UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


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




For
the quarterly period ended June 30, 2010





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




For
the transition period from _______ to _______





Commission
file number: 333-151148





CHINA
POLYPEPTIDE GROUP, INC.





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




Delaware
              
              20-8731646(State or other jurisdiction of incorporation or
                organization)
              
              (IRS Employer Identification No.)





No.
11 Jiangda Road


Jianghan
Economic Development Zone


Wuhan
430023, People’s Republic of China


(Address
of principal executive offices)





(86)
2783518396


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





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





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





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




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




Number of
shares outstanding of the registrant's common stock as of August 16,
2010:





11,299,224
shares of Common Stock, $0.0001 par value per share







TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem
      1.
                    
                    Unaudited
      Consolidated Financial Statements.
                    3Item
      2.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                    18Item
      3.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk.
                    26Item
      4.
                    
                    Controls
      and Procedures.
                    26PART
      II - OTHER INFORMATIONItem
      1.
                    
                    Legal
      Proceedings.
                    27Item 1A.
                    
                    Risk
      Factors.
                    27Item
      2.
                    
                    Unregistered
      Sales of Equity Securities and Use of Proceeds.
                    27Item
      3.
                    
                    Defaults
      Upon Senior Securities.
                    27Item
      4.
                    
                    (Removed
      and Reserved).
                    27Item
      5.
                    
                    Other
      Information.
                    27Item
      6.
                    
                    Exhibits.
                    27





China  Polypeptide
Group, Inc. and Subsidiaries


Consolidated
Balance Sheets





June 30,
                        
                        
                        September 30,2010
                        
                        
                        2009(Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                        
                        $
                        9,072,995
                        
                        
                        $
                        4,439,732Accounts
      receivable, net
                        
                        
                        5,736,947
                        
                        
                        
                        14,666,836Inventories,
      net
                        
                        
                        722,355
                        
                        
                        
                        970,685Prepayments
      and other receivables
                        
                        
                        6,214,020
                        
                        
                        
                        5,404,943Amounts
      due from staff
                        
                        
                        8,193,360
                        
                        
                        
                        5,460,867Deferred
      tax assets
                        
                        
                        264,324
                        
                        
                        
                        277,335Other
      assets
                        
                        
                        412,309
                        
                        
                        
                        411,824Total
      Current Assets
                        
                        
                        30,616,310
                        
                        
                        
                        31,632,222Property,
      plant and equipment, net
                        
                        
                        11,078,668
                        
                        
                        
                        6,943,440Investment
      in equity affiliates
                        
                        
                        230,658
                        
                        
                        
                        254,286Land
      use rights, net
                        
                        
                        281,284
                        
                        
                        
                        280,953Deposit
      for land use rights
                        
                        
                        6,344,917
                        
                        
                        
                        440,100Goodwill
                        
                        
                        113,926
                        
                        
                        
                        113,792$
                        48,665,763
                        
                        
                        $
                        39,664,793Liabilities
      and Shareholders’ EquityCurrent
      liabilitiesAccounts
      payable
                        
                        $
                        1,973,780
                        
                        
                        $
                        573,401Accrued
      expenses and other liabilities
                        
                        
                        1,662,005
                        
                        
                        
                        2,449,129Taxes
      payable
                        
                        
                        4,581,463
                        
                        
                        
                        6,404,040Short-term
      loans
                        
                        
                        516,993
                        
                        
                        
                        566,262Deferred
      revenue
                        
                        
                        1,594,143
                        
                        
                        
                        3,928,804Amounts
      due to related parties
                        
                        
                        439,927
                        
                        
                        
                        7,097,865Total
      Current Liabilities
                        
                        
                        10,768,311
                        
                        
                        
                        21,019,501Shareholders’
      equityCommon
      stock: 120,000,000 shares authorized, $0.0001 par value, 11,299,224 shares
      and 8,800,000 shares issued and outstanding as of June 30, 2010 and
      September 30, 2009, respectively
                        
                        
                        1,130
                        
                        
                        
                        880Additional
      paid-in capital
                        
                        
                        13,658,600
                        
                        
                        
                        638,404Deferred
      compensation
                        
                        
                        (42,389
                        )
                        
                        
                        -Unappropriated
      retained earnings
                        
                        
                        22,121,511
                        
                        
                        
                        16,842,439Appropriated
      retained earnings
                        
                        
                        2,055,924
                        
                        
                        
                        1,144,448Accumulated
      other comprehensive income
                        
                        
                        102,676
                        
                        
                        
                        19,121Total
      Shareholders’ Equity
                        
                        
                        37,897,452
                        
                        
                        
                        18,645,292$
                        48,665,763
                        
                        
                        $
                        39,664,793





See notes
to consolidated financial statements.


- 3
-





China  Polypeptide
Group, Inc. and Subsidiaries


Consolidated
Statements of Income and Comprehensive Income (Unaudited)





Three months ended
                
                
                Nine months endedJune 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenues
                
                $
                11,560,788
                
                
                $
                8,402,819
                
                
                $
                25,664,457
                
                
                $
                25,272,971Cost
      of sales
                
                
                685,905
                
                
                
                313,903
                
                
                
                1,782,788
                
                
                
                1,597,977Gross
      profit
                
                
                10,874,883
                
                
                
                8,088,916
                
                
                
                23,881,669
                
                
                
                23,674,994Operating
      expensesSelling
      and administrative expenses
                
                
                6,820,092
                
                
                
                6,020,038
                
                
                
                16,213,354
                
                
                
                15,022,666Operating
      income
                
                
                4,054,791
                
                
                
                2,068,878
                
                
                
                7,668,315
                
                
                
                8,652,328Other
      income (expense)Interest
      expense, net
                
                
                (27,904
                )
                
                
                (19,510
                )
                
                
                (63,968
                )
                
                
                (41,636
                )Equity
      in (loss)/gain in affiliates
                
                
                (7,362
                )
                
                
                (6,843
                )
                
                
                (23,835
                )
                
                
                11,544Other
      operating income (expense)
                
                
                (30,300
                )
                
                
                426,319
                
                
                
                (10,653
                )
                
                
                431,359(65,566
                )
                
                
                399,966
                
                
                
                (98,456
                )
                
                
                401,267Income
      before income tax expense
                
                
                3,989,225
                
                
                
                2,468,844
                
                
                
                7,569,859
                
                
                
                9,053,595Income
      tax expense
                
                
                906,963
                
                
                
                748,673
                
                
                
                1,379,311
                
                
                
                2,474,763Net
      income
                
                
                3,082,262
                
                
                
                1,720,171
                
                
                
                6,190,548
                
                
                
                6,578,832Other
      comprehensive incomeForeign
      currency translation gain (loss)
                
                
                158,903
                
                
                
                (2,049
                )
                
                
                83,555
                
                
                
                31,088Comprehensive
      income
                
                $
                3,241,165
                
                
                $
                1,718,122
                
                
                $
                6,274,103
                
                
                $
                6,609,920Earnings
      per shareBasic
      and diluted
                
                $
                0.276
                
                
                $
                0.195
                
                
                $
                0.595
                
                
                $
                0.748Weighted
      average number of common shares outstanding:Basic
      and diluted
                
                
                11,163,767
                
                
                
                8,800,000
                
                
                
                10,401,417
                
                
                
                8,800,000





See notes
to consolidated financial statements.


- 4
-





China  Polypeptide
Group, Inc. and Subsidiaries


Consolidated
Statements of Cash Flows (Unaudited)





Nine months endedJune 30,2010
                
                
                2009Cash
      flow from operating activitiesNet
      income
                
                $
                6,190,548
                
                
                $
                6,578,832Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and amortization
                
                
                285,871
                
                
                
                234,587Bad
      debts provision
                
                
                172,502
                
                
                
                38,586Amortization
      of stock-based compensation
                
                
                31,860
                
                
                
                -(Gain)
      Loss on investment in associates
                
                
                23,835
                
                
                
                (11,544
                )Changes
      in operating assets and liabilitiesAccounts
      receivable
                
                
                8,738,019
                
                
                
                (3,584,416
                )Inventories
                
                
                248,506
                
                
                
                230,510Prepayments
      and other receivables
                
                
                (797,701
                )
                
                
                (3,994,899
                )Amount
      due from staff
                
                
                (2,715,450
                )
                
                
                -Other
      assets
                
                
                13,286
                
                
                
                (31,619
                )Accounts
      payable
                
                
                1,394,259
                
                
                
                (76,673
                )Accrued
      expenses and other current liabilities
                
                
                (3,109,344
                )
                
                
                (392,923
                )Taxes
      payable
                
                
                (1,823,016
                )
                
                
                2,578,186Net
      cash provided by operating activities
                
                
                8,653,175
                
                
                
                1,568,627Cash
      flow from investing activitiesPurchases
      of property, plant and equipment
                
                
                (3,504,819
                )
                
                
                (77,711
                )Disposal
      of property, plant and equipment
                
                
                (14,229
                )
                
                
                -Cash
      paid for construction in progress
                
                
                (877,812
                )
                
                
                (2,660
                )Cash
      paid to acquire land use right
                
                
                (5,881,337
                )
                
                
                (1,465,309
                )Net
      cash used in investing activities
                
                
                (10,278,197
                )
                
                
                (1,545,680
                )Cash
      flow from financing activitiesProceeds
      from private placements
                
                
                6,320,144
                
                
                
                -Repayment
      of related parties loans
                
                
                (44,126
                )
                
                
                -Repayment
      of short-term bank loans
                
                
                (49,743
                )
                
                
                (26,376
                )Net
      cash provided by (used in) financing activities
                
                
                6,226,275
                
                
                
                (26,376
                )Effect
      of exchange rate fluctuation on cash and cash equivalents
                
                
                32,010
                
                
                
                25,285Net
      increase in cash and cash equivalents
                
                
                4,633,263
                
                
                
                21,856Cash
      and cash equivalents, beginning of period
                
                
                4,439,732
                
                
                
                5,918,414Cash
      and cash equivalents, end of period
                
                $
                9,072,995
                
                
                $
                5,940,270Supplemental
      disclosure of cash flow information:Income
      taxes paid
                
                $
                3,125,237
                
                
                $
                554,309Interest
      paid
                
                $
                31,607
                
                
                $
                75,878





See notes
to consolidated financial statements.


