10-Q/A 1 v144304_10qa.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to _____

Commission file number: 000-50005

CHINA BIOPHARMA, INC.

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

Delaware		04-3703334
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification number)

173 Yugu Lu, Zhongtian Dasha 16-L,
Hangzhou, China		310007
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number: (609) 651-8588

Not Applicable

(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 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 is a large accelerated filer, an accelerated filer, a non accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated Filer ¨ Non accelerated filer ¨ Smaller reporting company x

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

The number of shares of the issuer’s common stock, $.0001 per share, outstanding at November 11, 2008 was 6,842,608.

This filing is being amended to include, revise or amend information to improve the disclosures as follows:

Part I, Item 1 (“Financial Statements”). Revised the balance sheet, statement of operations, and statements of cash flows to present the changes as a result of restatements in financials for historical periods;

Part I, Item 1 (“Financial Statements”). Added a supplemental schedule of non-cash activities in Note 6;

Part I, Item 1 (“Financial Statements”). Added discussion regarding uncollectible other accounts receivables in Note 7;

Part I, Item 1 (“Financial Statements”). Added a schedule to reflect the effect of restatements in Note 10.

Part I, Item 2 (“Management’s Discussion and Analysis”). Added discussion regarding uncollectible other accounts receivables; Corrected the amount of purchase price of HCBD;

And

Part I, Item 4T (“Controls and Procedures”)

CHINA BIOPHARMA, INC.

- INDEX -

		Page

PART I – FINANCIAL INFORMATION:

Item 1.	Financial Statements	4

	Consolidated Balance Sheet as of September 30, 2008 (unaudited)	5

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007 (unaudited), and for the Period from September 13, 2000 (Date of Inception) to September 30, 2008 (unaudited)	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007 (unaudited), and for the Period from September 13, 2000 (Date of Inception) to September 30, 2008 (unaudited)	8

	Notes to Consolidated Financial Statements, September 30, 2008 and 2007	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4T	Controls and Procedures	32

PART II – OTHER INFORMATION:

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	Submission of Matters to a Vote of Security Holders	33

Item 5.	Other Information	34

Item 6.	Exhibits	34

Signatures		35

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Statements made in this Form 10-Q (the “Quarterly Report”) that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified by the use of terms such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”, “approximate”, or “continue”, or the negative thereof. China Biopharma, Inc. (the “Company”) intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include our current dependence on a limited number of products and customers, the shift in focus of our business, the demand for our products, pricing pressures on our products caused by demand and competition, delivery deadlines, customer satisfaction, our ability to generate sales and expand our customer base, operating our business in the Peoples Republic of China, currency controls and exchange rate exposure, and the other risk factors discussed in our reports filed with the Securities and Exchange Commission. The Company disclaims any obligation to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEET

	September 30,			December 31,
	2008			2007
	(Restated)			(Restated)

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	146,887		$	1,317,556
Accounts receivable, net of allowance for doubtful accounts of $2,133 and $1,699 at September 30, 2008 and December 31, 2007, respectively		1,248,902			393,171
Inventory		8,140			344
Due from related parties		-			-
Other receivables		1,253,717			2,865,088
Deferred compensation cost		132,780			160,944
Other current assets		744,375			2,500

Total Current Assets		3,534,801			4,739,603

PROPERTY AND EQUIPMENT, NET		44,513			49,432

INTANGIBLES –GOODWILL		1,456,957			1,456,957

Total Assets	$	5,036,271		$	6,245,992

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,976,110		$	1,910,670
Loans payable		1,567,289			2,032,216
Other liabilities		1,191,181			1,322,418
Due to officers		738,888			631,488

Total Current Liabilities		5,473,468			5,896,792

MINORITY INTEREST		1,371,412			2,083,760

Total Liabilities		6,844,880			7,980,552

COMITTMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock, stated value $.0001, 700,000,000 shares authorized; 6,420,131 and 159,377,774 shares issued and outstanding at September 30, 2008 and December 31, 2007		642			15,938
Additional paid-in capital		12,861,520			12,354,516
Deficit accumulated during the development stage		(15,369,154	)		(14,626,854	)
Accumulated other comprehensive income		698,383			521,840

Total Stockholders' Equity (Deficit)		(1,808,609	)		(1,734,560	)

Total Liabilities And Stockholders' Equity (Deficit)	$	5,036,271		$	6,245,992

The accompanying notes are an integral part of these consolidated financial statements.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	For the Three Months Ended
	September 30,
	2008			2007
	(Restated)			(Restated)

REVENUE	$	1,593,271		$	161,691

COST OF GOODS SOLD		1,530,240			153,747

GROSS PROFIT		63,031			7,944

OPERATING EXPENSES
Selling, general and administrative (including share-based
payment of $9,388 and $12,594, respectively)		107,944			298,515
Uncollectible accounts expense		468,773			-
Total Operating Expenses		576,717			298,515

LOSS FROM OPERATIONS		(513,686	)		(290,571	)

OTHER INCOME (EXPENSE)
Interest income (expense), net		(24,381	)		(44,836	)
Non operating income		111,868			-

Total Other Income (Expense)		87,487			(44,836	)

LOSS BEFORE MINORITY INTEREST		(426,199	)		(335,407	)

MINORITY INTEREST		57,283			(98,951	)

NET LOSS		(483,482	)		(236,456	)

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment, net of tax		11,776			65,214

COMPREHENSIVE LOSS	$	( 471,706	)	$	( 171,242	)

LOSS PER COMMON SHARE, BASIC	$	( 0.13	)	$	( 0.23	)

LOSS PER COMMON SHARE, DILUTED	$	( 0.13	)	$	( 0.23	)

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC		3,698,948			1,023,387

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED		3,698,948			1,023,387

The accompanying notes are an integral part of these consolidated financial statements.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

							For the Period From
	For the Nine Months Ended						September 13, 2000
	September 30,						(Date of Inception) to
	2008			2007			September 30, 2008
	(Restated)			(Restated)			(Restated)

REVENUE	$	5,408,369		$	410,390		$	8,837,795

COST OF GOODS SOLD		5,200,158			383,195			7,654,892

GROSS PROFIT		208,211			27,195			1,182,903

OPERATING EXPENSES
Research and development		-			-			2,274,698
Selling, general and administrative (including stock-based
compensation of $28,164, $165,458 and $3,117,286
respectively)		433,329			1,424,530			11,837,127
Depreciation and amortization		15,733			21,872			438,110
Uncollectible accounts expense		468,773			-			468,773
Impairment of goodwill		-			-			304,094

Total Operating Expenses		917,835			1,446,402			15,322,802

LOSS FROM OPERATIONS		(709,624	)		(1,419,207	)		(14,139,899	)

OTHER INCOME (EXPENSE)
Loss from unconsolidated subsidiary		-			-			(60,134	)
Sale of net operating loss carryforwards		-			-			216,247
Gain on foreign currency		-			-			660
Interest income (expense), net		(72,081	)		(157,048	)		(243,060	)
Loss on disposal of investments		-			-			(746,800	)
Non operating income (expenses)		129,137			21,277			(88,009	)

Total Other Income (Expense)		57,056			(135,771	)		(921,096	)

LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE		(652,568	)		(1,554,978	)		(15,060,995	)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX		-			-			(324,167	)

LOSS BEFORE MINORITY INTEREST		(652,568	)		(1,554,978	)		(15,385,162	)

MINORITY INTEREST		89,732			(126,866	)		(16,008	)

