First China Pharmaceutical 10Q 2012 Q3 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 endedSeptember 30, 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 November 12, 2012 was 59,664,480.

INDEX

		Page

PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS
	Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited)	4
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September, 2012 and 2011 (unaudited)	5
	Condensed Consolidated Statement of Cash Flows for the Three and Nine Months Ended September 30, 2012 and 2011 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25
ITEM 4.	CONTROLS AND PROCEDURES	25

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 1A.	RISK FACTORS	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	27
ITEM 4.	MINE SAFETY DISCLOSURES	27
ITEM 5.	OTHER INFORMATION	27
ITEM 6.	EXHIBITS	27

SIGNATURES		28

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.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST CHINA PHARMACEUTICAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

		September 30,			December 31,
		2012			2011
ASSETS
Current Assets
Cash and cash equivalents	$	6,397,820		$	3,641,120
Accounts receivable– net		2,683,831			1,776,649
Accounts receivable from a related party		948,631			2,240,261
Notes receivable– short term - net		-			245,677
Due from related parties		-			2,277,647
Prepayments		5,685,497			867,566
Inventories		3,551,314			707,075
Total Current Assets		19,267,093			11,755,995

Non-current Assets
Restricted cash		126,602			-
Notes receivable – long term		712,138			-
Equipment, net		82,228			66,682
Total Non-current Assets		920,968			66,682

Total Assets	$	20,188,061		$	11,822,677

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Short-term borrowings	$	3,261,409		$	-
Accounts payable		2,320,407			1,368,767
Other payables and accrued liabilities		685,173			1,003,634
Value added tax payable		6,181,843			6,158,426
Advance receipts		4,679,329			510,415
Due to related parties		106,852			191,630
Notes payable		2,848,552			1,133,055
Loans payable		-			3,604,981
Income tax payable		2,978,962			2,174,347
Total Current Liabilities		23,062,527			16,145,255

Non-current Liabilities
Convertible promissory notes		1,088,599			1,051,667
Warrants –derivative liability		911,717			639,528
Total Non-current Liabilities		2,000,316			1,691,195

Total Liabilities		25,062,843			17,836,450

Commitments and Contingencies

STOCKHOLDERS’ DEFICIT
Common stock $0.001 par value; 200,000,000 shares authorized and 59,664,480 shares issued and outstanding as of September 30, 2012 and December 31, 2011		59,664			59,664
Additional paid-in capital		1,033,196			974,774
Retained deficit		(6,036,341	)		(7,148,139	)
Accumulated other comprehensive income		68,699			99,928

Total Stockholders’ Deficit		(4,874,782	)		(6,013,773	)

Total Liabilities and Stockholders’ Deficit	$	20,188,061		$	11,822,677

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

FIRST CHINA PHARMACEUTICAL GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)

		Nine Months Ended						Three Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
					Restated						Restated

Net sales	$	43,536,041		$	33,240,776		$	17,384,697		$	14,222,135
Cost of Sales		39,329,671			29,582,514			15,635,580			13,206,877

Gross profit		4,206,370			3,658,262			1,749,117			1,015,258

Selling expenses		315,874			661,904			114,609			20,115
Administrative expenses		1,476,040			1,363,234			584,892			338,403

Income from operations		2,414,456			1,633,124			1,049,616			656,740

Other income (expense)		(126,360	)		97,157			(137,785	)		4,997
Derivative (loss) income		(272,189	)		1,329,501			431,336			409,401
Interest income		43,714			6,117			26,851			-
Interest expense		(154,153	)		(102,209	)		(62,763	)		(18,638	)

Income before tax		1,905,468			2,963,690			1,307,255			1,052,500

Income tax		793,670			798,280			316,276			216,310

Net Income		1,111,798			2,165,410			990,979			836,190

Other Comprehensive (Loss) Income

Foreign currency translation adjustments		(31,229	)		(168,312	)		1,254			(54,036	)

Total Comprehensive Income	$	1,080,569		$	1,997,098		$	992,233		$	782,154

Basic Earnings per Common Share
Weighted average number of common shares outstanding		59,664,480			58,201,539			59,664,480			59,664,480

Earnings per share – Basic	$	0.0186		$	0.0372		$	0.0166		$	0.0140

Diluted Earnings per Common Share

Weighted average number of shares		59,664,480			58,201,539			59,664,480			59,664,480