- 5
-





China
Polypeptide Group, Inc. and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited)




Note
1 - Principal Activities and Organization





China
Polypeptide Group, Inc. (“CPGI” or 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.  Prior
to the Exchange (as defined below), the Company was considered to be a
development stage company with no material assets or operations and had
generated no revenues since its inception.





Pursuant
to a Stock Exchange Agreement dated November 13, 2009 (the “Stock Exchange
Agreement”) by and among the Company, Cantix International Limited (“Cantix”), a
company incorporated on January 29, 2007, under the laws of the British Virgin
Islands (the “BVI”), and the shareholders of Cantix (the “Cantix Shareholders”),
on November 13, 2009, the Company acquired all of the issued and outstanding
capital 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 capital stock of the Company (the “Exchange”), resulting
in, among other items, Cantix becoming a wholly-owned subsidiary of the
Company.





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 CPGI’s common stock issued and outstanding on December 1,
2009 automatically converted into 8 shares of CPGI’s common stock.




Under
United States Generally Accepted Accounting Principles (“US GAAP”), the Exchange
is treated as a reverse acquisition, and the financial statements of the Company
have been retroactively adjusted to reflect the Exchange from the beginning of
the reported period. The Exchange has been accounted for as a reverse
acquisition and recapitalization 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 financial statements for the periods
prior to November 13, 2009 are those of Cantix except that the equity section
and earnings per share have been retroactively restated to reflect the Exchange.
To more accurately reflect its current business post the Exchange, on December
1, 2009, the Company changed its name to China Polypeptide Group,
Inc.





Cantix
has a wholly owned subsidiary, Moneyeasy Industries Limited (“Moneyeasy”), a
company incorporated in Hong Kong on August 25, 2006. This entity is a holding
company with minimum activities. Cantix, 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 anti-aging nutritional supplements, health foods, functional
foods and related material products.




Wuhan
Tallyho Biological Product Co., Limited (“Wuhan Tallyho”) was founded on
December 2, 1996 in the People Republic of China (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 health products and anti-aging
food.




Guangdong
Hopsun Polypeptide Biological Technology Co., Limited (“Guangdong Hopsun”) was
founded on November 13, 2007 in the PRC. It is a wholly owned subsidiary of
Wuhan Tallyho with $1,424,055 (RMB10,000,000) paid-in capital and specializes in
service-based sales of health and anti-aging products.




Anti-aging
Research & Development Co., Limited (“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, development and sales of polypeptide-based health products and
anti-aging foods. Prior to Moneyeasy’s acquisition of Anti-aging on December 18,
2007, Wuhan Tallyho had a 30% ownership interest in Anti-aging.




On
November 5, 2007, Moneyeasy entered into an agreement to acquire all the equity
of Wuhan Tallyho. Since Cantix, Moneyeasy and Wuhan Tallyho were controlled by
the same ultimate individual, these companies were deemed to be under common
control and the assets and liabilities were transferred at their carrying
amounts for business acquisition. This transaction was completed on December 26,
2007 and Wuhan Tallyho became a wholly owned subsidiary of Moneyeasy and Cantix.
The cash consideration was paid in October, 2009.




On
December 18, 2007, Moneyeasy entered into another agreement to acquire all the
equity of Anti-aging. The transaction was completed on January 3, 2008 and
Anti-aging became a wholly owned subsidiary of Moneyeasy and
Cantix.  The relevant cash consideration was paid in July,
2009.




Upon
completion of the acquisitions, Moneyeasy controls two wholly owned
subsidiaries, Wuhan Tallyho and Anti-aging. CPGI, Cantix, Moneyeasy, Wuhan
Tallyho, Guangdong Hopsun and Anti-aging are collectively hereinafter referred
to as the “Company”.


- 6
-


Note
2 - Summary of Significant Accounting Policies and Practices




(a)  
Basis of Presentation




The
unaudited interim consolidated financial statements (“consolidated financial
statements”) for the three and nine months ended June 30, 2010 and 2009 include
the financial statements of CPGI, Cantix, Moneyeasy and its subsidiaries, Wuhan
Tallyho, Anti-aging and Guangdong Hopsun, the subsidiary of Wuhan Tallyho, which
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the “SEC”).  Certain information
and footnote disclosures, which are normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to such rules
and regulations, although we believe that the disclosures made are adequate to
provide for fair presentation.  The interim financial information
should be read in conjunction with the consolidated financial statements and the
notes thereto, included in the Company’s audited consolidated financial
statements on Form 8-K/A for the fiscal year ended September 30, 2009,
previously filed with the SEC.




In the
opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of consolidated financial
position as of June 30, 2010, consolidated results of operations, and cash flows
for the nine months ended June 30, 2010 and 2009, 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.




(b)
Use of Estimates




The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.




(c)
Cash and Cash Equivalents




Cash and
cash equivalents represent cash on hand and deposits held at call with banks.
The Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash
equivalents.




(d)
Accounts Receivable




Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts, as needed. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable.  The
Company determines the allowance based on aging data, historical collection
experience, customer specific facts and economic conditions. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.  The
Company does not have any off-balance-sheet credit exposure related to its
customers. As of June 30, 2010 and September 30, 2009, $893,358 and $717,451
allowances for doubtful accounts were provided respectively.




(e)
Inventories




Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted average cost method. Cost of finished goods comprises direct material,
direct production cost and an allocated portion of production overheads based on
normal operating capacity. The Company evaluates the need for reserves
associated with obsolete, slow-moving and non-salable inventory by reviewing the
net realizable value on a periodic basis. If inventory is written down to net
realizable value, the write-down is charged to expense.




(f)
Other Receivables




As needed
for normal business purposes, the Company advances predetermined amounts based
upon internal policy to certain employees and unrelated parties to ensure
certain transactions to be performed in a timely manner. The Company has full
oversight and control over the advanced accounts. As of June 30, 2010 and
September 30, 2009, $52,442 and $54,263 allowances for doubtful accounts were
provided respectively (note 7).




(g)
Property, Plant and Equipment




Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment.





Depreciation
on property, plant and equipment is calculated on the straight-line method after
taking into account their respective estimated residual values over the
estimated useful lives of the assets as follows:




Asset
                
                Useful livesBuildings
                
                20~40
      yearsMachinery
      and equipment
                
                5~10
      yearsFurniture
      and office equipment
                
                2~5
      yearsMotor
      vehicles
                
                5
      years


- 7
-





Maintenance
and repair costs are expensed as incurred, whereas significant renewals and
betterments are capitalized.




(h)  Land
Use Rights




Land use
rights represent payments for the rights to use certain parcels of land for a
certain period of time in the PRC. Land use rights are carried at cost and
charged to expense on a straight-line basis over the period the rights are
granted, i.e., 50 years.




(i)
  Accounting for the Impairment of Long-Lived Assets




Long-lived
assets held and used by the Company are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of assets may not
be recoverable. It is reasonably possible that these assets could become
impaired as a result of technology or other industry changes. Determination of
recoverability of assets to be held and used is determined by comparing the
carrying amount of an asset to future undiscounted cash flows to be generated by
the assets. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.




There
were no impairments of long-lived assets as of June 30, 2010 and September 30,
2009.




(j)
Investment in Equity Affiliates




Investment
in affiliates consists of ownership in associated companies, which the Company
exercises significant influence, usually a percentage ownership between 20% and
50%, and is accounted for under the equity method of accounting. Under the
equity method of accounting, an investee’s accounts are not reflected within the
Company’s Consolidated Balance Sheets and Statements of Income; however, the
Company’s share of the earnings or losses of the investee are reflected in the
caption “Equity in income or (loss) in affiliates” in the consolidated
statements of income. The Company’s carrying value in an equity method investee
is reflected in the caption “Long-term Investment” in the Company’s consolidated
balance sheets.




When the
Company’s carrying value in an equity method investee is reduced to zero, no
further losses are recorded in the Company’s consolidated financial statements
unless the Company guaranteed obligations of the investee or has committed
additional funding. When the investee subsequently reports income, the Company
will not record its share of such income until it equals the amount of its share
of losses not previously recognized.




(k)
Goodwill




Goodwill
represents the excess of acquisition costs over the fair value of tangible net
assets and identifiable intangible assets of businesses acquired. Goodwill and
certain other intangible assets deemed to have indefinite lives are not
amortized. Intangible assets determined to have definite lives are amortized
over their useful lives. Goodwill and indefinite lived intangible assets are
subject to impairment testing annually as of the fiscal year-end or whenever
events or changes in circumstances indicate that the carrying amount may not be
fully recoverable, using the guidance and criteria described in Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”
(“ASC Topic 350”). This testing compares carrying values to fair values and,
when appropriate, the carrying value of these assets is reduced to fair
value.  There were no impairments of goodwill as of June 30, 2010 and
September 30, 2009.




(l)  Statutory
Surplus Reserve




In
accordance with the Company Law of the PRC, Wuhan Tallyho, Guangdong Hopsun and
Anti-aging are required to set aside 10% of its income after income taxes in
accordance with the PRC accounting regulations to the statutory surplus reserve
until the balance reaches 50% of its registered capital, whether further
appropriation will be at the directors’ recommendation. As of June 30, 2010 and
September 30, 2009, $2,055,924 and $1,144,448 were provided for statutory
surplus reserve.





(m)
Revenue Recognition




The
Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB")
No. 104 (“ASC Topic 605”). All of the following criteria must exist in order for
the Company 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.


- 8
-


Sales are
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.





(n)
Research and Development Costs




Research
and development costs are expensed as incurred.  These expenses
consist of the costs of the Company’s internal research and development
activities and the costs of developing new products and enhancing existing
products. Research and development costs amounted to $205,552 and $201,956 for
the nine months ended June 30, 2010 and 2009, and $86,158 and $47,133 for the
three months ended June 30, 2010 and 2009, respectively.




