UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q/A
 (Amendment No. 1)
 
 x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended  March 31, 2010
 
 or
 
 o   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:  033-145620
 
 China BCT Pharmacy Group, Inc.
 (Exact name of registrant as specified in its charter)
 
 Delaware
20-8067060(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 No. 102, Chengzhan Road, Liuzhou City, Guangxi Province, P.R.C.
 (Address of principal executive offices)
 
 +86 (772) 363 8318

(Registrant’s telephone number, including area code)
545007

(Zip Code)
 
 China Baicaotang Medicine Limited, Inc.
 (Former name, former address and former fiscal year, if changed since last report)
 
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:   Yesx    Noo
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o Accelerated filer o  Non-accelerated filer (Do not check if a smaller reporting company)o  Smaller reporting company  x
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes oNox
 
 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.)
 
 As of May 19, 2010 the registrant had 38,119,340 shares of common stock outstanding.
  
  TABLE OF CONTENTS
 
 Explanatory NotePart I -- Financial InformationItem 1.  Financial Statements
1Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
23Item 3.  Quantitative and Qualitative Disclosures About Market Risk
36Item 4T.  Controls and Procedures
36Part II – Other InformationItem 1.  Legal Proceedings
37Item 1A.  Risk Factors
37Item 2.  Unregistered shares of Equity Securities and Use of Proceeds
37Item 3.  Defaults Upon Senior Securities
37Item 4.  (Reserved and Removed)
37Item 5.  Other Information
37Item 6.  Exhibits
37
  
  Explanatory Note
 
 China BCT Pharmacy Group, Inc. (the “Company,” “we,” “us” or “our”) is filing this Amendment No. 1 on Form 10-Q/A to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, originally filed with the Securities and Exchange Commission (the “SEC”) on May 20, 2010 (the “Original Form 10-Q”), to amend our Original Form 10-Q in response to comments received from the SEC to conform the disclosures contained in our Quarterly Report to the disclosures contained in the Company’s Registration Statement on Form S-1, as amended. In addition, we are concurrently filing our Form S-1/A, our Form 10-K/A for the year ended December 31, 2009, our Form 10-Q/A for the period ended June 30, 2010 and Form 10-Q/A for the period ended September 30, 2010.
 
 Item 6 of Part II of this report has been revised to contain the currently-dated certifications from our principal executive officer and chief accounting officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.
 
 Because this Form 10-Q/A sets forth the Original Form 10-Q in its entirety, it includes both items that have been changed as a result of the restatement and items that are unchanged from the Original Form 10-Q. Other than the revision of the disclosures as discussed above, this Form 10-Q/A speaks as of the original filing date of the Original Form 10-Q and has not been updated to reflect other events occurring subsequent to the original filing date. This includes forward-looking statements and all other sections of this Form 10-Q/A that were not directly impacted by the restatement, which should be read in their historical context. The following items have been amended:
 
 Part I, Item 1 - Financial Statements;
 Part I, Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations;
 Part I, Item 4T - Controls and Procedures;
 Part II, Item 6 - Exhibits
  
  PART I—FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Condensed Consolidated Statements of Income and Comprehensive Income
 For the three months ended March 31, 2010 and 2009
 (Unaudited)
 (Stated in US Dollars)
 
 Three months endedMarch 31,2010


2009Sales revenue

$
34,028,878


$
32,342,392Cost of sales


25,167,201



23,493,795Gross profit


8,861,677



8,848,597Operating expensesAdministrative expenses


1,642,423



996,095Selling expenses


1,026,519



858,6862,668,942



1,854,781Income from operations


6,192,735



6,993,816Interest income


50,686



106Other income


98,040



-Change in fair value of warrant liabilities - Note 15


(288,783
)


-Other expenses


(39,312
)


(2,595
)Finance costs - Note 4


(263,696
)


(296,175
)Income before income taxes


5,749,670



6,695,152Income taxes - Note 5


(1,505,505
)


(1,688,383
)Net income attributable to China BCT Pharmacy Group, Inc.’scommon stockholders