Earnings per share – Diluted	$	0.0186		$	0.0372		$	0.0166		$	0.0140

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

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

		Nine Months Ended
		September 30,			September 30,
		2012			2011
					Restated
Cash Flows from Operating Activities
Net income	$	1,111,798		$	2,165,410
Adjustments to reconcile net income to net cash used inoperating activities:
Depreciation		18,389			5,007
Bad debt expense		141,695			-
Derivative loss (income)		272,189			(1,329,501	)
Share–based payments expense		58,422			28,333
Changes in operating assets and liabilities:
Accounts receivable		(1,040,389	)		2,330,889
Accounts receivable from a related party		1,306,387			-
Prepayments		(4,821,071	)		(3,939,320	)
Inventories		(2,844,994	)		5,863,567
Accounts payable		945,008			1,746,531
Advance receipts		4,172,981			236,803
Other payable and accrued liabilities		(321,353	)		(869,665	)
Due from related parties - operating		-			(2,742,634	)
Value added tax payable		(11,152	)		(7,369,624	)
Income tax payable		793,670			731,908
Net cash used in operating activities		(218,420	)		(3,142,296	)

Cash Flows from Investing Activities
Notes receivable		(465,855	)		(612,524	)
Purchases of equipment		(33,587	)		(35,858	)
Net cash used in investing activities		(499,442	)		(648,382	)

Cash Flows from Financing Activities
Proceeds (repayments) / of short term borrowings, including
accrued interest		3,266,571			(54,833	)
Proceeds of notes payable, net of deposits		1,711,976			857,419
Net proceeds from convertible notes		36,932			148,375
Due from related parties - financing		2,294,256			(2,590,491	)
Due to related parties		(86,227	)		35,000
Net proceed from private offering units		-			3,633,500
(Repayments)/proceeds from loans payable		(3,631,268	)		1,328,525
Increase in restricted cash		(126,813	)		-
Net cash provided by financing activities		3,465,427			3,357,495

Effect of foreign currency translation on cash and cash equivalents		9,135			20,029

Net increase (decrease) in cash and cash equivalents		2,756,700			(413,154	)

Cash and cash equivalents - beginning of period		3,641,120			1,125,057

Cash and cash equivalents at the end of period	$	6,397,820		$	711,903

Supplemental disclosures for cash flow information:
Cash paid for:
Interest	$	107,569		$	96,440
Income taxes		-			-

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

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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. 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

The condensed 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 condensed financial statements reflect necessary adjustments recorded in the books of account of the Group to present them in conformity with US GAAP.

The unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report have been prepared on the same basis as the audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011 that we filed with the Securities and Exchange Commission (SEC) on May 1, 2012 (the 2011 Annual Report) and amended on November 14, 2012. In our opinion, we have made all necessary adjustments (which include only normal recurring adjustments) in order to state fairly, in all material respects, our consolidated financial position, results of operations and cash flows as of the dates and for the periods presented. We have condensed the Consolidated Balance Sheet and Statement of Stockholder’s Equity at December 31, 2011 contained in this Quarterly Report as compared to our audited Consolidated Financial Statements at that date, and we have omitted certain information and footnote disclosures (including those related to the Consolidated Balance Sheet at December 31, 2011) normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Our results of operations for the interim period ended September 30, 2012 may not be indicative of our operating results for the full year. The Condensed Consolidated Financial Statements contained in this Quarterly Report should be read in conjunction with our 2011 Consolidated Financial Statements contained in our 2011 Annual Report.

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 as restated consolidated balance sheet information as of December 31, 2011 was derived from the audited consolidated financial statements included in Form 10-KT/A filed on November 14, 2012.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

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

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 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 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 11.

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 September 30, 2012 and December 31, 2011, $1,789,054 and $3,112,249, respectively were held under personal name accounts of certain officers of the Group, which are used for cash receipts from sales and purchases of inventory.

d) Accounts Receivable

As of September 30, 2012 and December 31, 2011, the allowance for doubtful accounts was approximately $519,000 and $375,000, respectively.

e) 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.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

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

f) 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”). For financial reporting purposes, the financial statements of the Company, FCPG HK and XYT have been translated into USD from their functional currencies. 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. 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.

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:

	September 30, 2012	December 31, 2011	September 30, 2011
Balance Sheet
HKD-USD	$ 0.13	$ 0.13	-
RMB-USD	$ 0.16	$ 0.16	-

Income statement
HKD-USD	$ 0.13	-	$ 0.13
RMB-USD	$ 0.16	-	$ 0.15

g) 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.