(o) Foreign
Currency Translation




The
functional currency of the Company is RMB and RMB is not freely convertible into
foreign currencies. The Company maintains its financial records in the
functional currency. Monetary assets and liabilities denominated in currencies
other than the functional currency are translated into the functional currency
at rates of exchange prevailing at the balance sheet date. Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions. Exchange gains or losses arising from foreign currency
transactions are included in the determination of net income for the respective
periods.




For
financial reporting purposes, the financial statements of the Company, which are
prepared using the functional currency, have been translated into United States
dollars (reporting currency). Assets and liabilities are translated at exchange
rates at the balance sheet date, revenue and expenses are translated at the
average exchange rates for the period, and Shareholders’ equity is
translated at historical exchange rates. Translation adjustments are included in
accumulated other comprehensive income, a component of
Shareholders’ equity.




The
exchange rates applied are as follows:




June 30,
                  2010
                
                
                September 30,
                  2009Period
      (year) end RMB exchange rate
                
                
                6.8086
                
                
                
                6.8166Average
      RMB exchange rate – period (year)
                
                
                6.8352
                
                
                
                6.8236





No
representation is made that the RMB amounts could have been, or could be,
converted into U.S. dollars at the rates used in translation.





(p)
Income Taxes




(i)    
Income tax




The
Company adopted Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes” (“ASC Topic 740”) 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.




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 Company intends to
settle its current tax assets and liabilities on a net basis.




(ii)   Value
added tax




Wuhan
Tallyho,Anti-aging, and Guangdong Hopsun are all qualified as ordinary
value-added taxpayers and the applicable tax rate for domestic sales is
17%.  Input VAT on purchases of raw materials, fuel, utilities and
other production materials (merchandise, transportation costs) can be deducted
from output VAT. VAT payable is the net difference between output and deductible
input VAT.


- 9
-


(q)
Commitments and Contingencies




In the
normal course of business, the Company is subject to loss contingencies, such as
legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations, product
and environmental liability, and tax matters. In accordance with SFAS
No. 5, “Accounting for
Contingencies”(“ASC Topic 450”), the Company records accruals for
such loss contingencies when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated. Historically, the Company
has not experienced any material service liability claims.




(r)
Fair Value of Financial Instruments




The
carrying amounts of cash and cash equivalents, accounts receivables from third
and related parties, amounts due from and due to related parties, accounts
payable, other payables and short-term borrowings approximate their fair values
due to their short term nature.




The fair
value is estimated by discounting the future cash flow using an interest rate
which approximated the rate for which the financial institution would charge
borrowers with similar credit ratings and remaining maturities.




(s)
Recently Issued Accounting Pronouncements




In April
2010, the FASB issued an authoritative pronouncement, ASU 2010-13, on effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity's functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The pronouncement clarifies that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition, and therefore should be considered an equity
award assuming all other criteria for equity classification are met. The
pronouncement is for interim and annual periods beginning on or after December
15, 2010, and will be applied prospectively. Affected companies will be required
to record a cumulative catch-up adjustment for all awards outstanding as of the
beginning of the annual period in which the guidance is adopted. This amendment
is not expected to have a material impact on the Company’s financial
statements.




In April
2010, the FASB issued Update No. 2010-17, or ASU 2010-17, Revenue
Recognition—Milestone Method, which updates the guidance currently included
under topic 605, Revenue Recognition. ASU 2010-17 provides guidance on defining
the milestone and determining when the use of the milestone method of revenue
recognition for research or development transactions is appropriate. It provides
criteria for evaluating if the milestone is substantive and clarifies that a
vendor can recognize consideration that is contingent upon achievement of a
milestone as revenue in the period in which the milestone is achieved, if the
milestone meets all the criteria to be considered substantive. ASU 2010-17 is
effective for milestones achieved in fiscal years, and interim periods within
those years, beginning after June 15, 2010 and should be applied
prospectively. Early adoption is permitted. The Company is currently evaluating
the potential impact, if any, of the new accounting guidance on its consolidated
financial statements.





Note
3 - Significant Risks




(a)    Foreign
currency risk




As Wuhan
Tallyho, Anti-aging and Guangdong Hopsun are operating in the PRC, a majority of
sales and expenses transactions and a significant portion of its assets and
liabilities are denominated in RMB. RMB is not freely convertible into foreign
currencies. In the PRC, certain foreign exchange transactions are required by
law to be transacted only by authorized financial institutions at exchange rates
set by the People’s Bank of China (“PBOC”). Remittances in currencies other than
RMB by the Company in China must be processed through the PBOC or other China
foreign exchange regulatory bodies which require certain supporting
documentation in order to affect the remittance.




(b)    Risk
of credit exposure




In the
normal course of business, the Company may give credit to its customers after
performing a credit analysis based on a number of financial and other criteria.
The Company performs ongoing credit evaluations of customers’ financial
condition and may require for collateral for significant credit
exposure.


- 10
-


The top
four third-party customers accounted for approximately 9.0% of the consolidated
revenues for the nine months ended June 30, 2010 and the top two third-party
customers accounted for approximately 16.1% of the consolidated revenues for the
nine months ended June 30, 2009. The top seven third-party customers accounted
for 91.9% of the accounts receivable as of June 30, 2010 and the top seven
third-party customers accounted for 91.0% of the accounts receivable as of
September 30, 2009.




Note
4 – Earnings per Share




The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings per Share” (“ASC Topic 260”).  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 per
share.  Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average common
shares outstanding during the period. Diluted earnings 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. The
following is a reconciliation of the basic and diluted earnings per share
computations for the nine and three months ended June 30, 2010 and
2009:





2010
                    
                    
                    2009For the nine months ended June 30, 2010 and 2009
                    
                    unaudited
                    
                    
                    unauditedNet
      income for basic and diluted earnings per share
                    
                    $
                    6,190,548
                    
                    
                    $
                    6,578,832Weighted
      average number of common shares outstanding – basic and
      diluted
                    
                    
                    10,401,417
                    
                    
                    
                    8,800,000Earnings
      per share – basic and diluted
                    
                    $
                    0.595
                    
                    
                    $
                    0.748





2010
                  
                  
                  2009For
      the three months ended June 30, 2010 and 2009
                  
                  unaudited
                  
                  
                  unauditedNet
      income for basic and diluted earnings per share
                  
                  $
                  3,082,262
                  
                  
                  $
                  1,720,171Weighted
      average number of common shares outstanding – basic and
      diluted
                  
                  
                  11,163,767
                  
                  
                  
                  8,800,000Earnings
      per share - basic and diluted
                  
                  $
                  0.276
                  
                  
                  $
                  0.195





Note
5 - Accounts Receivable





June 30,
                      2010
                    
                    
                    September 30,
                      2009unauditedAccounts
      receivable
                    
                    $
                    6,630,305
                    
                    
                    $
                    15,384,287Allowance
      for doubtful accounts
                    
                    
                    (893,358
                    )
                    
                    
                    (717,451
                    )$
                    5,736,947
                    
                    
                    $
                    14,666,836





The
movement of allowance for doubtful accounts for the nine months ended June 30,
2010 and 2009 is as follows:





2010
                  
                  
                  2009Allowance
      for doubtful accounts, September 30, 2009/2008
                  
                  $
                  717,451
                  
                  
                  $
                  117,365Addition
                  
                  
                  198,135
                  
                  
                  
                  -Reduction
                  
                  
                  (23,755
                  )
                  
                  
                  (4,623
                  )Translation
      adjustment
                  
                  
                  1,527
                  
                  
                  
                  533Allowance
      for doubtful accounts, June 30, 2010/2009
                  
                  $
                  893,358
                  
                  
                  $
                  113,275


- 11
-





Note
6 – Inventories





June 30,
                          2010
                        
                        
                        September 30,
                          2009unauditedRaw
      materials
                        
                        $
                        118,178
                        
                        
                        $
                        159,523Work
      in progress
                        
                        
                        257,743
                        
                        
                        
                        145,145Finished
      goods
                        
                        
                        393,835
                        
                        
                        
                        706,657Low-value
      consumables and packaging materials
                        
                        
                        109,417
                        
                        
                        
                        115,993879,173
                        
                        
                        
                        1,127,318Allowance
      for inventory obsolescence
                        
                        
                        (156,818
                        )
                        
                        
                        (156,633
                        )$
                        722,355
                        
                        
                        $
                        970,685




Note
7 - Prepayments and Other Receivables





June 30,
                    2010
                  
                  
                  September 30,
                    2009unauditedOther
      receivables
                  
                  $
                  1,552,165
                  
                  
                  $
                  995,284Advance
      to suppliers
                  
                  
                  701,725
                  
                  
                  
                  456,079ERA
      Bio-Technology (Shenzhen) Co., Ltd. (a)
                  
                  
                  4,012,572
                  
                  
                  
                  4,007,8436,266,462
                  
                  
                  
                  5,459,206Allowance
      for doubtful accounts
                  
                  
                  (52,442
                  )
                  
                  
                  (54,263
                  )$
                  6,214,020
                  
                  
                  $
                  5,404,943





(a)
            As of June 30, 2010, the Company
      had an outstanding loan balance of $4,012,572 (RMB27,320,000), in
      aggregate, to ERA Bio-Technology (Shenzhen) Co., Ltd. (“ERA
      Biotech”).  $2,276,533 (RMB15,500,000) of such loans was due on
      August 11, 2009 and was extended to July 28, 2010 on July 28, 2009. The
      $1,736,040 (RMB11,820,000) balance of such loans matured on June 9, 2010.
      Such loans are guaranteed by a majority shareholder of ERA Biotech. The
      Company has entered into a non-binding letter of intent with ERA Biotech
      to convert such loans into shares of ERA Biotech (note
      24).





Note
8 – Amounts Due from Staff




Amounts
due from staff represent various advances to certain employees for business
purposes and receivables from sales managers due to the cash collected from
customers by sales managers. Amounts due from staff amounted to $8,193,360 and
$5,460,867 as of June 30, 2010 and September 30, 2009,
respectively.