$
4,244,165


$
5,006,769Other comprehensive incomeForeign currency translation adjustments


24,538



(36,992
)Total comprehensive income

$
4,268,703


$
4,969,777Earnings per share : basic and diluted - Note 6

$
0.11


$
0.16Weighted average number of shares outstanding :basic and diluted


37,764,573



32,000,000
  See the accompanying notes to condensed consolidated financial statements
  1
 
 China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Condensed Consolidated Balance Sheets
 As of March 31, 2010 and December 31, 2009
 (Stated in US Dollars)
 
 March 31,


December 31,2010


2009(Unaudited)


(Audited)ASSETSCurrent assetsCash and cash equivalents

$
13,033,360


$
13,304,158Restricted cash


871,714



1,155,779Bills receivable


129,956



-Trade receivables, net


35,110,436



35,410,039Amounts due from related companies - Note 12


7,896,323



4,275,586Other receivables, prepayments and deposits


4,055,276



2,526,398Inventories - Note 7


10,761,047



8,745,525Deferred taxes


28,932



60,164Total current assets


71,887,044



65,477,649Goodwill - Note 8


107,968



107,968Other intangible assets - Note 8


625,520



660,034Property, plant and equipment, net - Note 9


12,028,584



12,171,689Land use rights - Note 10


13,218,822



13,979,753Deposit for acquisition of retail chain stores business - Note 20


2,434,101



-Deferred taxes


696,149



663,699TOTAL ASSETS

$
100,998,188


$
93,060,792
 
 See the accompanying notes to condensed consolidated financial statements
  2
  China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Condensed Consolidated Balance Sheets (Cont’d)
 As of March 31, 2010 and December 31, 2009
 (Stated in US Dollars)
 
 March 31,


December 31,2010


2009(Unaudited)


(Audited)LIABILITIES AND STOCKHOLDERS’ EQUITYLIABILITIESCurrent liabilitiesTrade payables

$
20,744,178


$
19,159,212Bills payable


1,743,428



2,239,604Other payables and accrued expenses


3,786,462



3,194,612Amounts due to directors - Note 11


848,208



1,008,111Amounts due to related companies - Note 12


922,913



128,579Income tax payable


682,251



562,603Secured bank loans - Note 13


6,626,811



7,136,069Other loans - Note 14


1,500,569



2,361,258Retirement benefit costs


59,158



59,158Total current liabilities


36,913,978



35,849,206Secured long-term bank loans - Note 13


3,631,957



3,631,957Warrant liabilities - Note 15


2,144,202



-Retirement benefit costs


201,320



201,320TOTAL LIABILITIES


42,891,457



39,682,483COMMITMENTS AND CONTINGENCIES- Note 16STOCKHOLDERS’ EQUITYCommon stock : par value $0.001 per shareAuthorized 100,000,000 shares and38,119,340 and 37,089,370 shares issued and outstanding as of March 31, 2010 and December 31, 2009 respectively- Note 17


38,119



37,089Additional paid-in capital


15,379,588



14,920,899Statutory and other reserves


2,605,901



2,605,901Accumulated other comprehensive income


2,134,808



2,110,270Retained earnings


37,948,315



33,704,150TOTAL STOCKHOLDERS’ EQUITY


58,106,731



53,378,309TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
100,998,188


$
93,060,792
 
 See the accompanying notes to condensed consolidated financial statements
  3
  China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Condensed Consolidated Statements of Cash Flows
 For the three months ended March 31, 2010 and 2009
 (Unaudited)
 (Stated in US Dollars)
 
 Three months ended

March 31,2010


2009Cash flows from operating activitiesNet income attributable to China BCT Pharmacy Group, Inc.’scommon stockholders

$
4,244,165


$
5,006,769Adjustments to reconcile net income to net cashprovided by (used in) operating activities :-Depreciation


181,481



158,941Deferred taxes


(1,218
)


-Gain on disposal of land use right


(44,919
)


-Loss on disposal of property, plant and equipment


-



306Amortization of intangible assets


34,514



29,024Amortization of land use rights


108,355



83,873Change in fair value of warrant liabilities


288,783



-Changes in operating assets and liabilities :-Trade receivables


299,603



(7,574,526
)Bills receivable


(129,956
)


