 (a)
Wuhan Inspection advanced to Tallyho payments for relevant expenses for obtaining the necessary special licenses for Wuhan Inspection’s inspection business through and with the assistance of Tallyho.
 
 All amounts due to related companies were interest free, unsecured and had no fixed term of repayment.
 Note 12 - Commitment and Contingency
 
 (a) Operating lease commitment
 
 The Group has entered into several tenancy agreements for the operating lease of office blocks, workshops and warehouses. The Group’s commitment for minimum lease payments under these operating leases as of March 31, 2011 for the next five years is as follows:
 
 As of March 31, 2011Within 1 year

$
17,241Between 1 and 2 years


5,133Between 2 and 3 years


3,019Between 3 and 4 years


3,019Between 4 and 5 years


7555 years then thereafter


-$
29,167
 
 (b) Capital commitment
 
 There is a capital commitment of $212,463 for the regional customer health center in Guangdong Province, China as of March 31, 2011.  There is no capital commitment as of September 30, 2010.
 
 (c) Contingency
 The Group is not currently a party to any legal proceeding, investigation or claim which, in the opinion of the management, is likely to have a material adverse effect on the business, financial condition or results of operations, The Group did not record any contingencies as of March 31, 2011 and September 30, 2010.
 
 12
 
 Note 13 – Shareholders’ Equity
 
 Common stock
 
 On November 13, 2009, as the result of closing of the Exchange disclosed in Note 1, the Company acquired all of the issued and outstanding capital stock of Cantix in exchange for the issuance of 8,800,000 (on a post 8-for-1 forward stock split basis) shares of the Company’s common stock.
 
 On January 8, 2010, as the result of closing of an investment of $3,600,000 pursuant to a Securities Purchase Agreement dated December 16, 2009, the Company issued a) 666,667 shares of the Company’s common stock, and b) a 5 year warrant to purchase up to an additional 333,333 shares of Common Stock at an exercise price of $6.75 per share to the investor. The net proceeds was $3,300,000 after deducting commissions and other closing expenses of $300,000.
 
 On March 1 and September 1, 2010, the Company issued, in aggregate, 38,000 shares of the Company’s common stock as payments for services which were valued at $137,490 and included in deferred compensation which was all expensed as of March 31, 2011.
 
 On April 21, 2010, as the result of closing of an investment with gross proceeds of $3,000,000 pursuant to a Share Purchase Agreement dated April 16, 2010, the Company issued (i) 609,557 shares of common stock, par value $.0001 per share, and (ii) a 5 year warrant to purchase up to an additional 80,956 shares of Common Stock at an exercise price of $6.75 per share to the investor. The net proceeds was $2,761,070 after deducting commissions and other closing expenses of $238,930.
 
 On September 2, 2010, as the result of closing of an investment with gross proceeds of $3,000,000 pursuant to a Share Purchase Agreement dated August 25, 2010, the Company issued (i) 585,743 shares of common stock, par value $.0001 per share, and (ii) a 5 year warrant to purchase up to an additional 87,861 shares of Common Stock at an exercise price of $6.75 per share to the investor. The net proceeds was $2,935,534 after deducting transaction related cash commission and expenses of $64,466. The Company also issued 40,000 shares of the Company’s common stock for commissions which were valued at $187,200 and treated as transaction costs associated with the above financing.
 
 Warrant
 
 On January 8, 2010, the Company issued a 5 year warrant to purchase up to 333,333 shares of Common Stock at an exercise price of $6.75 per share.  On April 21, 2010, the Company issued a 5 year warrant to purchase up to 80,956 shares of Common Stock at an exercise price of $6.75 per share.  On September 2, 2010, the Company issued a 5 year warrant to purchase up to 87,861 shares of Common Stock at an exercise price of $6.75 per share. The fair values of these warrants were estimated using the Black-Scholes option–pricing model.
 
