UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10−Q


(Mark
One)




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





For the
quarterly period ended: December 31, 2010




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




For the
transition period from ____________ to _____________




Commission
File Number: 333-151148





CHINA POLYPEPTIDE GROUP,
INC.


(Exact
Name of Registrant as Specified in Its Charter)





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





No.
11 Jiangda Road


Jianghan
Economic Development Zone


Wuhan
430023


People’s
Republic of China


(Address
of principal executive offices, Zip Code)




(86)
27 8351-8396


(Registrant’s
telephone number, including area code)








(Former
name, former address and former fiscal year, if changed since last
report)





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





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





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





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





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





The
number of shares outstanding of each of the issuer’s classes of common stock, as
of February 11, 2011 is as follows:





Class
      of Securities
              
              Shares
      OutstandingCommon
      Stock, $0.0001 par value
              
              11,939,967












CHINA
POLYPEPTIDE GROUP, INC.





Quarterly
Report on Form 10-Q


Three
Months Ended December 31, 2010




TABLE
OF CONTENTS




PART
      IFINANCIAL
      INFORMATIONItem
      1.
                    Unaudited
      Consoildated Financial Statements
                    1Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    19Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    24Item
      4.
                    Controls
      and Procedures
                    24PART
      IIOTHER
      INFORMATIONItem
      1.
                    Legal
      Proceedings
                    25Item 1A.
                    Risk
      Factors
                    25Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    25Item
      3.
                    Defaults
      Upon Senior Securities
                    25Item
      4.
                    (Removed
      and Reserved)
                    25Item
      5.
                    Other
      Information
                    26Item
      6.
                    Exhibits
                    26




i


PART
I


FINANCIAL
INFORMATION




ITEM
      1.
            UNAUDITED
      CONSOLIDATED FINANCIAL STATEMENTS.





CHINA
POLYPEPTIDE GROUP, INC.


CONSOLIDATED
FINANCIAL STATEMENTS





Page(s)Financial
      StatementsConsolidated
      Balance Sheets
                  2Consolidated
      Statements of Operations and Comprehensive Income (Loss)
                  3Consolidated
      Statements of Cash Flows
                  4Notes
      to Consolidated Financial Statements
                  5-18


1





China  Polypeptide
Group, Inc.


Consolidated
Balance Sheets





December 31,
                
                
                September 30,2010
                
                
                2010UnauditedAssetsCurrent
      assetsCash
      and cash equivalents (including assets of consolidated variable interest
      entities of $7,356 at December 31, 2010 and $7,135 at September 30, 2010
      available only to settle obligations of the consolidated variable interest
      entity)
                
                $
                14,503,716
                
                
                $
                14,421,012Accounts
      receivable, net
                
                
                3,980,756
                
                
                
                5,956,039Inventories,
      net
                
                
                654,437
                
                
                
                525,319Prepayments
      and other receivables, net
                
                
                2,833,200
                
                
                
                2,659,871Amounts
      due from staff
                
                
                7,262,313
                
                
                
                7,993,826Deferred
      tax assets
                
                
                890,540
                
                
                
                782,355Other
      assets
                
                
                424,582
                
                
                
                419,111Total
      Current Assets
                
                
                30,549,544
                
                
                
                32,757,533Property,
      plant and equipment, net
                
                
                12,074,204
                
                
                
                11,867,665Deposit
      for land use rights (including assets of consolidated variable interest
      entities of $5,322,139 at December 31, 2010 and $5,162,215 at September
      30, 2010 available only to settle obligations of the consolidated variable
      interest entity)
                
                
                5,624,629
                
                
                
                5,552,160Prepayment
      for long-lived assets (including assets of consolidated variable interest
      entities of $302,489 at December 31, 2010 and nil at September 30, 2010
      available only to settle obligations of the consolidated variable interest
      entity)
                
                
                1,361,203
                
                
                
                -Land
      use rights, net
                
                
                281,458
                
                
                
                279,450Investment
      in equity affiliates
                
                
                223,532
                
                
                
                227,351Intangible
      assets, net
                
                
                38,567
                
                
                
                42,829Total
      Assets
                
                $
                50,153,137
                
                
                $
                50,726,988Liabilities
      and Shareholders’ EquityCurrent
      liabilitiesAccounts
      payable
                
                $
                2,004,604
                
                
                $
                2,199,212Accrued
      expenses and other liabilities
                
                
                1,609,274
                
                
                
                1,525,934Taxes
      payable
                
                
                5,249,248
                
                
                
                5,597,799Short-term
      loans
                
                
                523,307
                
                
                
                519,550Amounts
      due to related parties
                
                
                443,481
                
                
                
                442,689Total
      Current Liabilities
                
                
                9,829,914
                
                
                
                10,285,184Shareholders’
      equityCommon
      stock: 120,000,000 shares authorized, $0.0001 par value, 11,939,967 shares
      issued and outstanding as of December 31 and September 30, 2010,
      respectively
                
                
                1,194
                
                
                
                1,194Additional
      paid-in capital
                
                
                16,231,912
                
                
                
                16,231,912Deferred
      compensation
                
                
                (40,305
                )
                
                
                (77,355
                )Unappropriated
      retained earnings
                
                
                21,544,034
                
                
                
                22,194,795Appropriated
      retained earnings
                
                
                1,283,484
                
                
                
                1,283,484Accumulated
      other comprehensive income
                
                
                1,302,904
                
                
                
                807,774Total
      Shareholders’ Equity
                
                
                40,323,223
                
                
                
                40,441,804Total
      Liabilities and Shareholders’ Equity
                
                $
                50,153,137
                
                
                $
                50,726,988





See notes
to consolidated financial statements.


2





China  Polypeptide
Group, Inc.


Consolidated
Statements of Operations and Comprehensive Income (Loss)





Three Months Ended December 31,2010
                
                
                2009Unaudited
                
                
                UnauditedRevenues
                
                $
                3,320,756
                
                
                $
                5,746,590Cost
      of sales
                
                
                409,049
                
                
                
                276,574Gross
      profit
                
                
                2,911,707
                
                
                
                5,470,016Operating
      expensesSelling
      and administrative expenses
                
                
                3,687,532
                
                
                
                4,302,838Operating
      income (loss)
                
                
                (775,825
                )
                
                
                1,167,178Other
      income (expense)Interest
      expense, net
                
                
                (29,215
                )
                
                
                (17,560
                )Equity
      loss in affiliates
                
                
                (6,731
                )
                
                
                (7,837
                )Other
      income (expense)
                
                
                44,129
                
                
                
                (6,169
                )8,183
                
                
                
                (31,566
                )Income
      (loss) before income tax expense (benefit)
                
                
                (767,642
                )
                
                
                1,135,612Income
      tax expense (benefit)
                
                
                (116,880
                )
                
                
                246,461Net
      income (loss)
                
                
                (650,762
                )
                
                
                889,151Other
      comprehensive incomeForeign
      currency translation gain (loss)
                
                
                495,130
                
                
                
                (71,918
                )Comprehensive
      income (loss)
                
                $
                (155,632
                )
                
                $
                817,233Earnings
      (loss) per shareBasic
      and diluted
                
                $
                (0.05
                )
                
                $
                0.09Weighted
      average number of common shares outstanding:Basic
      and diluted
                
                
                11,939,967
                
                
                
                9,439,130





See notes
to consolidated financial statements.


3





China
Polypeptide Group, Inc.


Consolidated
Statements of Cash Flows





Three Months EndedDecember 31,2010
                
                
                2009Unaudited
                
                
                UnauditedCash
      flow from operating activitiesNet
      income (loss)
                
                $
                (650,762
                )
                
                $
                889,151Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activitiesDepreciation
      and amortization
                
                
                212,222
                
                
                
                112,132Provision
      (Reversal) of bad debts
                
                
                (2,837
                )
                
                
                83,181Amortization
      of stock-based compensation
                
                
                37,050
                
                
                
                -Equity
      loss in affiliates
                
                
                6,731
                
                
                
                7,837Changes
      in operating assets and liabilitiesAccounts
      receivable
                
                
                2,038,863
                
                
                
                4,010,611Inventories
                
                
                (121,249
                )
                
                
                (24,847
                )Prepayments
      and other receivables
                
                
                (137,464
                )
                
                
                (798,773
                )Amounts
      due from staff
                
                
                828,932
                
                
                
                1,252,750Deferred
      tax assets
                
                
                (97,162
                )
                
                
                19,629Accounts
      payable
                
                
                (141,737
                )
                
                
                (198,116
                )Accrued
      expenses and other liabilities
                
                
                153,069
                
                
                
                (535,655
                )Taxes
      payable
                
                
                (418,125
                )
                
                
                157,712Net
      cash provided by operating activities
                
                
                1,707,531
                
                
                
                4,975,612Cash
      flow from investing activitiesPurchases
      of property, plant and equipment
                
                
                (336,752
                )
                
                
                (92,242
                )Prepayments
      for long-lived assets
                
                
                (1,349,933
                )
                
                
                -Cash
      paid to acquire land use rights
                
                
                -
                
                
                
                (2,340,541
                )Net
      cash used in investing activities
                
                
                (1,686,685
                )
                
                
                (2,432,783
                )Cash
      flow from financing activitiesProceeds
      from private placements, net
                
                
                -
                
                
                
                2,239,610Repayment
      of related parties loans
                
                
                (4,945
                )
                
                
                (44,397
                )Repayment
      of a bank loan
                
                
                (3,000
                )
                
                
                (31,066
                )Net
      cash provided by (used in) financing activities
                
                
                (7,945
                )
                
                
                2,164,147Effect
      of exchange rate fluctuation on cash and cash equivalents
                
                
                69,803
                
                
                
                (7,645
                )Net
      increase in cash and cash equivalents
                
                
                82,704
                
                
                
                4,699,331Cash
      and cash equivalents, beginning of period
                
                
                14,421,012
                
                
                
                4,439,732Cash
      and cash equivalents, end of period
                
                $
                14,503,716
                
                
                $
                9,139,063Supplemental
      disclosure of cash flow information:Income
      taxes paid
                
                $
                43,653
                
                
                $
                42,777Interest
      paid
                
                $
                12,802
                
                
                $
                22,070





See notes
to consolidated financial statements.


