First China Pharmaceutical (FCPG) 10-Q 2012 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period endedMarch 31, 2012

[   ]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:000-54076

__________________________

FIRST CHINA PHARMACEUTICAL GROUP, INC.
(Exact name of registrant as specified in its charter)

Nevada	74-3232809
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

Number 504, West Ren Min Road,
Kunming City, Yunnan Province
People’s Republic of China, 650000
(Address of principal executive offices)

852-2138-1668
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 [X]     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 definitions of “larger 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]
(Do not check if a smaller reporting company)

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

The number of shares outstanding of the registrant’s common stock at May 15, 2012 was 59,664,480.

INDEX

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	3
	Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011	5
	Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2012 and 2011	6
	Notes to Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	32
ITEM 4.	CONTROLS AND PROCEDURES	32
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	34
ITEM 1A.	RISK FACTORS	34
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34
ITEM 4.	MINE SAFETY DISCLOSURES	34
ITEM 5.	OTHER INFORMATION	34
ITEM 6.	EXHIBITS	34
SIGNATURES		36

i

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms, or the negative of such terms. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Transition Report on Form 10-K for the fiscal year ended December 31, 2011 filed on May 2, 2012.

In this Quarterly Report on Form 10-Q, references to “dollars” and “$” are to United States dollars and, unless otherwise indicated, references to “we,” “our,” “us,” the “Company,” “FCPG,” or the “Registrant” refer to First China Pharmaceutical Group, Inc., a Nevada corporation and its wholly owned subsidiaries, First China Pharmaceutical Group Limited, a Hong Kong company, and Kun Ming Xin Yuan Tang Pharmacies Co. Ltd., a company organized under the laws of the People’s Republic of China.

YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events or information as of the date on which the statements are made in this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we expect or hope.

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST CHINA PHARMACEUTICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS

		March 31,		December 31,
		2012		2011
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	3,974,334	$	3,641,120
Restricted cash		3,114,603		1,003,545
Accounts receivable– net		1,781,777		1,776,649
Notes receivable– short term - net		85,548		125,895
Related party receivables		16,314,945		11,715,355
Prepayments		2,095,214		867,566
Inventories		671,852		707,075
Total Current Assets		28,038,273		19,837,205
Non-current Assets
Notes receivable – long term		819,931		119,782
Equipment, net		73,344		63,303
Intangible assets, net		4,348		3,379
Total Non-current Assets		897,623		186,464
Total Assets	$	28,935,896	$	20,023,669

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

3

FIRST CHINA PHARMACEUTICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS

		March 31,			December 31,
		2012			2011
		(Unaudited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Short-term borrowings	$	1,354,610		$	-
Accounts payable		1,385,815			1,368,767
Other payables and accrued liabilities		952,492			1,003,634
Value added tax payable		11,675,736			11,434,702
Advance receipts		1,583,743			510,415
Related party payables		2,736,946			191,630
Notes payable		6,756,757			2,136,600
Loans payable		1,170,636			3,604,981
Income tax payable		3,629,310			2,174,348
Total Current Liabilities		31,246,045			22,425,077
Non-current Liabilities
Convertible promissory notes		1,058,309			1,045,907
Warrants –derivative liability		1,881,520			639,528
Total Non-current Liabilities		2,939,829			1,685,435
Total Liabilities		34,185,874			24,110,512
Commitments and contingencies
STOCKHOLDERS’ DEFICIT
Common stock $0.001 par value; 200,000,000 shares authorized as of March 31, 2012 and December 31, 2011; 59,664,480 shares issued and outstanding as of March 31, 2012 and December 31, 2011.		59,664			59,664
Additional paid-in capital		744,251			727,062
Retained deficit		(6,157,329	)		(4,991,938	)
Accumulated other comprehensive income - foreign currency translation adjustments		103,436			118,369
Total Stockholders’ Deficit		(5,249,978	)		(4,086,843	)
Total Liabilities and Stockholders’ Deficit	$	28,935,896		$	20,023,669

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

4

FIRST CHINA PHARMACEUTICAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)

		Three Months
		Ended March, 31
		2012			2011
Net sales	$	12,191,345		$	7,384,178
Cost of Sales		11,128,281			6,082,778
Gross profit		1,063,064			1,301,400
Selling expenses		102,256			591,285
Administrative expenses		686,643			549,668
Income (Loss) from operations		274,165			160,447
Other income / (expenses)		35,115			17,463
Derivative loss		(1,241,992	)		(175,555	)
Interest income		6,116			5,112
Interest expense		(41,973	)		(29,528	)
Loss before tax		(968,569	)		(22,061	)
Income tax		196,822			292,483
Net Loss		(1,165,391	)		(314,544	)
Other Comprehensive loss
Foreign currency translation adjustments		(14,937	)		(140,056	)
Total Comprehensive Loss	$	(1,180,328	)	$	(454,600	)
Basic Loss per CommonShare
Weighted average number of common shares outstanding		59,664,480			55,471,535
Earnings per share – Basic	$	(0.0195	)	$	(0.0057	)
Diluted Loss per CommonShare
Adjusted weighted average number of shares		59,664,480			55,471,535
Earnings per share – Diluted	$	(0.0195	)	$	(0.0057	)

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

5

FIRST CHINA PHARMACEUTICAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

		Three Months Ended
		March 31, 2012			March 31, 2011
Cash Flows from Operating Activities
Net loss	$	(1,165,391	)	$	(314,544	)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation		5,635			1,803
Provision for bad debts		227,396			-
Derivative loss		1,241,992			175,555
Share–based payments expense		17,189			-
Changes in operating assets and liabilities:
Accounts receivable		6,794			2,663,024
Prepayments		(1,224,672	)		(578,316	)
Inventories		40,054			1,516,227
Other payable and accrued liabilities		(54,528	)		(685,666	)
Accounts payable		7,745			148,224
Advance receipts		1,072,388			-
Value added tax payable		1,443,732			52,615
Income tax payable		164,787			295,752
Net cash provided by operating activities		1,783,121			3,274,674
Cash Flows from Investing Activities
Notes receivable		(887,078	)		(370,748	)
Purchases of equipment		(16,223	)		(2,891	)
Net cash used in investing activities		(903,301	)		(373,639	)

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

6

FIRST CHINA PHARMACEUTICAL GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

		Three Months Ended
		March 31, 2012			March 31, 2011
Cash Flows from Financing Activities
(Repayments)/proceeds of short term borrowings, including accrued interest		1,357,401			(40,993	)
Proceeds from notes payable		4,616,517			1,366,369
Net proceeds from convertible notes		12,402			135,672
Due from related parties		(4,531,099	)		(9,244,451	)
Due to related parties		2,549,930			3,264,746
Net proceeds from private offering units		-			2,723,500
Net (repayments)/proceeds from loans payable		(2,464,203	)		1,066,742
Increase in restricted cash		(2,109,212	)		(550,203	)
Net cash used by financing activities		(568,264	)		(1,278,618	)
Effect of foreign currency translation on cash and cash equivalents		21,658			(3,617	)
Net increase in cash and cash equivalents		333,214			1,618,800
Cash and cash equivalents - beginning of period		3,641,120			1,125,056
Cash and cash equivalents at the end of period	$	3,974,334		$	2,743,856
Supplemental disclosures for cash flow information:
Cash paid for:
Interest	$	41,973		$	29,528
Income taxes	$	-		$	-

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

7

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

1.          ORGANIZATION AND PRINCIPAL ACTIVITIES

First China Pharmaceutical Group, Inc., (the “Company”), was incorporated in Nevada as of July 31, 2007, and is a public reporting “shell company”, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As of May 14, 2010, the Company amended its Articles of Incorporation to change its name from “E-Dispatch Inc.” to “First China Pharmaceutical Group, Inc.”.