NET LOSS		(742,300	)		(1,428,112	)		(15,369,154	)

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		176,543			134,641			698,383

COMPREHENSIVE LOSS	$	( 565,757	)	$	(1,293,471	)	$	(14,670,771	)

LOSS PER COMMON SHARE, BASIC	$	( 0.20	)	$	( 1.40	)

LOSS PER COMMON SHARE, DILUTED	$	( 0.20	)	$	( 1.40	)

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC		3,698,948			1,023,387

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, DILUTED		3,698,948			1,023,387

The accompanying notes are an integral part of these consolidated financial statements.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

							For the Period From
	For the Nine Months Ended						September 13, 2000
	September 30,						(Date of Inception) to
	2008			2007			September 30, 2008
	(Restated)			(Restated)			(Restated)

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	( 742,300	)	$	(1,428,112	)	$	(15,369,154	)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization		15,733			21,872			554,275
Minority interest		89,732			(126,866	)		(16,008	)
Impairment of goodwill		-			-			304,093
Cumulative effect of change in accounting principle		-			-			324,167
Loss on disposal of fixed assets		-			-			14,808
Loss on unconsolidated subsidiary		-			-			60,134
Bad debt expense		1,813			-			55,433
Loss on foreign currency translation		-			-			(3,526	)
Loss on disposal of subsidiaries, net of tax		-			-			746,800
Share based payment		26,781			314,855			181,607
Deferred compensation cost		28,164			(44,232	)		3,117,286
Uncollectible accounts expense		468,773						468,773
Changes in assets and liabilities:
Accounts receivable		(857,544	)		493,832			(1,177,776	)
Inventory		(7,796	)		(253,072	)		(8,140	)
Due from related parties		-			110,496			-
Other receivables		340,517			(795,999	)		(801,121	)
Advance payments		2,500			(60,831	)		2,198,546
Other current assets		(744,375	)		(18,980	)		(744,375	)
Other assets		-			(609	)		-
Accounts payable and accrued expenses		65,440			(686,199	)		2,437,364
Other liabilities		(23,838	)		554,773			1,338,775
Total Adjustments		(594,100	)		(490,960	)		9,051,115

Net Cash Used In Operating Activities		(1,336,400	)		(1,919,072	)		(6,318,039	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated subsidiary					-			(409,832	)
Acquisition of HCBD, net of cash acquired		-			-			(2,782,333	)
Proceeds from disposal of fixed assets					5,693			5,693
Purchase of property and equipment		(10,813	)		-			(294,982	)
Net Cash Provided By (Used In) Investing Activities		(10,813	)		5,693			(3,481,454	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options		-			-			5,903,583
Repurchase of treasury stock		-			-			(432	)
Net proceeds from convertible debt		-			-			3,000,000
Proceeds from officers’ advances		-			60,299			549,213
Net Cash Provided By Financing Activities		-			65,284			9,452,364

EFFECT OF FOREIGN CURRENCY CONVERSION ON CASH		176,544			218,571			494,016

NET INCEASE (DECREASE) IN CASH		(1,170,669	)		(1,629,524	)		146,887

CASH AND CASH EQUIVALENTS – BEGINNING		1,317,556			2,307,799			-

CASH AND CASH EQUIVALENTS – ENDING	$	146,887		$	678,275		$	146,887

The accompanying notes are an integral part of these consolidated financial statements.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND DESCRIPTION OF BUSINESS

China Biopharma, Inc. (“CBI” or “the Company”), a Delaware corporation, is a provider of pharmaceutical products with its focus mainly on the introduction and marketing of human vaccines and other pharmaceutical products. The Company distributes its products in China.

BASIS OF PRESENTATION

The Company’s Consolidated Financial Statements include the accounts of its direct wholly-owned subsidiaries and its indirect proportionate share of subsidiaries owned by the wholly-owned subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X applicable to small business issuers. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

NOTE 2 - INTERIM FINANCIAL STATEMENTS

These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2007, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the year ended December 31, 2007.

NOTE 3 - EARNINGS (LOSS) PER SHARE

The Company presents earnings (loss) per share on a basic and diluted basis. Basic earnings (loss) per share have been computed by dividing net earnings by the weighted average number of shares outstanding. Diluted earnings (loss) per share has been computed by dividing net earnings by the weighted average number of shares outstanding including the dilutive effect of equity securities. The weighted average number of shares calculated for Diluted EPS excludes the potential common stock that would be exercised under the options and warrants granted to officers, employees and consultants in April, 2007, because the inclusion of the potential shares from these options and warrants would cause an antidilutive effect by reducing the net loss per share. In September 2008, the Company effected a 1 for100 reverse stock split of the Company’s common stock previously reported share and earnings (loss) per share amounts have been restated.

	Three Months Ended September 30
	2008			2007

Net loss	$	( 483,482	)	$	( 236,456	)

Weighted average common shares
(denominator for basic income per share)		3,698,948			1,023,387

Effect of diluted securities:		-			-

Weighted average common shares
(denominator for diluted income per share)		3,698,948			1,023,387

Basic net income (loss) per share	$	( 0.13	)	$	( 0.23	)
Diluted net income (loss) per share	$	( 0.13	)	$	( 0.23	)

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 3 - EARNINGS (LOSS) PER SHARE (continued)

	Nine Months Ended September 30
	2008			2007

Net loss	$	( 742,300	)	$	( 1,428,112	)

Weighted average common shares
(denominator for basic income per share)		3,698,948			1,023,387

Effect of diluted securities:		-			-

Weighted average common shares
(denominator for diluted income per share)		3,698,948			1,023,387

Basic net income (loss) per share	$	( 0.20	)	$	( 1.40	)
Diluted net income (loss) per share	$	( 0.20	)	$	( 1.40	)

NOTE 4 – LOSSES DURING THE DEVELOPMENT STAGE AND MANAGEMENT PLANS

From inception through September 30, 2008, the Company had incurred development stage losses totaling $14,670,496 and net cash used in operating activities of $8,401,714. At September 30, 2008 the Company had $146,887 of cash and cash equivalents and $1,248,902 of net accounts receivable to fund short-term working capital requirements.

The Company’s ability to continue as a going concern and its future success is dependent upon its ability to raise capital in the near term to 1) satisfy its current obligations, 2) continue its business efforts, and 3) successfully deploy and market its products on a wide scale.

NOTE 5 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

					For the period from
					September 13, 2000
	September 30,				(date of inception) to
	2008		2007		September 30, 2008

Interest paid	$	-	$	-	$	-
Income taxes paid	$	-	$	-	$	3,773

As indicated in Note 6, the Company issued common stock to satisfy its payment obligation in long-term debt.

Income Taxes paid for the period from the date of inception was solely attributed to its wholly-owned subsidiary, China Quantum Communications, Inc., which was disposed of by the Company in 2006.

Note 6 – SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES

					For the period from
					September 13, 2000
	September 30,				(date of inception) to
	2008		2007		September 30, 2008

Other receivable exchanged for minority interest	$	802,080	$	-	$	802,080

Reduction of other receivables in exchange for a decrease in the additional contributed capital paid by the minority interest in HCBD, a majority owned subsidiary of ZTBC, accounted for as both a financing and investment activity.