4


China
Polypeptide Group, Inc.


Notes
to Consolidated Financial Statements (Unaudited)




Note
1 - Principal Activities and Organization





The
consolidated financial statements include the financial statements of China
Polypeptide Group, Inc. (“CPGI” or the “Company”), its subsidiaries and variable
interest entity (“VIE”), Cantix International Limited (“Cantix”), Moneyeasy
Industries Limited (“Moneyeasy”), Wuhan Tallyho Biological Product Co., Limited
(“Tallyho”), Guangdong Hopsun Polypeptide Biological Technology Co., Limited
(“Hopsun”), Wuhan Polypeptide Anti-Aging Research & Development Co., Limited
(“Anti-Aging”), and Guangdong Xingpu Polypeptide Research Co., Limited
(“Xingpu”). The Company, its subsidiaries and VIE are collectively referred to
as the “Group”.





Principal
Activities





The
Company, formerly known as Hamptons Extreme, Inc., was incorporated under the
laws of the State of Delaware in March 2007. The Company was formed to engage in
the design, manufacturing, distribution and marketing of surfboards and related
equipment.  After the Exchange (as defined below), the Company,
through its operating subsidiaries in the People’s Republic of China (the
“PRC”), is principally engaged in research, development,
manufacturing, marketing and sales of polypeptide-based nutritional supplements,
health foods, functional foods and related ingredient products.





Cantix, a
wholly owned subsidiary of the Company, was incorporated in British Virgin
Islands (the “BVI”) on January 29, 2007.  Cantix is a holding company
with minimum activities.





Moneyeasy,
a wholly owned subsidiary of Cantix, was incorporated in Hong Kong on
August 25, 2006, and is a holding company with minimum activities.





Tallyho
was founded on December 2, 1996 in the PRC with a paid-in capital of $5,854,361
(RMB40,230,000) and has been engaged in research, production and sales of
polypeptide-based nutritional supplements, health food products and related
ingredient products. Tallyho is a wholly owned subsidiary of
Moneyeasy.




Hopsun
was founded on November 13, 2007 in the PRC. It is a wholly owned subsidiary of
Tallyho with $1,424,055 (RMB10,000,000) initial paid-in capital which was later
increased to $2,008,227 (RMB14,000,000) and specializes in service-based sales
of health and anti-aging products.





Anti-Aging
was founded on June 13, 2007 in the PRC, with $1,045,246 (RMB8,000,000) paid-in
capital and specialized in research and development of polypeptide-based health
products and provision of related technological services. Anti-Aging is a wholly
owned subsidiary of Moneyeasy.




Xingpu is
a development stage company established on March 2, 2010. Its registered capital
is approximately $29,255,164 (RMB200,000,000) of which $5,851,033
(RMB40,000,000) was paid up as of September 30, 2010. The equity holders of
Xingpu are Mr. Dongliang Chen, the Company’s Chief Executive Officer and the
Chairman of the Board, and Mr. Shengfan Yan, the President and a director
of the Company, with each holding a 50% equity interest of Xingpu. Xingpu’s
business scope includes polypeptide product development, real estate
investment, technology transfer, technical consultation, import and export, etc.
with the current purpose to develop the Group’s regional headquarter and its
research and development center.





Effective September
28, 2010, Hopsun entered into a contractual arrangement with Xingpu and its
equity holders consisting of a series of agreements, including an Exclusive
Business Cooperation Agreement, through which Hopsun has the right to advise,
consult with, manage and operate Xingpu, and to collect fees based on its
profits. Xingpu's equity holders have also granted their voting rights over
Xingpu to Hopsun. In order to further reinforce Hopsun's rights to control and
operate Xingpu, Xingpu and its equity holders have granted Hopsun the exclusive
right and option to acquire all of their equity interests in Xinpu. Further,
Xingpu’s equity holders have pledged all of their rights, titles and interests
in Xingpu to Hopsun. As both companies are under common control, this has been
accounted for as a reorganization of entities and the financial statements have
been prepared as if the reorganization had occurred from the beginning of the
periods presented.  CPGI consolidates Xingpu’s results, assets and
liabilities in its financial statements.




5


On
November 13, 2009, the Company, Cantix and the shareholders of Cantix entered
into a stock exchange agreement (the “Stock Exchange Agreement”), pursuant to
which the Company acquired all of the issued and outstanding shares of common
stock of Cantix from the Cantix shareholders in exchange for 8,800,000 shares of
common stock of the Company, representing approximately 88% of the issued and
outstanding shares of common stock of the Company (the “Exchange”). After the
Exchange, Cantix became a wholly-owned subsidiary of the Company.





Under
accounting principles generally accepted in the United States of America (“U.S.
GAAP”), the Exchange is treated as a reverse acquisition, and the consolidated
financial statements of the Company have been retroactively adjusted to reflect
the Exchange from the beginning of the periods presented. The Exchange has been
accounted for as a reverse acquisition and recapitalization (the
“Reorganization”) of the Company, whereby Cantix is deemed to be the accounting
acquirer (legal acquiree) and the Company to be the accounting acquiree (legal
acquirer). The historical consolidated financial statements for the periods
prior to November 13, 2009 are solely of Cantix except that the equity section
and earnings per share have been retroactively restated to reflect the
Exchange.





On
December 1, 2009, all shares and per share numbers set forth in this Note 1
reflect an 8-for-1 forward stock split effectuated by the Company, pursuant to
which each one (1) share of the Company’s common stock issued and outstanding on
December 1, 2009 automatically converted into eight(8) shares of the Company’s
common stock.





Note
2 - Summary of Significant Accounting Policies and Practices




(a) Basis
of Presentation




The
consolidated financial statements have been prepared in accordance with U.S.
GAAP.




Variable
Interest Entities - A VIE is an entity that either (i) has insufficient equity
to permit the entity to finance its activities without additional subordinated
financial support or (ii) has equity investors who lack the characteristics of a
controlling financial interest. A VIE is consolidated by its primary
beneficiary. The primary beneficiary has both the power to direct the activities
that most significantly impact the entity's economic performance and the
obligation to absorb losses or the right to receive benefits from the entity
that could potentially be significant to the VIE.
 
 If the
Company determines that it has operating power and the obligation to absorb
losses or receive benefits, the Company consolidates the VIE as the primary
beneficiary, and if not, does not consolidate. The Company’s involvement
constitutes power that is most significant to the entity when it has
unconstrained decision making ability over key operational functions within the
entity.
 
 Assets
recognized as a result of consolidating VIEs do not represent additional assets
that could be used to satisfy claims against the Company’s general assets.
Conversely, liabilities recognized as a result of consolidating these VIEs do
not represent additional claims on the Company’s general assets; rather, they
represent claims against the specific assets of the consolidated
VIEs.
 
 The
Company has concluded that Xingpu is a VIE and that the Company is the
primary beneficiary and loss absorber as of December 31, 2010. Under the
requirements of ASC Topic 810 the Company consolidated the financial statements
of Xingpu.
 
 Summary
information regarding Xingpu is as follows:
 
 December 31,2010AssetsCash
      and cash equivalents
                            
                            $
                            7,356Deposit
      for land use rights
                            
                            
                            5,322,139Prepayment
      for long-lived assets
                            
                            
                            302,489Total
      assets
                            
                            $
                            5,631,984Total
      liabilities
                            
                            $
                            -
 
 The
financial performance of Xingpu reported in the consolidated statements of
operations for the three months ended December 31, 2010 includes revenues of
$nil, net loss of $nil.




In the
opinion of management, all adjustments (which include normal recurring
adjustments) necessary to present a fair statement of consolidated financial
position as of December 31, 2010, and consolidated results of operations, and
cash flows for the three month periods ended December 31, 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.





The
consolidated financial statements include the financial statements of the
Company, its subsidiaries and VIE. All significant inter-company transactions
and balances have been eliminated in consolidation.




(b)
Use of Estimates




The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions relating to the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Significant items subject to such estimates and assumptions include revenues;
the allowance for doubtful receivables; deposit for land use rights;
recoverability of the carrying amount of property and equipment and intangible
assets; fair values of financial instruments; and the assessment of contingent
obligations.  These estimates are often based on complex judgments and
assumptions that management believes to be reasonable but are inherently
uncertain and unpredictable.  Actual results could differ from those
estimates.