First China Pharmaceutical Group, Inc. limited (the “FCPG HK”) was incorporated in Hong Kong as of April 29, 2010 under the Companies Ordinance of Hong Kong. As of September 15, 2010, the Company issued 15,000,000 shares in exchange for 100% of the issued and outstanding common stock of FCPG HK. The newly issued shares represented 25% of the Company’s issued and outstanding common stock.

Kun Ming Xin Yuan Tang Pharmacies Co. Ltd. (“XYT”) was established under the laws of the People’s Republic of China (“PRC”) as of November 12, 2002 with a paid-in capital of RMB 2,000,000 as of December 31, 2010. As of June 25, 2010, FCPG HK acquired XYT, which became FCPG HK’s wholly owned subsidiary.

The Company and the Subsidiaries (collectively the “Group”) are principally engaged in drug logistics and distribution in Yunnan Province, China through drug stores, medical clinics and hospitals.

On May 6, 2011, the Group's Board of Directors changed the Group’s fiscal year end from March 31 to December 31.

2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)          Basis of Preparation and Presentation

As of September 15, 2010, the Company acquired FCPG HK and XYT. The Company was a shell company and its accounting acquirer is FCPG HK and XYT on the date before September 15, 2010. According to the division of Corporation Finance Financial Reporting Manual 1170.1, financial information of a registrant’s predecessor is required for all periods prior to the succession, with no lapse in audited periods or omission of other information required about the registrant. Any interim period of the predecessor prior to its acquisition by the registrant should be audited when audited financial statements for the period after the acquisition are presented. Schedules required by S-X Article 12 are required for predecessor entities.

The Share Exchange was accounted for as a reverse merger presumed to be effected on January 1, 2010 instead of September 15, 2010. The statements of balance sheets as of March 31, 2012 and December 31, 2011, the statement of income and comprehensive income for the three months ended March 31, 2012 and 2011, the statements of cash flows for the three months ended March 31, 2012 and 2011 have been prepared for the Group.

8

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(a)          Basis of Preparation and Presentation (Cont’d)

The consolidated balance sheets as March 31, 2012 and December 31, 2011, have been prepared for the predecessor, XYT on a comparative basis. Information presented for comparative purposes in the consolidated financial statements is also to be retroactively adjusted to reflect the legal parent’s (the Company’s) legal capital.

The consolidated financial statements include the accounts of the Group and its wholly-owned subsidiaries. All inter-company transactions and accounts have been eliminated in consolidation.

This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Group, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC GAAP”), the accounting standards used in the places of their domicile. The accompanying financial statements reflect necessary adjustments recorded in the books of account of the Group to present them in conformity with US GAAP.

The accompanying unaudited consolidated financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet information as of December 31, 2011 was derived from the audited consolidated financial statements included in Form 10-K.

(b)         Use of Estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of due from related parties, inventories and the estimation on useful lives of plant and machinery and intangible assets. Actual results could differ from those estimates.

Warrants that could require cash settlement or have anti-dilution price protection provisions are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income (expense) in our statement of loss and comprehensive loss in each subsequent period. In general, warrants with anti-dilution provisions are measured using the Black-Scholes valuation model. The methodology based, in part, upon inputs for which there is little or no observable market data, requiring the Group to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates, however these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Also see Note 13.

9

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(c)         Cash and Cash Equivalents

The Group considers all highly liquid investments with initial maturities of six months or less to be cash equivalents. As of March 31, 2012 and December 31, 2011, $3,663,567 and $3,112,249, respectively were held under personal named accounts of certain officers of the Group, which are used for cash receipts from sales and purchases of inventory.

(d)          Restricted Cash

Deposits in banks, as security for notes payable, that are restricted in use and are classified as restricted cash under current assets.

(e)          Trade Receivables

Accounts receivable are recognized and carried at original invoiced amount less an allowance for any potential uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. The Group generally does not require collateral from its customers.

The Group maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make payments on time. The Group reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Group considers many factors, including the age of the balance, the customer’s historical payment history, its current credit-worthiness and current economic trends.

As of March 31, 2012 and December 31, 2011, the allowance for doubtful accounts was $377,920 and $375,405, respectively.

(f)          Inventories

Inventories are finished goods purchased from outsiders of the Group and stated at the lower of cost and net realizable value. Cost is determined using the specific identification basis. The cost of inventories, principally comprising purchase cost. Net realizable value is the estimated selling price in the ordinary course of business.

10

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(g)          Equipment

Equipment is stated at cost less depreciation and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.

Depreciation of equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The principal depreciation periods are as follows:

Office equipment	3 years
Other equipment	5 years
Motor vehicle	5 years

(h)         Intangible Assets

Intangible assets are stated at cost less amortization and accumulated impairment loss. The intangible assets of the Group represent purchased software. The intangible assets are amortized over their estimated useful lives of 5-10 years using the straight-line method.

(i)          Revenue Recognition

Revenue from sales of the Group’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time of delivery and the sales price is fixed or determinable and collection is reasonably assured.

When the customers checked and accepted the products, the collection is reasonably assured. Since the nature of the products, the type of their customers and their distribution methods are substantially similar, the revenue recognition policy on all products is the same.

Revenues are shown net of applicable value added tax and sales returns.

(j)          Income Taxes

The Group uses the asset and liability method of accounting for income taxes pursuant to ASC 740 “Accounting for Income Taxes”. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

(k)          Comprehensive Income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Group’s current component of other comprehensive income is the foreign currency translation adjustments.

11

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(l)          Foreign Currency Translation

The Group maintains its financial statements in the functional currency. The functional currency of the Company is US dollar (“USD”, “$”), the functional currency of FCPG HK is Hong Kong dollar (“HKD”), and the functional currency of XYT is Renminbi (“RMB”). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

For financial reporting purposes, the financial statements of the Company, FCPG HK and XYT which are prepared using the functional currency have been translated into USD. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.

HKD is pegged to USD and hence there is no significant translation adjustment impact on these financial statements.

RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

Rates applicable to periods presented:

	March 31, 2012	December 31, 2011	March 31, 2011
Balance Sheet
HKD-USD	$ 0.13	$ 0.13	$ 0.13
RMB-USD	$ 0.16	$ 0.16	$ 0.15
Income statement
HKD-USD	$ 0.13	$ 0.13	$ 0.13
RMB-USD	$ 0.16	$ 0.16	$ 0.15

(m)          Financial Instruments

The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash and cash equivalents, restricted cash, due from (to) a related party, notes payable, other payable and accrued liabilities and income tax payable approximate their fair values due to the short-term nature of these items. The carrying amounts of short-term and long-term borrowings approximate the fair value based on the Group’s expected borrowing rate for debt with similar remaining maturities and comparable risk.

It is management’s opinion that the Group is not exposed to significant interest, price or credit risks arising from these financial instruments.

12

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(n)          Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04 (“ASU 2011-04”),Fair Value Measurement (“ASC 820”) which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The adoption of the guidance did not have a material impact on its consolidated financial statements and disclosures.

In June 2011, the FASB issued ASU No. 2011-05 (“ASU 2011-05”),Comprehensive Income (Topic 220), Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income (“OCI”) and its components in the statements of shareholders’ equity. Instead, an entity will be required to present items of net income and OCI in one continuous statement or in two separate, but consecutive, statements. In December 2011, the FASB issued ASU No. 2011-12 (“ASU 2011-12”),Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU defers the ASU 2011-05 requirement that companies present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements and the requirement to report reclassification adjustments in interim periods. The amendments in ASU 2011-05 and ASU 2011-12 should be applied retrospectively and are effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption of the guidance did not have a material impact on its consolidated financial statements and disclosures.

(o)          Business and Economic Risks

The Group participates in a medicine wholesale industry and believes that changes in any of the following areas could have a material adverse effect on the Group’s future financial position, results of operations or cash flows: change in government policy on medicine price control; change in supplier costs; changes in certain strategic relationships or customer relationships; regulatory considerations; and risks associated with the Group’s ability to attract and retain employees necessary to support its growth.

The Company’s operations could be adversely affected by significant political, economic and social uncertainties in the PRC.

(p)          Tax Surcharges

The Group incurs tax surcharges in connection with sale of goods to customers. The tax surcharges are calculated based on the Value Added Tax of the transaction. According to ASC 605-45, “Revenue Recognition: Principal Agent Considerations”, the Group includes the tax surcharges in the cost of sales.

13

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(q)          Fair Value Measurements

Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that market participants would use in pricing an asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:

• Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;

• Level 2 inputs: Inputs, other than quoted prices included in Level 1 that are observable either directly or indirectly; and

• Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2013 and the year ended December 31, 2011, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3)

	Level 1:	Level 2:		Level 3:		Total
		Significant
	Quoted Prices in	Other		Significant
	Active Markets for	Observable		Unobservable		March 31,
Description	Identical Assets	Inputs		Inputs		2012
Derivative Liability – Warrants			$	1,881,520	$	1,881,520
Total			$	1,881,520	$	1,881,520

	Level 1:	Level 2:		Level 3:		Total
		Significant
	Quoted Prices in	Other		Significant
	Active Markets for	Observable		Unobservable		December 31,
Description	Identical Assets	Inputs		Inputs		2011
Derivative Liability – Warrants			$	639,528	$	639,528
Total			$	639,528	$	639,528

(r)          Statutory Surplus Reserve

In accordance with the relevant laws and regulations of PRC, XYT is required to allocate 10% of its net income to the statutory surplus reserve after offsetting any prior year losses until the balance reaches 50% of the registered capital. The statutory reserves can be used to offset prior years’ losses, if any, and may be converted into registered capital, provided that the remaining balances of the reserve after such conversion is not less than 25% of registered capital. The statutory surplus reserve is non-distributable. As of March 31,2012 and December 31, 2011the Group has made no reserves.

14

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)

(s)          Reclassification

Notes receivable of approximately $120,000 was reclassified from current notes receivable current to long-term notes receivable to conform to current period presentation.

3.          RELATED PARTIES

		March 31,		December 31,
		2012		2011
Due from shareholder	$	8,732,270	$	7,093,764
Due from related parties		7,582,675		4,621,591
Total due from related parties	$	16,314,945	$	11,715,355
Due to shareholder	$	498,476	$	191,630
Due to related parties		2,238,470		-
Total due to related party	$	2,736,946	$	191,630

Due From Shareholder

The amount due from a shareholder and officer of the Group that represents cash receipts that the shareholder had collected on behalf of XYT, which the shareholder pays to the Group. In addition, the Group advanced funds to the shareholder to pay for certain operating costs. The amount due is interest free and unsecured.

Due From Related Parties

The amount due from related parties represents loans and receivables from related party companies that are owned by an officer of XYT. During the three months ended March, 31, 2012 and 2011, the Group recorded sales of $1,659,661 and $-0-, and purchases of $2,640,598, and $-0- from related parties.

Due to Shareholder and Related Parties

The amount due to shareholder and related parties represent expenses paid by the shareholder and related parties on behalf of the Group.

15

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

4.          CONCENTRATION OF CREDIT RISK

Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, prepayments, restricted cash and due from related parties. The Group places its cash with financial institutions with high-credit ratings and quality. The Group conducts periodic reviews of the related party financial conditions and payment practices.

The Group has a diverse customer base predominantly in the Yunnan Province. For the three months ended March 31, 2012 three customers exceeded 5% of the Group’s total revenues, one of which is a related party, representing 13% of total revenues. For the three months ended March 31, 2011 there were no customers exceeding 5% of the Group’s total revenues.

The Group relies on supplies from numerous vendors. For the three months ended March 31, 2012 three vendors exceeded 5% of the Group’s total purchases, of which one is a related party, representing 24% of total purchases. For the three months ended March 31, 2011 on vendor exceeded 5% of the Group’s total purchases.

5.          PREPAYMENTS

		March 31,		December 31,
		2012		2011
Prepayments for materials purchases	$	1,789,782	$	699,186
Deposits		-		127,469
Prepayments		305,432		9,607
Deferred expenses		-		31,304
Total	$	2,095,214	$	867,566

16

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

6.           NOTES RECEIVABLE

		March			December
		31, 2012			31, 2011
Botou City JRCC Vacuum Equipment Mfg., Co., uncollateralized note receivable executed on April 15, 2011 due on April 25, 2012. Interest rate at 7%. Principle and accrued interest was paid on due date.	$	212,287		$	125,895
Hebei Eastern Equipment Mfg. Co., uncollateralized note receivable executed on April 10, 2010 due on April 20, 2012. It is non-interest bearing if principle was repaid on due date.		253,477			251,790
Other, three uncollateralized notes receivable due in 2012. They are non-interest bearing.		100,131			-
Subtotal - short term		565,895			377,685
Allowance for doubtful accounts		(480,347	)		(251,790	)
Short term –net		85,548			125,895
Kunming City DGTW Trading Co., uncollateralized note receivable executed on November 15, 2009 due on November 30, 2013. The Group agreed to lend up to RMB 1,000,000 or approximately $160,000. Interest rate at the prevailing rate set by People’s Bank of China of similar terms, 6.24% on the date of the loan.		120,585			119,782
Kunming FRK Trading Co., uncollateralized note receivable executed on January 15, 2012. The Group agreed to lend up to RMB 8,000,000 or approximately $1,270,000 between January 20, 2012 and December 20, 2012. Each withdraw is due within three years from the draw date. Interest is at the prevailing rate set by People’s Bank of China of similar terms, 6.9% on the date of the loan.		699,346			-
Subtotal - long term		819,931			119,782
Total	$	905,479		$	245,677

17

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

7.          EQUIPMENT

		March 31,			December 31,
		2012			2011
Office equipment	$	38,271		$	34,976
Other equipment		45,857			34,035
Motor vehicle		45,658			44,775
Total cost		129,786			113,786
Accumulated depreciation		(56,442	)		(50,483	)
Equipment, net	$	73,344		$	63,303

Depreciation expense for the three months ended March 31, 2012 and 2011 was $5,635 and $1,803, respectively.