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.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

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

h) Business and Economic Risks

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

i) 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 nine months ended September 30, 2012 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		September 30,
Description		Identical Assets		Inputs		Inputs		2012
Derivative Liability – Warrants	$	-	$	-	$	911,717	$	911,717
Total	$	-	$	-	$	911,717	$	911,717

		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

j) Liquidity

Cash and cash equivalents on September 30, 2012 was approximately $6.4 million. The Group has negative working capital of approximately $3.8 million. The Group intends to meet its cash requirements through the use of existing cash on hand and short-term borrowing.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

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

k) Earnings Per Share

Basic and diluted earnings per common share was calculated by dividing the net income applicable to common stock for the period by the weighted-average number of common shares outstanding during the period. Common stock equivalents are included in the calculation of diluted earnings per common share only if their effect is dilutive. Warrants and convertible promissory notes were not included in the dilutive calculation because the exercise price was less than the average market price for September 30, 2012 and 2011.

	September 30, 2012	September 30, 2011
Warrants	8,928,962	8,928,962
Convertible promissory notes	5,442,995	1,885,665
Total	14,371,957	10,814,627

3.RELATED PARTIES

		September 30,		December 31,
		2012		2011

Accounts Receivable From a Related Party	$	948,631	$	2,240,261
Due From Related Parties	$	-	$	2,277,647

Due to Related Parties	$	12,866	$	-
Due to Shareholder		93,986		191,630
Total Due to Related Parties	$	106,852	$	191,630

Accounts Receivable From a Related Party

The Group conducts business with a medicine manufacturer majority owned by an officer of the Group. The Group sells natural herbs as raw materials and purchases patented Chinese drugs as finished goods from the related party. The amount receivable from the related party represents the net sales to the related party. Sales to related party are as follows:

		Nine Months Ended				Three Months Ended
		September 30,				September 30,
		2012		2011		2012		2011

Net sales	$	38,744,206	$	33,240,776	$	16,803,347	$	14,222,135
Sales to a related party		4,791,835		-		581,350		-
Total Sales	$	43,536,041	$	33,240,776	$	17,384,697	$	14,222,135

Due From Related Parties

The amount due from related parties represents:1) a loan made out to companies majority owned by an officer of XYT due on December 31, 2012 with interest rate comparable to prime rate set by the People's Bank of China paid upon maturity; 2) loans to companies that are owned by individuals related to a shareholder of the Group that were repaid in 2012; and 3) advance to officers of XYT to pay for purchases and operating expense during the normal course of business.

Due to Shareholder

The amount due to shareholder and officer represents expenses paid by the shareholder and officer on behalf of the Group, and rent the Group collected on behalf of the shareholder.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

4.RESTATEMENTS

The unaudited financial statements for the nine and three months ended September 30, 2011 have been restated to correct the following errors:

. The Group discovered in May 2012 that an adjustment to sales of approximately $674,000 and cost of sales of approximately $1,483,000 was reflected in the statement of operations for the three months ended March 31, 2011, which subsequently affected the statement of operations for nine months ended September 30, 2011. The sales and cost of sales were related to operations in December 2010. Numerous accounts were affected in connection with this error.

. The Group restated the March 31, 2011 financial statements in November 2012 to correct the treatment of warrants. In connection with this restatement, the change in fair value of the derivative liability between grant date and September 30, 2011 was calculated to be approximately $1,330,000. As a result, the Group recorded an adjustment to derivative income of the same amount.

. The Group corrected an under-accrual of income tax liability of approximately $355,000.

. The Group discovered in October 2012 that it had incorrectly treated warrants and promissory notes as having a dilutive effect in the earnings per share calculation for nine and three months ended September 30, 2011. Due to the average market price was more than the exercise price, those instruments should have been excluded from the dilutive calculation.