 The following table summarizes the assumptions used in the Black-Scholes option–pricing model when calculating the fair values of the warrants:
 
 Number of

Shares

Underlying the

Warrant Valued


Expected Life

(Years)


Exercise Price


Expected

Volatility


Dividend Yield


Risk Free

Interest Rate


Grant Date Fair

Value333,333



2


$
6.75



125
%


-



0.96
%

$
1,051,43480,956



2


$
6.75



125
%


-



1.03
%

$
225,50587,861



2


$
6.75



125
%


-



0.50
%

$
257,394
 
 Due to the limited trading history of the Company’s common stock, the Company used the market prices of a similar public company's (similar industry, size and length of operations) to calculate the volatility which was estimated to be 125%.
 
 13
  Following is a summary of the warrant activity:
 
 Outstanding as of October 1, 2010


502,150Granted


-Forfeited


-Exercised


-Outstanding as of March 31, 2011


502,150
 
 Deferred compensation
 
 The deferred compensation was recognized as the remuneration for the previous CFO and amortized to expenses over the service period. As the result of the resignation of the previous CFO, there is no deferred compensation recognized as of March 31, 2011. There is deferred compensation of $77,355 as of September 30, 2010.
 
 
 Note 14 - Subsequent Events
 
 Management has considered all events occurring through the date that the consolidated financial statements have been issued and has determined that there are no such events that are material to the consolidated financial statements.
 
 ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 Special Note Regarding Forward Looking Statements
 
 In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; and any statements regarding future economic conditions or performance, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.
 
 Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations.
 
 14
 
 Use of Terms
 
 Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:
 
 ·
“Company,” “we,” “us” and “our” are to the combined business of China Polypeptide Group, Inc., a Delaware corporation, and its subsidiaries, Cantix, Moneyeasy, Tallyho, Wuhan Anti-Aging, and Hopsun, and its variable interest entity, or VIE, Xingpu;
 
 ·
“Cantix” are to our wholly-owned direct subsidiary, Cantix International Limited, a British Virgin Islands limited company;
 
 ·
“Moneyeasy” are to our wholly-owned indirect subsidiary, Moneyeasy Industries Limited, a Hong Kong limited company;
 
 ·
“Tallyho” are to our wholly-owned indirect subsidiary, Wuhan Tallyho Biological Product Co., Ltd., a PRC limited company;
 
 ·
“Wuhan Anti-Aging” or “Anti-Aging” are to our wholly-owned indirect subsidiary, Wuhan Polypeptide Anti-Aging Research & Development Co., Ltd., a PRC limited company;
 
 ·
“Hopsun” are to our wholly-owned indirect subsidiary, Guangdong Hopsun Polypeptide Biological Technology Co., Ltd., a PRC limited company;
 
 ·
“Xingpu” are to our variable interest entity (VIE) indirect subsidiary, Guangdong Xingpu Polypeptide Research Co., Ltd., a PRC limited company;
 
 ·
“SEC” are to the United States Securities and Exchange Commission;
 
 ·
“Securities Act” are to the Securities Act of 1933, as amended, and “Exchange Act” are to the Securities Exchange Act of 1934, as amended.
 
 ·
“China” and “PRC” are to People’s Republic of China;
 
 ·
“BVI” are to the British Virgin Islands;
 
 ·
“Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
 
 ·
“RMB” are to Renminbi, the legal currency of China; and
 
 ·
“U.S. dollar,” “$” and “US$” are to the legal currency of the United States.
 
 
 Overview of our Business
 
 Through our operating subsidiaries in China, we are engaged in the research, development, production and sale of polypeptide-based nutritional supplements, health foods, functional foods, nutricosmetics products and other related health and wellness products in China and abroad. Polypeptides are small molecular structures consisting of 10-50 amino acids and have been found to have high nutritional value and support body functions such as regulating immunological functions. We focus on enzyme engineering in order to produce micromolecular protein structures in the form of certain functional peptides for use as nutritional ingredients, additives and supplements.
 