Note 7 – OTHER ACCOUNTS RECEIVABLES AND UNCOLLECTIBLES

In July 2008, the Company agreed to reduce a receivable amounting to $820,080, owed by Zhejiang Tianyuan Bio-pharmaceutical Co., a 20% minority interest owner in the subsidiary, Hainan CITIC Biopharmaceutical Development Co., Ltd. The original recorded contributed capital for the minority interest investee was reduced by the same amount to reflect this exchange, but the ownership interest was not affected.

In September 2008, approximately $468,773 of Other Receivables was deemed uncollectible and this amount was charged as an expense to operations. The entire 2005 balance represented an operating fund obligation owed to Quantum Communications (China) Co., Ltd., a wholly-owned subsidiary of the Company, from its business partner, Beijing Guangtung Communications Co., Ltd. (“BGC”). BGC was a privately owned limited liability company registered in Beijing, China and was not a related party of the Company or any of its subsidiaries. BGC acquired 3.5Mhz frequency which is used for 802.16 standard WiMax communication services in China. Instead of undertaking a direct investment into BGC, the Company extended a non-interest bearing loan to be used in operations by BGC, subject to a contractual right to convert the loan into an equity interest based on the success of BGC’s business. After determining that the WiMax services business was unsuccessful, the Company refused to make any additional loans to BGC and requested full payment on its original loan. Pursuant to that initial demand, BGC had concurrently agreed to fully repay the loan, while actively seeking buyers or financiers to fund its operations. In the third quarter of 2008, the Chinese economic environment severely deteriorated and BGC declared to the Company the failure in its fund raising efforts. In September 2008, the Company determined that the loan would be uncollectible. BGC closed its business at the end of 2008 due to severe financial distress.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 8 - STOCKHOLDERS' EQUITY

On January 24, 2006, the Company granted 2,701,000 options of which all are fully vested, to purchase shares of common stock at an excise price of $0.52 to officers, employees and consultants of the Company.

On April 7, 2006, the Company entered into a Share Exchange Agreement for the purpose of acquiring 100% of the outstanding capital stock of CBL, which has rights to invest in Tianyuan Bio-Pharmaceuticals Company, Ltd. and Zhejiang Tianyuan Biotech Co., Ltd. (“ZTBC”). The Company issued a total of 3,000,000 shares of restricted common stock in exchange for 100% of the outstanding capital of CBL.

In December 2006, the Company amended its Certificate of Incorporation to increase the number authorized shares of its common stock from 100,000,000 to 200,000,000.

SECURED CONVERTIBLE PROMISSORY NOTES (continued)

Provided that an Event of Default has not occurred, the Company may, at its option, prepay the outstanding principal amount of the Notes, in whole or in part, at any time upon 30 days written notice to the holders by paying 120% of the principal amount to be repaid together with accrued interest plus any other sums due thereon to the date of redemption. The Notes are secured by a Security Agreement entered into by and among the Company, CQCL, CBL, and QCCN and Barbara R. Mittman, as collateral agent for the purchasers of the Notes. The obligations of the Company under the Subscription Agreement with respect to the Notes and the Notes are guaranteed by the CQCL, CBL and QCCN pursuant to a Guaranty, dated as of December 13, 2006, entered into by the CQCL, CBL and QCCN, for the benefit of the purchasers of the Notes.

In connection with the sale of the Notes, the Company also issued to the purchasers of the Notes, Class A Warrants to purchase up to an aggregate of 6,000,000 shares of common stock and Class B Warrants to purchase up to an aggregate of 6,000,000 shares of common stock (each a “Warrant” and collectively, the “Warrants”). One Class A Warrant and one Class B Warrant were issued for each two shares of common stock that would have been issuable on the closing date assuming the complete conversion of the Notes on such date. The Class A Warrants have an exercise price of $0.30 per share and the Class B Warrants have an exercise price of $0.40.

Melton Management Ltd. acted as the finder with respect to the issuance and sale of the Notes and received a warrant to purchase 2,400,000 shares of our common stock at an exercise price of $0.30 per share.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 8 - STOCKHOLDERS' EQUITY (continued)

SECURED CONVERTIBLE PROMISSORY NOTES (continued)

In January 2007, one employee of the Company exercised stock options to purchase 25,000 shares of the common stock of the Company at exercise price of $0.20 per share. The Company received total net proceeds of $4,985.

On April 12, 2007, the Company granted 3,199,405 options to purchase shares of common stock at an excise price of $0.14 to officers, employees and consultants of the Company. Such options have a ten-year life and are vested within 5 years.

In 2007, the Company issued an aggregate of 25,041,747 shares of common stock to the holders of the Secured Convertible Promissory Notes in payment of principal and accrued interest on the Notes of $1,122,609.26 at an average conversion price of $0.045 per share, which was equal to 75% of the average of the closing bid prices for the common stock for the five trading days prior to the date of conversion.

In 2007, the Company issued an aggregate of 48,791,027 shares of common stock to two investors pursuant to Section 12(c), “Favored Nations Provision,” of the Securities Purchase Agreement dated April 29, 2005, as amended, between the investors and the Company. According to this Favored Nations Provision, if at any time shares are held by such investors until three years after the Actual Effective Date, the Company shall offer, issue or agree to issue any Common Stock or securities convertible into or exercisable for shares of Common Stock (or modify any of the foregoing which may be outstanding) to any person or entity at a price per share of Common Stock or exercise price per share of Common Stock which shall be less than the per share Purchase Price of the Shares, or less than the exercise price per Warrant Share, respectively, without the consent of each of such investors holding Shares, Warrants, or Warrant Shares, then the Company shall issue, for each such occasion, additional shares of Common Stock to each of such investors so that the average per share purchase price of the shares of Common Stock issued to the investors (of only the Shares or Warrant Shares still owned by the investors) is equal to such other lower price per share and the Warrant Exercise Price shall automatically be reduced to such other lower price per share.

This “Favored Nations Provision” was triggered by the issuance of stock in payment of the principal and interest on the Notes.

In the first half of 2008, the Company issued an aggregate of 291,866,036 shares of common stock to the holders of the Secured Convertible Promissory Notes as a result of the conversion of the principal and interest of the Notes with an approximate fair market value of $336,500 at the average conversion price of $0.0012 per share.

In June 2008, the Company amended its Certificate of Incorporation to increase the number authorized shares of its common stock from 200,000,000 to 700,000,000.

During the quarter ended September 30, 2008, the Company issued an aggregate of 199,195,955 shares of common stock to the holders of the Secured Convertible Promissory Notes as conversion of the principal and interest of the Notes worth approximately $160,600 at the average conversion price of $0.0008 per share.

In September 2008, the Company amended its Certificate of Incorporation to effect a 1 for 100 reverse stock split of the Company’s Common Stock, $.0001 par value per share. The reverse stock split shall have no effect on the number of authorized shares of Common Stock.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 8 - STOCKHOLDERS' EQUITY (continued)

SECURED CONVERTIBLE PROMISSORY NOTES (continued)

On October 15, 2007, an “event of default” occurred and is continuing under the Notes in that the Company failed to make its monthly amortization payment due on that date in registered shares of common stock or in cash. This event of default has not been waived by the investors and is continuing. The Company intends to endeavor to satisfy its past and future amortization payments due under the Notes by delivery of shares of its common stock. However, there can be no assurance that this will be possible as the investors have the right to request payment in cash following an event of default. The Company has communicated with its investors and they have verbally agreed to continue to accept unregistered shares in payment of amounts due to date. However, the Company cannot provide assurance that the investors will continue to permit the Company to make monthly payments due on the Notes in the future in shares of its common stock. The Company does not currently have sufficient cash flow to make the payments due on the Notes in cash. Accordingly if the investors do not continue to permit the Company to make the monthly payments due on the Notes by issuing shares of its common stock the Company may not be able to continue as a going concern and may be forced to wind up its affairs or seek protection under the bankruptcy laws. Other than as stated above, the Company has no specific plans, arrangements or understandings, either written or oral, to issue any of the additional authorized shares of Common Stock.