Note
9 – Property, Plant and Equipment




June 30,
                    2010
                  
                  
                  September 30,
                    2009unauditedBuildings
                  
                  $
                  2,404,992
                  
                  
                  $
                  2,263,059Machinery
      and equipment
                  
                  
                  1,102,135
                  
                  
                  
                  629,806Furniture
      and office equipment
                  
                  
                  443,270
                  
                  
                  
                  294,680Motor
      vehicles
                  
                  
                  683,107
                  
                  
                  
                  629,6614,633,504
                  
                  
                  
                  3,817,206Accumulated
      depreciation
                  
                  
                  (1,552,263
                  )
                  
                  
                  (1,274,766
                  )3,081,241
                  
                  
                  
                  2,542,440Construction
      in progress
                  
                  
                  7,997,427
                  
                  
                  
                  4,401,000$
                  11,078,668
                  
                  
                  $
                  6,943,440




A
building owned by the Company with net book value of $1,044,092 (RMB7,108,806)
was pledged by the Company to Xianfeng Rural Credit Co-operative of Wuhan for a
loan of $734,365 (RMB5,000,000), 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 Company for a loan facility of
$734,365(RMB5,000,000) to the Company in exchange for the pledge. As of June 30,
2010, the Company borrowed a total of $563,186 (RMB3,834,509) from Wuhan
Pan-Asia (note 16).




Depreciation
expense for the nine months ended June 30, 2010 and 2009 was $285,871 and
$234,587, respectively. Depreciation expense for the three months ended June 30,
2010 and 2009 was $86,428 and $74,604, respectively.


- 12
-


As of
June 30, 2010, the construction of a new factory located in Wuhan, Hubei
Province, the PRC, to which the construction in progress is related, is expected
to be completed by October 2010 upon final assessment (note 22).




Note
10 - Land Use Rights




As of
June 30, 2010, land use rights of the Company included certain parcels of land
located in Wuhan City, Hubei Province, the PRC, with a net carrying value of
$281,284. The land use rights for land with area of approximately 11,208 square
meters and 7,947 square meters which will expire in November 2048 and January
2059 respectively.




Note
11 – Deposit for Land Use Rights




Deposit
for land use rights represents the payments that are paid to the government to
secure the land use rights of the land lots in Guangzhou Science Park for future
regional headquarters and research and development center purpose and in Wuhan
for future manufacturing facility expansion. The Company has paid deposit for
land use rights, in aggregate, $6,344,917 and $440,100 as of June 30, 2010 and
September 30, 2009, respectively. The relevant certificates of land use right
are to be issued, and if not, such amount will be refunded.




Note
12 – Investment in Equity Affiliates




As of
June 30, 2010, the Company’s investment in affiliates accounted for based on the
equity method of accounting represented 40% interest in Wuhan Hopsun Biological
Product Inspection Co., Limited (“Wuhan Hopsun”), which engages in
biotechnological health products testing including Wuhan Tallyho’s
products.




The
investments in Wuhan Hopsun amounted to $230,658 and $254,286 at June 30, 2010
and September 30, 2009, respectively, which includes the Company’s share of
accumulated losses in this affiliate of $23,835 for the nine months ended June
30, 2010 and a gain of $11,544 for the same period in 2009.




Note
13 - Other Assets




Other
assets represented equipment held for sale. The Company acted as a guarantor for
an original loan amount of $412,309 (RMB2,807,250) borrowed by Wuhan Sanrong
Company Limited (“Wuhan Sanrong”) from Agriculture Bank of China in 2001. The
loan was secured with elevators that belonged to Wuhan Sanrong at that time.
Wuhan Sanrong encountered some cash flow difficulties and the bank requested
that the Company take over the loan. The loan including the collateral was taken
over by the Company in September 2002. These assets are held for disposal and
are carried at lower of carrying value or fair value less cost to
sell.




Wuhan
Sanrong was a former shareholder of Wuhan Tallyho and ceased to be a shareholder
on March 28, 2001.




Note
14 - Short-term Loans




Interest
                                rate per
                              
                              
                              June 30, 2010
                              
                              
                              September 30, 2009Lender
                              
                              annum
                              
                              
                              RMB
                              
                              
                              USD
                              
                              
                              RMB
                              
                              
                              USDUnauditedAgriculture Bank of ChinaThe
      term of the loan has expired in September 2003 (note 13)
                              
                              
                              5.84
                              %
                              
                              
                              2,020,000
                              
                              
                              
                              296,683
                              
                              
                              
                              2,360,000
                              
                              
                              
                              346,211Wuhan Finance BureauThe
      term of the loan has expired in November 2001
                              
                              
                              5.94
                              %
                              
                              
                              1,500,000
                              
                              
                              
                              220,310
                              
                              
                              
                              1,500,000
                              
                              
                              
                              220,051Total
      bank loans
                              
                              
                              
                              
                              
                              
                              3,520,000
                              
                              
                              
                              516,993
                              
                              
                              
                              3,860,000
                              
                              
                              
                              566,262




Short-term
loans represent those short-term loans from financial institutions. The term of
the loan from Agriculture Bank of China and Wuhan Finance Bureau expired in 2003
and 2001; however, the lenders have not demanded repayment. Interest accrued on
a monthly basis base on the contractual rate.


- 13
-


The
interest expenses for the nine months ended June 30, 2010 and 2009
were $63,340 and $75,878, respectively.  The
interest expenses for the three months ended June 30, 2010 and 2009
were $21,018 and $26,588, respectively.  The interest expenses also
include those related to the loan from Wuhan Pan-Asia, an unrelated party (note
16).





Note
15 – Deferred Revenue




Deferred
revenue represents the sales related to the products delivered to the
third-party wholesalers or distributors for which collectability could not be
reasonably assured. As of June 30, 2010 and September 30, 2009, deferred revenue
amounted to $1,594,143 and $3,928,804, respectively.




Note
16 - Accrued Expenses and Other Liabilities





June 30,
                  2010
                
                
                September 30,
                  2009unauditedAdvance
      from customers
                
                $
                16,387
                
                
                $
                3,738Accrued
      payroll
                
                
                91,935
                
                
                
                87,891Accrued
      expense
                
                
                207,934
                
                
                
                134,146Other
      payables–
      Wuhan Pan-Asia (a)
                
                
                563,186
                
                
                
                679,223–
      Guangzhou Shunfa Garment Factory
                
                
                -
                
                
                
                564,428–
      Wuhan Xinwang Investment Management Company
                
                
                386,532
                
                
                
                386,077–
      Malaysia Phoenix Company
                
                
                117,190
                
                
                
                117,052Others
                
                
                278,841
                
                
                
                476,574$
                1,662,005
                
                
                $
                2,449,129





(a)
            As of June 30, 2010, the Company
      had an outstanding  loan totaling RMB3,834,509 (approximately
      $563,186) from Wuhan Pan-Asia, an unrelated third party, under a loan
      facility agreement of RMB5,000,000 (approximately
      $734,365).  Wuhan Pan-Asia borrowed the funds to lend to the
      Company from Xianfeng Rural Credit Co-operative for which the Company
      pledged an office building as collateral (note 9). Interest on the loan is
      paid by the Company monthly at the rate of 0.531% (note 14). This loan
      matures in August 2010 and will be renewed as
      necessary.




Note
17 - Taxes Payable




CPGI is
incorporated in Delaware and is subject to US federal income tax with a system
of graduated marginal tax rates ranging from 15% to 39%. As CPGI does not
conduct any business in Delaware, it is not subject to Delaware state corporate
income tax.




Cantix,
being 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
0%.




Moneyeasy,
incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.
The PRC entities are subject to the PRC Enterprises Income Tax at the applicable
tax rates on the taxable income.




Wuhan
Tallyho, registered in the City of Wuhan in the PRC, is subject to the
applicable income tax rate of 25% for the nine month periods ended June 30, 2010
and 2009.




Guangdong
Hopsun, registered in the City of Guangzhou in the PRC, is subject to the
Enterprise Income Tax rate of 25% for the nine months ended June 30, 2009.
Guangdong Hopsun has passed all necessary examinations and was certified as a
high technological enterprise by relevant governmental authorities in December
2009. According to the PRC income tax law, a certified high technological
enterprise can be subject to a preferential Enterprise Income Tax rate of
15%.




Wuhan
Anti-Aging, registered in the City of Wuhan in the PRC, is subject to the
Enterprise Income Tax rate of 25%. Wuhan Anti-Aging incurred a net operating
loss of $77,789 for the nine month periods ended June 30, 2010 which may be
carried forward for 5 years to reduce future years’ taxable income. Management
believes that the realization of the benefits arising from this loss appear to
be remote due to the research and development nature of Wuhan Anti-Aging’s
operation and its continuing losses for PRC income tax purpose.


- 14
-





June 30,
                
                
                September 30,2010
                
                
                2009unauditedVAT
      payable
                
                $
                2,975,632
                
                
                $
                2,629,954Income
      tax payable
                
                
                1,393,310
                
                
                
                3,569,913Other
      taxes payable
                
                
                212,521
                
                
                
                204,173$
                4,581,463
                
                
                $
                6,404,040




In June
2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes” (“ASC Topic 740”). This interpretation clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with ASC Topic 740.  This interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The interpretation also provides guidance for
de-recognition of tax positions, financial statement classification, interest
and penalties, accounting in interim periods, disclosure, and transition. This
interpretation was effective for fiscal years beginning after December 15, 2006.
The adoption of ASC Topic 740 did not have a material effect on the Company’s
financial position or results of operations.




The
Company and its subsidiaries file tax returns with the relevant government
authorities in the PRC. The Company does not believe there will be any material
changes in its unrecognized tax positions over the next 12 months.




The
Company’s policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of ASC Topic 740, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor were any interest
expense recognized for the nine months ended June 30, 2010 and
2009.




Deferred
tax relates to depreciation difference of fixed assets and provision of
assets.




Note
18 - 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:





June 30,
                  2010
                
                
                September 30,
                  2009unauditedDue
      to related partiesWuhan
      Hopsun Biological Products Inspection Company Limited
                
                $
                439,927
                
                
                $
                450,642Xiu
      Chio Fa
                
                
                -
                
                
                
                898,275Former
      equity holders of Wuhan Tallyho (a)
                
                
                -
                
                
                
                5,748,948$
                439,927
                
                
                $
                7,097,865





(a)
            Pursuant to an acquisition
      agreement between Moneyeasy and the former equity holders of Wuhan Tallyho
      on November 5, 2007, Moneyeasy acquired 100% of Wuhan Tallyho’s shares
      with a total consideration of $5,854,361(RMB40,230,000). The balance was
      settled as of December 31,
2009.