 We have developed over 70 different types of polypeptide-based nutritional products. Our key products include Polypeptide Protein Powder and Shenguo Polypeptide Capsules. Other functional polypeptide-based nutritional supplement products include lipid lowering soy peptide products. These products are manufactured using our proprietary processing methods.
  15
  Our products are primarily manufacturedin our owned and operated production facilities located on 16,477 square meters of land in the Hannan Economic Development Zone in Wuhan, China. Some of our nutritional supplements and personal care products are manufactured for us through contractual relationships with other manufacturing companies, in accordance with our own proprietary formulations. Our products have been tested and approved by the relevant Chinese governmental hygiene and safety agencies, such as the local bureaus of Ministry of Health and the State Food and Drug Administration. Our research and development efforts, which encompass basic peptide research and anti-aging-focused applied research and related product development, are conducted in three research and development centers in Wuhan, China.
 
 Our products are sold to customers through a combined network of sales personnel in our headquarters, through our branch sales offices located in 15 provinces across China, and through our wholesalers, distributors and private labeled partners.
 
 We believe that we are one of the largest companies in China focusing on the development and production of functional peptide nutritional products, and that we are one of the few companies in our industry that offer competitive prices and high quality diversified nutritional products combined with excellent customer service.
 
 Results of Operations
 
 The following table sets forth our statements of operations for the three and six months ended March 31, 2011 and 2010 in U.S. dollars (unaudited):
 
 Comparison of Three Months Ended March 31, 2011 and 2010
 Three Months Ended March 31,2011

2010Amount

% of Revenues

Amount

% of Revenues(in dollars, except percentages)REVENUES


4,466,807



100.0
%


8,357,079



100.0
%COST OF SALES


997,914



22.3
%


820,309



9.8
%GROSS PROFIT


3,468,893



77.7
%


7,536,770



90.2
%SELLING AND ADMINISTRATIVES

EXPENSES


6,331,408



141.7
%


5,090,424



60.9
%OPERATING (LOSS) INCOME


(2,862,515
)


-64.1
%


2,446,346



29.3
%OTHER INCOME (EXPENSE)Interest (expense) income


40,344



0.9
%


(18,504
)


-0.2
%Equity loss in affiliates


(99
)


0.0
%


(8,636
)


-0.1
%Other income


45,681



1.0
%


25,816



0.3
%85,926

1.9%

(1,324)

0.0%INCOME (LOSS) BEFORE INCOME TAX (BENIFIT) EXPENSE


(2,776,589
)


-62.2
%


2,445,022



29.3
%INCOME TAX (BENIFIT) EXPENSE


(630,639
)


-14.1
%


225,887



2.7
%NET (LOSS) INCOME


(2,145,950
)


-48
%


2,219,135



26.6
%OTHER COMPREHENSIVE (LOSS) INCOMEForeign currency translation loss


(318,511
)


-7.1
%


(3,430
)


0.0
%COMPREHENSIVE (LOSS) INCOME


(2,464,461
)


-55.2
%


2,215,705



26.5
%
  16
  Revenues.Revenues for the three months ended March 31, 2011 decreased to $4,466,807, as compared to $8,357,079 for the three months ended March 31, 2010, a decrease of $3,890,272 or 46.6%.    The decrease is mainly attributable to the restructuring of Hopsun and its sales branches that commenced in late March, 2011. The restructuring was carried out to change our sales model from a self-owned meeting-based sales network to a centralized, third-party distributor network for our own branded consumer end products. Management expects that this new centralized, third-party channel sales model will help to significantly decrease our selling and marketing expenses going forward, as we expect such expenses will be borne by the third party distributors.  While revenues will be temporarily impacted and only gradually rebound in future periods, we expect to improve our operational efficiency and net profit in the near term.
 