(c)
Cash and Cash Equivalents





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


6





(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 Group’s best estimate of the amount of probable
credit losses in the Group’s existing accounts receivable.  The Group
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 Group does not
have any off-balance-sheet credit exposure related to its customers. As of
December 31 and September 30, 2010, $1,588,394 and $1,570,754 allowances for
doubtful accounts were provided respectively (note 5).





(e)
Inventories





Inventories
are stated at the lower of cost or market value. Cost is determined using the
weighted average cost method. Inventories embraces raw materials, low-value
consumables, packaging materials, work in process and finished goods. Cost
of finished goods comprises direct material, direct production cost and an
allocated portion of production overheads based on normal operating
capacity.





The Group
evaluates the need for reserves associated with obsolete, slow-moving and
non-salable inventories by reviewing the net realizable value on a periodic
basis. Where there is evidence that the utility of inventories, in their
disposal in the ordinary course of business, will be less than cost, whether due
to physical deterioration, obsolescence, changes in price levels, or other
causes, a provision is accrued for the difference with charges to cost of
sales.





(f)
Prepayments and Other Receivables





As needed
for normal business purposes, the Group 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 Group has full
oversight and control over the advanced accounts except for the loans to ERA
Bio-Technology (Shenzhen) Co., Ltd. (“ERA Biotech”). As of December 31 and
September 30, 2010, $3,186,524 and $3,145,468 allowances for doubtful accounts
were provided respectively (note 7).





(g)
Property, Plant and Equipment





Property,
plant and equipment are stated at historical cost less accumulated depreciation
and impairment. The historical cost of acquiring an item of property, plant and
equipment includes the costs necessarily incurred to bring it to the condition
and location necessary for its intended use. If an item of property, plant and
equipment requires a period of time in which to carry out the activities
necessary to bring it to that condition and location, the interest cost incurred
during that period as a result of expenditures for the item is a part of the
historical cost. This item is categorized as construction in progress and is not
depreciated until substantially all the activities necessary to bring it to the
condition and location necessary for its intended use are
completed.





Depreciation
of property, plant and equipment is calculated using the straight-line method
(after taking into account their respective estimated residual value) over the
estimated useful lives of the assets as follows.





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





Depreciation
of property, plant and equipment attributable to manufacturing activities is
capitalized as part of inventories, and expensed to cost of goods sold when
inventories are sold.





Expenditure
for maintenance and repairs is expensed as incurred.





The gain
or loss on the disposal of property, plant and equipment is the difference
between the net sales proceeds and the carrying amount of the relevant assets
and is recognized in the consolidated statements of income and comprehensive
income.


7





Construction
in progress represented capital expenditure in respect of direct costs of
construction or acquisition and design fees incurred.  Capitalization
of these costs ceases and the construction in progress is transferred to the
appropriate category of property, plant and equipment when substantially all the
activities necessary to prepare the assets for their intended use are
completed.  Construction in progress is not depreciated.





(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)
Investment in Equity Affiliates





Investment
in affiliates consists of ownership in associated companies, which the Group
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
Group’s consolidated balance sheets and statements of income and comprehensive
income; however, the Company’s share of the earnings or losses of the investee
are reflected in the caption “Equity in loss in affiliates” in the consolidated
statements of income and comprehensive income. The Group’s carrying value in an
equity method investee is reflected in the caption “Long-term Investment” in the
Group’s consolidated balance sheets.





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





(j)
Impairment of Long-Lived Assets





Long-lived
assets held and used by the Group 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 is no impairment of long-lived assets as of December 31
and September 30, 2010.





(k)
Appropriated Retained Earnings





The
income of the Group’s PRC subsidiaries is distributable to its equity holders
after transfer to reserves as required by relevant PRC laws and regulations and
the subsidiaries’ articles of association. Appropriations to the reserves are
approved by the respective boards of directors.





Reserves
include statutory reserves and other reserves. Statutory reserves can be used to
make good previous years’ losses, if any, and may be converted into capital in
proportion to the existing equity interests of shareholders, provided that the
balance after such conversion is not less than 25% of the registered capital.
The appropriation of statutory reserve may cease to apply if the balance of the
fund is equal to 50% of the entity’s registered capital. Pursuant to relevant
PRC laws and articles of association of Tallyho, Hopsun, Anti-Aging and Xingpu,
the appropriation to the statutory reserves and other reserves is 10% of net
profit after taxation of respective entity, as determined in accordance with PRC
accounting standards and regulations. The results of operations reflected in the
consolidated financial statements prepared in accordance with U.S. GAAP
might differ from those reflected in the statutory financial statements of the
Group’s subsidiaries.





As of
December 31 and September 30, 2010, the statutory reserve recorded by the
Group’s PRC subsidiaries amounted to $1,283,484, respectively.




8


(l)
Revenue Recognition





The Group
recognizes revenue in accordance with ASC Topic 605. All of the following
criteria must exist in order for the Group to recognize revenue:
(1) persuasive evidence of an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to the
buyer is fixed or determinable; and (4) collectability is reasonably
assured.





Revenue
is recognized when products are delivered and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable.





(m)
Research and Development Costs





Research
and development costs are expensed as incurred.  These expenses
consist of the costs of the Group’s internal research and development
activities and the costs of developing new products and enhancing existing
products. Research and development costs amounted to $68,011 and $53,038 for the
three months ended December 31, 2010 and 2009, respectively.





(n)
Advertising





The Group
expenses all advertising costs as incurred. The advertising expense for the
three months ended December 31, 2010 and 2009 was $1,152 and nil,
respectively.





(o)
Retirement and Other Postretirement Benefits





Full-time
employees of the Group in the PRC participate in a government mandated defined
contribution plan, pursuant to which certain pension benefits, medical care,
employee housing fund and other welfare benefits are provided to employees.
Chinese labor regulations require that the PRC subsidiaries of the Group make
contributions to the government for these benefits based on certain percentages
of the employees’ salaries. The Group has no legal obligation for the benefits
beyond the contributions made. The total amounts for such employee benefits,
which were expensed as incurred, were approximately $65,403 and $71,358 for the
three months ended December 31, 2010 and 2009, respectively.





(p) Foreign
Currency Translation and Transactions





The
Company’s functional currency is the United States dollar (“$” or “US$”). The
functional currency of the Company’s subsidiaries and VIE in the PRC is Renminbi
(“RMB”) and in Hong Kong is the Hong Kong dollar (“HK$”).





At the
date a foreign currency transaction is recognized, each asset, liability,
revenue, expense, gain, or loss arising from the transaction is measured
initially in the functional currency of the recording entity by use of the
exchange rate in effect at that date.  The increase or decrease in
expected functional currency cash flows upon settlement of a transaction
resulting from a change in exchange rates between the functional currency and
the currency in which the transaction is denominated is recognized as foreign
currency transaction gain or loss that is included in determining net income for
the period in which the exchange rate changes. At each balance sheet date,
recorded balances that are denominated in a foreign currency are adjusted to
reflect the current exchange rate.





The
Company’s reporting currency is US$. Assets and liabilities of the PRC
subsidiaries and VIE are translated at the current exchange rate at the balance
sheet dates, and revenues and expenses are translated at the average exchange
rates during the reporting periods. Translation adjustments are reported in
other comprehensive income.





(q)
Income Taxes





The Group
adopted ASC Topic 740  “Accounting for Income Taxes” that requires
recognition of deferred income tax liabilities and assets for the expected
future tax consequences of temporary differences between income tax basis and
financial reporting basis of assets and liabilities. Provision for income taxes
consist of taxes currently due plus deferred taxes.





The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.


9


Deferred
tax is calculated at the tax rates that are expected to apply to the period when
the asset is realized or the liability is settled. Deferred tax is charged or
credited in the income statement, except when it related to items credited or
charged directly to equity, in which case the deferred tax is also dealt with in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Group intends to
settle its current tax assets and liabilities on a net basis.





(r)
Uncertain Tax Positions





The Group
follows ASC Topic 740  “Accounting for Uncertainty in Income Taxes”.
ASC Topic 740 prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. ASC Topic 740 also provides guidance on recognition of
income tax assets and liabilities, classification of current and deferred income
tax assets and liabilities, accounting for interest and penalties associated
with tax positions, accounting for income taxes in interim periods, and income
tax disclosures. The Group did not have any interest and penalties associated
with tax positions as of December 31 and September 30, 2010.





(s)
Earnings per Share





Earnings
per share are calculated in accordance with ASC Topic 260  “Earnings
Per Share”. Basic earnings per share are computed by dividing income
attributable to holders of common shares by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted into common
shares.





(t)
Comprehensive Income





The Group
follows ASC Topic 220  “Reporting Comprehensive Income”, which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, ASC Topic 220 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. During the
periods presented, the Group’s comprehensive income represents its net income
and foreign currency translation adjustments.





(u)
Commitments and Contingencies





In the
normal course of business, the Group 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 ASC Topic 450
(SFAS No. 5, “Accounting for Contingencies”), the Group 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
Group has not experienced any material service liability claims.