The
balances due to related companies were interest free, unsecured and had no fixed
term of repayment.




Note
19 - Advertising




The
Company expenses all advertising costs as incurred. The advertising cost for the
nine months ended June 30, 2010 and 2009 was 21,946 and $22,643,
respectively.




Note
20 - Fair Value of Financial Instruments




The
carrying amount of cash and cash equivalents, trade accounts receivable,
prepayments and other receivables, amounts due from related parties, amounts due
to related parties, and accrued liabilities and other payables, approximate
their fair values because of the short maturity of these
instruments.




The
carrying amount of bank loans approximate the fair value based on the borrowing
rates currently available for bank loans with similar terms and
maturity.


- 15
-




Note
21 - Operating Lease Commitments




The
Company leases office block, workshop and warehouses under operating leases. The
leases typically run for an initial period of one year, with an option to renew
the lease after that date at which time all terms are
renegotiated.  The lease includes contingent rentals.  There
were no significant operating lease commitment as of June 30, 2010 and September
30, 2009. Rental expenses under these leases aggregated $94,376 and $84,321 for
the nine months ended June 30, 2010 and 2009 and $29,522 and $27,184 for the
three months ended June 30, 2010 and 2009.




Note
22 - Capital Commitments




Capital
commitments for construction of a new factory (note 9) were approximately $1.47
million as recognized in accounts payable as of June 30, 2010 which may be
adjusted according the final assessment and approximately $8.98 million combined
with that for the purchase of the land use right as of September 30,
2009.




Note
23 – 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.




On March
1, 2010, the Company issued 23,000 shares of the Company’s common stock as
payment for services which are worth $67,290, which has been included in
deferred compensation.




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 as of April 16, 2010,
the Company issued (i) 609,557 shares of common stock, par value U.S. $.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 U.S. $6.75 per share to the investor.
The net proceeds is $2,761,070 after deducting commissions and other closing
expenses.




Warrant





The
Company issued 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 on January 8, 2010 and 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 on April 21, 2010 (see above for details)
at which the fair value of the warrant was 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 value of the
warrant:





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
                              %
                              
                              $
                              225,505





Due to
the limited trading history of the Company’s common stock, the Company used a
similar public company's (similar industry, similar size and similar length of
operations) market prices to calculate the volatility which was estimated to be
125%.





Following
is a summary of the warrant activity:





Outstanding
      as of October 1, 2009
                
                
                -Granted
                
                
                414,289Forfeited
                
                
                -Exercised
                
                
                -Outstanding
      as of June 30, 2010
                
                
                414,289


- 16
-


Note
24 - Subsequent Events





As of
August 16, 2010, which is the consolidated financial statements issuance date,
Management identified the following subsequent event:





On August
11, 2010, the Company entered into a non-binding letter of intent with ERA
Biotech, to convert the Company’s loan receivable balance of $4,012,572
(RMB27,320,000) with them as of June 30, 2010 into a certain percentage of ERA
Biotech’s shares, to be agreed upon by the Company and ERA Biotech in a future
definitive agreement, following the completion of a financial due diligence
review of ERA Biotech.  The Company expects to complete the financial
due diligence process by December 2010. As the details will be
subject to further negotiation, there is a contingency that both parties might
not reach a final agreement. Based on management best estimation, the
possibility of not reaching an agreement for the transaction is less than
probable as of August 16, 2010.


- 17
-




ITEM 2.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





Cautionary
Notice Regarding Forward-Looking Statements





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 products, and other
statements of our plans, beliefs, or expectations, including the statements
contained under the captions “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business,” as well as captions elsewhere
in this document, are forward-looking statements.  In some cases these
statements are identifiable through the use of words such as “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can”,
“could,” “may,” “should,” “will,” “would,” and similar expressions.  We
intend such forward-looking statements to be covered by the safe harbor
provisions contained in Section 27A of the Securities Act of 1933, as amended,
or the Securities Act, and in Section 21E of the Securities Exchange Act of
1934, as amended, or 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 revenues,
expenses, and net income difficult.  Thus, our ability to predict results
or the actual effect of our future plans or strategies is inherently uncertain.
 The risks and uncertainties involved in our business could affect the
matters referred to in any forward-looking statements and it is possible that
our actual results may differ materially from the anticipated results indicated
in these forward-looking statements.  Important factors that could cause
actual results to differ from those in the forward-looking statements include,
without limitation, the following:





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


·
            legislative and regulatory
      changes that affect our
business;


·
            the availability of funds and
      working capital;


·
            the actions and initiatives of
      current and potential
competitors;


·
            investor sentiment;
      and


·
            our
      reputation.




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





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





Use
of Certain Defined Terms





Unless
otherwise specified or required by context, references to “we,” “the Company,”
“our” and “us” refer collectively to China Polypeptide Group, Inc., a Delaware
corporation, together with its wholly-owned subsidiary, Cantix International
Ltd., a British Virgin Islands limited company, or Cantix; Cantix’s wholly-owned
direct subsidiary, Moneyeasy Industries Limited, a Hong Kong limited company, or
Moneyeasy;  Moneyeasy’s wholly-owned direct subsidiaries, Wuhan
Tallyho Biological Product Co., Ltd., a PRC limited company, or Tallyho, and
Wuhan Polypeptide Anti-Aging Research and Development Co., Ltd., a PRC limited
company, or Anti-Aging, and Tallyho’s operating subsidiary, Guangdong Hopsun
Polypeptide Biological Technology Co., Ltd., or Hopsun.  Specific
discussions or comments relating only to China Polypeptide Group, Inc. will
reference “CPGI” and those relating only to Cantix and its subsidiaries will
reference “Cantix.”




Throughout
this report, we have converted RMB to USD as follows:




June
      30, 2010Balance
      sheet
                    
                    RMB 6.8086 to US$1.00Statement of
      income and comprehensive income
                    
                    RMB
      6.8352 to US$1.00June
      30, 2009Balance
      sheet
                    
                    RMB
      6.8259 to US$1.00Statement
      of income and comprehensive income
                    
                    RMB
      6.8245 to
US$1.00




- 18
-





Overview





CPGI was
incorporated in Delaware in March 2007 to engage in the design, manufacturing,
distribution and marketing of surfboards and related equipment.  Prior
to the acquisition of Cantix, discussed below, CPGI was a development stage
company and had no material assets and no revenues.  On November 13,
2009, CPGI acquired all of the issued and outstanding capital stock of
Cantix.  As a result of the acquisition (i) Cantix became a wholly
owned subsidiary of CPGI, (ii) CPGI’s principal business became the business of
Cantix, (iii) CPGI ceased to be a shell Company, (iv) CPGI changed its fiscal
year end from December 31 to September 30, and (v) the shareholders of Cantix
became the controlling shareholders of CPGI. The share exchange
transaction with Cantix was treated as a reverse acquisition, with Cantix as the
acquirer and CPGI as the acquired party.  Because Cantix and its
affiliates’ operations are the only significant operations of the Company,
unless the context suggests otherwise, when we refer in this report to business
and financial information for periods prior to the consummation of the reverse
acquisition, we are referring to the business and financial information of
Cantix and its consolidated subsidiaries.





Through
our direct and indirect operating subsidiaries, Tallyho, Hopsun and Anti-Aging,
we are principally engaged in the research, development, manufacturing,
marketing and sales of polypeptide-based anti-aging nutritional supplements,
health foods, functional foods and related material products.  We have
developed over 70 different types of polypeptide-based products. We market and
sell our products through a combined network of sales personnel, wholesalers and
private labeled partners in China and internationally, however China is
currently our primary market.





Our
products are primarily manufacturedin our 16,477 square
meters production facilities located in the Hannan Economic Development Zone in
Wuhan, China.  Our products currently being marketed and sold in China
have been tested and approved by the applicable Chinese governmental hygiene and
safety agencies, including by the local bureaus of the Ministry of Health and
the State Food and Drug Administration.  Our research and development
efforts are conducted at our facilities in Wuhan, China.





We
believe that we are one of the few companies in our industry with competitive
prices and high quality of diversified nutritional products combined with
excellent customer service.  We believe that we are one of the largest
companies in China focusing on the development and production of functional
peptide nutritional products.





Our
common stock is eligible for quotation on Over-the-Counter Bulletin Board under
the trading symbol of “CHPN.”





Recent
Developments





On August
11, 2010, we entered into a non-binding letter of intent with ERA Bio-Technology
(Shenzhen) Co., Ltd., or ERA Biotech, to convert our loan receivable balance of
$4,012,572 (RMB27,320,000) as of June 30, 2010 with them into a certain
percentage of ERA Biotech’s shares, to be agreed upon by the Company and ERA
Biotech in a future definitive agreement, following the completion of a
financial due diligence review of ERA Biotech.  We expect to complete
the financial due diligence process by December 2010.  As the details
will be subject to further negotiation, there is a contingency that both parties
might not reach a final agreement. Based on management best estimation, the
possibility of not reaching an agreement for the transaction is less than
probable as of August 16, 2010.





Results
of Operations




The
following tables set forth key components of our results of operations for the
periods indicated, both in dollars and as a percentage of sales
revenues.