 Cost of Sales.Cost of sales for the three months ended March 31, 2011 amounted to $997,914, or approximately22.3% of revenues, compared to $820,309, or approximately 9.8% of revenues, for the three months ended March 31, 2010, an increase of $177,605, or 21.7%.  The increase is mainly attributable to an increase in overhead costs as a result of salary increases, additional depreciation of new equipment and an increase of utility costs.
 
 Gross Profit.Gross profit for the three months ended March 31, 2011 decreased $4,067,877, or 54%, to $3,468,893 from $7,536,770 for the three months ended March 31, 2010, with a gross margin of 77.7% and 90.2% for the three months ended March 31, 2011 and 2010 respectively.  The decrease in gross profit is mainly due to the $3,890,272, or 46.6%, decrease in revenues and $177,605, or 21.7%, increase in cost of sales during the 2011 period.
 
 Selling and Administrative Expenses.Selling and administrative expenses for the three months ended March 31, 2011 totaled $6,331,408, or approximately 141.7% of revenues, compared to $5,090,424, or approximately 60.9% of revenues, for the same period in 2010, an increase of $1,240,984, or 24.4%. The significant increase in the proportion of selling and administrative expenses to revenues is mainly attributable to the decrease in revenues discussed above. The absolute value of the increase in selling and administrative expenses is mainly due to the Company’s provision for a $1,522,047 bad debt expense on ERA Biotech, as of March 31, 2011.
 
 Operating (Loss) Income.An operating loss of $2,862,515, or approximately -64.1% of revenues, was incurred for the three months ended March 31, 2011, as compared to an operating income of $2,446,346, or approximately 29.3% of revenues, for the three months ended March 31, 2010, a decrease of $5,308,861 or 217%. The operating loss is mainly attributable to the decrease in revenues in the three months ended March 31, 2011.
 
 Interest (Expense) Income.Net interest income totaled $40,344 for the three months ended March 31, 2011, as compared to net interest expense of $18,504 for the three months ended March 31, 2010, an increase of $58,848 or 318%.
 
 Equity Loss in Affiliates.Equity loss in affiliates for the three months ended March 31, 2010 amounted to $99, a decrease of $8,537, or 98.9%, as compared to equity loss in affiliates of $8,636 for the three months ended March 31, 2010. The decrease is due to the decrease in the net loss of an affiliate company in which the Company has a 40% equity interest and uses the equity method to account for such an investment.
 
 Other Income.Other income was $45,681 for the three months ended March 31, 2011, as compared to other income of $25,816 for the three months ended March 31, 2010, an increase of $19,865. The change is mainly attributable to government subsidy income during the three months ended March 31, 2011.
 
 (Loss) Income before Income Tax (Benefit) Expense. Loss before income tax expense (benefit) was $2,776,589 or approximately -62.2% of revenues, for the three months ended March 31, 2011, as compared to income before income tax expense of $2,445,022, or approximately 29.3% of revenues, for the three months ended March 31, 2010, a decrease of $5,221,611, or -213.6%. The decrease in income before income tax expense is mainly attributable to the $3,890,272 decrease in revenues during the three months ended March 31, 2011.
 
 17
 
 Income Tax (Benefit) Expense.According to the analysis and evaluation of the management, the group recognized a tax benefit amounted $630,639 for the three months ended March 31, 2011, as compared to income tax expense $225,887 for the three months ended March 31,2010, decrease of $856,526, or 379.2%
 
 Net (Loss) Income.Net loss was $2,145,950, or approximately -48% of revenues, for the three months ended March 31, 2011, as compared to net income of $2,219,135, or approximately 26.6% of revenues, for the three months ended March 31, 2010, a decrease of $4,365,085, or -196.7%. The decrease in net income is mainly attributable to the $3,890,272 decrease in revenues during the three months ended March 31, 2011.Although no assurance can be given, management believes that our revenues and net income will resume growth in future periods resulting from, among other factors, growing market demands for anti-aging nutritional supplements, health foods and functional food products, our increased sales and marketing efforts after the restructuring of our sales network, our newly added manufacturing capacity to meet such increasing demands, our expansion into other high margin peptide-based product categories, as well as the PRC government’s increasing emphasis on domestic consumption as a key area for future sustained economic growth.
 