(v)
Fair Value of Financial Instruments





Financial
instruments include cash and cash equivalents, accounts and notes receivable,
prepayments and other receivables, short-term loans, accounts and notes payable,
other payables and amounts due to related party. The carrying amounts of these
financial instruments approximate their fair value due to the short term
maturities of these instruments.





The Group
adopted ASC Topic 820-10  “Fair Value Measurements” on January 1,
2008 for all financial assets and liabilities and nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the consolidated
financial statements on a recurring basis (at least annually). ASC Topic 820-10
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The Group has not adopted ASC
Topic 820-10 for non-financial assets and non-financial liabilities, as these
items are not recognized at fair value on a recurring basis.




10


ASC Topic
820-10 defines fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, the Group considers the principal or most advantageous market in
which it would transact and it considers assumptions that market participants
would use when pricing the asset or liability.





ASC Topic
820-10 establishes a fair value hierarchy that requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. A financial instrument’s categorization within the fair
value hierarchy is based upon the lowest level of input that is significant to
the fair value measurement. ASC Topic 820-10 establishes three levels of inputs
that may be used to measure fair value:





-
            Level 1 applies to assets or
      liabilities for which there are quoted prices in active markets for
      identical assets or
liabilities.


-
            Level 2 applies to assets or
      liabilities for which there are inputs other than quoted prices included
      within Level 1 that are observable for the asset or liability such as
      quoted prices for similar assets or liabilities in active markets; quoted
      prices for identical assets or liabilities in markets with insufficient
      volume or infrequent transactions (less active markets); or model-derived
      valuations in which significant inputs are observable or can be derived
      principally from, or corroborated by, observable market
      data.


-
            Level 3 applies to assets or
      liabilities for which there are unobservable inputs to the valuation
      methodology that are significant to the measurement of the fair value of
      the assets or liabilities.





(w)
Recently Issued Accounting Pronouncements




The FASB
has issued Accounting Standard Update (ASU) 2009-17, Consolidations (Topic 810)
- Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. ASU 2009-17 changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. This determination is based on,
among other things, the other entity’s purpose and design and the Company’s
ability to direct the activities of the other entity that most significantly
impact the other entity’s economic performance.  ASU 2009-17 also
required additional disclosures concerning an enterprise’s continuing
involvement with variable interest entities.  ASU 2009-17 is effective
at the start of the Company’s first fiscal year beginning after November 15,
2009.  The adoption had no effect on the Company’s financial position,
results of operations, or cash flows but resulted in additional disclosures
related to variable interest entities.


After
October 30, 2010, the FASB issued several Accounting Standard Updates (“ASUs”)–
ASU 2010-26 through ASU 2010-29 and ASU 2011-01, which do not require adoption
until a future date, are not expected to have a material impact on the
consolidated financial statements upon adoption.





Note
3 - Significant Risks





(a)    Foreign
Currency Risk





The Group
transacts all of its business in RMB, which is not freely convertible into
foreign currencies. On January 1, 1994, the PRC government abolished the
dual rate system and introduced a single rate of exchange as quoted daily by the
People’s Bank of China (the “PBOC”). However, the unification of the exchange
rates does not imply that RMB may be readily convertible into US$ or other
foreign currencies. All foreign exchange transactions continue to take place
either through the PBOC or other banks authorized to buy and sell foreign
currencies at the exchange rates quoted by the PBOC. Approval of foreign
currency payments by the PBOC or other institutions requires submitting a
payment application form together with suppliers’ invoices, shipping documents
and signed contracts.





Additionally,
the value of RMB is subject to changes in central government policies and
international economic and political developments affecting supply and demand in
the PRC foreign exchange trading system market.





(b)  Concentration
of Credit Risk





Assets
that potentially subject the Group to significant concentration of credit risk
primarily consist of cash and cash equivalents, accounts and notes receivable.
As of December 31 and September 30, 2010, substantially all of the Group’s cash
and cash equivalents were deposited in financial institutions located in the
PRC, which management believes are of high credit quality. Accounts receivable
are typically unsecured and are derived from revenue earned from customers in
the PRC. The risk with respect to accounts receivable is mitigated by credit
evaluations the Group performs on its customers and its ongoing monitoring
process of outstanding balances.





(c)  Concentration
of Customers





The top
six third-party customers accounted for approximately 8.7% of the consolidated
revenues for the three months ended December 31, 2010 and the top three
third-party customers accounted for approximately 1.4% of the consolidated
revenues for the three months ended December 31, 2009.





The top
six third-party customers accounted for 72.9% of the accounts receivable as of
December 31, 2010 and the top six third-party customers accounted for 67% of the
accounts receivable as of September 30, 2010.


11





(d)
Concentration of Suppliers





The top
five third-party suppliers accounted for approximately 50.9% of the total
purchase for materials and services for the three months ended December 31, 2010
while approximately 63.4% for the three months ended December 31,
2009.





The top
five third-party suppliers accounted for 46.3% of the accounts payable for
materials and services as of December 31, 2010 and the top five third-party
suppliers accounted for 56% of the accounts payable for materials and services
as of September 30, 2010.





Note
4 – Earnings (Loss) per Share





The Group
reports earnings (loss) per share in accordance with ASC Topic
260  “Earnings per Share”.  ASC Topic 260 requires
presentation of basic and diluted earnings per share in conjunction with the
disclosure of the methodology used in computing such earnings (loss) per
share.  Basic earnings per share excludes dilution and is computed by
dividing income available to common shareholders by the weighted average common
shares outstanding during the period. Diluted earnings (loss) per share takes
into account the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common stock.
The following is a reconciliation of the basic and diluted earnings (loss) per
share computations for the three months ended December 31, 2010 and
2009:





Three Months Ended
                    December 31,2010
                  
                  
                  2009For the three
      months ended December 31, 2010 and 2009Net
      income (loss) for basic and diluted earnings (loss) per
    share
                  
                  $
                  (650,762
                  )
                  
                  $
                  889,151Weighted
      average number of common shares outstanding – basic and diluted
      *
                  
                  
                  11,939,967
                  
                  
                  
                  9,439,130Earnings
      (loss) per share – basic and diluted
                  
                  $
                  (0.05
                  )
                  
                  $
                  0.09





* All the
outstanding warrant shares do not have dilutive effect on earnings per
share.





Note
5 - Accounts Receivable, net





December 31,
                  
                  
                  September 30,2010
                  
                  
                  2010Accounts
      receivable
                  
                  $
                  5,569,150
                  
                  
                  $
                  7,526,793Allowance
      for doubtful accounts
                  
                  
                  (1,588,394
                  )
                  
                  
                  (1,570,754
                  )$
                  3,980,756
                  
                  
                  $
                  5,956,039





The
movement of allowance for doubtful accounts for the three months ended December
31, 2010 and 2009 is as follows:





Three Months Ended
                  December 31,2010
                
                
                2009Allowance
      for doubtful accounts, beginning of the quarter
                
                $
                1,570,753
                
                
                $
                717,451Addition
                
                
                -
                
                
                
                95,707Reduction
                
                
                (2,837
                )
                
                
                -Translation
      adjustment
                
                
                20,478
                
                
                
                (2,174
                )Allowance
      for doubtful accounts, end of the quarter
                
                $
                1,588,394
                
                
                $
                810,984




12




Note
6 – Inventories, net





December 31,
                
                
                September 30,2010
                
                
                2010Raw
      materials
                
                $
                200,384
                
                
                $
                179,993Work
      in progress
                
                
                255,412
                
                
                
                226,844Finished
      goods
                
                
                80,447
                
                
                
                29,541Low-value
      consumables and packaging materials
                
                
                118,194
                
                
                
                88,941$
                654,437
                
                
                $
                525,319





Note
7 - Prepayments and Other Receivables





December 31,
                
                
                September 30,2010
                
                
                2010ERA
      Bio-Technology (Shenzhen) Co., Ltd. (a)
                
                $
                4,132,006
                
                
                $
                4,078,769Other
      receivables and prepaid expenses
                
                
                1,065,562
                
                
                
                1,360,730Advance
      to suppliers
                
                
                822,156
                
                
                
                365,8406,019,724
                
                
                
                5,805,339Allowance
      for doubtful accounts
                
                
                (3,186,524
                )
                
                
                (3,145,468
                )$
                2,833,200
                
                
                $
                2,659,871







(a)
            As of December 31, 2010, the
      Group lent $4,132,006, in aggregate to ERA Biotech.  $2,344,294
      of such loans was due on August 11, 2009 and was extended to July 28, 2010
      on July 28, 2009. The remaining $1,787,712 balance of such loans matured
      on June 9, 2010. The Company evaluated the collectability of such loan
      balance and determined to provide a bad debt allowance of $2,619,559 as of
      December 31, 2010.





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 certain amounts of funds
collected from customers by sales managers of Hopsun and kept at respective bank
accounts for working capital purposes. Hopsun has entered into a cash advance
custody agreement with each sales manager which stipulates the ownership and all
the other rights related to such funds belong to Hopsun and each sales manager
bears various legal responsibilities including guarding the safety of such
funds. In addition to other control measures, these bank accounts are operated
by Hopsun instead of sales managers. Amounts due from staff amounted to
$7,262,313 and $7,993,826 as of December 31 and September 30, 2010,
respectively. As of January 8, 2011, $4,114,916 of amounts due from staff had
been transferred to the Group’s corporate bank accounts.