. The Group discovered in October 2012 that it had incorrectly calculated the other comprehensive income for the nine and three months ended September 30, 2011 because of differing exchange rates were used. In addition, the change in other comprehensive income should be an expense instead of an income. Therefore, the Group corrected the change in other comprehensive income by approximately $530,000 for the nine months ended September 30, 2011 and approximately $400 for the three months ended September 30, 2011.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

4. RESTATEMENTS (CONT'D)

		Nine Months Ended September 30, 2011
		Restated			Reported			Change
Net sales	$	33,240,776		$	33,914,608		$	(673,832	)
Cost of Sales		29,582,514			31,065,960			(1,483,446	)
Gross profit		3,658,262			2,848,648			809,614

Selling expenses		661,904			720,756			(58,852	)
Administrative expenses		1,363,234			1,242,237			120,997
Income from operations		1,633,124			885,655			747,469

Other income		97,157			6,079			91,078
Derivative income		1,329,501			-			1,329,501
Interest income		6,117			-			6,117
Interest expense		(102,209	)		(96,440	)		(5,769	)
Income before tax		2,963,690			795,294			2,168,396

Income tax		798,280			443,464			354,816
Net Income		2,165,410			351,830			1,813,580

Other Comprehensive Income (Loss)
Foreign currency translation adjustments		(168,312	)		361,219			(529,531	)
Total Comprehensive Income	$	1,997,098		$	713,049		$	1,284,049

Basic Earnings per Common Share
Weighted average number of common shares outstanding		58,201,539			58,201,539			-
Earnings per share – Basic	$	0.0372		$	0.0060		$	0.0312

Diluted Earnings per Common Share
Weighted average number of shares		58,201,539			64,970,730			(6,769,191	)
Earnings per share – Diluted	$	0.0372		$	0.0054		$	0.0318

		Three Months Ended September 30, 2011
		Restated			Reported			Change
Net sales	$	14,222,135		$	14,222,135		$	-
Cost of Sales		13,206,877			13,206,877			-
Gross profit		1,015,258			1,015,258			-

Selling expenses		20,115			20,115			-
Administrative expenses		338,403			338,403			-
Income from operations		656,740			656,740			-

Other income		4,997			4,997			-
Derivative income		409,401			-			409,401
Interest income		-			-			-
Interest expense		(18,638	)		(18,638	)		-
Income before tax		1,052,500			643,099			409,401

Income tax		216,310			149,938			66,372
Net Income		836,190			493,161			343,029

Other Comprehensive Income (Loss)
Foreign currency translation adjustments		(54,036	)		(54,492	)		456
Total Comprehensive Income	$	782,154		$	438,669		$	343,485

Basic Earnings per Common Share
Weighted average number of common shares outstanding		59,664,480			59,664,480			-
Earnings per share – Basic	$	0.0140		$	0.0083		$	0.0057

Diluted Earnings per Common Share
Weighted average number of shares		59,664,480			69,192,351			(9,527,871	)
Earnings per share – Diluted	$	0.0140		$	0.0071		$	0.0069

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

4. RESTATEMENTS (CONT'D)

		Nine Months Ended September 30,
		2011			2011			Change
		Restated			Reported
Cash Flows from Operating Activities
Net income	$	2,165,410		$	351,830		$	1,813,580
Adjustments to reconcile net income to net cash used in operating activities:								-
Depreciation		5,007			5,007			-
Provision for bad debts		-			-			-
Derivative income		(1,329,501	)		-			(1,329,501	)
Interest expense on convertible notes		-			13,375			(13,375	)
Share–based payments expense		28,333			28,333			-
Changes in operating assets and liabilities:
Due to related parties		-			6,138,978			(6,138,978	)
Other receivable		-			(6,501,679	)		6,501,679
Notes receivable		-			(24,487	)		24,487
Deferred expenses		-			(693,820	)		693,820
Accounts receivable		2,330,889			(175,635	)		2,506,524
Prepayments		(3,939,320	)		(6,133,339	)		2,194,019
Inventories		5,863,567			5,863,567			-
Accounts payable		1,746,531			-			1,746,531
Advance receipts		236,803			-			236,803
Other payable and accrued liabilities		(869,665	)		840,180			(1,709,845	)
Due from related parties - operating activities		(2,742,634	)		(4,902,954	)		2,160,320
Value added tax payable		(7,369,624	)		-			(7,369,624	)
Notes payable		-			1,421,928			(1,421,928	)
Income tax payable		731,908			443,463			288,445
Net cash used in operating activities		(3,142,296	)		(3,325,253	)		182,957

Cash Flows from Investing Activities
Notes receivable		(612,524	)		-			(612,524	)
Additions in intangible assets		-			(92,006	)		92,006
Purchases of equipment		(35,858	)		(35,858	)		-
Net cash used in investing activities		(648,382	)		(127,864	)		(520,518	)