 
 Comparison of Six Months Ended March 31, 2011 and 2010
 Six Months Ended March 31,2011

2010Amount

% of Revenues

Amount

% of Revenues(in dollars, except percentages)REVENUES


7,787,563



100.0
%


14,103,669



100.0
%COST OF SALES


1,406,963



18.1
%


1,096,883



7.8
%GROSS PROFIT


6,380,600



81.9
%


13,006,786



92.2
%SELLING AND ADMINISTRATIVES EXPENSES


10,018,940



128.7
%


9,393,262



66.6
%OPERATING (LOSS) INCOME


(3,638,340
)


-46.7
%


3,613,524



25.6
%OTHER INCOME (EXPENSE)Interest (expense) income


11,129



0.1
%


(36,064
)


-0.3
%Equity loss in affiliates


(6,830
)


-0.1
%


(16,473
)


-0.1
%Other income


89,810



1.2
%


19,647



0.1
%94,109

1.2
%
(32,890
)
-0.4
%INCOME (LOSS) BEFORE INCOME TAX (BENIFIT) EXPENSE


(3,544,231
)


-45.5
%


3,580,634



25.4
%INCOME TAX (BENIFIT) EXPENSE


(747,519
)


-9.6
%


472,348



3.3
%NET (LOSS) INCOME


(2,796,712
)


-35.9
%


3,108,286



22.0
%OTHER COMPREHENSIVE (LOSS) INCOMEForeign currency translation loss (gain)


176,620



2.3
%


(75,348
)


-0.5
%COMPREHENSIVE (LOSS) INCOME


(2,620,092
)


-33.6
%


3,032,938



21.5
%
 
 18
 
 Revenues.Revenues for the six months ended March 31, 2011 decreased to $7,787,563, as compared to $14,103,669 for the six months ended March 31, 2010, a decrease of $6,316,106 or 44.8%.    The decrease is mainly attributable to the restructuring of Hopsun and its sales branches in late March 2011. Management expects that revenues will gradually rebound in future periods.
 
 Cost of Sales.Cost of sales for the six months ended March 31, 2011 amounted to $1,406,963, or approximately 18.1% of revenues, compared to $1,096,883, or approximately 7.8% of revenues, for the six months ended March 31, 2010, an increase of $310,080 or 28.3%. The increase is mainly attributable to an increase in overhead costs in connection with salary increases, additional depreciation of new equipment and an increase in utility costs.
 
 Gross Profit.Gross profit for the six months ended March 31, 2011 decreased $6,626,186, or 50.9%, to $6,380,600, from $13,006,786 for the six months ended March 31, 2010.  The respective gross margins are 81.9% and 92.2% for the six months ended March 31, 2011 and 2010, with a 50.9% decrease.  The decrease in gross profit is mainly due to the $6,316,106, or 44.8%, decrease in revenues and $310,080, or 28.3%, increase in cost of sales.
 
 Selling and Administrative Expenses.Selling and administrative expenses for the six months ended March 31, 2011 totaled $10,018,940, or approximately 128.7% of revenues, compared to $9,393,262, or approximately 66.6% of revenues, for the same period in 2010, an increase of $625,678, or 6.7%. The absolute value of the increase in selling and administrative expenses is mainly due to the Company’s provision of a $1,522,047 bad debt on ERA Biotech as of March 31, 2011. The significant increase in the proportion of selling and administrative expenses to revenues is mainly attributable to the decrease in revenues discussed above.
 