13





Note
9 – Property, Plant and Equipment





December 31,
                
                
                September 30,2010
                
                
                2010Buildings
      and improvement
                
                $
                10,009,170
                
                
                $
                9,885,136Machinery
      and equipment
                
                
                2,628,294
                
                
                
                2,315,357Furniture
      and office equipment
                
                
                543,016
                
                
                
                517,850Motor
      vehicles
                
                
                793,618
                
                
                
                786,50113,974,098
                
                
                
                13,504,844Accumulated
      depreciation
                
                
                (1,899,894
                )
                
                
                (1,637,179
                )$
                12,074,204
                
                
                $
                11,867,665





A
building owned by the Group with net book value of $1,058,367 was pledged, as
renewed as of September 30, 2010, by the Group to Wuhan Rural Commercial Bank
for a loan of $514,232, borrowed by Wuhan Pan-Asia Peptide Material Research Co.
Limited (“Wuhan Pan-Asia”), an unrelated third party. Wuhan Pan-Asia entered
into an agreement with the Group for a loan facility of $756,224 to the Group in
exchange for the pledge. As of December 31, 2010, the balance due to Wuhan
Pan-Asia was nil.





Depreciation
expense for the three months ended December 31, 2010 and 2009 was $205,815 and
$72,930, respectively.





Note
10 – 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 Group has paid deposit for land
use rights, in aggregate, $5,624,629 and $5,552,160 as of December 31 and
September 30, 2010, respectively. The relevant certificates of land use right
are to be issued, and if not, such amount will be refunded.





Note
11 – Prepayments for Long-lived Assets





As of
December 31, 2010, prepayments for long-lived assets  include the
prepayment of $302,489 for the turnkey design services for construction for the
regional headquarters (note 10) and the prepayment of $1,058,713 for the
regional customer health center in Guangdong province.





Note
12 - Land Use Rights





As of
December 31, 2010, land use rights of the Group included certain parcels of land
located in Wuhan City, Hubei Province, the PRC, with a net carrying value of
$281,458. 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. Amortization expense for the three months ended December 31,
2010 and 2009 was $1,626 and $1,586, respectively.





Note
13 – Investment in Equity Affiliates





As of
December 31, 2010, the Group’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 Inspection”), which engages
in biotechnological health products testing including Tallyho’s
products.





The
investment in affiliates amounted to $223,532 and $227,351 as of December 31 and
September 30, 2010, respectively, which includes the Group’s share of losses in
the affiliates of $6,731 and $7,837 for the three months ended December 31, 2010
and 2009.





Note
14 - Other Assets





Other
assets represented equipment held for sale. The Group acted as a guarantor for
an original loan amount of $424,582 borrowed by Wuhan Sanrong Group 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 Group
take over the loan. The loan including the collateral was taken over by the
Group 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 has
ceased to be a shareholder of Tallyho since March 28, 2001.


14





Note
15 - Short-term Loans





Interest
                      
                      
                      December 31,
                      September 30,rate per
                      
                      
                      2010
                      
                      
                      2010Lender
                      
                      Annum
                      
                      
                      RMB
                      
                      
                      USD
                      
                      
                      RMB
                      
                      
                      USDAgriculture Bank of ChinaThe
      term of the loan has expired in September 2003 (note 14)
                      
                      
                      5.84
                      %
                      
                      
                      1,960,000
                      
                      
                      
                      296,440
                      
                      
                      
                      1,980,000
                      
                      
                      
                      295,606Wuhan Finance BureauThe
      term of the loan has expired in November 2001
                      
                      
                      5.94
                      %
                      
                      
                      1,500,000
                      
                      
                      
                      226,867
                      
                      
                      
                      1,500,000
                      
                      
                      
                      223,944Total
      bank loans
                      
                      
                      
                      
                      
                      
                      3,460,000
                      
                      
                      
                      523,307
                      
                      
                      
                      3,480,000
                      
                      
                      
                      519,550





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.  The loan from Agriculture Bank of China is being repaid by
approximately $3,000 per month at the request of the bank, but Wuhan Finance
Bureau has not demanded repayment. Interest accrued on a monthly basis based on
the contractual rate.





The
interest expenses for the three months ended December 31, 2010 and
2009 were $23,329 and $22,070, respectively.   The interest expenses
also include those related to the loan from Wuhan Pan-Asia, an unrelated party
(note 9).





Note
16 - Accrued Expenses and Other Liabilities





December31,
                  
                  
                  September 30,2010
                  
                  
                  2010Advance
      from customers
                  
                  $
                  68,990
                  
                  
                  $
                  15,355Accrued
      payroll
                  
                  
                  242,556
                  
                  
                  
                  243,373Accrued
      expense
                  
                  
                  223,073
                  
                  
                  
                  208,852Other
      payables–
      Wuhan Xinwang Investment Management Group
                  
                  
                  398,037
                  
                  
                  
                  392,909–
      Wuhan Fukang Construction Co.
                  
                  
                  179,528
                  
                  
                  
                  -–
      Malaysia Phoenix Group
                  
                  
                  117,817
                  
                  
                  
                  119,123Others
                  
                  
                  379,274
                  
                  
                  
                  546,322$
                  1, 609,274
                  
                  
                  $
                  1,525,934





Note
17 - Taxation





The
Company, its subsidiaries and VIE each file tax returns
separately.


15





1)
VAT





Pursuant
to the Provisional Regulation of the PRC on the VAT and its implementing rules,
all entities and individuals (“Taxpayers”) that are engaged in the sale of
products in the PRC are generally required to pay the VAT at a rate of 17% of
the gross sales proceeds received, less any deductible VAT already paid or borne
by the taxpayers. Further, when exporting goods, the exporter is entitled to a
portion of or all the refund of VAT that it has already paid or incurred. VAT
Taxpayers can be divided into two categories, i.e., General VAT Taxpayer and
Small Scale VAT Taxpayer. The Small Scale VAT Taxpayer is subject to a
simplified VAT rate on the gross sales proceeds while all VAT previously paid,
or input VAT, cannot be deductible for tax payment purpose. This simplified VAT
tax rate was reduced to 3% effective January 1, 2009. Some of Hopsun’s branch
offices are Small Scale VAT Taxpayers and subject to the simplified VAT rate of
3%,





2) Income
tax





United
States





CPGI is
incorporated in Delaware and is subject to U.S. federal income tax with a system
of graduated tax rates ranging from 15% to 35%. As CPGI does not conduct any
business in Delaware, it is not subject to Delaware state corporate income
tax.





BVI





Cantix,
incorporated in BVI, is governed by the income tax law of BVI. According to
current BVI income tax law, the applicable income tax rate for Cantix is
nil.





Hong
Kong





Moneyeasy,
incorporated in Hong Kong, is subject to a corporate income tax rate of
16.5%.





PRC





In
accordance with the relevant tax laws and regulations of the PRC, a company
registered in the PRC is subject to income taxes within the PRC at the
applicable tax rate on the taxable income. The statutory tax rate is
25%.





Tallyho,
registered in the City of Wuhan in the PRC, has obtained the approval and would
be qualified as a New and High-Tech Enterprise ("NHTE") by relevant
governmental authorities in December 2010. According to the PRC income tax law,
Tallyho would be eligible to enjoy a preferential tax rate of 15% for the
calendar year of 2010.





Hopsun,
registered in the City of Guangzhou in the PRC, was qualified as a  NHTE by
relevant governmental authorities in December 2009. According to the PRC income
tax law and its NHTE certificate issued, Hopsun is subject to income tax at a
preferential tax rate of 15% starting from the calendar year of 2009 for 3 years
unless the NHTE status would become invalid.





Anti-Aging,
registered in the City of Wuhan in the PRC, is subject to the income tax at tax
rate of 25%.





Xingpu,
registered in the City of Guangzhou in the PRC, is subject to the income tax at
tax rate of 25%.





Taxes
payable consist of the following:





December 31,
                
                
                September 30,2010
                
                
                2010VAT
      payable
                
                $
                2,911,500
                
                
                $
                3,113,658Income
      tax payable
                
                
                2,112,380
                
                
                
                2,250,810Other
      taxes payable
                
                
                225,368
                
                
                
                233,331$
                5,249,248
                
                
                $
                5,597,799




The
deferred tax benefit resulted from operating loss amounted to $116,880 and nil
during the three months ended December 31, 2010 and 2009.


16





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:





December 31,
                
                
                September 30,2010
                
                
                2010Due
      to related partiesWuhan
      Inspection (a)
                
                $
                443,481
                
                
                $
                442,689








(a)
            Wuhan Inspection advanced to
      Tallyho payments for relevant expenses for obtaining the necessary special
      licenses for Wuhan Inspection’s inspection business through and with the
      assistance of Tallyho.





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





Note
19 - Restricted Net Assets





The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiaries. Relevant PRC statutory
laws and regulations permit payments of dividends by the Company’s PRC
subsidiary only out of their retained earnings, if any, as determined in
accordance with PRC accounting standards and regulations. The results of
operations reflected in the consolidated financial statements prepared in
accordance with U.S. GAAP differ from those reflected in the statutory financial
statements of the Company’s subsidiaries.