NOTE 9 - RELATED PARTY TRANSACTIONS

The Company records material related party transactions. Those charges, if any, are included in general and administrative expenses.

The Company occasionally engages in advances to and advances from related parties. The advances have no stated terms of repayment and carry no interest.

Following is a summary of transactions and balances with affiliated entities and related parties for 2008 and 2007:

					For the period from
					September 13, 2000
	September 30,				(date of inception) to
	2008		2007		September 30, 2008

Revenues from related parties	$	-	$	-	$	93,546

Purchases and expenses to
related parties	$	-	$		$	214,541

Due from related parties	$	-	$	41,038	$	-

Due to officers	$	738,888	$	1,017,016	$	738,888

Amounts due to officers consist of advances from the Company's CEO to fund the Company's operations. It also includes compensation deferred by the Company's CEO, former CFO and other management. No written repayment agreements exist with either officer. Amounts are unsecured, non-interest bearing and due upon demand.

NOTE 10- RESTATEMENT TO REFLECT CORRECTION OF ACCOUNTING ERRORS

The Company revised its Consolidated balance sheet, Consolidated statements of operations and Comprehensive Loss and Consolidated statements of cash flows to correct for certain accounting errors after receiving comments from the SEC as follows:

The Company reconsidered its accounting treatment for the disposition of an operating subsidiary to an employee, in 2006, which it had originally recorded as a reduction of contributed capital. The Company modified its original accounting position and recorded the entire amount of $698,658 as an expense in the consolidated statement of operations for the current fiscal year. The company reclassified the disclosure in the consolidated balance sheets to reflect the change in other liabilities and accumulated deficit for the same amount.

As indicated in Notes 6 and 7, we restated the Statements of Cash Flows to reflect a non-cash transaction in which the Company reduced its other receivables by $802,080, in exchange for a reduction in the recorded amount of original contributed paid in capital of the 20% minority interest holder in HCBD, a subsidiary 70% owned by ZTBC. As indicated in Note 7, In July 2008, the Company agreed to reduce a receivable amounting to $820,080, owed by Zhejiang Tianyuan Bio-pharmaceutical Co., a 20% minority interest owner in the subsidiary, Hainan CITIC Biopharmaceutical Development Co., Ltd. The original recorded contributed capital for the minority interest investor was reduced by the same amount to reflect this exchange, but the ownership interest was not affected.

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 10- RESTATEMENT TO REFLECT CORRECTION OF ACCOUNTING ERRORS (continued)

The effect of the restatement is as follows:

CONSOLIDATED BALANCE SHEETS

	As Reported			As Restated			Effect of
	September 30,			September 30,			Change
	2008			2008

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	146,887		$	146,887		$	-
Accounts receivable, net of allowance for doubtful accounts of $2,133
and $1,699 at September 30, 2008 and December 31, 2007, respectively		1,248,902			1,248,902			-
Inventory		8,140			8,140			-
Due from related parties		-			-			-
Other receivables		1,253,717			1,253,717			-
Deferred compensation cost		132,780			132,780			-
Other current assets		744,375			744,375			-

Total Current Assets		3,534,801			3,534,801			-

PROPERTY AND EQUIPMENT, NET		44,513			44,513			-

INTANGIBLES –GOODWILL		1,456,957			1,456,957			-

Total Assets	$	5,036,271		$	5,036,271		$	-

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,976,110		$	1,976,110		$	-
Loans payable		1,567,289			1,567,289			-
Other liabilities		1,191,181			1,191,181			-
Due to officers		738,888			738,888			-

Total Current Liabilities		5,473,468			5,473,468			-

MINORITY INTEREST		1,371,412			1,371,412			-

Total Liabilities		6,844,880			6,844,880			-

COMITTMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY (DEFICIT)
Common stock, stated value $.0001, 700,000,000 shares authorized;
6,420,131 and 159,377,774 shares issued and outstanding at
September 30, 2008 and December 31, 2007		642			642			-
Additional paid-in capital		12,162,862			12,861,520			698,658
Deficit accumulated during the development stage		(14,670,496	)		(15,369,154	)		(698,658	)
Accumulated other comprehensive income		698,383			698,383			-

Total Stockholders' Equity (Deficit)		(1,808,609	)		(1,808,609	)		-

Total Liabilities And Stockholders' Equity (Deficit)	$	5,036,271		$	5,036,271		$	-

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 10- RESTATEMENT TO REFLECT CORRECTION OF ACCOUNTING ERRORS (continued)

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

	As Reported			As Restated			Effect of
	September 30,			September 30,			Change
	2008			2008

REVENUE	$	5,408,369		$	5,408,369		$	-

COST OF GOODS SOLD		5,200,158			5,200,158			-

GROSS PROFIT		208,211			208,211			-

OPERATING EXPENSES
Research and development		-			-			-
Selling, general and administrative (including stock-based
compensation of $28,164, $165,458 and $3,117,286
respectively)		433,329			433,329			-
Depreciation and amortization		15,733			15,733			-
Uncollectible accounts expense		468,773			468,773			-
Impairment of goodwill		-			-			-

Total Operating Expenses		917,835			917,835			-

LOSS FROM OPERATIONS		(709,624	)		(709,624	)		-

OTHER INCOME (EXPENSE)
Loss from unconsolidated subsidiary		-			-			-
Sale of net operating loss carryforwards		-			-			-
Gain on foreign currency		-			-			-
Interest income (expense), net		(72,081	)		(72,081	)		-
Non operating income (expenses)		129,137			129,137			-

Total Other Income (Expense)		57,056			57,056			-

LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE		(652,568	)		(652,568	)		-

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX		-			-			-

LOSS BEFORE MINORITY INTEREST		(652,568	)		(652,568	)		-

MINORITY INTEREST		89,732			89,732			-

NET LOSS		(742,300	)		(742,300	)		-

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment		176,543			176,543			-

COMPREHENSIVE LOSS	$	( 565,757	)	$	( 565,757	)	$	-

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 10- RESTATEMENT TO REFLECT CORRECTION OF ACCOUNTING ERRORS (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	As Reported			As Restated			Effect of
	September 30,			September 30,			Change
	2008			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	( 742,300	)	$	( 742,300	)	$	-
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization		15,733			15,733			-
Minority interest		(712,348	)		89,732			802,080
Impairment of goodwill		-			-			-
Cumulative effect of change in accounting principle		-			-			-
Loss on disposal of fixed assets		-			-			-
Loss on unconsolidated subsidiary		-			-			-
Loss on foreign currency translation		-			-			-
Loss on disposal of subsidiaries, net of tax		-			-			-
Share based payment		26,781			26,781			-
Deferred compensation cost		28,164			28,164			-
Bad debt expense		1,813			1,813			-
Uncollectible accounts expense		468,773			468,773			-
Changes in assets and liabilities:								-
Accounts receivable		(857,544	)		(857,544	)		-
Inventory		(7,796	)		(7,796	)		-
Due from related parties		-			-			-
Other receivables		1,142,597			340,517			(802,080	)
Advance payments		2,500			2,500			-
Other current assets		(744,375	)		(744,375	)		-
Other assets		-			-			-
Accounts payable and accrued expenses		65,440			65,440			-
Other liabilities		(23,838	)		(23,838	)		-
Total Adjustments		207,980			207,980			-