 Operating (Loss) Income.An operating loss of $3,638,340, or approximately -46.7% of revenues, was incurred for the six months ended March 31, 2011, as compared to an operating income of $3,613,524, or approximately 25.6% of revenues, for the six months ended March 31, 2010, a decrease of $7,251,864, or -200.7%. The operating loss is mainly attributable to the decrease in revenues and increase in costs of sales in the six months ended March 31, 2011.
 
 Interest (Expense) Income.Net interest income totaled $11,129 for the six months ended March 31, 2011, as compared to net interest expense of $36,064 for the six months ended March 31, 2010, an increase of $47,193, or 130.9%.
 
 Equity Loss in Affiliates.Equity loss in affiliates for the six months ended March 31, 2010 amounted to $6,830, a decrease of $9,643, as compared to equity loss in affiliates of $16,473 for the six months ended March 31, 2010. The decrease is due to the decrease in the net loss of an affiliate company in which the Company has a 40% equity interest and uses the equity method to account for such an investment.
 
 Other Income.Other income was $89,810 for the six months ended March 31, 2011, as compared to other income of $19,647 for the six months ended March 31, 2010, an increase of $70,163. The change is mainly attributable to government subsidy income during the three months ended March 31, 2011.
 
 (Loss) Income before Income Tax Expense (Benefit). Loss before income tax expense was $3,544,231, or approximately -45.5% of revenues, for the six months ended March 31, 2011, as compared to income before income tax expense of $3,580,634, or approximately 25.4% of revenues, for the six months ended March 31, 2010, a decrease of $7,124,865, or -199%. The decrease in income before income tax expense is mainly attributable to the $6,316,106 decrease in revenues and the $310,080 increase in costs of sales during the six months ended March 31, 2011.
 
 Income tax (benefit) expense.According to the analysis and evaluation of the management, the group recognized a tax benefit amounted $747,519 for the six months ended March 31, 2011, as compared to income tax expense $472,348, an increase of $1,219,867, or 258.3%
 
 Net (Loss) Income.Net loss was $2,796,712, or approximately -35.9% of revenues, for the six months ended March 31, 2011, as compared to net income of $3,108,286, or approximately 22% of revenues, for the six months ended March 31, 2010, a decrease of $5,904,998, or -190%.   The decrease in net income is mainly attributable to the decrease of $6,316,106 in revenues during the six months ended March 31, 2011.Although no assurance can be given, management believes that our revenues and net income will resume growth in future periods resulting from, among other factors, growing market demands for anti-aging nutritional supplements, health foods and functional food products, our increased sales and marketing efforts after the restructuring of our sales network, our newly added manufacturing capacity to meet such increasing demands, our expansion into other high margin peptide-based product categories, as well as the PRC government’s increasing emphasis on domestic consumption as a key area for future sustained economic growth.
 
 19
 
 Liquidity and Capital Resources
 
 Cash Flows
 
 The following table sets forth a summary of our cash flows for the periods indicated below:
 
 Six Months Ended March 31,2011


2010(in dollars)Net cash provided by operating activities


3,187,719



2,398,302Net cash used in investing activities


(2,107,563
)


(6,706,743
)Net cash (used in) provided by financing activities


(2,618
)


3,511,955Effect of exchange rate fluctuation on cash and cash equivalents


(264,655
)


(1,596
)Net increase (decrease) in cash and cash equivalents


812,883



(798,082
)Cash and cash equivalents, beginning of period


14,421,012



4,439,732Cash and cash equivalents, end of period


15,233,895



3,641,650
 
 Operating Activities
 
 Net cash provided by operating activities amounted to $3,187,719 during the six months ended March 31, 2011, an increase of $789,417, or 32.9%, as compared to $2,398,302 during the six months ended March 31, 2010. The increase is mainly attributable to a $7,965,983 increase in amounts due from staff, a $1,345,395 increase in bad debt provision and a $3,891,292 decrease in thecollection of accounts receivable during the 2011 period.
 