8.          OTHER PAYABLES AND ACCRUED LIABILITIES

		March 31,		December 31,
		2012		2011
Other payables	$	625,845	$	623,195
Deposits		-		55,965
Social insurance payable		326,647		324,474
Total	$	952,492	$	1,003,634

9.          NOTES PAYABLE, LOANS PAYABLE AND SHORT TERM BORROWINGS

The notes payable which were issued by XYT with bank guarantees are secured by the restricted cash. All notes bear interest of 0.5% and are due within three to four months. These notes payable are guaranteed by Yunnan Yishang Guaranty Co., a non-related third party for a deposit of approximately $215,000.

		March 31, 2012		December 31, 2011
Guangfa Bank	$	-	$	1,259,000
Qujing City Commercial Bank		4,119,008		-
Shanghai Pufa Development Bank		2,637,749		787,000
Fudian Bank		-		90,600
Total	$	6,756,757	$	2,136,600

18

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

9.          NOTES PAYABLE, LOANS PAYABLE AND SHORT TERM BORROWINGS (CON’T)

Loans payables were funds advanced from unrelated third parties to XYT. They are non-interest bearing and generally do not include terms of repayment. They are repaid within three months. Imputed interest was not considered material.

		March 31,		December 31,
		2012		2011
Individuals	$	1,000,219	$	2,708,474
Companies		170,417		896,507
Total	$	1,170,636	$	3,604,981

On March 19, 2012, we issued a promissory note to the Belmont Group Ltd., in the principal amount of $500,000, with interest on the unpaid principle at a rate of 12.0% simple interest per annum. The Note matures on March 19, 2013. As of March 31, 2012, the Group has drawn $150,000 under the Note.

On January 13, 2012, the Group executed a loan agreement with Fudian Bank. The loan carries a variable interest rate adjusted monthly based upon one hundred thirty percent of the prevailing rate set by the Peoples Bank of China. The Group is responsible to pay interest on a monthly basis, and the principal is due on January 6, 2013. The loan is guaranteed by Kunming City DGTW Trading Co., a non-related third party.

The following summarizes short term borrowings at March, 31, 2012 and December 31, 2011:

		March 31, 2012		December 31, 2011
Fudian Bank	$	1,204,018	$	-
Belmont Group Ltd.		150,592		-
Total	$	1,354,610	$	-

10.          CONVERTIBLE PROMISSORY NOTES

On October 3, 2010, we issued a convertible promissory note in the principal amount of up to $400,000, with interest on the unpaid principal at a rate of 5.0% simple interest per annum. The Note matures on October 3, 2015. The outstanding principal and accrued but unpaid interest thereon may be converted (1) upon a qualified debt or equity financing, in which case the holder of the Note would receive for the same promissory note or class and series of stock, respectively, issued in such qualified financing; (2) upon mutual agreement by the holder and the Company, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price; or (3) upon a reorganization, consolidation or merger of the Group, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price. On October 4, 2010, the note was assigned to another party (“Note I”), and on January 21, 2011, the note holder agreed to extend the total funds available to the Group to $500,000. As of March 31, 2012, the Group has drawn $495,000 under Note I and no share conversion occurred.

19

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

10.          CONVERTIBLE PROMISSORY NOTES (CON’T)

On December 22, 2010, we issued a convertible promissory note (“Note II”) in the principal amount of $500,000, with interest on the unpaid principal at a rate of 5.0% simple interest per annum. The Note matures on December 22, 2015. The outstanding principal and accrued but unpaid interest thereon may be converted (1) upon a qualified debt or equity financing, in which case the holder of the Note would receive for the same promissory note or class and series of stock, respectively, issued in such qualified financing; (2) upon mutual agreement by the holder and the Group, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price; or (3) upon a reorganization, consolidation or merger of the Group, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price. As of March 31, 2012, the Group has drawn $500,000 under the Note and no share conversion occurred.

The details of convertible promissory notes as of March 31, 2012 are as follows:

		As of March 31, 2012
		Note I		Note II		Total
Convertible notes payable:
-Par value	$	495,000	$	500,000	$	995,000
-Accrued interest		31,528		31,781		63,309
	$	526,528	$	531,781	$	1,058,309

The details of convertible promissory notes as of December 31, 2011 are as follows:

		As of December 31, 2011
		Note I		Note II		Total
Convertible notes payable:
-Par value	$	495,000	$	500,000	$	995,000
-Accrued interest		25,326		25,581		50,907
	$	520,326	$	525,581	$	1,045,907

20

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

11.          COMMON STOCK

Issuance of Private Offering Units

Between March 18, 2011 and April 15, 2011, the Group entered into a form of Securities Purchase Agreement (the “SPA”) with certain accredited investors (the “Purchasers”) for the issuance and sale of one hundred and fifty four (154) Units of the Company at a purchase price of $25,000 per Unit (the “Private Offering”), for aggregate consideration of $3,850,000.

Each “Unit” is comprised of (i) 27,778 shares of Company common stock, $0.001 par value per share (the “Common Stock,” and the shares of Common Stock offered referred to as the “Shares”), (ii) warrants to purchase 27,778 shares of Common Stock at an exercise price of $1.25 per share (the “Series A-1 Warrants”), and (iii) warrants to purchase 27,778 shares of Common Stock at an exercise price of $2.00 per share (the “Series A-2 Warrants”) (the Series A-1 Warrants and the Series A-2 Warrants, collectively, the “Warrants”). The Warrants expire four (4) years from the date of issuance, subject to early termination or forfeiture in accordance with certain terms and conditions of the Warrants.

Each of the Purchasers executed an SPA and each Purchaser represented to the Group that such investor is an “accredited investor” as defined in Rule 501(a) of Regulation D of the Securities Act of 1933. The Group used the net proceeds of the Private Offering, totaling $3,633,500 after deducting for certain costs and expenses of the Private Offering, for general corporate purposes. An aggregate of 4,464,480 Shares, 4,464,480 Series A-1 Warrants and 4,464,480 Series A-2 Warrants were issued in connection with the Private Offering.