Net Cash Used In Operating Activities		(534,320	)		(534,320	)		-

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in unconsolidated subsidiary								-
Proceeds from disposal of fixed assets								-
Purchase of property and equipment		(10,813	)		(10,813	)		-
Net Cash Provided By (Used In) Investing Activities		(10,813	)		(10,813	)		-

CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from private placement of common stock		-			-			-
Repurchase of treasury stock		-			-			-
Net proceeds from convertible debt		-			-			-
Reclassification of due from disposed subsidiary		-			-			-
Net proceeds from exercise of stock options		-			-			-
Proceeds from officers’ advances		-			-			-
Net Cash Provided By Financing Activities		-			-			-

EFFECT OF FOREIGN CURRENCY CONVERSION
ON CASH		176,544			176,544			-

NET INCEASE (DECREASE) IN CASH		(1,170,669	)		(1,170,669	)		-

CASH AND CASH EQUIVALENTS – BEGINNING		1,317,556			1,317,556			-

CASH AND CASH EQUIVALENTS – ENDING	$	146,887		$	146,887		$	-

CHINA BIOPHARMA, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 AND 2007

NOTE 11- SUBSEQUENT EVENTS

In October 2008, the Company issued an aggregate of 422,477 shares of common stock to the holders of the Secured Convertible Promissory Notes as conversion of the principal and interest of the Notes worth approximately $6,131 at the average conversion price of $0.0145 per share. The number of shares issued and average conversion price per share reflect the effect after the 1 for 100 reverse stock split.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations or Plan of Operations.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

You should read the following discussion together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this report and in the documents that we incorporate by reference into this report. This report may contain certain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by our use of words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative or other variations of these words, or other comparable words or phrases. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Part I, Item 1 of our annual report on Form 10-KSB under the caption “Risk Factors,” which annual report was filed on March 25, 2008, as well as the amendment thereto on Form 10-K/A filed on November 12, 2008.

Unless the context requires otherwise, references to "we," "us," "our," "China Biopharma" and the "Company" refer to China Biopharma, Inc. and its consolidated subsidiaries.

CRITICAL ACCOUNTING POLICIES

See “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements December 31, 2007 in our annual report on Form 10-KSB filed on March 25, 2008 and Form 10-K/A filed on November 12, 2008 for our critical accounting policies. These policies include revenue recognition, determining our allowance for doubtful accounts receivable, accounting for cost of revenue, valuation of long-lived assets and research and development costs.

BUSINESS OVERVIEW

The Company is a distributor of human vaccines and other pharmaceutical products. Currently, the Company distributes the products in China. The Company has established its distribution network in China through the acquisition of its interest in its subsidiary, Hainan CITIC Bio-pharmaceutical Development Co., Ltd. (“HCBD”) and, through its joint venture with Zhejiang Tianyuan Bio-pharmaceutical Co., Ltd. (“Zhejiang Tianyuan”)

The emphasis of the Company is on the introduction and the marketing and distribution of products rather than on manufacturing. Substantially all of the operations are in China.

Over the past year the vaccine business has become more competitive. In order to improve our operating performance and cope with the changing environment, the Company has changed its business strategy and formulated a new business plan to conserve cash, lower expenses and increase profitability. Beginning in 2007 it started to distribute a few specialty drug products, such as Serrapeptase. The Company plans to take more control on the available cash in the subsidiaries and move into areas with higher market potential and higher margin specialty pharmaceutical products. Since then the operation results have significantly improved in increased sales and operating profit.

Move Away from the Low Margin Vaccine Business

The Company has planned to move away from the low margin vaccine business and focus on higher margin vaccine and specialty drugs. Due to the recent changes in vaccine sectors, more and more vaccine manufacturers have entered the low margin vaccine business such as distribution of flu vaccine, which has created severe competition among, and squeezed the profit margin of the vaccine distributors. To avoid this direct competition, the Company had started to negotiate with a few global vaccine manufacturers for carrying their higher margin products. The Company cannot assure you that it be successful in entering into an agreement.

Commence Distribution of Specialty Pharmaceutical Products

In February, 2008 the Company began distributing on a trial basis certain specialty pharmaceutical products of Takeda Pharmaceutical Company, Ltd. (“Takeda”), the largest pharmaceutical company in Japan. Takeda specializes in the research and development of breakthrough drugs, and has marketing operations throughout U.S., Europe, and Asia. In Japan, Takeda has also built a strong presence in the over-the-counter (OTC) drugs market, and holds the second largest share of that domestic market.

Antiviral Products

In October 2007 the Company began working with Soonfast Pharmaceutical Science & Technology Co., Ltd. (“Soonfast”) to introduce a new antiviral medicine to the overseas market (including the United States and other overseas markets). This all-natural product has been approved in China for external use to treat human papillomavirus (“HPV”) and herpes simplex virus (“HSV”). The commercial product was released in November 2007, and the Company has started distributing this product in certain regions in China and has the right to distribute it in all overseas markets, including the United States.

Take Closer Control on Subsidiaries

The Company is working to take direct control of our subsidiaries’ operations and financial management instead of relying on its joint venture partner’s performance. The Company reached agreement with its joint venture partner to increase shareholding in the joint venture in China, Zhejiang Tianyuan Biotech Co., Ltd., and eventually to have 100% control and ownership in this joint venture. The Company plans to change its name to Zhejiang Kangchen Pharmaceutical Co., Ltd. The Company does not need to raise additional capital to complete this transaction. It is expected that this will help to preserve the available cash, increase operating stability, provide the Company with more operation flexibility, and improve its current performance. The Company has filed all necessary documents with local government and is waiting for the final approval.

Registered Capital Reduction in HCBD

On June 23, 2008, the Company finished the process to reduce the total registered capital of HCBD from Renminbi Yuan (Chinese currency) 30 million to 6 million. Through this registered capital reduction, the Company shall repatriate some fund from HCBD back to its proposed 100% controlled Zhejiang Kangchen Pharmaceutical Co., Ltd. This reduction will improve the Company’s capital structure and make available fund for future acquisitions.

Improve Current Operation Results

After about one year of endeavoring to establish its footing into China, the Company has adjusted to this complicated market environment and business landscape. In an effort to improve its current operating results, the Company has begun taking the steps outlined above with a view to strengthen its control over the operating subsidiaries, preserve cash, apply available resources to, and refocus on, higher margin, less competitive products with greater market potential. The Company cannot assure you that it will be successful with any of these objectives.

Description of Company

In July 2002, the Company was incorporated in Delaware as Techedge, Inc. to serve as the successor to the business and assets of BSD Development Partners, LTD. (“BSD”). BSD was formed in 1997 as a Delaware limited partnership for the purpose of investing in the intellectual property of emerging and established companies. In September 2002, BSD merged with Techedge. From September 2002 until June 2004, Techedge endeavored to continue the business of BSD and sought to enhance the liquidity of the securities owned by its investors by becoming subject to the reporting requirements of the Securities Exchange Act of 1934 and by seeking to have its common stock quoted on the OTC Bulletin Board, or “OTCBB”.

On June 9, 2004, Techedge acquired all of the issued and outstanding stock of China Quantum Communication Limited, or CQCL, pursuant to a share exchange agreement, by and among Techedge, certain of its stockholders, CQCL and its stockholders (the “Share Exchange”). In connection with the Share Exchange, Techedge’s then existing directors and officers resigned as directors and officers of Techedge and were replaced by directors and officers designated by CQCL.