 Investing Activities
 
 Net cash used in investing activities decreased by $4,599,180, or 68.6%, to $2,107,563 during the six months ended March 31, 2011, as compared to $6,706,743 during the six months ended March 31, 2010.  During the six months ended March 31, 2010, there were approximately $5.58 million in payments to acquire the land use rights for the building of our regional headquarters and research and development center in Guangzhou city, China. During the period, we also made prepayments totaling $1,369,842 for certain long-lived assets.
 
 Financing Activities
 
 Net cash used in financing activities amounted to $2,618 during the six months ended March 31, 2011, as compared to net cash provided by financing activities of $3,511,955 during the six months ended March 31, 2010, a decrease of $3,514,573, or 100.1%, resulting from approximately $3.6 million in partial payments of an equity investment made by an institutional investor during the six months ended March 31, 2010.
 
 Loan Commitments
 
 As of March 31, 2011, we had the following outstanding bank loans:
 
 We have an outstanding bank loan of RMB1,960,000 (approximately $297,000) from the Agriculture Bank of China, Wuhan Branch. This bank loan has been continuously extended from September 2003, the original maturity date.  The Company has been repaying the principal amount of this loan with payments of RMB 20,000 (approximately $3,000) per month at the request of the bank.  Interest accrues on a monthly basis at the rate of 5.84% per annum.
 
 We have an outstanding bank loan of RMB1,500,000 (approximately $227,638) from the Wuhan Finance Bureau. This loan has been continuously extended from November 2001, the original maturity date, and such loan will be repaid when the bank requests repayment.  Interest accrues on a monthly basis at the rate of 5.94% per annum.
 
 We have a loan facility agreement of RMB5,000,000 (approximately $759,000) with Wuhan Pan-Asia Peptide Material Research Co., Ltd. (“Wuhan Pan-Asia”), an unrelated third party. Under such an agreement, Wuhan Pan-Asia lends to the Company, when needed, with the funds borrowed from Wuhan Rural Commercial Bank for part of which, i.e., RMB3,400,000 (approximately 516,000),  the Company pledges an office building as collateral.  Interest on the loan is paid by the Company monthly at the rate of 0.566%. As of March 31, 2011, the balance due to Wuhan Pan-Asia was nil.
  20
 
 We believe that we will require additional capital to finance any future manufacturing expansion, market channel expansion, changes in our business plan or other future capital intensive developments, including any investments or acquisitions we may decide to pursue. To the extent it becomes necessary to raise additional capital, we may seek to raise it through the sale of debt and/or equity securities, funding from joint-venture or strategic partners, institutional debt financing or loans, or a combination of the foregoing. Other than as described above, we currently do not have any binding commitments for, or readily available sources of, additional financing. If we decide to pursue any of the above projects, we cannot provide any assurances that we will be able to secure the additional cash or working capital we may require to implement such project now or in the future, or if we do, the terms thereof.
 
 We believe that our currently available funds, funds from operations and available financing is sufficient for us to continue our operations as presently conducted for at least the next twelve (12) months.
 
 Obligations Under Material Contracts
 
 In addition to the loan agreements disclosed above, we have made a capital commitment of $212,462 for the regional customer health center in Guangdong province, China as of March 31, 2011.
  We have no other long term debt, capital or operating lease or fixed purchase obligations under material contracts.
 
 Off Balance Sheet Arrangements
 
 Other than with respect to our pledge of an office building owned by us in connection with the Wuhan Pan-Asia loan as described above, we have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
 Seasonality
 
 In recent years, our revenues for the second and forth quarters in each fiscal year have been higher than revenues for the first and third fiscal quarters.  We believe that this is partially due to a number of major domestic festivals and holiday celebrations that occur in China around January and September, such as the Chinese New Year.
 