12.          STOCK PURCHASE WARRANTS

The Group has historically issued warrants to purchase shares of the Group’s common stock in connection with certain of its common stock offerings. Warrants that have anti-dilution price protection provisions are recorded as liabilities of the Group at the estimated fair value at the date of issuance, with changes in estimated fair value recorded as non-cash income or expense in the Company’s statement of operations in each subsequent period. The following warrants were outstanding as of March 31, 2012 and December 31, 2011:

(i)	Series A-1 series warrants to purchase an aggregate of 4,464,481 shares of the Group’s common stock, issued in March 2011, exercisable for a four year period commencing on the date of issuance at an exercise price of $1.25 per share, all of which remained outstanding as of March 31, 2012 and December 31, 2011; and
(ii)	Series A-2 series warrants to purchase an aggregate of 4,464,481 shares of the Group’s common stock, issued in March 2011, exercisable for a four year period commencing on the date of issuance at an exercise price of $2.00 per share, all of which remained outstanding as of March 31, 2012 and December 31, 2011.

All of the warrants listed above contain anti-dilution provisions that adjust the exercise price of the warrant if the Group issues or sells, or is deemed to have issued or sold, any shares of its common stock or securities exercisable or convertible into shares of common stock for no consideration or for a consideration per share less than the applicable exercise price in effect immediately prior to the time of such issue or sale. In the event of such a subsequent issuance of common stock of the Group, the exercise price of the warrants would be adjusted to the price per share at which the new shares of common stock of the Group are being issued.

21

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

12.          STOCK PURCHASE WARRANTS (CON’T)

The warrants are measured using the Black-Scholes valuation model. The methodology is based, in part, upon inputs for which there is little or no observable market data, requiring the Group to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent the Group’s best estimates, however these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liabilities and the change in estimated fair value of the warrants could be materially different.

Inherent in the Black-Scholes valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield. The Group estimates the volatility of its common stock based on historical volatility using the earliest quoted price available. The risk-free interest rate is based on the U.S. Treasury yield with similar terms on the balance sheet date. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on management estimation, and the Group anticipates to remain zero. The current price of the stock on the grant date was determined by the closing price of the common stock on the balance sheet date.

The Group evaluated the fair value under binomial method and determined the result of is not significant different than Black-Scholes. The assumptions used by the Group are summarized in the following tables for warrants that were outstanding as of the balance sheet dates:

	March 31, 2012	December 31, 2011
Current price	$0.33	$0.18
Expected dividend rate	0	0
Expected volatility	154%	115%
Risk free rate	0.51%	2.11%
Expected life	3.00	3.21

The following table summarizes the change in the estimated fair value of the Group’s warrant liabilities:

Warrant liabilities
As of March 31, 2010	$	-
Warrants issued year ended March 31, 2011		2,046,353
Increase in fair value		175,555
Fair value as of March 31, 2011		2,221,908
Warrants issued nine months ended		827,769
December 31, 2011
Decrease in fair value		(2,410,149	)
Fair value as of December 31, 2011		639,528
Increase in fair value		1,241,992
Fair value as of March 31, 2012	$	1,881,520

22

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

12.          STOCK PURCHASE WARRANTS (CON’T)

Share-Based Payment for Consultant Service

As of May 6, 2011, the Group entered into a Board Advisory Agreement (the “Agreement”) with Jack Zwick, whereby Mr. Zwick consented to serve as a director of the Group. Pursuant to the Agreement, Mr. Zwick will receive two hundred thousand (200,000) shares of Group common stock, vesting monthly over a period of two years, in connection with his service as a director and a consulting fee of $2,000 per month. The share-based award was valued on May 6, 2011 using the ending market price of common stock. Expense related to the share-based compensation for the three months ended March 31, 2011and March 31, 2012 was approximately $-0- and $17,000, respectively.

13.          TAX

Corporate Income Tax (“CIT”)

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the People’s Republic of China (the “new CIT law”), which went into effect on January 1, 2008. In accordance with the relevant tax laws and regulations of the PRC, the applicable corporate income tax rate is 25%.

The Group has adopted ASC 740-10, “Accounting for Uncertainty in Income Taxes”. The interpretation addresses the determination of whether tax benefits claimed on a tax return should be recorded in the financial statements. Under ASC 740-10, the Group may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. Tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

The Group’s income tax expense for the three months ended March 31, 2012 and 2011 is summarized below:

		March 31, 2012			March 31, 2011
PRC income before tax	$	559,891		$	1,169,930
Non-PRC income before tax		(1,528,460	)		(1,147,869	)
Income (Loss) before income tax	$	(968,569	)	$	(22,061	)

Income taxes consist of:
		March 31, 2012			March 31, 2011
Current tax at the PRC statutory rate	$	(242,142	)	$	(5,516	)
Permanent differences – derivative losses		310,498			43,889
Change in valuation allowance		128,466			254,110
Income tax	$	196,822		$	292,483

23

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

13.          TAX (CON’T)

The components of deferred income tax as of March 31, 2012 and December 31, 2011:

		March 31, 2012			December 31, 2011
Non-PRC operating loss carry-forward	$	323,859		$	252,242
Allowance for bad debt		212,142			155,293
Total		536,001		$	407,535
Valuation allowance		(536,001	)		(407,535	)
Deferred tax assets, net	$	-		$	-

Value Added Tax (“VAT”)

Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with Chinese Laws. The value added tax standard rate is 17% of the gross sale price, and the Group records its revenue net of VAT. A credit is available whereby VAT paid on the purchase of inventory can be used to offset the VAT on the sales.

14.          COMMITMENTS

There was no amount due to commitments and contingencies except that XYT leases the office and warehouse under non-cancelable operating lease agreement that expires in 2015.

		Payments Due by Period
Contractual Obligations
		2012		2013		2014		2015		Total
Operating Lease Obligations	$	21,500	$	21,500	$	21,500	$	2,300	$	66,800

Rent Expense for the three months ended March 31, 2011 and 2012 was approximately $5,250 and $9,600, respectively.

15.         SEGMENT INFORMATION

No segment information is disclosed as the Company is engaged in the sales of Chinese patent drug, bio-chemicals, chemical preparations and biological. The nature of the products, the type of their customers and their distribution methods are substantially similar. The Group operates in a single segment in the PRC. The CEO is Group’s Decision maker.

24

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)

16.          EARNINGS PER SHARE

The Group reports basic and diluted earnings per share in accordance with ASC Topic 260, “Earnings Per Share”. Basic earnings/ (loss) per share is computed by dividing net comprehensive income/ (loss) by weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net comprehensive income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Common equivalent shares are excluded from the computation in periods for which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and, accordingly, are excluded from the calculation.