-Other receivables, prepayments and deposits


(1,528,878
)


(1,477,625
)Inventories


(2,015,522
)


(440,823
)Trade payables


1,584,966



(1,397,972
)Amounts due from (to) related companies


388,390



(277,722
)Other payables and accrued expenses


591,850



1,463,456Bills payable


(496,176
)


2,223,521Restricted cash


284,065



(2,201,559
)Income tax payable


119,648



344,597Net cash flows provided by (used in) operating activities

$
3,909,151


$
(4,059,740
)
  See the accompanying notes to condensed consolidated financial statements
  4
  China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Condensed Consolidated Statements of Cash Flows (Cont’d)
 For the three months ended March 31, 2010 and 2009
 (Unaudited)
 (Stated in US Dollars)
 
 Three months ended

March 31,2010


2009Cash flows from investing activitiesPayments to acquire and deposit for acquisition ofproperty, plant and equipment

$
(38,376
)

$
(14,110
)Proceeds from sales of property, plant and equipment


-



407Proceeds from sales of land use right


697,495



-Deposit for acquisition of retail chain stores business


(2,434,101
)


-Repayment from related companies


-



3,671,755Net cash flows (used in) provided by investing activities


(1,774,982
)


3,658,052Cash flows from financing activitiesRepayment (to) from related companies


(3,214,793
)


1,040,480Repayment to directors


(159,903
)


-Net cash received from private placement – Note 17a


2,315,138



-Proceeds from bank loans


1,290,960



9,675,520Repayment of bank loans


(1,800,218
)


(7,243,454
)Repayment of other loans


(860,689
)


(122,333
)Net cash flows (used in) provided by financing activities


(2,429,505
)


3,350,213Effect of foreign currency translation on cash and cash equivalents


24,538



(2,571
)Net (decrease) increase in cash and cash equivalents


(270,798
)


2,945,954Cash and cash equivalents - beginning of period


13,304,158



1,265,184Cash and cash equivalents - end of period

$
13,033,360


$
4,211,138Supplemental disclosures for cash flow information:Cash paid for:Interest

$
196,262


$
218,520Income taxes

$
1,387,075


$
1,343,750
 
 See the accompanying notes to condensed consolidated financial statements
  5
  China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Consolidated Statements of Equity
 Unaudited
 (Stated in US Dollars)
 
 AccumulatedAdditional


Statutory


otherCommon stock


paid-in


and surplus


comprehensive


RetainedNo. of shares


Amount


capital


reserves


income


earnings


TotalBalance, December 31, 2009


37,089,370


$
37,089


$
14,920,899


$
2,605,901


$
2,110,270


$
33,704,150


$
53,378,309Net income


-



-



-



-



-



4,244,165



4,244,165Foreign currency translation adjustments


-



-



-



-



24,538



-



24,538Private placement - Note 17(a)


1,029,970



1,030



1,752,831



-



-



-



1,753,861Reclassification  - Note 15


-



-



(1,294,142
)


-



-



-



(1,294,142
)Balance, March 31, 2010


38,119,340


$
38,119


$
15,379,588


$
2,605,901


$
2,134,808


$
37,948,315


$
58,106,731
 
 See the accompanying notes to condensed consolidated financial statements
  6
  China BCT Pharmacy Group, Inc.
 (Formerly named China Baicaotang Medicine Limited)
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated in US Dollars)
 
 1.
Corporate information
 
 China BCT Pharmacy Group Inc. (the “Company”), formerly known as China Baicaotang Medicine and, previous to that, Limited Purden Lake Resource Corp., was incorporated in the State of Delaware on November 30, 2006 as a limited liability company. The name of the Company was changed from China Baicaotang Medicine Limited to China BCT Pharmacy Group, Inc. on March 25, 2010.
 
 The Company is principally engaged in the distribution, production, and retail sale of pharmaceutical products in the People’s Republic of China (the “PRC”).
 