Amounts
restricted include registered paid-in capital, additional paid-in capital and
statutory reserve funds of the Company’s PRC subsidiaries as determined pursuant
to PRC generally accepted accounting principles, totaling approximately
$7,631,088 and $7,532,767, as of December 31 and September 30, 2010,
respectively.





Note
20 - Commitment and Contingency





(a)
Operating lease commitment





The Group
has entered into several tenancy agreements for the operating lease of office
blocks, workshops and warehouses. The Group’s commitment for minimum lease
payments under these operating leases as of December 31, 2010 for the next five
years is as follows:





As
      of December 31, 2010Within
      1 year
                
                $
                34,516Between
      1 and 2 years
                
                
                8,379Between
      2 and 3 years
                
                
                3,085Between
      3 and 4 years
                
                
                3,085Above
      4 years
                
                
                1,286$
                50,351





(b)
Capital commitment





There is
a capital commitment of $211,743 for the regional customer health center in
Guangdong province, China as of December 31, 2010.  There is no
capital commitment as of September 30, 2010.





(c)
Contingency





The Group
is not currently a party to any legal proceeding, investigation or claim which,
in the opinion of the management, is likely to have a material adverse effect on
the business, financial condition or results of operations, The Group did not
record any contingencies as of December 31 and September 30,
2010.


17


Note
21 – Shareholders’ Equity





Common
stock





On
November 13, 2009, as the result of closing of the Exchange disclosed in Note 1,
the Company acquired all of the issued and outstanding capital stock of Cantix
in exchange for the issuance of 8,800,000 (on a post 8-for-1 forward stock split
basis) shares of the Company’s common stock.





On
January 8, 2010, as the result of closing of an investment of $3,600,000
pursuant to a Securities Purchase Agreement dated December 16, 2009, the Company
issued a) 666,667 shares of the Company’s common stock, and b) a 5 year warrant
to purchase up to an additional 333,333 shares of Common Stock at an exercise
price of $6.75 per share to the investor. The net proceeds was $3,300,000 after
deducting commissions and other closing expenses of $300,000.





On March
1 and September 1, 2010, the Company issued, in aggregate, 38,000 shares of the
Company’s common stock as payments for services which were valued at $137,490
and included in deferred compensation of which $37,050 was expensed during the
three months ended December 31, 2010.





On April
21, 2010, as the result of closing of an investment with gross proceeds of
$3,000,000 pursuant to a Share Purchase Agreement dated April 16, 2010, the
Company issued (i) 609,557 shares of common stock, par value $.0001 per share,
and (ii) a 5 year warrant to purchase up to an additional 80,956 shares of
Common Stock at an exercise price of $6.75 per share to the investor. The net
proceeds was $2,761,070 after deducting commissions and other closing expenses
of $238,930.





On
September 2, 2010, as the result of closing of an investment with gross proceeds
of $3,000,000 pursuant to a Share Purchase Agreement dated August 25, 2010, the
Company issued (i) 585,743 shares of common stock, par value $.0001 per share,
and (ii) a 5 year warrant to purchase up to an additional 87,861 shares of
Common Stock at an exercise price of $6.75 per share to the investor. The net
proceeds was $2,935,534 after deducting transaction related cash commission and
expenses of $64,466. The Company also issued 40,000 shares of the Company’s
common stock for commissions which were valued at $187,200 and treated as
transaction costs associated with the above financing.





Warrant





On
January 8, 2010, the Company issued a 5 year warrant to purchase up to 333,333
shares of Common Stock at an exercise price of $6.75 per share.  On
April 21, 2010, the Company issued a 5 year warrant to purchase up to 80,956
shares of Common Stock at an exercise price of $6.75 per share.  On
September 2, 2010, the Company issued a 5 year warrant to purchase up to 87,861
shares of Common Stock at an exercise price of $6.75 per share. The fair values
of these warrants were estimated using the Black-Scholes option–pricing
model.





The
following table summarizes the assumptions used in the Black-Scholes
option–pricing model when calculating the fair values of the
warrants:





Number of
                  Shares
                  Underlying the
                  Warrant Valued
                
                Expected Life
                  (Years)
                
                
                Exercise Price
                
                
                Expected
                  Volatility
                
                
                Dividend Yield
                
                
                Risk Free
                  Interest Rate
                
                
                Grant Date Fair
                  Value333,333
                
                
                2
                
                
                $
                6.75
                
                
                
                125
                %
                
                
                -
                
                
                
                0.96
                %
                
                $
                1,051,43480,956
                
                
                2
                
                
                $
                6.75
                
                
                
                125
                %
                
                
                -
                
                
                
                1.03
                %
                
                $
                225,50587,861
                
                
                2
                
                
                $
                6.75
                
                
                
                125
                %
                
                
                -
                
                
                
                0.50
                %
                
                $
                257,394





Due to
the limited trading history of the Company’s common stock, the Company used 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, 2010
                
                
                502,150Granted
                
                
                -Forfeited
                
                
                -Exercised
                
                
                -Outstanding
      as of December 31, 2010
                
                
                502,150




Note
22 - Subsequent Events





Management
has considered all events occurring through the date that the consolidated
financial statements have been issued and has determined that there are no such
events that are material to the consolidated financial statements.




18


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





Special
Note Regarding Forward Looking Statements





In addition to historical
information, this report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. We use words such as “believe,”
“expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,”
“aim,” “will” or similar expressions which are intended to identify
forward-looking statements. Such statements include, among others, those
concerning market and industry segment growth and demand and acceptance of new
and existing products; any projections of sales, earnings, revenue, margins or
other financial items; any statements of the plans, strategies and objectives of
management for future operations; and any statements regarding future economic
conditions or performance, as well as all assumptions, expectations,
predictions, intentions or beliefs about future events. You are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, including those identified in Item 1A, “Risk
Factors” included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2010, as well as assumptions, which, if they were to ever
materialize or prove incorrect, could cause the results of the Company to differ
materially from those expressed or implied by such forward-looking
statements.





Although
we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance,
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements as predictions
of future events. We are under no duty to update any of these forward-looking
statements after the date of this report to conform our prior statements to
actual results or revised expectations.





Use
of Terms





Except as
otherwise indicated by the context and for the purposes of this report only,
references in this report to:





·
            “Company,”
      “we,” “us” and “our” are to the combined business of China Polypeptide
      Group, Inc., a Delaware corporation, and its subsidiaries, Cantix,
      Moneyeasy, Tallyho, Wuhan Anti-Aging, and Hopsun, and its variable
      interest entity, or VIE,
Xingpu;




·
            “Cantix”
      are to our wholly-owned direct subsidiary, Cantix International Limited, a
      British Virgin Islands limited
company;




·
            “Moneyeasy”
      are to our wholly-owned indirect subsidiary, Moneyeasy Industries Limited,
      a Hong Kong limited company;




·
            “Tallyho”
      are to our wholly-owned indirect subsidiary, Wuhan Tallyho Biological
      Product Co., Ltd., a PRC limited
company;




·
            “Wuhan
      Anti-Aging” or “Anti-Aging” are to our wholly-owned indirect subsidiary,
      Wuhan Polypeptide Anti-Aging Research & Development Co., Ltd., a PRC
      limited company;




·
            “Hopsun”
      are to our wholly-owned indirect subsidiary, Guangdong Hopsun Polypeptide
      Biological Technology Co., Ltd., a PRC limited
  company;




·
            “Xingpu”
      are to our variable interest entity (VIE) indirect subsidiary, Guangdong
      Xingpu Polypeptide Research Co., Ltd., a PRC limited
    company;




·
            “SEC”
      are to the United States Securities and Exchange
    Commission;




·
            “Securities
      Act” are to the Securities Act of 1933, as amended, and “Exchange Act” are
      to the Securities Exchange Act of 1934, as
  amended.




·
            “China”
      and “PRC” are to People’s Republic of
China;




·
            “BVI”
      are to the British Virgin Islands;




·
            “Hong
      Kong” are to the Hong Kong Special Administrative Region of the People’s
      Republic of China;




·
            “RMB”
      are to Renminbi, the legal currency of China;
  and




·
            “U.S.
      dollar,” “$” and “US$” are to the legal currency of the United
      States.




19




Overview of our Business





Through
our operating subsidiaries in China, we are engaged in the research,
development, production and sale of polypeptide-based nutritional supplements,
health foods, functional foods, nutricosmetics products and other related health
and wellness products. Polypeptides are small molecular structures consisting of
10-50 amino acids and have been found to have high nutritional value and support
body functions such as regulating immunological functions. We focus on enzyme
engineering in order to produce micromolecular protein structures in the form of
certain functional peptides for use as nutritional ingredients, additives and
supplements.





We have
developed over 70 different types of polypeptide-based nutritional products. Our
key products include Polypeptide Protein Powder and Shenguo Polypeptide
Capsules. Other functional polypeptide-based nutritional supplement products
include lipid lowering soy peptide products. These products are manufactured
using our proprietary processing methods.