Basic loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed on the basis of the weighted average number of shares of common shares outstanding during the period, using the if-converted method for the convertible notes and preferred stock and the treasury stock method for warrants. Warrants to purchase 8,928,962 shares of common stock and convertible notes were not included in diluted earnings per share for the three months ended March 31, 2012 due to net loss. Common stock equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive. The following table sets forth the computation of basic and diluted net loss per share:

		For the Three Months Ended
		March 31,
		2012			2011
Net loss for common stockholders – basic	$	(1,165,391	)	$	(314,544	)
Interest expense on convertible notes		12,402			-
Net loss for common stockholders – diluted	$	(1,177,793	)	$	(314,544	)
Weighted average outstanding shares of common stock – basic		59,664,480			55,471,535
Weighted average outstanding shares of common stock – diluted		59,664,480			55,471,535

17.          RETIREMENT PLAN

The Group contributes on a monthly basis to defined contribution retirement benefit plans organized by relevant municipal and provincial governments. The municipal and provincial governments assume the retirement benefit obligations payable to all existing and future retired employees under these plans. The Group has no further obligation for post-retirement benefits beyond the contributions made. Expenses for three months ended March 31, 2012 and 2011 was approximately $6,800 and $20,000, respectively.

25

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

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements.

Overview

     First China Pharmaceutical Group, Inc. (“FCPG” or the “Company”), formerly known as E-Dispatch Inc., was incorporated under the laws of the State of Nevada on July 31, 2007. On September 15, 2010, we closed a voluntary share exchange transaction pursuant to a Share Exchange Agreement, dated August 23, 2010 (the “Exchange Transaction”), by and among FCPG, First China Pharmaceutical Group Limited, a Hong Kong company (“FCPG HK”), and Kun Ming Xin Yuan Tang Pharmacies Co. Ltd., a company organized under the laws of the People’s Republic of China (“PRC”) and wholly-owned subsidiary of FCPG HK (“XYT”). As a result of the Exchange Transaction, the FCPG HK stockholder acquired approximately 25% of our issued and outstanding common stock, FCPG HK and XYT became our wholly-owned subsidiaries, and we acquired the business and operations of FCPG HK and XYT.

     As a result of the Exchange Transaction, through our wholly-owned subsidiary, XYT, we are now engaged in drug logistics and distribution in Yunnan Province, China through drug stores, medical clinics and hospitals, as well as the wholesale distribution of medicine products, chemical agents, antibiotics, biochemistry drugs and biological preparations to hospitals and the XYT store located at the Company’s distribution facility in Kunming. XYT was founded in November 2002 and is a provincial pharmaceutical distributor that offers approximately 5,000 drugs, of which approximately 1,000 are over-the-counter drugs, approximately 1,000 are prescription drugs, approximately 2,000 are prepared Chinese medicines and approximately 1,000 are supplements. Currently, XYT has approximately 4,700 customers and supplies approximately 10% of such customers’ inventories with a sales network that covers the entire Yunnan Province of China. XYT believes it has a strategic advantage over certain of its competitors in Yunnan Province as it has obtained government approval to fill orders over the internet. XYT received the License of Internet Drug Information Service issued by the Yunnan Food and Drug Administration in October 2009. This license enables XYT to bypass municipal and county pharmaceutical distributors, market XYT’s product line, provide pricing information and provide products directly to XYT customers. Bypassing these layers of distribution enables XYT to offer products to its customers at a significantly lower price than its major competitors while maintaining its margins. In October 2011, we were awarded the IDTSL, a key national license which permits us to accept orders and transact payments over the internet. The new license compliments our existing Internet Drug Information Service License so that we can now market and advertise our products, along with accepting orders and transacting payments, over the internet.

     Our continuing strategy is to build a nationwide pharmaceutical distribution network throughout China. We plan to expand our customer base through the use of the following tactics: broadening of our current product line to attract larger customers that currently do not utilize us and benefit from internet ordering and the lower prices that we offer; providing computers to customers to attract new customers as our management is unaware of any other pharmaceutical distribution company providing this benefit; and increasing our current sales force to directly target hospitals, medical clinics and pharmacies.

     The IDTSL offers us broad national exposure to an audience that for the first time can now directly access, submit orders and transact payments for purchases from our product catalogue over the internet. As a result, management is now re-evaluating our acquisition-based expansion strategy, as this new license presents options which enables us to quickly expand throughout China without exposing us to the additional financial burdens and increased administrative complexities of a an acquisition-only strategy.

     Key factors affecting our results of operations include revenues, cost of revenues, operating expenses and income and taxation.

Comparison of the Three Months Ended March 31, 2012 and 2011

     The following table sets forth certain information regarding our results of operations.

26

		Three Months Ended March 31
		2012		2011
Statements of Operations Data
Sales	US$	12,191,345	US$	7,384,178
Cost of Sales		11,128,281		6,082,778
Gross Profit		1,063,064		1,301,400
Selling expenses		102,256		591,285
Administrative expenses		686,643		549,668
Other income		35,115		17,463
Derivative loss		1,241,992		175,555
Interest expense, net		35,857		24,416
Income tax		196,822		292,483
Net Loss		1,165,391		314,544
Effects of foreign currency translation conversion		14,937		140,056
Comprehensive loss		1,180,328		454,600

     Sales

     Sales increased from US$7,384,178 for the three months ended March 31, 2011 to US$12,191,345 for the three months ended March 31, 2012, representing an increase of US$4,807,167 or 65%. The increase in sales is primarily a result of the April 2011 financing, which enabled the Company to broaden its product line and increase inventory purchases. The Internet Drug Transaction Service License (IDTSL) enabled the Company to reduce order processing costs and offer certain pharmaceuticals at prices lower than competitors and that has led to increased sales.

     Cost of sales

     Cost of sales increased from US$6,082,778 for the three months ended March 31, 2011 to US$11,128,281 for the three months ended March 31, 2012, representing an increase of US$5,045,503 or 83%. Cost of sales consists primarily of cost of inventory which is directly attributable to the selling of pharmaceutical products. This increase in cost of goods relates to the increase in sales. Sales rose by 63% and the cost of sales had an increase of 83%. The increase of cost of sales was greater than the increase in sales due to the Company’s focus on expanding sales and customer base.

     We anticipate that through 2012 and beyond, the cost to purchase inventory will continue to increase due to inflation. This may have a negative effect on our net income if it cannot be offset by volume purchases due to market conditions and competitive conditions, we may not be able to increase the price for our products in proportion to the increase in costs of goods sold.

     Gross profit

     Gross profit decreased from US$1,304,400 for the three months ended March 31, 2011 to US$1,063,064 for the three months ended March 31, 2012, representing a decrease of US$241,336 or 19%. The decrease in gross profit is due to reasons noted in cost of sales. The reduced margin was anticipated and was experienced by the whole industry as part of the government’s move to increase per capita health care spending by limiting the retail price of drugs on the Essential Drugs List.

     Selling, general and administrative expenses, and others

     Selling, general and administrative expenses, and others decreased by 31% to US$788,899 for the three months ended March 31, 2012 from US$1,140,953 for the three months ended March 31, 2011. In 2011, the Company accrued the quarterly bonus for the CEO in accordance with the compensation agreement. In 2012, the CEO elected to forego the bonus.