 Currently the Company has five subsidiaries:
 
 Company name

Place/date of

incorporation orestablishment

The Company's

effective ownershipinterest

Common stock/

registered capital

Principal activitiesIngenious Paragon Global Limited (“Ingenious”)

British Virgin Islands (“BVI”) / May 29, 2008

100%

Authorized, issued and fully paid 50,000 common shares of $1 par value each

Investment holdingForever Well Asia Pacific Limited (“Forever Well”)

Hong Kong / January 10, 2008

100%

Authorized, issued and fully paid 10,000 common shares of HK$1 each

Investment holdingGuangxi Liuzhou Baicaotang Medicine Limited (“Liuzhou BCT”)

PRC / April 3, 1986

100%

Registered and fully paid up capital RMB10 million

Investment holding and distribution of drugsGuangxi Liuzhou Baicaotang Medicine (Retail Chain) Limited (“BCT Retail”)

PRC / October 30, 2001

100%

Registered and fully paid up capital RMB300,000

Retail of drugsGuangxi Hefeng Pharmaceutical Company Limited (“Hefeng Pharmaceutical”)

PRC / September 18, 2000

100%

Registered and fully paid up capital RMB5,000,000

Production and sales of drugs
  7
  2.
Basis of presentation
 
 The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to Form 10-Q and Regulation S-X.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulation and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2009.
 
 In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month periods have been made.  Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year.
 
 3.
Summary of significant accounting policies
 
 Basis of consolidation
 
 The consolidated financial statements include the accounts of the Company, Ingenious, Forever Well, Liuzhou BCT, BCT Retail and Hefeng Pharmaceutical.  All significant inter-company accounts and transactions have been eliminated in consolidation.
  Use of estimates
 
 In preparing 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 accounts receivable, inventories and the estimation on useful lives of property, plant and equipment and intangible assets. Actual results could differ from those estimates.
 
 Cash and cash equivalents
 
 Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less. As of March 31, 2010 and December 31, 2009, the cash and cash equivalents were mainly denominated in Renminbi (“RMB”) and United States dollars were placed with banks in the PRC and Hong Kong. For those denominated in RMB, they are not freely convertible into foreign currencies and the remittance of these funds out of the PRC is subject to exchange control restrictions imposed by the PRC government. The remaining insignificant balance of cash and cash equivalents were denominated in Hong Kong dollars.
 
 Restricted Cash
 
 Deposits in banks pledged as securities for bills payable (note 10) that are restricted in use are classified as restricted cash under current assets.
 
 Allowance for doubtful accounts
 
 The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade receivables.  A considerable amount of judgment is required in assessing the amount of the allowance, the Company considers the historical level of credit losses of all segments (Retail, Wholesales and Manufacturing) and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future for all segments. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
 8
 
 Based on the above assessment, during the reporting periods, management establishes the general provisioning policy for all segments to make allowance equivalent to 40% of the gross amount of trade receivables due between six months and twelve months and 100% of the gross amount of accounts receivable due over twelve months.  Additional specific provisions are made against trade receivables whenever they are considered to be doubtful.
  Bad debts are written off when identified.  The Company extends unsecured credit to customers ranging from three to six months in the normal course of business. The Company does not accrue interest on trade accounts receivable.
  Inventories
  Inventories are stated at the lower of cost or market value.  Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition.  In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels.  The Company’s reserve requirements generally increase with its projected demand requirements; decrease due to market conditions, product life cycle changes. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.  Inventory quantities and expiry dates are regularly reviewed and provisions for excess or obsolete inventory are recorded primarily based on the expiry dates and the Company’s forecast of future demand and market conditions.
  No provision for excess or obsolete inventory was made at March 31, 2010 or December 31, 2009.
  Property, plant and equipment
 
 Property, plant and equipment are stated at cost less accumulated depreciation.  Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
 
 Depreciation is provided on straight-line basis over their estimated useful lives.  The principal depreciation rates are as follows :
 
 Annual rate


Residual valueBuildings


2.54% - 9.84
%
Nil - 2
%Plant and machinery


7% - 18.4
%
Nil - 10
%Motor vehicles


6% -18.4
%


10
%Furniture, fixtures and equipment


6% -18.4
%


10
%
 
 Construction in progress mainly represents expenditures in respect of the construction of a new production line and improving the manufacturing process.  All direct costs relating to the new production line and improving the manufacturing process are capitalized as construction in progress. No depreciation is provided in respect of construction in progress.
 