After the Share Exchange, Techedge refocused its business efforts on developing and providing its IP-based personal communication service, a regional mobile voice over IP (“VoIP”) service delivered on unlicensed low-power PCS frequencies through IP-enabled local transceiver and IP-centric soft-switched networks, operating on an advanced proprietary software centric multi-service global communication service platform and management system. Techedge also continued operating CQCL’s communications service business through CQCL and CQCL’s wholly-owned subsidiaries, China Quantum Communications Inc., a Delaware corporation, and Guang Tong Wang Luo Ke Ji (China) Co. Ltd. (also known as Quantum Communications (China) Co., Ltd.), a Chinese company.

On January 26, 2006, the Company announced its plans to re-position its business for bio-pharmaceutical and other high growth opportunities in China, while continuing its commercialization of its high potential mobile VoIP services.

On February 27, 2006, in conjunction with the Company’s re-positioning plans, the Company entered into an agreement to transfer ownership of its Chinese subsidiary Zheijang Guang Tong Wang Luo Co., Ltd to third parties. On January 1, 2006, the Company also entered into an agreement to transfer ownership of its U.S. subsidiary China Quantum Communications, Inc. to a former employee.

On April 7, 2006, the Company entered into a Share Exchange Agreement for the purpose of acquiring 100% of the outstanding capital stock of China BioPharma Limited (“CBL”), a Cayman Islands company, which has rights to invest in Tianyuan Bio-Pharmaceuticals Company, Ltd. and Zhejiang Tianyuan Biotech Co., Ltd. (“ZTBC”). (CBL has signed an investment agreement with Tianyuan Bio-pharmaceuticals Co., Ltd. to invest into the joint venture partner and the joint venture.) In exchange for 100% of the outstanding capital of CBL, the Company issued a total of 3,000,000 shares of restricted common stock to CBL’s stockholders.

On July 14, 2006, Techedge and China Biopharma, Inc. (“CBI”), a Delaware corporation and a wholly-owned subsidiary of Techedge, executed and delivered a Plan and Agreement of Merger whereby the parties agreed to merge CBI with and into Techedge, with Techedge being the surviving corporation. By virtue of, and effective upon the consummation of the merger, the Certificate of Incorporation of the Company was amended to change its name from “Techedge, Inc.” to “China Biopharma, Inc.”. The merger became effective on August 10, 2006.

In April 2006, ZTBC acquired 20% of the outstanding stock of HCBD from three individuals in consideration for approximately $0.9 million; In August 2006, ZTBC acquired an additional 40% of the outstanding stock of HCBD from CITIC Pharmaceutical and China Biological Engineering Corporation in consideration for approximately $1.8 million. In December 2006, ZTBC acquired another 10% of the outstanding stock of HCBD from one individual in consideration for approximately $0.5 million.

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto:

RESULTS OF OPERATIONS

For the Three Months Ended September 30, 2008 and 2007

Revenue

Revenue increased by $1,431,580 to $1,593,271 for the three months ended September 30, 2008 compared to $161,691 for the three months ended September 30, 2007. The Company’s revenue during the three months ended September 30, 2007 was generated from the vaccine and other bio-pharmaceutical products distribution business solely as a result of consolidation of the financials of HCBD for the period. Vaccine is a seasonal product that is used mainly during the late fall and early winter seasons. Over the past year the vaccine business has become more competitive in China. Later in 2007 we changed our business strategy, with a plan to move away from the vaccine business and focus on specialty drugs. Revenue during the three months ended September 30, 2008 was generated from other pharmaceutical products distribution business conducted by HCBD for the period. Due to recent strategic and operation structure changes, the Company predicts that it would generate much higher sales revenue this year compared with 2007.

Cost of Sales and Gross Margin

Cost of sales increased by $1,376,493 to $1,530,240 for the three months ended September 30, 2008 compared to $153,747 for three months ended September 30, 2007. The decrease in gross margin was due to higher purchasing costs and transportation costs in the third quarter of 2008 compared with same period last year.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consisted primarily of labor cost and related overhead costs for sales, marketing, legal, human resources and general management. Such costs also include the expenses recognized for stock-based compensation pursuant to SFAS 123(R).

SG&A expenses decreased by $190,571 to $107,944 in the three months ended September 30, 2008 from $298,515 in the three months ended September 30, 2007. The relatively high SG&A expenses in the three months ended September 30, 2007 was mainly attributed to some costs incurred during that period related to professional services including legal and other advisory services, as well as amortization of $12,594 for stock-based compensation expenses in that period compared with $9,388 recognized for this quarter.

Uncollectible Accounts Expense

Included in Operating Expenses was a charge for an account deemed to be uncollectible, amounting to $468,773 for the three months ended September 30, 2008. The entire 2005 balance represented an operating fund obligation owed to Quantum Communications (China) Co., Ltd., a wholly-owned subsidiary of the Company, from its business partner, Beijing Guangtung Communications Co., Ltd. (“BGC”). BGC was a privately owned limited liability company registered in Beijing, China and was not a related party of the Company or any of its subsidiaries. BGC acquired 3.5 MHz frequency which is used for 802.16 standard WiMax communication services in China. Instead of undertaking a direct investment into BGC, the Company extended a non-interest bearing loan to be used in operations by BGC, subject to a contractual right to convert the loan into an equity interest based on the success of BGC’s business. After determining that the WiMax services business was unsuccessful, the Company refused to make any additional loans to BGC and requested full payment on its original loan. Pursuant to that initial demand, BGC had concurrently agreed to fully repay the loan, while actively seeking buyers or financiers to fund its operations. In the third quarter of 2008, the Chinese economic environment severely deteriorated and BGC declared to the Company the failure in its fund raising efforts. In September 2008, the Company determined that the loan would be uncollectible. BGC closed its business at the end of 2008 due to severe financial distress.

Interest Expense

Interest expense net of interest income, was $24,381 for the three months ended September 30, 2008, compared with $44,836 for the three months ended September 30, 2007. Interest expense primarily comprised of accrued interest for the $3,000,000 Secured Convertible Promissory Notes. Interest payments were made in form of common stock of the Company. Decrease in interest expense during the two contrasting periods was due to repayment of principal over the periods.

Non Operating Income

The company recorded non operating income of $111,868 for the three months ended September 30, 2008, compared with $0 for the three months ended September 30, 2007. Out of the total amount of non operating income in the three months ended September 30, 2008, approximately $94,890 arose from elimination of payables to previous shareholders of HCBD as a result of their waiver of the final outstanding payments for the acquisition of HCBD.

Income Taxes

The Company has been incurring operating losses over the years and therefore is only required to accrue and pay minimum taxes according to local tax regulations. No income tax provision has been recorded for the three months ended September 30, 2008 or 2007 as a result of the accumulated operating losses incurred.

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Comprehensive Loss

Comprehensive loss increased by $300,464 to $471,706 for the three months ended September 30, 2008 compared to comprehensive loss of $171,242 for the three months ended September 30, 2007. The increase in loss was primarily due to the charge to operations of $468,773 uncollectible account expense in the three months ended September 30, 2008, despite of increase in sales and gross profit and decrease in SG&A for the period.