Our
products are primarily manufacturedin our owned and
operated production facilities located on 16,477 square meters of land in the
Hannan Economic Development Zone in Wuhan, China, which are planned to be
further expanded. Some of our nutritional supplements and personal care products
are manufactured for us through contractual relationships with other
manufacturing companies, in accordance with our own proprietary formulations.
Our products currently being marketed and sold in China have been tested and
approved by the relevant Chinese governmental hygiene and safety agencies such
as the local bureaus of Ministry of Health and the State Food and Drug
Administration. Our research and development efforts are conducted in three
different R&D centers from basic peptide research to anti-aging focused
applied research and related product development in Wuhan, China.





Our
products are sold to customers both in China and internationally, with China
currently being the primary market, through a combined network of sales
personnel in our headquarters and throughout our branch sales offices in 15
provinces in China, wholesalers, distributors and private labeled
partners.





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.





Results
of Operations





The
following table sets 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 December 31, 2010 and December 31, 2009





Three Months Ended December 31,2010
                                            
                                            
                                            2009Amount
                                            
                                            
                                            % ofRevenues
                                            
                                            
                                            Amount
                                            
                                            
                                            % ofRevenues(in dollars, except percentages)REVENUES
                                            
                                            
                                            3,320,756
                                            
                                            
                                            
                                            100.0
                                            %
                                            
                                            
                                            5,746,590
                                            
                                            
                                            
                                            100.0
                                            %COST
      OF SALES
                                            
                                            
                                            409,049
                                            
                                            
                                            
                                            12.3
                                            %
                                            
                                            
                                            276,574
                                            
                                            
                                            
                                            4.8
                                            %GROSS
      PROFIT
                                            
                                            
                                            2,911,707
                                            
                                            
                                            
                                            87.7
                                            %
                                            
                                            
                                            5,470,016
                                            
                                            
                                            
                                            95.2
                                            %SELLING
      AND ADMINISTRATIVES EXPENSES
                                            
                                            
                                            3,687,532
                                            
                                            
                                            
                                            111.0
                                            %
                                            
                                            
                                            4,302,838
                                            
                                            
                                            
                                            74.9
                                            %OPERATING
      INCOME (LOSS)
                                            
                                            
                                            (775,825
                                            )
                                            
                                            
                                            -23.4
                                            %
                                            
                                            
                                            1,167,178
                                            
                                            
                                            
                                            20.3
                                            %OTHER
      INCOME (EXPENSE)Interest
      expense, net
                                            
                                            
                                            (29,215
                                            )
                                            
                                            
                                            -0.9
                                            %
                                            
                                            
                                            (17,560
                                            )
                                            
                                            
                                            -0.3
                                            %Equity
      loss in affiliates
                                            
                                            
                                            (6,731
                                            )
                                            
                                            
                                            -0.2
                                            %
                                            
                                            
                                            (7,837
                                            )
                                            
                                            
                                            -0.1
                                            %Other
      income (expense)
                                            
                                            
                                            44,129
                                            
                                            
                                            
                                            1.3
                                            %
                                            
                                            
                                            (6,169
                                            )
                                            
                                            
                                            -0.1
                                            %INCOME
      (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
                                            
                                            
                                            (767,642
                                            )
                                            
                                            
                                            -23.1
                                            %
                                            
                                            
                                            1,135,612
                                            
                                            
                                            
                                            19.8
                                            %INCOME
      TAX EXPENSE (BENEFIT)
                                            
                                            
                                            (116,880
                                            )
                                            
                                            
                                            -3.5
                                            %
                                            
                                            
                                            246,461
                                            
                                            
                                            
                                            4.3
                                            %NET
      INCOME (LOSS)
                                            
                                            
                                            (650,762
                                            )
                                            
                                            
                                            -19.6
                                            %
                                            
                                            
                                            889,151
                                            
                                            
                                            
                                            15.5
                                            %OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation gain (loss)
                                            
                                            
                                            495,130
                                            
                                            
                                            
                                            14.9
                                            %
                                            
                                            
                                            (71,918
                                            )
                                            
                                            
                                            -1.3
                                            %COMPREHENSIVE
      INCOME (LOSS)
                                            
                                            
                                            (155,632
                                            )
                                            
                                            
                                            -4.7
                                            %
                                            
                                            
                                            817,233
                                            
                                            
                                            
                                            14.2
                                            %




20




Revenues.Revenues for the three
months ended December 31, 2010 decreased to
$3,320,756 as compared to $5,746,590 for the three months ended December 31,
2009, a decrease of $2,425,834 or 42.2%.  The decrease is mainly
attributable to the decrease of our business-to-consumer, or B2C, sales of our
branded polypeptide-based nutraceutical products of $2,865,738, or 49.5%, while
our business-to-business, or B2B, sales of polypeptide-based ingredients and
private-labeled products to other nutraceutical manufacturers and marketers
increased by $294,212, or 295.5%, as compared to those in the three months ended
December 31, 2009.  The decrease in our B2C sales is mainly due to
reduced sales activities as a result of our B2C sales network restructuring and
preparation for subsequent higher sale seasons.  Management expects
that revenues will rebound in future periods.





Cost of
Sales.Cost of
sales for the three months ended December 31, 2010 amounted to $409,049, or
approximately 12.3% of revenues, compared to $276,574, or approximately 4.8% of
revenues, for the three months ended December 31, 2009, an increase of $132,475
or 47.9%.  The increase is mainly attributable to increase in overhead
costs as a result of salary increase, additional depreciations of new equipment
and utility cost increase.





Gross
Profit.Gross
profit for the three months ended December 31, 2010 decreased $2,558,309, or
46.8%, to $2,911,707, from $5,470,016 for the three months ended December 31,
2009.  The respective gross margins are 87.7% and 95.2% for the three
months ended December 31, 2010 and 2009.  The decrease in gross profit
is mainly due to the decrease in revenues and increase in costs of sales noted
above.




Selling and
Administrative Expenses.Selling and administrative
expenses for the three months ended December 31, 2010 totaled $3,687,532, or
approximately 111.0% of revenues, compared to $4,302,838, or approximately 74.9%
of revenues, for the same period in 2009, a decrease of $615,306, or 14.3%.
Though the absolute value of selling and administrative expenses decreased, the
proportion to revenues significantly increased. The significant increase in the
proportion to revenues is mainly attributable to the decrease in
revenues.
 
 Operating Income
(Loss).An
operating loss of $775,825, or approximately -23.4% of revenues, was incurred
for the three months ended December 31, 2010, as compared to an operating income
of $1,167,178, or approximately20.3% of revenues, for the three months ended
December 31, 2009, a decrease of $1,943,003, or 166.5%. The operating loss is
mainly attributable to the decrease in revenues and increase in costs of sales
in the three months ended December 31, 2010.





Interest
Expense.Net
interest expense totaled $29,215 for the three months ended December 31, 2010,
as compared to net interest expense of $17,560 for the three months ended
December 31, 2009, an increase of $11,655 or 66.4%.





Equity Loss in
Affiliates.Equity loss in affiliates for the three months ended December 31, 2010
amounted to $6,731, a decrease of $1,106, or 14.1%, as compared to equity loss
in affiliates of $7,837 for the three months ended December 31, 2009. The
decrease is due to the decrease in the net loss of an affiliate company in which
the Company has a 40% equity interest and uses the equity method to account for
such an investment.




21




Other Income
(Expense).Other
income was $44,129 for the three months ended December 31, 2010, as compared to
other expense of $6,169 for the three months ended December 31, 2009, an
absolute change of $50,298. The change is mainly attributable to the subsidy
income from governments during the three months ended December 31,
2010.




Income(Loss)
before Income Tax Expense(Benefit). Loss
before income tax expense (benefit) was $767,642, or approximately -23.1% of
revenues, for the three months ended December 31, 2010, as compared to income
before income tax expense of $1,135,612, or approximately 19.8% of revenues, for
the three months ended December 31, 2009, a decrease of $1,903,254, or -167.6%.
The decrease in income before income tax expense is mainly attributable to the
$2,425,834 decrease in revenues and the $132,475 increase in costs of sales
during the three months ended December 31, 2010.
 
 Net Income
(Loss).Net loss
was $650,762, or approximately -19.6% of revenues, for the three months ended
December 31, 2010, as compared to net income of $889,151, or approximately 15.5%
of revenues, for the three months ended December 31, 2009, a decrease of
$1,539,913, or -173.2%.   The decrease in net income is mainly
attributable to the decrease of $2,425,834 in revenues, the increase of $132,475
in costs of sales during the three months ended December 31, 2010.Although no assurance
can be given, management believes that our revenues and net income will resume
growth in future periods resulting from, among other factors, growing market
demands for anti-aging nutritional supplements, health foods and functional food
products, our increased sales and marketing efforts after the restructuring of
our sales network, our newly added manufacturing capacity to meet such
increasing demands, our expansion into other high margin peptide-based product
categories, as well as the PRC government’s increasing emphasis on domestic
consumption as a key area for future sustained economic
growth.