 Maintenance or repairs are charged to expense as incurred.  Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
 
 Goodwill and intangible assets
 
 The Company applies the provisions of FASB ASC 805, “Goodwill and Intangible Assets” (“FASB ASC 805”). Under FASB ASC 805, goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually.
  9
  Goodwill, with an infinite useful life, is stated at cost less accumulated impairment.
 
 Pharmaceutical licenses, customer contracts, trademarks, know-how and patents are stated at cost less accumulated amortization. Amortization is provided on a straight-line over their useful lives as follows :
 
 Pharmaceutical licenses
10 yearsCustomer contracts, trademarks, know-how and patents
1–3 years
 
 Land use rights
 
 Land use rights are stated at cost less accumulated amortization.  Amortization is provided using the straight-line method over the terms of the leases of 40 to 70 years obtained from the relevant PRC land authority.
 
 Impairment of long-lived assets
 
 Long-lived assets are tested for impairment in accordance with FASB ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets”.  The Company periodically evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  The Company recognizes impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets.  During the reporting period, the Company has not identified any indicators that would require testing for impairment.
 
 Government grants
 
 Receipts of government grants to encourage research and development activities, which are non-refundable, are credited to deferred income upon receipt.  Government grants are used for purchases of property, plant and equipment, to subsidize the research and development expenses incurred, for compensation expenses already incurred or for good performance of the Company.
 
 Grants applicable to purchase of property, plant and equipment are amortized over the life of the depreciable assets.  For research and development expenses, the Company matches and offsets the government grants with the expenses of the research and development activities as specified in the grant approval document in the corresponding period when such expenses are incurred.  Government grants received as compensation for expenses already incurred in the prior period or for good performance of the Company are recognized as income in the period they become recognizable.
 
 Revenue recognition
  Revenue from sales of the Company’s products in wholesales and manufacturing segments is recognized upon customer acceptance, which occur at the time of delivery to customer, provided persuasive evidence of an arrangement exists, such as signed sales contract, the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are delivered to its customers with no significant post-delivery obligation on our part, the sales price is fixed or determinable and collection is reasonably assured.  We do not provide our customers with contractual rights of return for any of our products.  When there are any significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled.  The Company evaluates the terms of sales agreement with its customer in order to determine whether any significant post-delivery performance obligations exist.  Currently, the sales under wholesale and manufacturing segments do not include any terms which may impose any significant post-delivery performance obligations to the Company.
 
 Revenue from sales of the Company’s products in its retail segment is recognized upon customer acceptance, which occurs at the time the product is purchased by the retail customers at our retail stores with no significant post-delivery obligation on our part, and collection is reasonably assured.  The Company does not have a return policy allowing customers to return the products sold.   When there are any significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled.  The Company evaluates the rules and regulations relating to retail sales of drugs in the PRC in order to determine whether any significant post-delivery performance obligations exist.  Currently, the rules and regulations relating to retail sales of drugs in the PRC does not include any provisions which may impose any significant post-delivery performance obligations on the Company.
  10
 
 Revenue from sales of the Company’s product represents the invoiced value of goods, net of the value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax at a rate of 17 percent of the gross sales price. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing the Company’s finished product products.
 
 Advertising, research and development expenses
 
 Advertising and research and development expenses are charged to expense as incurred.
 
 Retirement benefit costs
 
 Liuzhou BCT adopted a retirement scheme to provide for eligible staff employed prior to April 23, 2002.  The eligible staff are entitled to receive certain amounts based on their years of service in Liuzhou BCT up to April 23, 2002, upon their termination of employment relationship with the Company or retirement.  The obligation of retirement benefit costs is recorded at the present value of the cost expected to settle the obligation and is recognized when the retirement scheme has been approved.  The staff employed after April 23, 2002 is not entitled to this retirement scheme.
 
 Shipping and handling costs
 
 Shipping and handling costs are charged to expense as incurred and are included in selling expenses.
 