 Critical Accounting Policies and Estimates
 
 Critical accounting policies are those we believe are most important to portraying our financial condition and results of operations and also require the greatest amount of subjective or complex judgments by management.  Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions.  There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
 
 Our management’s discussion and analysis of our financial condition and results of operations above is based on our consolidated financial statements which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. However, actual results could differ materially from these estimates under different assumptions or conditions.
 
 Recent Accounting Pronouncements
 
 See Note 2(g) (Recently Issued Accounting Pronouncements) to our unaudited consolidated financial statements included elsewhere in this report.
 
 21
  ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 Not applicable.
 
 ITEM 4.
CONTROLS AND PROCEDURES.
 
 Evaluation of Disclosure Controls and Procedures
 
 We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 As required by Rule 13a-15 under the Exchange Act, our management, including Mr. Dongliang Chen, our Chief Executive Officer and Ms. Lirong Hu, our interim Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011.  Based on that evaluation, Mr. Chen and Ms. Hu concluded that, because of the material weaknesses described in Item 9A “Controls and Procedures” on our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, which we are still in the process of remediating as of March 31, 2011, our disclosure controls and procedures were not effective.  Investors are directed to Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for the description of these weaknesses.
 
 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.
 
 During its evaluation of the effectiveness of internal control over financial reporting as of March 31, 2011, the management concluded that: (1) we lacked qualified resources to perform our internal audit functions properly and that we have not yet fully developed the scope and effectiveness of our internal audit function; (2) we lacked an audit committee within our board to oversee the financial reporting pursuant to U.S. GAAP and the SEC’s rules and regulations; and (3) our accounting staff lacked sufficient accounting skills and experience necessary to fulfill our public reporting obligations according to U.S. GAAP and the SEC’s rules and regulations.
 
 Our management is in the process of implementing remediation procedures to improve internal controls over financial reporting. We have already taken measures to remediate these material weaknesses by seeking additional financial reporting and accounting staff members with relevant accounting experience, skills and knowledge in the preparation of financial statements in accordance with of U.S. GAAP and financial reporting disclosure requirements under SEC rules.   We are also in the process of implementing a rigorous process for collecting and reviewing information required for the preparation of the financial statements to meet our public accounting obligations according to U.S. GAAP and the SEC’s rules and regulations with the support from the board and additional personnel experienced in U.S. GAAP and the SEC’s rules to be hired.
 
 We have also engaged a professional consulting firm experienced in handling compliance with the requirements of the Sarbanes-Oxley Act of 2002 with respect to internal control over financial reporting in order to assist us with improving our internal controls and meet the requirements of Sarbanes-Oxley Act of 2002. In the meantime, we have been searching and negotiating with several qualified candidates to serve as the audit committee members so as to establish an audit committee within the Board of Directors.  We are also in the process of establishing an internal audit function and will continue to hire more experienced personnel with expertise in U.S. public company financial reporting.
 
 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
 
 Management remains committed to improving its internal control over financial reporting and will continue to work to put effective controls in place.
 
 Other than the foregoing changes, there were no changes in our internal controls over financial reporting during period covered by this report that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
 
 22
 
 PART II
 OTHER INFORMATION
 
 ITEM 1.
LEGAL PROCEEDINGS.
 
 From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
 
 ITEM 1A.
RISK FACTORS.
 
 Not applicable.
 
 ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
 None.
 
 ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
 
 None.
 
 ITEM 4.
(REMOVED AND RESERVED).
 
 
 ITEM 5.
OTHER INFORMATION.
 
 We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
 
 ITEM 6.
EXHIBITS.
 
 The following exhibits are filed as part of this report or incorporated by reference:
 
 Exhibit No.

Description31.1

Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 23
  SIGNATURES
 
 In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 Date: May 16, 2011
CHINA POLYPEPTIDE GROUP, INC.By:
/s/ Dongliang ChenDongliang Chen, Chief Executive Officer(Principal Executive Officer)
 
 By:
/s/ Lirong HuChief Financial Officer(Principal Financial Officer and Principal

Accounting Officer)
  24