For the Nine Months Ended September 30, 2008 and 2007

Revenue

Revenue increased by $4,997,979 to $5,408,369 for the nine months ended September 30, 2008 compared to $410,390 for the nine months ended September 30, 2007. The Company’s revenue during the nine months ended September 30, 2007 was generated from the vaccine and other bio-pharmaceutical products distribution business solely as a result of consolidation of the financials of HCBD for the period. Vaccine is a seasonal product that is used mainly during late the fall and early winter seasons. Over the past year the vaccine business has become more competitive in China. Later in 2007 we changed our business strategy, with a plan to move away from the vaccine business and focus on specialty drugs. Revenue during the nine months ended September 30, 2008 was generated from other pharmaceutical products distribution business conducted by HCBD for the period. Due to recent strategic and operation structure changes, the Company predicts that it would generate much higher sales revenue this year compared with 2007.

Cost of Sales and Gross Margin

Cost of sales increased by $4,816,963 to $5,200,158 for the nine months ended September 30, 2008 compared to $383,195 for nine months ended September 30, 2007. The decrease in gross margin was due to higher purchasing costs and transportation costs in the three quarters of 2008 compared with same period last year.

Selling, General and Administrative Expenses

SG&A expenses decreased by $991,201 to $433,329 in the nine months ended September 30, 2008 from $1,424,530 in the nine months ended September 30, 2007. The relatively high SG&A expenses in the nine months ended September 30, 2007 was mainly attributed to some costs incurred during that period related to professional services including legal and other advisory services, as well as amortization of $165,458 for stock-based compensation expenses in that period compared with $28,164 recognized for the three quarters of 2008.

Uncollectible Accounts Expense

Interest Expense

Interest expense net of interest income, was $72,081 for the nine months ended September 30, 2008, compared with $157,048 for the nine months ended September 30, 2007. Interest expense primarily comprised of accrued interest for the $3,000,000 Secured Convertible Promissory Notes. Interest payments were made in form of common stock of the company. Decrease in interest expense during the two contrasting periods was due to repayment of principal over the periods.

Non Operating Income

The Company recorded non operating income of $129,137 for the nine months ended September 30, 2008, compared with $21,277 for the nine months ended September 30, 2007. Out of the total amount of non operating income in the nine months ended September 30, 2008, approximately $94,890 arose from elimination of payables to previous shareholders of HCBD as a result of their waiver of the final outstanding payments for the acquisition of HCBD.

Income Taxes

The Company has been incurring operating losses over the years and therefore is only required to accrue and pay minimum taxes according to local tax regulations. No income tax provision has been recorded for the nine months ended September 30, 2008 or 2007 as a result of the accumulated operating losses incurred.

Comprehensive Loss

Comprehensive loss decreased by $727,714 to $565,757 for the nine months ended September 30, 2008 compared to comprehensive loss of $1,293,471 for the nine months ended September 30, 2007. The decrease in loss was primarily due to increase in sales and gross profit and decrease in SG&A for the period, and partially contributed by other comprehensive income for amount of $176,543for the period, resulting from foreign currency translation adjustment, despite of the charge to operations of $468,773 uncollectible account expense in third quarter of 2008.

LIQUIDITY AND CAPITAL RESOURCES

Working capital

As of September 30, 2008, the Company had combined cash and cash equivalents of $146,887 and working capital deficit of $1,938,667, as compared to cash and cash equivalents of $1,317,556 and working capital deficit of $1,157,189 as of December 31, 2007. Current assets of approximately $3.5 million as at September 30, 2008 also mainly included accounts receivable and other receivables totaling approximately $2.5 million, and other current assets for approximately $0.7 million. Current liabilities of approximately $5.5 million as at September 30, 2008 mainly included approximately $2 million of accounts payable and accrued expenses, approximately $1.6 million outstanding principal of the two-year Secured Convertible Promissory Notes due in November 2008, and approximately $1.2 million other current liabilities.

For the nine months ended September 30, 2008, the Company used approximately $1,336,400 of cash for operations as compared to approximately $1,919,072 for the same period in 2007. The decrease in use of cash in operating activities was mainly attributive to the Company’s decreased operating loss during the nine months ended September 30, 2008 as compared to the same period in 2007, due to the factors discussed above, and decrease in other receivables between the two periods.

There was no cash flow incurred in investing activities other than $10,813 outflow for the nine months ended September 30, 2008 due to purchase of fixed assets. Payment for principal and interest of the Secured Convertible Promissory Notes was made in form of common stock and thus there was no cash flow for financing activities for the period.

The management of the Company acknowledges that its existing cash and cash equivalents may not be sufficient to fund its operations over the next 12 months. Therefore, the ability of the Company to continue as a going concern will be dependent on whether the Company can generate sufficient revenue or obtain funding from alternative sources.

Capital Stock Transactions

In February 2005, the Company completed a private placement of 260,000 shares of common stock at a price of $1.00 per share, or gross proceeds of $260,000.

During the quarter ended March 31, 2005, the Company granted 402,000 fully vested, non-forfeitable warrants to purchase shares of common stock to two consultants for services in addition to cash payments. Those warrants expired without being exercised. Also during the quarter ended March 31, 2005, the Company granted 100,000 fully vested, non-forfeitable shares of common stock to a consultant for services.

In April 2005, the Company completed a private placement of 95,000 shares of common stock at a purchase price of $1.00 per share, or gross proceeds of $95,000, and, for no additional consideration, a cashless 2-year warrant to purchase an additional 95,000 shares at an exercise price of $1.50 per share. Those warrants have expired without being exercised.

In May 2005, the Company completed a private placement of 500,000 shares of common stock at a purchase price of $0.50 per share, or gross proceeds of $250,000, and for no additional consideration, a cashless 5-year warrant to purchase an additional 147,059 shares at an exercise price of $0.75 per share. A value of $71,470 of the proceeds has been allocated to the warrant.

Also in May 2005, the Company completed a private placement of 500,000 shares of common stock at a purchase price of $0.50 per share, or gross proceeds of $250,000, and for no additional consideration, a cashless 5-year warrant to purchase an additional 147,059 shares at an exercise price of $0.75 per share. A value of $68,240 of the proceeds has been allocated to the warrant.

In July 2005, the Company completed a private placement of 1,000,000 of common stock at a purchase price of $0.50 per share, or gross proceeds of $500,000 and, for no additional consideration, a cashless 5-year warrant to purchase an additional 400,000 shares at an exercise price of $0.75 per share. A value of $168,000 of the proceeds has been allocated to the warrant.

Also in July 2005, the Company entered into a service agreement pursuant to which the Company agreed to issue warrants to purchase up to an aggregate of 200,000 shares (the “Service Warrant Shares”) of the common stock in exchange for investor relations services. The Company had the right to terminate the service agreement at any time on or after October 5, 2005, upon 30 days prior written notice. The Service Warrant Shares were scheduled to vest in accordance with the following schedule and are purchasable at the following exercise prices:

50,000 Service Warrant Shares were immediately vested and may be purchased at an exercise price of $0.90 per share;

50,000 Service Warrant Shares were scheduled to vest on the 91st day following the date of the service agreement and were purchasable at an exercise price of $1.10 per share;

50,000 Service Warrant Shares were scheduled to vest on the 181st day following the date of the service agreement and were purchasable at an exercise price of $1.30 per share;

50,000 Service Warrant Shares were scheduled to vest on the 271st day following the date of the service agreement and were purchasable at an exercise price of $1.50 per share.