     Derivative gain/ (loss)

     Derivative loss was US$1,241,992 for the three months ended March 31, 2012 compared to $175,555 loss for the three month ended March 31, 2011. This loss is a non cash decrease to the income statement that is a result of the Black Scholes derivative valuation of the warrants issued by the Company in relation to the financing in March and April 2011. The valuation of these warrants is required by US GAAP and can produce either a non cash gain or loss; depending upon the fair market value of the common stock. This is a non cash transaction and does not affect the Company’s working capital.

27

     Income tax expense

     Income tax expense for the three months ended March 31, 2012 was US$196,822 compared to income tax expense of US$292,483 for the three months ended March 31, 2011. The decrease in income tax expense was due to decrease in income before tax of the Company’s Chinese subsidiary.

     Net income/(loss)

     Our net loss for the three months ended March 31, 2012 was US$1,165,391, an increase of $850,847, from net loss of US$314,544 for the three months ended March 31, 2011. This increase was primarily due to the non-cash derivative loss on the valuation of the warrants issued with respect to the April 2011 financing.

     Effects of foreign currency translation conversion

     We recognized a loss of US$14,937 on the effects of foreign currency conversion for the three months ended March 31, 2012, as compared to a loss of US$140,056 for the three months ended March 31, 2011. This change is due to differences in exchange rates used during the years for converting from XYT’s functional currency of Renminbi to U.S. dollars for financial reporting purposes.

Liquidity and Capital Resources

     Overview

     As of March 31, 2012, we had cash and equivalents on hand of US$3,974,334 and a working capital deficit of US$3,207,772. We believe that our cash on hand and working capital will be sufficient to meet our operational cash requirements through December 31, 2012. In order to continue to grow sales, we will have to obtain additional capital in the form of debt or equity. Additional capital is required to acquire sufficient inventory to meet growing sales and to broaden our product line. Additional capital is also required to facilitate the ability to obtain exclusivity for the distribution of certain pharmaceutical products, as they require the Company to place large consistent orders with drug manufacturers. The incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that would restrict its operations. Financing may not be available in amounts or on terms acceptable to the Company, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

     On March 19, 2012, we issue a Promissory Note to Belmont Group, Ltd., a company organized under the laws of Samoa (“Belmont”), up to an aggregate amount of $500,000 due on or before March 19, 2013 (the “Note”). The Note has an interest rate of 12% per annum. Belmont will provide funds to the Company under the Note through draws, with a maximum of $100,000 per draw. To date, we have drawn $150,000 under the Note.

     On January 13, 2012, we executed a Short-Term Borrowing arrangement with Fudian Bank, a regional bank in the Yunnan Province, for approximately $1,200,000 due on January 6, 2013 (the “Loan”). The Loan has an adjustable monthly interest rate based on one hundred and thirty percent of the prevailing rate set by the People’s Bank of China. The Loan is guaranteed by a non-related third party. The primary purpose of the loan is for purchase of inventory.

     Substantially all of our revenues are earned by XYT, our PRC subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to their offshore parent company. Pursuant to the law of PRC on foreign-capital enterprises, when XYT decides to distribute profits, reserve funds and bonus and welfare funds for workers and staff members shall be withdrawn from the profits after a foreign-capital enterprise has paid income tax in accordance with the provisions of the Chinese tax law. The proportion of reserve funds to be withdrawn shall not be lower than 10% of the total amount of profits after payment of tax; the withdrawal of reserve funds may be stopped when the total cumulative reserve has reached 50% of the registered capital. The proportion of bonus and welfare funds for workers and staff members to be withdrawn shall be determined by the foreign-capital enterprise of its own accord. Companies may be subject to a fine up to 5,000 RMB as a result of non-compliance of such rules. The registered capital of XYT is US$2,295,000. Shareholders of XYT had not determined the proportion of reserve funds and bonus and welfare funds for workers and staff members, and XYT had not distributed any profits previously. If we decide to distribute profits in the future, XYT will comply with the relevant rules to withdraw statutory reserve funds which will be no lower than 10% of the total amount of profits after payment of tax.

28

     Our cash needs are primarily for working capital to support our operations, the purchase of inventory and future strategic acquisitions. We presently finance our operations through revenue from the sale of our products and services, the private placement of equity and debt securities and short-term bank borrowings. We believe that our existing capital resources are sufficient to meet our current obligations and operating requirements, but will not be sufficient to meet our more aggressive growth plans and that we will need to raise additional capital in the next 12 months. In order to meet our planned growth, we estimate requiring US$6 to $10 million in capital. We will consider debt or equity offerings or institutional borrowing as potential means of financing, however, there are no assurances that we will be successful or that we will obtain terms that are favorable to us.

     In addition to the US$6-$10 million for growth, XYT will also require financing to expand its product line. The Company completed a financing of $3.6 million (net of fees) and utilized the majority of these proceeds to expand its product line and increase inventory holdings. As the funding fell short of the $5 to $6 million objective for the Company has not been able to expand the product line and increase inventory holdings to fuel growth objectives throughout 2012. The Company’s short term objective is now to broaden our product line from our current 7,500 products to 20,000 by year end. This will allow XYT to not only sell more products to its existing customers, but also attract more customers that currently do not utilize XYT. The bulk of these funds will be utilized to purchase inventory, which will be on a cash basis until a track record is established and net 30 day terms can be negotiated. The broader product line will include significantly more Western drugs as well as traditional Chinese drugs and herbs. In addition, the Company may be required to raise capital in order to make acquisitions in furtherance of its growth plan. Although funds from operations are adequate to conduct the Company’s current operations, it will need to raise capital in order to grow organically or through acquisitions.

     Further, we may need to pursue direct bank financing or sell additional equity securities to meet our operational cash requirements as we may experience potential shortfalls from not collecting certain receivables from Mr. Wang, our Chairman and Chief Executive Officer, and our liquidity position could be affected such that we will not have the opportunity to use these earnings to fund our operations for any period of time. We are in the process of trying to obtain a line of credit from a bank to be used for the purchase of inventories to cover any potential shortfalls in capital resulting from not collecting the receivables from Mr. Wang. There are no assurances that we will be successful or that we will be presented with terms that will be satisfactory to us.

     Our liquidity could be further impacted by external factors such as any significant decrease in the market price of pharmaceutical products as a result of downward periodic price adjustments enforced by the PRC government seeking to make pharmaceutical products more affordable to the general public, and reimbursement policies of the PRC Ministry of Labor and Social Security. Although we have yet to be materially impacted by such factors, each or a combination of such factors may result in lower sales, increased expenses and costs and result in lower profitability and cash flow, thus reducing our liquidity. We may also in the future apply for and receive government subsidies. Although we have not applied for any such subsidies to date, any such subsidies which we may receive in the future may increase our liquidity.

     Net cash provided by (used in) operating activities

     Net cash provided by operating activities for the three months ended March 31, 2012 was US$1,783,121, compared to net cash provided by operating activities of US$3,274,074 for the three months ended March 31, 2011. The decrease in cash provided by operating activities was due to accounts receivable, inventory, prepayments, and advance receipts. The Company focused on collection of outstanding accounts receivable, while maintaining a low level of inventory compared to the prior periods. In addition, as normal business practice, the Company paid deposits to suppliers and collected deposits from customers.