Cash Flows from Financing Activities
Proceeds (repayments) / of short term borrowings, including accrued interest		(54,833	)		(52,930	)		(1,903	)
Proceeds of notes payable, net of cash deposit		857,419			-			857,419
Net proceeds from convertible notes		148,375			135,000			13,375
Due to related parties		35,000			-			35,000
Due from related parties - financing activities		(2,590,491	)		-			(2,590,491	)
Net proceed from private offering units		3,633,500			3,528,230			105,270
Increase in restricted cash		-			(590,366	)		590,366
(Repayments)/proceeds from loans payable		1,328,525			-			1,328,525
Net cash provided by financing activities		3,357,495			3,019,934			337,561

Effect of foreign currency translation on cash and cash equivalents		20,029			20,029			-
Net decrease in cash and cash equivalents		(413,154	)		(413,154	)		-

Cash and cash equivalents - beginning of period		1,125,057			1,125,057			-
Cash and cash equivalents at the end of period	$	711,903		$	711,903		$	-

Supplemental disclosures for cash flow information:
Cash paid for:
Interest	$	96,440			96,440		$	-
Income taxes	$	-		$	-		$	-

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

5.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 nine months ended September 30, 2012, one customer exceeded 5% of the Group’s total revenues, it is a related party, represented 11% of total revenues. For the nine months ended September 30, 2011 there were no customers exceeding 5% of the Group’s total revenues.

The Group relies on supplies from numerous vendors. For the nine months ended September 30, 2012 five vendors exceeded 5% of the Group’s total purchases, of which one is a related party, represented 17% of total purchases. For the nine months ended September 30, 2011 no vendor exceeded 5% of the Group’s total purchases.

6.PREPAYMENTS

		September 30, 2012		December 31, 2011
Deposit	$	546,078	$	127,469
Prepayments for inventory		5,107,182		699,186
Deferred expenses		17,821		31,304
Other prepaid		14,416		9,607
Total	$	5,685,497	$	867,566

7.NOTES RECEIVABLE

		September 30,		December 31,
		2012		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.	$	-	$	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.		-		251,790
Kunming City DGTW Trading Co., uncollateralized note receivable executed on April 8, 2011 matures on October 8, 2012. The Group agreed to lend up to RMB 5,000,000 or approximately $800,000. Interest rate at the prevailing rate set by People’s Bank of China of similar terms. Interest will be accrued and paid upon maturity.		-		119,782
Subtotal - short term		-		497,467

Allowance for doubtful accounts		-		(251,790	)

Short term –net		-		245,677
Kunming City DGTW Trading Co., uncollateralized note receivable renewed on June 28, 2012 matures on June 28, 2015. The Group agreed to lend up to RMB 8,000,000 or approximately $1.3 million. Interest rate at the prevailing rate set by People’s Bank of China of similar terms, 6.24% on the date of the loan. Interest will be accrued and paid upon maturity.		712,138		-
Subtotal - long term		712,138		-
Total	$	712,138	$	245,677

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

8.NOTES PAYABLE, LOANS PAYABLE AND SHORT TERM BORROWINGS

Notes payable are notes issued by the Group to its suppliers through various banks. They are presented net of the cash deposited by the Group on issuance date. The Group is liable to remit the unpaid balance on maturity date to the bank. 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. and Yunnan Financing Guaranty Co., non-related third parties.

		September 30, 2012		December 31, 2011
Guangfa Bank	$	-	$	472,106
Shanghai Pufa Development Bank		2,848,552		629,475
Fudian Bank		-		31,474
Total	$	2,848,552	$	1,133,055

Loans payable were funds advanced from unrelated third parties to the Group. 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.

		September 30, 2012		December 31, 2011

Individuals	$	-	$	2,708,474
Companies		-		896,507
Total	$	-	$	3,604,981

The following summarizes short term borrowings at September 30, 2012 and December 31, 2011:

		September 30, 2012		December 31, 2011

Bank of Communications	$	1,899,035	$	-
Fudian Bank		1,202,722		-
Belmont Group Ltd.		159,652		-
Total	$	3,261,409	$	-

On March 19, 2012, the Group 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 September 30, 2012, the Group has drawn $150,000 under the note.

On January 13, 2012, the Group executed a loan agreement with Fudian Bank for approximately $1,200,000 that matures on January 6, 2013. 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. The loan is guaranteed by Kunming City DGTW Trading Co., a non-related third party.