The warrants shall terminate on the 24-month anniversary of the effective date of a registration statement filed by the Company to register the resale of the Service Warrant Shares; provided, however, in the event that the Company elects to terminate the service agreement early as described above, the warrants will immediately terminate as to any Service Warrant Shares that are not then vested. By October 5, 2005, the Company terminated the service agreement, resulting in only 50,000 Service Warrant Shares vested with an exercise price of $0.90 per share. Those warrants have expired without being exercised.

On January 24, 2006, the Company granted 2,701,000 options, of which all are fully vested, to purchase shares of common stock at an exercise price of $0.52, to officers, employees and consultants of the Company.

On January 26, 2006, the Company announced its plans to re-position itself for bio-pharmaceutical and other high growth opportunities in China, while continuing its commercialization of its high potential mobile VoIP solutions.

In conjunction with the Company’s re-positioning plans, on February 27, 2006 the Company entered into an agreement to transfer ownership of its Chinese subsidiary Zhejiang Guang Tong Wang Luo Co., Ltd (ZJQC) to third parties. On January 1, 2006, the Company also entered into an agreement to transfer ownership of its U.S. subsidiary China Quantum Communications, Inc. to a former employee.

In December 2006, the Company amended its Certificate of Incorporation to increase the number authorized shares of its common stock from 100,000,000 to 200,000,000.

On December 13, 2006, the Company entered into a Subscription Agreement with respect to the issuance and sale of $3,000,000 aggregate principal amount of its Secured Convertible Promissory Notes due December 13, 2008. The Notes are convertible at the option of the holders at any time into shares of the Company’s common stock. Prior to the occurrence of an Event of Default (as defined in the Notes), the Notes are convertible at a per share conversion price equal to $0.25 per share. Following the occurrence of an Event of Default (as defined in the Notes), the Notes are convertible at the lesser of $0.25 per share and 75% of the average of the closing bid prices for the common stock for the five trading days prior to the date of conversion. The Notes bear interest at a rate of eight percent (8%) per annum. After an event of default the Notes bear interest at 15 % per annum. The Company’s obligation to make monthly payments, consisting of principal of and accrued interest on the Notes commenced on March 13, 2007. Prior to an event of default, the Company may, at its option pay the monthly payments in the form of either cash or shares of common stock. In the event that the Company elects to pay the monthly amount in cash, the Company shall be obligated to pay 115% of the principal amount component of the monthly amount and 100% of all other components of the monthly amount. In the event that the Company elects to pay the monthly amount in shares of common stock, the stock shall be valued at an applicable conversion rate equal to the lesser of $0.25 per share or seventy five percent (75%) of the average of the closing bid price of the common stock for the five trading days preceding the applicable repayment date. Provided that an Event of Default has not occurred, the Company may, at its option, prepay the outstanding principal amount of the Notes, in whole or in part, at any time upon 30 days written notice to the holders by paying 120% of the principal amount to be repaid, together with accrued interest thereon plus any other sums due to the date of redemption. The Notes are secured by a Security Agreement entered into by and among the Company, CQCL, CBL, and QCCN and Barbara R. Mittman, as collateral agent for the purchasers of the Notes. The obligations of the Company under the Subscription Agreement with respect to the Notes and the Notes are guaranteed by the CQCL, CBL and QCCN pursuant to a Guaranty, dated as of December 13, 2006, entered into by the CQCL, CBL and QCCN, for the benefit of the purchasers of the Notes.

In connection with the sale of the Notes, the Company also issued to the purchasers of the Notes, Class A Warrants to purchase up to an aggregate of 6,000,000 shares of common stock and Class B Warrants to purchase up to an aggregate of 6,000,000 shares of common stock. One Class A Warrant and one Class B Warrant were issued for each two shares of common stock that would have been issuable on the closing date assuming the complete conversion of the Notes on such date. The Class A Warrants have an exercise price of $0.30 per share and the Class B Warrants have an exercise price of $0.40.

This “Favored Nations Provision” was triggered by the issuance of stock in payment of the principal and interest on the Notes.

In June 2008, the Company amended its Certificate of Incorporation to increase the number authorized shares of its common stock from 200,000,000 to 700,000,000.

Need for current financing

Our ability to continue as a going concern is dependent upon our ability to raise capital in the near term to: (1) satisfy our current obligations, and (2) continue our planned re-positioning for bio-pharmaceutical opportunities in China. We do not have sufficient capital to fund our operations at the current level unless we receive additional capital either through external independent or related party funding, revenues from sales, further expense reductions or some combination thereof.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information is not required for smaller reporting companies.

Item 4T. Controls and Procedures.

On March 20, 2009, the Board of Directors concluded, based on the recommendation of management, that the Company’s consolidated financial statements contained in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, filed on November 14, 2008, should be restated to correct a number of errors and that the financials as previously filed should no longer be relied upon.

In addition to the impact of these errors on the consolidated financial statements, management considered the impact these errors has on the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures for the periods being restated. Management believes that the Company's Internal Controls over Financial Reporting, under Item 308 of Regulation S-K, and the Company's Disclosure Controls, under Item 307 of Regulation S-K, were ineffective at September 30, 2008.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

Not applicable to smaller reporting companies.

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

None.

Item 3. Defaults Upon Senior Securities.

On December 13, 2006, the Company entered into a Subscription Agreement with respect to the issuance and sale of $3,000,000 aggregate principal amount of its Secured Convertible Promissory Notes due December 13, 2008. On October 15, 2007, an “event of default” occurred and is continuing under the Notes in that we failed to make our monthly amortization payment due on that date in registered shares of common stock or in cash. This event of default has not been waived by the investors and is continuing. We intend to endeavor to satisfy our past and future amortization payments due under the Notes by delivery of shares of our common stock. However, there can be no assurance that this will be possible as the investors have the right to request payment in cash following an event of default. We have communicated with our investors and they have verbally agreed to continue to accept unregistered shares in payment of amounts due to date. However, we cannot assure you that the investors will continue to permit us to make monthly payments due on the Notes in the future in shares of our common stock. We do not currently have sufficient cash flow to make the payments due on the Notes in cash. Accordingly if the investors do not continue to permit us to make the monthly payments due on the Notes by issuing shares of our common stock we may not be able to continue as a going concern and may be forced to wind up our affairs or seek protection under the bankruptcy laws. Other than as stated above, the Company has no specific plans, arrangements or understandings, either written or oral, to issue any of the additional authorized shares of Common Stock.

Item 4. Submission of Matters to a Vote of Security Holders.

The Company held its annual meeting of stockholders in Princeton, New Jersey on August 15, 2008. At the meeting, Peter Wang, Ya Li, and Charles Xue were reelected as directors of the Company's board of directors to serve until the Company's 2009 annual meeting of stockholders or until their successors are duly elected and qualified.

Subsequent to the unanimous written consent dated July 3, 2008 by the Company’s Board of Directors for adoption of an amendment to the Company’s Certificate of Incorporation (the “Amendment”) to effect a 1 for 100 reverse stock spit of the Company’s outstanding Common Stock, in July 2008, the holders of a majority of the outstanding shares of Common Stock by written consent approved the filing of the Amendment and the reverse split contemplated thereby.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit		Description

31.1		Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.

31.2		Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008.

32.1		Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

SIGNATURES

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

Date: March 27, 2009	CHINA BIOPHARMA, INC.

		By:	/s/ Peter Wang
		Name: Peter Wang
		Title: Chairman, Chief Executive Officer

		By:	/s/ Chunhui Shu
		Name: Chunhui Shu
		Title: Chief Financial Officer