Comparison
of Three Months Ended June 30, 2010 and 2009 (Unaudited)




Three Months Ended June 30,2010
                                              
                                              
                                              2009Amount
                                              
                                              
                                              % of
                                                Revenues
                                              
                                              
                                              Amount
                                              
                                              
                                              % of
                                                Revenues(in
      dollars, except percentages)REVENUES
                                              
                                              
                                              11,560,788
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              
                                              8,402,819
                                              
                                              
                                              
                                              100.0
                                              %COST
      OF SALES
                                              
                                              
                                              685,905
                                              
                                              
                                              
                                              5.9
                                              %
                                              
                                              
                                              313,903
                                              
                                              
                                              
                                              3.7
                                              %GROSS
      PROFIT
                                              
                                              
                                              10,874,883
                                              
                                              
                                              
                                              94.1
                                              %
                                              
                                              
                                              8,088,916
                                              
                                              
                                              
                                              96.3
                                              %SELLING
      AND ADMINISTRATIVES EXPENSES
                                              
                                              
                                              6,820,092
                                              
                                              
                                              
                                              59.0
                                              %
                                              
                                              
                                              6,020,038
                                              
                                              
                                              
                                              71.6
                                              %OPERATING
      INCOME
                                              
                                              
                                              4,054,791
                                              
                                              
                                              
                                              35.1
                                              %
                                              
                                              
                                              2,068,878
                                              
                                              
                                              
                                              24.6
                                              %OTHER
      INCOME (EXPENSE)Interest
      expense, net
                                              
                                              
                                              (27,904
                                              )
                                              
                                              
                                              -0.2
                                              %
                                              
                                              
                                              (19,510
                                              )
                                              
                                              
                                              -0.2
                                              %Equity
      in (loss) in affiliates
                                              
                                              
                                              (7,362
                                              )
                                              
                                              
                                              -0.1
                                              %
                                              
                                              
                                              (6,843
                                              )
                                              
                                              
                                              -0.1
                                              %Other
      operating income (expense)
                                              
                                              
                                              (30,300
                                              )
                                              
                                              
                                              -0.3
                                              %
                                              
                                              
                                              426,319
                                              
                                              
                                              
                                              5.1
                                              %INCOME
      BEFORE INCOME TAX EXPENSE
                                              
                                              
                                              3,989,225
                                              
                                              
                                              
                                              34.5
                                              %
                                              
                                              
                                              2,468,844
                                              
                                              
                                              
                                              29.4
                                              %INCOME
      TAX EXPENSE
                                              
                                              
                                              906,963
                                              
                                              
                                              
                                              7.8
                                              %
                                              
                                              
                                              748,673
                                              
                                              
                                              
                                              8.9
                                              %NET
      INCOME
                                              
                                              
                                              3,082,262
                                              
                                              
                                              
                                              26.7
                                              %
                                              
                                              
                                              1,720,171
                                              
                                              
                                              
                                              20.5
                                              %OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation gain (loss)
                                              
                                              
                                              158,903
                                              
                                              
                                              
                                              1.4
                                              %
                                              
                                              
                                              (2,049
                                              )
                                              
                                              
                                              0.0
                                              %COMPREHENSIVE
      INCOME
                                              
                                              
                                              3,241,165
                                              
                                              
                                              
                                              28.0
                                              %
                                              
                                              
                                              1,718,122
                                              
                                              
                                              
                                              20.4
                                              %




- 19
-





Revenues.Revenues for the
three months ended June 30, 2010 increased $3,157,969, or 37.6%, to $11,560,788,
from $8,402,819 for the three months ended June 30, 2009. The increase is mainly
attributable to our increased sales efforts during the quarter ended June 30,
2010.





Cost of Sales.Cost of sales
for the three months ended June 30, 2010 totaled $685,905, or approximately 5.9%
of revenues, compared to $313,903, or approximately 3.7% of revenues, for the
three months ended June 30, 2009, an increase of $372,002 or 118.5% from period
to period.  The increase is mainly attributable to an increase in
prices of raw materials and overhead costs during the 2010 period. Given the
overall market inflation expectation in China, especially for those agricultural
products which are the main raw materials for our products, management expects
that the prices of our raw materials will continue to increase in 2010. We
expect that the inflationary impact, if any, on our results of operations will
be minimal given our historical high gross margin.





Gross Profit.Gross profit
for the three months ended June 30, 2010 increased $2,785,967, or 34.4%, to
$10,874,883, from $8,088,916 for the three months ended June 30,
2009.  The respective gross margins are 94.1% and 96.3% for the three
months ended June 30, 2010 and 2009.  The increase in the value of
gross profit in the 2010 period is mainly due to the increase of
revenues.  The decrease in gross margin is mainly due to the increase
of cost of sales.





Selling and Administrative Expenses.Selling and administrative expenses for the three months ended June 30,
2010 totaled $6,820,092, or approximately 59% of revenues, compared to
$6,020,038, or approximately 71.6% of revenues, for the same period in 2009, an
increase of $800,054 or 13.3% from period to period.   Selling and
administrative expenses increased together with the increase in revenues for the
three months ended March 31, 2010, as compared to the same period in
2009.  However, its rate of increase of 13.3% is lower than that of
revenues, i.e., 37.6%, in the same period, as a result of certain sales
efficiency improvement measures which we undertook during the 2010 period, such
as holding sales events at self sales locations, where feasible, instead of
renting third-party locations which would incur extra expenses.





Operating Income.Operating
income amounted to $4,054,791, or approximately 35.1% of revenues, for the three
months ended June 30, 2010, as compared to $2,068,878, or approximately 24.6% of
revenues, for the three months ended June 30, 2009, an increase of $1,985,913 or
96.0% from period to period. The increase in operating income is mainly
attributable to the increase in revenues and sales efficiency improvement
measures that helped save selling expenses in the same period in
2010.





Interest Expense.Net
interest expense for the three months ended June 30, 2010 increased $8,394, or
43.0%, to $27,904, as compared to interest expense of $19,510 for the three
months ended June 30, 2009. The increase in interest expense is due to the
increase in funds borrowed by us from Wuhan Pan-Asia (as defined below), an
unrelated third party, as disclosed under “Liquidity and Capital Resources –
Loan
Commitments”.





Equity in (Loss) in Affiliates.The equity in loss in affiliates for the three months ended June 30, 2010
amounted to $7,362, an increase of $519, as compared to the equity in loss in
affiliates of $6,843 for the three months ended June 30, 2009. The increase
is due to the increase in the net loss of an affiliate company in which the
Company has a 40% equity interest, thus using the equity method to account for
such an investment.


- 20
-





Other
Operating Income (Expense).Other operating expense was $30,300 for the three months ended
June 30, 2010, as compared to other operating income of $426,319 for
the three months
ended June 30, 2009, an absolute change of $456,619. The change is mainly
attributable to the income of $468,899 earned from transferring the technical
know-how of certain of our products specifically developed for a third party
health food distributor during the quarter ended June 30, 2009.





Income before Income Tax
Expense. Income before income tax expense was $3,989,225, or
approximately 34.5% of revenues, for the three months ended June 30, 2010, as
compared to $2,468,844, or approximately 29.4% of revenues, for the three months
ended June 30, 2009, an increase of $1,520,381 or 61.6%. The increase in income
before income tax expense is mainly attributable to the increase of revenues and
sales efficiency improvement measures that helped save selling expenses in the
same period in 2010.





Net Income.Net income
amounted to $3,082,262, or approximately 26.7% of revenues, for the three months
ended June 30, 2010, as compared to $1,720,171, or approximately 20.5% of
revenues, for the three months ended June 30, 2009, an increase of $1,362,091 or
79.2%.  The increase in net income is mainly attributable to increased
revenues with selling and administrative expenses increased at a lower rate as a
result of sales efficiency improvement measures that helped save selling
expenses during the 2010 period. Although no assurance can be given, management
believes that our revenues and net income will continue to grow in future
periods resulting from, among other factors, growing market demands for
anti-aging nutritional supplements, health food and functional food products,
our increased sales and marketing efforts after the restructuring of our sales
offices, our newly added manufacturing capacity to meet such increasing demands,
our expansion into other high margin peptide-based product categories as well as
improved economic conditions and the government’s stimulus measures focusing on
stimulating consumption in China.





Comparison
of Nine Months Ended June 30, 2010 and 2009 (Unaudited)




Nine Months Ended June 30,2010
                                              
                                              
                                              2009Amount
                                              
                                              
                                              %
      of
                                                Revenues
                                              
                                              
                                              Amount
                                              
                                              
                                              %
      of
                                                Revenues(in
      dollars, except percentages)REVENUES
                                              
                                              
                                              25,664,457
                                              
                                              
                                              
                                              100.0
                                              %
                                              
                                              
                                              25,272,971
                                              
                                              
                                              
                                              100.0
                                              %COST
      OF SALES
                                              
                                              
                                              1,782,788
                                              
                                              
                                              
                                              6.9
                                              %
                                              
                                              
                                              1,597,977
                                              
                                              
                                              
                                              6.3
                                              %GROSS
      PROFIT
                                              
                                              
                                              23,881,669
                                              
                                              
                                              
                                              93.1
                                              %
                                              
                                              
                                              23,674,994
                                              
                                              
                                              
                                              93.7
                                              %SELLING
      AND ADMINISTRATIVES EXPENSES
                                              
                                              
                                              16,213,354
                                              
                                              
                                              
                                              63.2
                                              %
                                              
                                              
                                              15,022,666
                                              
                                              
                                              
                                              59.4
                                              %OPERATING
      INCOME
                                              
                                              
                                              7,668,315
                                              
                                              
                                              
                                              29.9
                                              %
                                              
                                              
                                              8,652,328
                                              
                                              
                                              
                                              34.2
                                              %OTHER
      INCOME (EXPENSE)Interest
      expense, net
                                              
                                              
                                              (63,968
                                              )
                                              
                                              
                                              -0.2
                                              %
                                              
                                              
                                              (41,636
                                              )
                                              
                                              
                                              -0.2
                                              %Equity
      in (loss)/gain in affiliates
                                              
                                              
                                              (23,835
                                              )
                                              
                                              
                                              -0.1
                                              %
                                              
                                              
                                              11,544
                                              
                                              
                                              
                                              0.0
                                              %Other
      operating income (loss)
                                              
                                              
                                              (10,653
                                              )
                                              
                                              
                                              0.0
                                              %
                                              
                                              
                                              431,359
                                              
                                              
                                              
                                              1.7
                                              %INCOME
      BEFORE INCOME TAX EXPENSE
                                              
                                              
                                              7,569,859
                                              
                                              
                                              
                                              29.5
                                              %
                                              
                                              
                                              9,053,595
                                              
                                              
                                              
                                              35.8
                                              %INCOME
      TAX EXPENSE
                                              
                                              
                                              1,379,311
                                              
                                              
                                              
                                              5.4
                                              %
                                              
                                              
                                              2,474,763
                                              
                                              
                                              
                                              9.8
                                              %NET
      INCOME
                                              
                                              
                                              6,190,548
                                              
                                              
                                              
                                              24.1
                                              %
                                              
                                              
                                              6,578,832
                                              
                                              
                                              
                                              26.0
                                              %OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation gain (loss)
                                              
                                              
                                              83,555
                                              
                                              
                                              
                                              0.3
                                              %
                                              
                                              
                                              31,088
                                              
                                              
                                              
                                              0.1
                                              %COMPREHENSIVE
      INCOME
                                              
                                              
                                              6,274,103
                                              
                                              
                                              
                                              24.4
                                              %
                                              
                                              
                                              6,609,920
                                              
                                              
                                              
                                              26.2
                                              %




- 21
-





Revenues.Revenues for the
nine months ended June 30, 2010 increased by $391,486, or 1.5%, to $25,664,457,
from $25,272,971 for the nine months ended June 30, 2009. The increase is mainly
attributable to our increased sales efforts during the quarter ended June 30,
2010 that increased the revenues in the current quarter while revenues for the
previous six month period decreased year-over-year.