On August 2, 2012, the Group entered into a loan agreement with the Bank of Communications for approximately $1,900,000 that matures on August 3, 2013. The loan carries an interest rate of one hundred and fifty percent of the prevailing rate set by the People's Bank of China. The Group is responsible to remit interest payment on a quarterly basis. The loan is guaranteed by Yunnan YF Financing Guaranty Co., a non-related third party.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

9.CONVERTIBLE PROMISSORY NOTES

On October 3, 2010, the Group 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 September 30, 2012, the Group has drawn $495,000 under Note I and no share conversion occurred.

On December 22, 2010, the Group 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 September 30, 2012, the Group has drawn $500,000 under the Note and no share conversion occurred.

The details of convertible promissory notes as of September 30, 2012 are as follows:

		As of September 30, 2012
		Note I		Note II		Total
Convertible notes payable:
-Par value	$	495,000	$	500,000	$	995,000
-Accrued interest		46,799		46,800		93,599
	$	541,799	$	546,800	$	1,088,599

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		28,333		28,334		56,667
	$	523,333	$	528,334	$	1,051,667

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

10.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.

11.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 September 30, 2012 and December 31, 2011:

	(i)	Series A-1 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 September 30, 2012 and December 31, 2011; and

	(ii)	Series A-2 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 September 30, 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.

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.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

11. STOCK PURCHASE WARRANTS (CONT'D)

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:

	September 30, 2012	December 31, 2011
Current price	$0.20	$0.18
Expected dividend rate	0	0
Expected volatility	170%	123%
Risk free rate	0.31%	2.11%
Expected life	2.50	3.21

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

Warrant liabilities
Fair value as of December 31, 2011	$	639,528
Increase in fair value		272,190
Fair value as of September 30, 2012	$	911,717

12.SHARE-BASED PAYMENT FOR CONSULTANT SERVICE

The Group had historically issued stock to various board members in connection with their services. The total cost associated with the stock awards are valued using the publicly quoted price of the stock on grant date. The expenses are recognized based on the vesting schedules in accordance with the stock award agreements. Expense for the nine months ended September 30, 2012 and 2011 was approximately $58,000 and $28,000, respectively.

FIRST CHINA PHARMACEUTICAL GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2012
(UNAUDITED)

13.TAX

Corporate Income Tax (“CIT”)

The Group has fully reserved against deferred tax asset, and the income tax expense for the nine months ended September 30, is summarized as follows:

		September 30, 2012			September 30, 2011
Expected tax expense at the PRC statutory rate of 25%	$	505,146		$	803,779
Non PRC jurisdictions		350,302			381,123
Other, net		(61,778	)		(323,766	)
Tax expense	$	793,670		$	798,280

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. In addition, the Group had estimated a VAT liability based on sales that excluded small scale taxpayors because they are subject to VAT rate of 3%. The liability is relieved upon receiving a tax bureau certification indicating the Group's tax status is current. The Group records the reversal of the liability net of the current period accrual.

14.COMMITMENTS AND CONTINGENCIES

The Group had established financing for its customers to improve their ability to purchase products from the Group. The Group serves as the guarantor, with additional collateral provided by Kunming City DGTW Trading Co., a non-related third party. The maximum amount for each loan is RMB 1,000,000. In accordance with the agreements, the Group maintains a deposit of RMB 200,000 for each loan at the lending financial institution. Total Restricted Cash for the nine months ended September 30, 2012 was approximately $126,000.

Rent Expense for the nine months ended September 30, 2012 and 2011 was approximately $37,000 and $24,000, respectively.

15.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 the nine months ended September 30, 2012 and 2011 was approximately $16,000 and $28,000, respectively.

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 engage in drug logistics and distribution in Yunnan Province, China. We distribute medicines to local distributors, pharmacies, hospitals, and clinics. We carry a wide range of products, including western medicines, patented Chinese medicine, natural Chinese herbs, supplements, and medical devices. Currently, XYT services approximately 5,800 customers through a sales network that covers the entire Yunnan Province of China. XYT has a strategic advantage over its competitors in Yunnan Province because XYT obtained government approval to conduct business 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 retailers. 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 complements our existing Internet Drug Information Service License that enables us to market and advertise our products, along with accepting orders and transacting payments, over the internet.

We are focused on expanding our customer base within Yunnan province and on expanding our product selection. We will grow our customer base through leveraging our online platform. 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. We will expand our inventory through short term financing and strategic partnerships. The additional inventory will allow XYT to not only sell more products to our existing customers, but also attract more customers that currently do not purchase from XYT.