 Vendor allowances
 
 The Company receives allowances from certain of its vendors whose products it purchases for resale.  These allowances are received for a variety of buying activities, including vendor programs such as volume purchase allowance.  Consideration received from a vendor is a reduction in the cost of the vendor’s products and is recognized as a reduction in the cost of sales and the related inventory.  The Company also receives promotional allowance funds for specific vendor-sponsored programs that are recognized as a reduction of cost of sales as the program occurs and the funds are earned per the applicable agreements.
 
 Store opening costs
 
 Costs incurred in connection with store start-up costs, such as travel for recruitment, training and setup of new store openings, are expensed as incurred.
 
 Dividends
 
 Dividends are recorded in the Company’s financial statements in the period in which they are declared.
 
 Off-balance sheet arrangements
 
 The Company does not have any off-balance sheet arrangements.
 
 Registration payment arrangement
 
 Contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, are separately recognized and measured when they are probable and reasonably estimable.
 
 11
  Income taxes
 
 The Company uses the asset and liability method of accounting for income taxes pursuant to FASB  ASC 740 "Income Taxes”.  Under the asset and liability method of FASB 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.
 
 Comprehensive income
 
 The Company has adopted FASB ASC 220, “Comprehensive Income”, which establishes standards for reporting and display of comprehensive income (loss), its components and accumulated balances. Components of comprehensive income (loss) include net income (loss) and foreign currency translation adjustments.
 
 Concentrations of credit risk
 
 Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, trade receivables and amounts due from related companies.  As of March 31, 2010, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality.  With respect to trade receivables, the Company extends credit based on an evaluation of the customer’s financial condition.  The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.
 
 During the reporting periods, no customers were identified who accounted for 10% or more of the Company’s consolidated sales and no customers assets accounted  for or constituted 10% or more of the Company’s trade receivables.
 
 Foreign currency translation
  The functional currency of the Company is RMB and RMB is not freely convertible into foreign currencies. The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the 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.
 
 Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. The resulting translation adjustment is reflected as accumulated other comprehensive income (loss), a separate component of stockholder’s equity in the statement of stockholder’s equity.
 
 Basic and diluted earnings per share
  The Company reports basic earnings per share in accordance with FASB ASC 260, “Earnings Per Share”.  Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented.  The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods.  Diluted earnings per share is computed using the weighted average number of common shares outstanding during the periods plus the effect of dilutive securities outstanding during the periods.
 
 Fair value of financial instruments
 
 The Company adopted ASC 820 (previously Statement of Financial Accounting Standards (“SFAS”) No. 157) on January 1, 2008. The adoption of ASC 820 did not materially impact the Company’s financial position, results of operations or cash flows.
  12
 
 ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which fair value option was not elected. The carrying amounts of the financial assets and liabilities approximate to their fair values due to short maturities or the applicable interest rates approximate the current market rates.
 
 Recently issued accounting pronouncements
 
 Accounting for Transfers of Financial Assets (Included in amended Topic ASC 860 “Transfers and Servicing”, previously SFAS No. 166, “Accounting for Transfers of Financial Assets - an Amendment ofFinancial Accounting Standard Board (“FASB”)Statement No. 140.”).The amended topic addresses information a reporting entity provides in its financial statements about the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. Also, the amended topic removes the concept of a qualifying special purpose entity, limits the circumstances in which a transferor derecognizes a portion or component of a financial asset, defines participating interest and enhances the information provided to financial statement users to provide greater transparency. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and was effective for us as of January 1, 2010. The adoption of this amended topic has no material impact on the Company’s financial statements.
 
 Consolidation of Variable Interest Entities - Amended (Included in amended Topic ASC 810 “Consolidation”, previously SFAS 167 “Amendments to FASB Interpretation No. 46(R)”). The amended topic requires an enterprise to perform an analysis to determine the primary beneficiary of a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity. The amended topic also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The amended topic is effective for the first annual reporting period beginning after November 15, 2009 and will be effective for us as of January 1, 2010. The adoption of this amended topic has no material impact on the Company’s financial statements.
 