Cost of Sales.Cost of sales
for the nine months ended June 30, 2010 totaled $1,782,788, or approximately
6.9% of revenues, compared to $1,597,977, or approximately 6.3% of revenues, for
the nine months ended June 30, 2009, an increase of $184,811, or
11.6%.  The increase is mainly attributable to increase in prices of
raw materials and overhead costs during the 2010 period. Given the overall
market inflation expectation in China, especially for those agricultural
products that are the main raw materials for our products, management expects
that the prices of our raw materials will continue to increase in 2010. We
expect that the inflationary impact, if any, on our results of operations will
be minimal given our historical high gross margin.





Gross Profit.Gross profit
for the nine months ended June 30, 2010 increased $206,675, or 0.9%, to
$23,881,669, as compared to $23,674,994 for the nine months ended June 30,
2009.  The respective gross margins are 93.1% and 93.7% for the nine
months ended June 30, 2010 and 2009.  The slight increase in gross
profit is mainly due to the slightly increased revenues in the 2010
period.





Selling and Administrative Expenses.Selling and administrative expenses for the nine months ended June 30,
2010 totaled $16,213,354, or approximately 63.2% of revenues, compared to
$15,022,666, or approximately 59.4% of revenues, for the same period in 2009, an
increase of $1,190,688, or 7.9%.  The increase is mainly attributable
to (a) the increase of selling expenses, (b) the increase in professional
expenses related to public company operations, and (c) the increase of bad debt
allowance provided for accounts receivable.   Selling expenses
amounted to $13,476,133 during the nine months ended June 30, 2010, as compared
to $13,146,571 in the same period of 2009, an increase of $329,562 or 2.5%,
which is in line with the increase of sales revenues in the
period.  The Company incurred $526,401 in professional expenses
related to the public company operations during the nine months ended June 30,
2010, as compared to $41,439 incurred during the same period in 2009 before the
reverse merger closed in November 2009, an increase of $484,962 or
1,170.3%.  The bad debt allowance provided for accounts receivable
during the nine months ended June 30, 2010 was $174,380, as compared to $4,623
recovered bad debts in the same period of 2009, an absolute change of
$179,003.





Operating Income.Operating
income amounted to $7,668,315, or approximately 29.9% of revenues, for the nine
months ended June 30, 2010, as compared to $8,652,328, or approximately 34.2% of
revenues, for the nine months ended June 30, 2009, a decrease of $984,013, or
11.4%. The decrease in operating income is mainly due to the fact that revenues
were rather flat while selling and administrative expenses
increased.





Interest Expense.Net
interest expense totaled $63,968 for the nine months ended June 30, 2010, as
compared to net interest expense of $41,636 for the nine months ended June 30,
2009, an increase of $22,332, or 53.6%.  The increase in interest
expense is due to the increase in funds borrowed by us from Wuhan Pan Asia (as
defined below), an unrelated third party, as disclosed under “Liquidity and
Capital Resources – Loan
Commitments”.





Equity in (Loss)/Gain in Affiliates.The equity in loss in affiliates amounted to $23,835 for the nine months
ended June 30, 2010, as compared to the equity in gain in affiliates of $11,544
for the nine months ended June 30, 2009, an absolute change of
$35,379.  The change is due to the increase in the net loss of an
affiliate company in which the Company has a 40% equity interest, thus using the
equity method to account for such an investment.





Other
Operating Income (Expense).Other operating expense was $10,653 for the nine months ended
June 30, 2010, as compared to other operating income of $431,359 for
the nine months
ended June 30, 2009, an absolute change of $442,012. The change is mainly
attributable to the income of $468,899 earned from transferring the technical
know-how of certain of our products specifically developed for a third party
health food distributor during the quarter ended June 30, 2009.





Income before Income Tax
Expense. Income before income tax expense was $7,569,859, or
approximately 29.5% of revenues, for the nine months ended June 30, 2010, as
compared to $9,053,595, or approximately 35.8% of revenues, for the nine months
ended June 30, 2009, a decrease of $1,483,736, or 16.4%.The decrease in income
before income tax expense is mainly attributable to the increase of selling and
administrative expenses and the decrease of other operating income while gross
profit was rather flat.





Net Income.Net income
amounted to $6,190,548, or approximately 24.1% of revenues, for the nine months
ended June 30, 2010, as compared to $6,578,832, or approximately 26.0% of
revenues, for the nine months ended June 30, 2009, a decrease of $388,284 or
5.9%. The decrease in net income is mainly attributable to the increase of
selling and administrative expenses and the decrease of other operating income
while gross profit was rather flat.  Although no assurance can be
given, management believes that our revenues and net income would continue to
grow in future periods resulting from, among other factors, growing market
demands for anti-aging nutritional supplements, health food and functional food
products, our increased sales and marketing efforts after the restructuring of
our sales offices, our newly added manufacturing capacity to meet such
increasing demands, our expansion into other high margin peptide-based product
categories as well as improved economic conditions and the government’s stimulus
measures focusing on stimulating consumption in China.


- 22
-


Liquidity
and Capital Resources





Cash
Flows (Unaudited)





The
following table sets forth a summary of our cash flows for the periods indicated
below:




Nine Months Ended June 30,2010
                      
                      
                      2009(in
      dollars)Net
      cash provided by operating activities
                      
                      
                      8,653,175
                      
                      
                      
                      1,568,627Net
      cash used in investing activities
                      
                      
                      (10,278,197
                      )
                      
                      
                      (1,545,680
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      6,226,275
                      
                      
                      
                      (26,376
                      )Effect
      of exchange rate fluctuation on cash and cash equivalents
                      
                      
                      32,010
                      
                      
                      
                      25,285Net
      increase in cash and cash equivalents
                      
                      
                      4,633,263
                      
                      
                      
                      21,856Cash
      and cash equivalents, beginning of period
                      
                      
                      4,439,732
                      
                      
                      
                      5,918,414Cash
      and cash equivalents, end of period
                      
                      
                      9,072,995
                      
                      
                      
                      5,940,270




Operating
Activities





Net cash
provided by operating activities increased to $8,653,175 during the nine months
ended June 30, 2010, an increase of $7,084,548, or 451.6%, from net cash
provided by operating activities of $1,568,627 during the nine months ended June
30, 2009.  The increase is mainly attributable to a significant
decrease in accounts receivable due to collections by June 30,
2010.





Investing
Activities





Net cash
used in investing activities increased by $8,732,517, or 565.0%, to $10,278,197
during the nine months ended June 30, 2010, as compared to $1,545,680 during the
nine months ended June 30, 2009.  The significant increase is mainly
due to (a) the increase of approximately $3.5 million in construction in
progress for the current new factory construction in Wuhan, China, and (b) the
payments of approximately $5.9 million to acquire the land use rights for the
land lot on which the Company plans to build its regional headquarters and
research and development center in Guangzhou, China and that in Wuhan, China
reserved for further manufacturing capacity expansion.





Financing
Activities





Net cash
provided by financing activities amounted to $6,226,275 during the nine months
ended June 30, 2010, as compared to net cash used in financing activities of
$26,376 during the nine months ended June 30, 2009, an absolute change of
$6,252,651, resulting from two equity investments with net proceeds, in
aggregate, of $6.36 million made by two institutional investors during the nine
months ended June 30, 2010. See “Capital Resources”.





Capital
Resources





In
January 2010, we sold 666,667 shares of our common stock and a warrant to
purchase an additional 333,333 shares of our common stock at an exercise price
of $6.75 per share to a non-U.S. institutional investor, for an aggregate
purchase price for $3,600,000.   The Company received $2.24
million of the $3,600,000 purchase price in December 2009 and the remaining
$1.36 million in January 2010.





On April
21, 2010, we consummated a share purchase agreement, dated April 16, 2010,
between the Company and a non-U.S. institutional investor, pursuant to which the
investor purchased (i) 609,557 shares of our common stock, for an aggregate
purchase price of $3,000,000, and (ii) a five year warrant to purchase up to an
additional 80,956 shares of our common stock at an exercise price of $6.75 per
share.  We agreed to give the investor piggy-back resale registration
rights in connection with the purchase, as well as a right of first refusal with
respect to any new shares of common stock issued by us in connection with any
future private offering.  We also agreed to grant the investor the right to
equally participate in any future sale by the principal shareholders of shares
in the Company to a third party. The net proceeds is approximately $2.76 million
after deducting commissions and other closing expenses.





Loan
Commitments




As of
June 30, 2010, the Company had the following outstanding bank
loans:


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-


·
            The
      Company had an outstanding bank loan of RMB2,020,000 (approximately
      $296,683) from the Agriculture Bank of China, Wuhan Branch (“Agriculture
      Bank”). This bank loan has been continuously extended from September 2003,
      the original maturity date, and will be repaid when Agriculture Bank
      requests repayment.  The Company has been repaying the principal
      amount of this loan with payments of RMB20,000 (approximately $2,926) each
      month. Interest accrues on a monthly basis at the rate of 5.84% per
      annum.