     Net cash provided by (used in) investing activities

     Net cash used in investing activities was US$903,301 for the three months ended March 31, 2012, compared to net cash used in investing activities of US$373,639 for the three months ended March 31, 2011. Investment activities relate to the purchase of equipment and notes receivable from business partners in China.

     Net cash provided by (used in) financing activities

     Net cash used in financing activities was US$568,264 for three months ended March 31, 2012, compared to net cash used by financing activities of US$1,278,618 for the three months ended March 31, 2011. The decrease in net cash used by financing activities was primarily a result of decrease of related party receivables, new short-term borrowings, and an increase of notes payable. The Company executed a new short-term borrowing arrangement to purchase inventory, and issued additional notes payable agreements with local banks to pay suppliers.

29

Off-Balance Sheet Arrangements

     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 shareholder’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.

Critical Accounting Policies and Estimates

     Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and this requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the dates of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates under different assumptions or conditions. Significant estimates include:

Trade receivables

     Accounts receivable are recognized and carried at original invoiced amount less an allowance for any potential uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. The Company generally does not require collateral from its customers.

     The Company maintains allowances for doubtful accounts for estimated losses resulting from the failure of customers to make payments on time. The Company reviews the accounts receivable on a periodic basis and makes general and specific allowances when there is doubt as to the collectability of individual balances. In evaluating the collectability of individual receivable balances, the Company considers many factors, including the age of the balance, the customer’s historical payment history, its current credit-worthiness and current economic trends.

     At March 31, 2012, allowance for doubtful accounts was $377,920.

Inventories

     Inventories are finished goods purchased from outsiders of the Company and stated at the lower of cost and net realizable value. Cost is determined using the specific identification basis. The cost of inventories, principally comprising purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale. Inventories are processed on a first in, first out basis.

Income taxes

     The Group uses the asset and liability method of accounting for income taxes pursuant to ASC 740 “Accounting for Income Taxes”. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Equipment

     Equipment is stated at cost less depreciation and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Depreciation of equipment is calculated to written off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. The principal depreciation periods are as follows:

30

Office equipment	3 years
Other equipment	5 years
Vehicles	5 years

Fair Value

     Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that market participants would use in pricing an asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:

• Level 1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;

• Level 2 inputs: Inputs, other than quoted prices included in Level 1 that are observable either directly or indirectly; and

• Level 3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

     In many cases, a valuation technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy described above. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

     As of March 31, 2012, the Company valued the warrants liability as level three due to significant unobservable inputs.

Estimates

     In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of due from related parties, inventories and the estimation on useful lives of plant and machinery and intangible assets. Actual results could differ from those estimates.

     Warrants that could require cash settlement or have anti-dilution price protection provisions are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income (expense) in our statement of loss and comprehensive loss in each subsequent period. In general, warrants with anti-dilution provisions are measured using the Black-Scholes valuation model. The methodology based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates, however these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different.

Recently Issued Accounting Pronouncements

     In May 2011, the FASB issued ASU No. 2011-04 (“ASU 2011-04”),Fair Value Measurement(“ASC 820”) which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The adoption had no material impact on its consolidated financial statements and disclosures.

     In June 2011, the FASB issued ASU No. 2011-05 (“ASU 2011-05”),Comprehensive Income (Topic 220), Presentation of Comprehensive Income, which eliminates the current option to report other comprehensive income (“OCI”) and its components in the statements of shareholders’ equity. Instead, an entity will be required to present items of net income and OCI in one continuous statement or in two separate, but consecutive, statements. In December 2011, the FASB issued ASU No. 2011-12 (“ASU 2011-12”),Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU defers the ASU 2011-05 requirement that companies present reclassification adjustments for each component of OCI in both net income and OCI on the face of the financial statements and the requirement to report reclassification adjustments in interim periods. The amendments in ASU 2011-05 and ASU 2011-12 should be applied retrospectively and are effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The adoption had no material impact on its consolidated financial statements and disclosures.

     We do not anticipate that the adoption of the above recent accounting pronouncements will have a material impact on our financial statements.

31

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

          Not Applicable.

ITEM 4.           CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

          We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer along with our Principal Financial Officer, of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of March 31, 2012 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer along with our Principal Financial Officer concluded that our disclosure controls and procedures are not effective as of March 31, 2012 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.

          In performing the above-referenced assessment, our management identified the following material weaknesses:

i)	We lack personnel with the experience to properly analyze and record complex transactions in accordance with U.S. GAAP. We have improved our reporting capacity with the appointment of a board member who is an expert in U.S. GAAP and by contracting an accounting firm familiar with U.S. GAAP to assist in the preparation of our financial statements.
ii)	We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis. A review and assessment of our internal controls is currently underway by an independent consulting firm.
iii)	We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.
iv)	We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

          We continue to review our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources and personnel to potentially mitigate these material weaknesses. Our present management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.

32

          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 or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Changes in Internal Control Over Financial Reporting

          There were no changes in our internal controls over financial reporting that occurred during the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

33

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

          To the best of management’s knowledge, there are no material legal proceedings pending against the Company.

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. MINE SAFETY DISCLOSURES

          Not applicable.

ITEM 5. OTHER INFORMATION

          On March 19, 2012, we issue the Note to Belmont, up to an aggregate amount of $500,000, due on or before March 19, 2013. The Note has an interest rate of 12% per annum. Belmont will provide funds to the Company under the Note through draws, with a maximum of $100,000 per draw. To date, we have drawn $150,000 under the Note.

ITEM 6. EXHIBITS

          The following exhibits are included as part of this report by reference:

Exhibit
Number	Description
2.1	Share Exchange Agreement, dated August 23, 2010 (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on August 24, 2010).
3.1	Articles of Incorporation of the Registrant, dated July 31, 2007, including all amendments to date (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed September 21, 2010).
3.2	Amended and Restated Bylaws of the Registrant, as amended, dated June 1, 2010 (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on June 30, 2010).
10.1	Promissory Note with Belmont Group, Ltd. dated March 19, 2012*
10.2	Form of Note Receivable*
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Principal Financial Officer and Principal Accounting Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.*
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of Principal Financial and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101.INS	XBRL Instance Document**
101.SCH	XBRL Taxonomy Extension Schema**
101.CAL	XBRL Taxonomy Extension Calculation Linkbase**
101.DEF	XBRL Taxonomy Extension Definition Linkbase**
101.LAB	XBRL Taxonomy Extension Label Linkbase**
101.PRE	XBRL Taxonomy Extension Presentation Linkbase**

* Filed herewith

34

**Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

35

SIGNATURES

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

	FIRST CHINA PHARMACEUTICAL GROUP, INC.
Date: May 18, 2012	/s/ Yi Jia Li
	Name: Yi Jia Li
	Title: Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

36