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

Comparison of the Nine Months Ended September 30, 2012 and 2011

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

		Nine Months Ended September 30,
		2012			2011
Statements of Operations Data
Sales	$	43,536,041		$	33,240,776
Cost of Sales		39,329,671			29,582,514
Gross Profit		4,206,370			3,658,262
Selling and administrative expense		(1,791,914	)		(2,025,138	)
Other income (expenses), net		(236,799	)		1,065
Derivative gain (loss)		(272,189	)		1,329,501
Income tax		(793,670	)		(798,280	)
Net Income	$	1,111,798		$	2,165,410

Sales

Sales increased from $33.2 million for the nine months ended September 30, 2011 to $43.5 million for the nine months ended September 30, 2012, representing an increase of $10.3 million or 31%. The majority of our sales remain in patented Chinese herbal medicine. The increase can be attributed to three factors. Our internet platform enables existing customers to place more orders more frequently. In addition, our customers ordered more products from us due to our expanded inventory. Lastly, our Chinese natural herb product line in 2012 was more mature than 2011.

Cost of sales

Cost of sales increased from $29.6 million for the nine months ended September 30, 2011 to $39.3 million for the nine months ended September 30, 2012, representing an increase of $9.7 million or 33%. Cost of sales consists primarily of material cost which is directly attributable to the selling of pharmaceutical products. This increase in cost of goods is directly related to the increase in sales.

We anticipate that through 2012 and beyond, our cost to purchase inventory will continue to increase. 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 increased from $3.6 million for the nine months ended September 30, 2011 to $4.2 million for the nine months ended September 30, 2012, representing an increase of approximately $0.6 million or 15%. We were able to maintain our gross margin percentage primarily due to our cooperation with Anhui Huayuan Pharmaceutical Inc. since June 2012. We are able to purchase from Huayuan at a significantly lower price due to their wide selection of suppliers. As a result, we were able to offer competitive pricing to our customers amid rising costs.

Selling, general and administrative expenses, and others

Selling, general and administrative expenses, and others decrease by 12% to $1.8 million for the nine months ended September 30, 2012 from $2.0 million for the nine months ended September 30, 2011. The decrease was due to professional fees incurred in 2011 related to the private placement.

Derivative gain/ (loss)

Derivative loss was $0.3 million for the nine months ended September 30, 2012 compared to $1.3 million gain for the nine months ended September 30, 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 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 positively affect the Company’s working capital.

Income tax expense

Income tax expense for the nine months ended September 30, 2012 was $794,000 compared to income tax expense of $798,000 for the nine months ended September 30, 2011. Our effective tax rate changed due to losses in non PRC jurisdictions, and bad debt reserve, which is a non-taxable item.

Net income

Our net income for the nine months ended September 30, 2012 was $1.1 million, a decrease of 49%, from net income of $2.2 million for the nine months ended September 30, 2011. The increase was primarily due to fluctuation in our derivative liability.

Comparison of the Three Months Ended September 30, 2012 and 2011

		Three Months Ended September 30,
		2012			2011
Statements of Operations Data
Sales	$	17,384,697		$	14,222,135
Cost of Sales		15,635,580			13,206,877
Gross Profit		1,749,117			1,015,258
Selling and administrative expense		(699,501	)		(358,518	)
Other income (expenses), net		(173,697	)		(13,641	)
Derivative gain (loss)		431,336			409,401
Income tax		(316,276	)		(216,310	)
Net Income	$	990,979		$	836,190

Sales

Sales increased from $14.2 million for the three months ended September 30, 2011 to $17.4 million for the three months ended September 30, 2012, representing an increase of $3.2 million or 22%. The growth rate is consistent with our expectation. Our cooperation with Anhui Huayuan Pharmaceutical Inc. since June 2012 has yielded significant benefits. We are able to purchase inventory at a lower price. As a result, we can offer competitive pricing to attract customers.

Cost of sales

Cost of sales increased from $13.2 million for the three months ended September 30, 2011 to $15.6 million for the three months ended September 30, 2012, representing an increase of $2.4 million or 18%. Cost of sales consists primarily of material cost which is directly attributable to the selling of pharmaceutical products. This increase in cost of goods is directly related to the growth in sales.