Liquidity
and Capital Resources





Cash
Flows





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





Three Months Ended December 31,2010
                  
                  
                  2009(in dollars)Net
      cash provided by operating activities
                  
                  
                  1,707,531
                  
                  
                  
                  4,975,612Net
      cash (used in) investing activities
                  
                  
                  (1,686,685
                  )
                  
                  
                  (2,432,783
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (7,945
                  )
                  
                  
                  2,164,147Effect
      of exchange rate fluctuation on cash and cash equivalents
                  
                  
                  69,803
                  
                  
                  
                  (7,645
                  )Net
      increase in cash and cash equivalents
                  
                  
                  82,704
                  
                  
                  
                  4,699,331Cash
      and cash equivalents, beginning of period
                  
                  
                  14,421,012
                  
                  
                  
                  4,439,732Cash
      and cash equivalents, end of period
                  
                  
                  14,503,716
                  
                  
                  
                  9,139,063




Operating
Activities





Net cash
provided by operating activities amounted to $1,707,531 during the three months
ended December 31, 2010, a decrease of $3,268,081, or 65.7%, as compared to
$4,975,612 during the three months ended December 31, 2009. The decrease is
mainly attributable to the decrease of $1,539,913 in net income and less
collection of accounts receivable of $1,971,748.





Investing
Activities





Net cash
used in investing activities decreased by $746,098, or 30.7%, to $1,686,685
during the three months ended December 31, 2010, as compared to $2,432,783
during the three months ended December 31, 2009.  There were payments
(approximately $2.34 million) incurred during the three months ended December
31, 2009 to acquire the land use right for building the regional headquarters
and research and development center in Guangzhou city, China. On the other hand,
we made prepayments for certain long-lived assets, totaling $1,349,933 during
the three months ended December 31, 2010




22




Financing
Activities





Net cash
used in financing activities amounted to $7,945 during the three months ended
December 31, 2010, as compared to net cash provided by financing activities of
$2,164,147 during the three months ended December 31, 2009, a decrease of
$2,172,092, or 100.4%, resulting from the partial payments (approximately $2.24
million) of an equity investment made by an institutional investor during the
three months ended December 31, 2009.





Loan
Commitments




As of
December 31, 2010, we had the following outstanding bank
loans:





We had an
outstanding bank loan of RMB1,960,000 (approximately $296,440) from the
Agriculture Bank of China, Wuhan Branch. This bank loan has been continuously
extended from September 2003, the original maturity date.  The Company
has been repaying the principal amount of this loan with payments of RMB 20,000
(approximately $3,000) per month at the request of the bank.  Interest
accrues on a monthly basis at the rate of 5.84% per annum.





The
Company had an outstanding bank loan of RMB1,500,000 (approximately $226,867)
from the Wuhan Finance Bureau. This loan has been continuously extended from
November 2001, the original maturity date, and such loan will be repaid when the
bank requests repayment.  Interest accrues on a monthly basis at the rate
of 5.94% per annum.





The
Company has a loan facility agreement of RMB5,000,000 (approximately $756,224)
with Wuhan Pan-Asia Peptide Material Research Co., Ltd. (“Wuhan Pan-Asia”), an
unrelated third party. Under such an agreement, Wuhan Pan-Asia lends to the
Company, when needed, with the funds borrowed from Wuhan Rural Commercial Bank
for part of which, i.e., RMB3,400,000 (approximately 514,232),  the
Company pledges an office building as collateral.  Interest on the
loan is paid by the Company monthly at the rate of 0.566%. As of December 31,
2010, the balance due to Wuhan Pan-Asia was nil.





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





There is
a capital commitment of $211,743 for the regional customer health center in
Guangdong province, China as of December 31, 2010.  There is no
capital commitment as of September 30, 2010.





Other
than the above, we have no other long term debt, capital or operating lease or
fixed purchase obligations under material contracts.





Off
Balance Sheet Arrangements





Other
than with respect to our pledge of an office building owned by us in connection
with the Wuhan Pan-Asia loan as described above, we have not entered into any
other financial guarantees or other commitments to guarantee the payment
obligations of any third parties. We have not entered into any derivative
contracts that are indexed to our shares and classified as stockholder’s equity
or that are not reflected in our consolidated financial statements.
Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or
market risk support to such entity. We do not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.




23




Seasonality




In recent
years, our revenues for the second and forth quarters in each fiscal year have
been higher than revenues for the first and third fiscal quarters.  We
believe that this is partially due to a number of major domestic festivals and
holiday celebrations that occur in China around January and September, such as
the Chinese New Year.





Critical
Accounting Policies and Estimates





Critical accounting policies are those we believe are most
important to portraying our financial condition and results of operations and
also require the greatest amount of subjective or complex judgments by
management.  Judgments and uncertainties regarding the application of these
policies may result in materially different amounts being reported under various
conditions or using different assumptions.  There have been no material
changes to the critical accounting policies previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended September 30,
2010.





Our
management’s discussion and analysis of our financial condition and results of
operations above is based on our consolidated financial statements which have
been prepared in accordance with United States generally accepted accounting
principles (“U.S. GAAP”). The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. We evaluate our estimates and assumptions
on an ongoing basis. We base our estimates on historical experience and on
various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. However, actual results could differ materially from these estimates
under different assumptions or conditions.





Recent
Accounting Pronouncements





See Note
2(w) (Recently Issued Accounting Pronouncements) to our unaudited consolidated
financial statements included elsewhere in this report.





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 December 31, 2010.  Based
on that evaluation, Mr. Chen and Mr. Liu concluded that, because of the material
weaknesses described in Item 9A “Controls and Procedures” on our Annual Report
on Form 10-K for the fiscal year ended September 30, 2010, which we are still in
the process of remediating as of December 31, 2010, our disclosure controls and
procedures were not effective.  Investors are directed to Item 9A of
our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for
the description of these weaknesses.





Changes
in Internal Control Over Financial Reporting





We
regularly review our system of internal control over financial reporting and
make changes to our processes and systems to improve controls and increase
efficiency, while ensuring that we maintain an effective internal control
environment. Changes may include such activities as implementing new, more
efficient systems, consolidating activities, and migrating
processes.




24




During
its evaluation of the effectiveness of internal control over financial reporting
as of December 31, 2010, the management concluded that: (1) we lacked qualified
resources to perform our internal audit functions properly and that we have not
yet fully developed the scope and effectiveness of our internal audit function;
(2) we lacked an audit committee within our board to oversee the financial
reporting pursuant to U.S. GAAP and the SEC’s rules and regulations; and (3) our
accounting staff lacked sufficient accounting skills and experience necessary to
fulfill our public reporting obligations according to U.S. GAAP and the SEC’s
rules and regulations.





Our
management is in the process of implementing remediation procedures to improve
internal controls over financial reporting. We have already taken measures to
remediate these material weaknesses by seeking additional financial reporting
and accounting staff members with relevant accounting experience, skills and
knowledge in the preparation of financial statements in accordance with of U.S.
GAAP and financial reporting disclosure requirements under SEC
rules.   We are also in the process of implementing a rigorous process
for collecting and reviewing information required for the preparation of the
financial statements to meet our public accounting obligations according to U.S.
GAAP and the SEC’s rules and regulations with the support from the board and
additional personnel experienced in U.S. GAAP and the SEC’s rules to be
hired.





We have
also engaged a professional consulting firm experienced in handling compliance
with the requirements of the Sarbanes-Oxley Act of 2002 with respect to internal
control over financial reporting in order to assist us with improving our
internal controls and meet the requirements of Sarbanes-Oxley Act of 2002. In
the meantime, we have been searching and negotiating with several qualified
candidates to serve as the audit committee members so as to establish an audit
committee within the Board of Directors.  We are also in the process
of establishing an internal audit function and will continue to hire more
experienced personnel with expertise in U.S. public company financial
reporting.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies and procedures may deteriorate.





Management
remains committed to improving its internal control over financial reporting and
will continue to work to put effective controls in place.





Other
than the foregoing changes, there were no changes in our internal controls over
financial reporting during period covered by this report that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.




PART
II


OTHER
INFORMATION





ITEM
      1.
            LEGAL
      PROCEEDINGS.





From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise, in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these, or other matters, may
arise from time to time that may harm our business. We are currently not aware
of any such legal proceedings or claims that we believe will have a material
adverse affect on our business, financial condition or operating
results.





ITEM
      1A.
            RISK
      FACTORS.





Not
applicable.





ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.





None.





ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.





None.





ITEM
      4.
            (REMOVED
      AND RESERVED).





25




ITEM
      5.
            OTHER
      INFORMATION.





We have
no information to disclose that was required to be in a report on Form 8-K
during the period covered by this report, but was not reported. There have been
no material changes to the procedures by which security holders may recommend
nominees to our board of directors.





ITEM
      6.
            EXHIBITS.





The
following exhibits are filed as part of this report or incorporated by
reference:





Exhibit No.
              
              Description31.1
              
              Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Certifications
      of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
              
              Certifications
      of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


26




SIGNATURES





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





Date:
      February 14, 2011
                      CHINA
      POLYPEPTIDE GROUP, INC.By:
                      /s/
      Dongliang ChenDongliang
      Chen, Chief Executive Officer(Principal
      Executive
Officer)




By:
                  /s/ Richard
      LiuRichard
      Liu, Chief Financial Officer(Principal
      Financial Officer and Principal
                    Accounting
      Officer)




27