·
            The
      Company had an outstanding bank loan of RMB1,500,000 (approximately
      $220,310) from the Wuhan Finance Bureau (“WFB”). This loan has been
      continuously extended from November 2001, the original maturity date, and
      such loan will be repaid when WFB requests repayment.  Interest
      accrues on a monthly basis at the rate of 5.94% per
  annum.





·
            The
      Company had an outstanding  loan totaling RMB3,834,509
      (approximately $563,186) from Wuhan Pan-Asia Peptide Material Research
      Co., Ltd. (“Wuhan Pan-Asia”), an unrelated third party, under a loan
      facility agreement of RMB5,000,000 (approximately
      $734,365).  Wuhan Pan-Asia borrowed the funds to lend to the
      Company, from time to time, from Xianfeng Rural Credit Co-operative
      (“Xianfeng”) for which the Company pledged an office building as
      collateral. Interest on the loan is paid by the Company monthly at the
      rate of 6.37% per annum. This loan matures in August 2010 and the Company
      has been in negotiations with Wuhan Pan-Asia and Xianfeng for renewal of
      the loan.




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




The
capital commitments for construction of a new facility as of June 30, 2010 were
approximately $1.47 million.





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




Historically,
the Company’s revenues for the first and forth quarters in each fiscal year have
been higher than revenues for the second and third fiscal
quarters.  We believe that this is partially due to a number of major
festivals and holiday celebrations that occur in China around the end of our
first and fourth fiscal quarters.  Though it may be the case, as some
Chinese festivals such as the Chinese New Year follow the Chinese Lunar calendar
which usually lags the Gregorian calendar that is used worldwide, if such
festivals happen to occur substantially later than the end of the first and
fourth quarters, we believe a certain portion of such revenues would fall in the
following quarters.




Critical
Accounting Policies and Estimates





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 (“US 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.


- 24
-





While our
significant accounting policies are more fully described in Note 2 of the Notes
to our consolidated financial statements in this Quarterly Report on Form
10-Q, we believe that the following accounting policies are the most critical
accounting policies to assist in fully understanding and evaluating
our management’s discussion and analysis:





Principles
of Consolidation





The
consolidated financial statements, prepared in accordance with US GAAP, include
the assets, liabilities, revenues, expenses and cash flows of the Company and
all its subsidiaries. This basis of accounting differs in certain material
respects from that used for the preparation of the books and records of the
Company's principal subsidiaries, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liabilities established in the PRC, the accounting
standards used in the place of such entities’ domicile.  The
accompanying consolidated financial statements reflect necessary adjustments not
recorded in the books and records of the Company's subsidiaries to present them
in conformity with US GAAP.  All significant inter-company accounts,
transactions and cash flows are eliminated on
consolidation.  Investment in affiliates in which the Company
exercises significant influence but do not control and are not the primary
beneficiary are accounted for using the equity method.





Use
of Estimates





The
preparation of the Company’s financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect 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.  The financial statements include
some amounts that are based on management’s best estimates and
judgments.  These accounts and estimates include, but are not limited
to, the valuation of accounts receivable, other receivables, inventories, taxes
payable, and the estimation on useful lives of property, plant and equipment and
intangible assets.  These estimates may be adjusted as more current
information becomes available, and any adjustment could be
significant.




Revenue
Recognition





Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the buyer at the time when the
products are delivered to and accepted by its customers, the price is fixed or
determinable, and collectability is reasonably assured.  Customers do not
have a general right of return on products shipped.  The number of
products returned to the Company was insignificant during past
years.  There are no post-shipment obligations, price protection and
bill and hold arrangements.




Accounts
Receivable





Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts, as needed. The allowance
for doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable.  The
Company determines the allowance based on aging data, historical collection
experience, customer specific facts and economic conditions. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.  The
Company does not have any off-balance-sheet credit exposure related to its
customers.





Inventories





Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted average cost method. Cost of finished goods comprises direct material,
direct production cost and an allocated portion of production overheads based on
normal operating capacity. The Company evaluates the need for reserves
associated with obsolete, slow-moving and non-salable inventory by reviewing the
net realizable value on a periodic basis.  If inventory is written
down to net realizable value, the write-down is charged to expense.





Foreign
Currency Translation





The
accompanying financial statements are presented in United States dollars. The
functional currency of the PRC operating subsidiaries of Cantix is Renminbi
(“RMB”).  The financial statements are translated into United States
dollars from RMB at year-end exchange rates as to assets and liabilities and
average exchange rates as to revenues and expenses.  Capital accounts are
translated at their historical exchange rates when the capital transactions
occurred.


- 25
-


Recent
Accounting Pronouncements




In April
2010, the FASB issued an authoritative pronouncement, ASU 2010-13, on effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity securities trades and that currency
is different from (1) entity's functional currency, (2) functional currency of
the foreign operation for which the employee provides services, and (3) payroll
currency of the employee. The pronouncement clarifies that an employee
share-based payment award with an exercise price denominated in the currency of
a market in which a substantial portion of the entity's equity securities trades
should not be considered to contain a condition that is not a market,
performance, or service condition, and therefore should be considered an equity
award assuming all other criteria for equity classification are met. The
pronouncement is for interim and annual periods beginning on or after December
15, 2010, and will be applied prospectively. Affected companies will be required
to record a cumulative catch-up adjustment for all awards outstanding as of the
beginning of the annual period in which the guidance is adopted. This amendment
is not expected to have a material impact on the Company’s financial
statements.





In April
2010, the FASB issued Update No. 2010-17, or ASU 2010-17, Revenue
Recognition—Milestone Method, which updates the guidance currently included
under topic 605, Revenue Recognition. ASU 2010-17 provides guidance on defining
the milestone and determining when the use of the milestone method of revenue
recognition for research or development transactions is appropriate. It provides
criteria for evaluating if the milestone is substantive and clarifies that a
vendor can recognize consideration that is contingent upon achievement of a
milestone as revenue in the period in which the milestone is achieved, if the
milestone meets all the criteria to be considered substantive. ASU 2010-17 is
effective for milestones achieved in fiscal years, and interim periods within
those years, beginning after June 15, 2010 and should be applied
prospectively. Early adoption is permitted. The Company is currently evaluating
the potential impact, if any, of the new accounting guidance on its consolidated
financial statements.





ITEM 3.
            QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET
RISK.





Not
Applicable.




ITEM 4.
            CONTROLS AND
      PROCEDURES.





Evaluation
of Disclosure Controls and Procedures.





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 Mr. Richard Liu, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of June 30, 2010.  Based on
that evaluation, Mr. Chen and Mr. Liu concluded that, because of the material
weaknesses described in Item 4 “Controls and Procedures” on our quarterly report
on Form 10-Q for the fiscal quarter ended December 31, 2009, which we are still
in the process of remediating, as of June 30, 2010, our disclosure controls and
procedures were not effective.  Investors are directed to Item 4 of
our quarterly report on Form 10-Q for the fiscal quarter ended December 31, 2009
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 December 31, 2009, 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 US 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 US GAAP and the SEC's
rules and regulations.


- 26
-


The
Company has 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.  The Company’s first step in
this regard is the recent appointment of Mr. Richard Liu as Chief Financial
Officer by our Board of Directors. Mr. Liu is an experienced professional in the
field of financial reporting and other related areas from a public accounting
professional to financial executive of U.S. listed companies.  Mr. Liu
holds an MBA degree from UCLA and obtained his B.E. degree from Shanghai Jiao
Tong University in China.  Mr. Liu is also a member of the Chinese
Institute of Certified Public Accountants (CICPA). The Company believes that Mr.
Liu brings the sufficient accounting skills and experience necessary to enable
us to implement and reinforce a rigorous process for collecting and reviewing
information required for the preparation of the financial statement, and help us
fulfill our public accounting obligations according to US GAAP and the SEC’s
rules and regulations.




In April
2010, the Company 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 the Company with
improving its internal controls and meet the requirements of Sarbanes-Oxley Act
of 2002. In the meantime, the Company has 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 of the
Company.  The Company is 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.




Other
than the foregoing changes, there were no changes in our internal controls over
financial reporting during the third quarter of fiscal 2010 that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.




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. We are currently not aware of any
such legal proceedings or claims that we believe will have a material adverse
impact on our business, financial condition or operating results. 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.




ITEM 1A.
            RISK
    FACTORS.





The
Company's business, financial condition, operating results and cash flows can be
impacted by a number of factors, any one of which could cause the Company's
actual results to vary materially from recent results or from the Company's
anticipated future results. The consummation of the Acquisition caused
the Company to materially change the risk factors previously disclosed in
the Company's Annual Report on Form 10-K for the year ended December 31, 2008
(the prior year end). For a discussion identifying risk factors and
important factors that could cause actual results to differ materially from
those anticipated, see the Company's Current Report on Form 8-K filed with
the SEC on November 17, 2009. Such discussion contained therein has not
materially changed since then.  The risks described in our Current
Report on Form 8-K filed with the SEC on November 17, 2009 are not the only
risks we face.  Additional risks and uncertainties not currently known
or that may develop in the future to us or that we currently deem to be
immaterial or that may develop in the future also may materially adversely
affect our future business, financial condition and/or operating
results.





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 include that was required to be but was not disclosed in a
report on Form 8-K during the period covered by this Form 10-Q. 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:





(a)
Exhibits


- 27
-





Exhibit Number
              
              Description31.1
              
              Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              
              Certifications
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              
              Certifications
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002




- 28
-




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
      POLYPEPTIDE GROUP, INC.Date:
      August 16, 2010
                  By:
                  /s/
      Dongliang ChenName: Dongliang
      ChenTitle: Chairman
      and Chief Executive Officer(Principal Executive
      Officer)





Date:
      August 16, 2010
                    By:
                    /s/
      Richard LiuName: Richard
      LiuTitle: Chief
      Financial Officer(Principal Accounting and
      Financial Officer)




- 29
-





EXHIBIT
INDEX





Exhibit Number
              
              Description31.1
              
              Certifications
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certifications
      of Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
              
              Certifications
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 200232.2
              
              Certifications
      of Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002




- 30
-