Gross profit

Gross profit increased from $1.0 million for the three months ended September 30, 2011 to $1.8 million for the three months ended September 30, 2012, representing an increase of approximately $0.8 million or 73%. The increase is primarily due to increase in sales while maintaining our gross margin. Our gross margin for 2012 was 10% compared to 7% in 2011. The increase in gross margin was due to our natural herbal medicine products, which have high margin, and our ability to purchase inventory at a lower price from Anhui Huayuan Pharmaceutical Inc.

Selling, general and administrative expenses, and others

Selling, general and administrative expenses, and others increase by 95% to $0.7 million for the three months ended September 30, 2012 from $0.4 million for the three months ended September 30, 2011. In 2012, we incurred significant professional fees relate to amendments of our March 31, 2011 and December 31, 2011 filings.

Derivative gain/ (loss)

Derivative gain was $0.4 million for the three months ended September 30, 2012 compared to $0.4 million for the three months ended September 30, 2011. This gain 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 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 positively affect the Company’s working capital.

Income tax expense

Income tax expense for the three months ended September 30, 2012 was $0.3 million compared to income tax expense of $0.2 million for the three months ended September 30, 2011. Our effective tax rate changed due to losses in non PRC jurisdictions, and bad debt reserve, which is a non-taxable item.

Net income/(loss)

Our net income for the three months ended September 30, 2012 was $1.0 million, an increase of $0.2million from net income of $0.8 million for the three months ended September 30, 2011. The increase is primarily attributed to improved gross margin.

Liquidity and Capital Resources

Overview

As of September 30, 2012, we had cash and equivalents on hand of approximately $6.4 million and a working capital deficit of approximately $3.8 million. 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 our growth, 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.

In 2012, we had arranged for the following short term loan agreements to fund our operations:

On March 19, 2012, we issued 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 loan agreement with Fudian Bank for approximately $1,200,000. 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.

On August 6, 2012, the Group entered into a loan agreement with the Bank of Communications for approximately $1,900,000 to purchase inventory. The loan carries an interest rate of 9.17% with monthly interest payment. The principal is due within one year.

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 PRC regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise (FIE) to its foreign non-resident investors are subject to a 10% withholding tax unless such foreign investors' jurisdiction has a tax treaty with China that provides for a reduced tax rate. XYT is wholly owned by FCPG HK, which falls under Hong Kong jurisdiction. Hong Kong has a tax treaty with China that reduces the withholding to 5% under certain condition. Dividends are only allowed to be paid out of accumulated earnings determined in accordance with PRC accounting standards, less any statutory reserve funds that are required by law. 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.

Our cash needs are primarily for working capital to support our operations and purchase of inventory. We presently finance our operations through revenue from the sale of our products and services 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.

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 used in operating activities

Net cash used in operating activities for the nine months ended September 30, 2012 was $0.2 million, compared to net cash used in operating activities of approximately $3 million for the nine months ended September 30, 2011. We had increased our inventory as the result of our cooperation with Anhui Huayuan Pharmaceutical Inc. in 2012.

Net cash used in investing activities

Net cash used in investing activities was $0.5 million for the nine months ended September 30, 2012, compared to net cash used in investing activities of $0.6 million for the nine months ended September 30, 2011. Investment activities, relate to the purchase of equipment and issuance of notes receivable to a non-related third party.

Net cash provided by financing activities

Net cash provided by financing activities was $3.5 million for nine months ended September 30, 2012, compared to net cash used in financing activities of $3.4 million for the nine months ended September 30, 2011. In 2012, we paid off a significant amount of our loans payable. In addition, we collected on a significant amount of loans made to related party companies. Lastly, we were able to arrange for short term financing to sustain our growth.

Off-Balance Sheet Arrangements

As of September 30, 2012, we are not parties to any off-balance sheet arrangements.

Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A summary of our significant accounting policies is included in Item 1. Financial Statements, Note 2 — Summary of Significant Accounting Policies, which are included in our Annual Report on Form 10-K for the year ended December 31, 2011. Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often employing the use of estimates about the effects of matters that are inherently uncertain. Such policies are summarized in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2011 amended in November 2012.

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.

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 September 30, 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 September 30, 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 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.

	ii)	We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.

	iii)	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.

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 September 30, 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.

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

None.

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).

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
** 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.

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: November 19, 2012	/s/ Yi Jia Li
	Name: Yi Jia Li
	Title: Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

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First China Pharmaceutical (FCPG) Inactive 10-Q2012 Q3 Quarterly report

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