 The FASB issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging Issues Task Force.” This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available. The Company will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted. The management is in the process of evaluating the impact of adopting this ASU update on the Company’s financial statements.
  The FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends ASC Topic 820 to require the following additional disclosures regarding fair value measurements: (i) the amounts of transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) reasons for any transfers in or out of Level 3 of the fair value hierarchy and (iii) the inclusion of information about purchases, sales, issuances and settlements in the reconciliation of recurring Level 3 measurements. ASU 2010-06 also amends ASC Topic 820 to clarify existing disclosure requirements, requiring fair value disclosures by class of assets and liabilities rather than by major category and the disclosure of valuation techniques and inputs used to determine the fair value of Level 2 and Level 3 assets and liabilities. With the exception of disclosures relating to purchases, sales, issuances and settlements of recurring Level 3 measurements, ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009. The disclosure requirements related to purchases, sales, issuances and settlements of recurring Level 3 measurements will be effective for financial statements for annual reporting periods beginning after December 15, 2010.  The management is in the process of evaluating the effect of ASC 2010-06 on its financial statements and results of operation and is currently not yet in a position to determine such effects.
  13
 
 The FASB issued ASU No. 2010-02, “Consolidation (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification”. This amendment affects entities that have previously adopted Topic 810-10 (formally SFAS 160). It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The adoption of this ASU update has no material impact on the Company’s financial statements.
 
 In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic 855, Subsequent Events. The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. This update had no material impact on the financial position, results of operations or cash flows of the Company.
 
 4.
Finance costs
 
 Three months endedMarch 31,(Unaudited)2010


2009Bank loan interest

$
246,829


$
283,145Bank charges


16,867



11,623Others


-



1,407$
263,696


$
296,175
  5.
Income taxes
 
 United States
 
 The Company is subject to the United States of America tax law at tax rates up to 34%.  No provision for the US federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods.
 
 BVI
 
 Ingenious was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes.
 
 Hong Kong
 
 Forever Well is subject to the Hong Kong Profits tax at tax rate of 16.5%. No provision for the Hong Kong Profits tax has been made as the Company had no taxable income in this jurisdiction since its incorporation.
  14
  PRC
 
 Corporate income tax (“CIT”) to Baicaotang Medicine and Baicaotang Retail, was charged at 33%, of which 30% is for national tax and 3% is for local tax, of the assessable profits before 2008.  The PRC’s legislative body, the National People’s Congress, adopted the unified CIT Law on March 16, 2007.  This new tax law replaces the existing separate income tax laws for domestic enterprises and foreign-invested enterprises and became effective on January 1, 2008.  Under the new tax law, a unified income tax rate is set at 25% for both domestic enterprises and foreign-invested enterprises.  However, there is a transition period for enterprises, whether foreign-invested or domestic, that are currently receiving preferential tax treatments granted by relevant tax authorities.  Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and will transition into the new tax rate over a five-year period beginning on the effective date of the CIT Law.  Enterprises that are currently entitled to exemptions for a fixed term will continue to enjoy such treatment until the exemption term expires.  Preferential tax treatment will continue to be granted to industries and projects that qualify for such preferential treatments under the new tax law. Accordingly, Liuzhou BCT and BCT Retail were subject to tax rate of 25% starting from fiscal year 2008.
 
 In accordance with the Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region (“DOWR”), the companies are entitled to preferential rate of 15% if it is engaged in the projects listed in Guiding Catalogue and the revenue derived from it account for the amount over 70% of total revenue.  As Hefeng Pharmaceutical met this DOWR requirement, it was approved by the tax authority and was granted a preferential tax rate of 15% for fiscal years 2003 to 2010. From fiscal year 2011, Hefeng Pharmaceutical will be subject to CIT at rate of 25% under the new tax law.
 
 6.
Earnings per share
 
 During the reporting periods, potential dilutive shares are excluded from the computation of earnings per share as their effects are anti-dilutive. Accordingly, the basic and diluted earnings per share are the same.
 
 7.
Inventories
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Raw materials

$
848,853


$
722,109Work-in-progress


156,181



148,954Finished goods


9,756,013



7,874,462$
10,761,047


$
8,745,525
 
 8.
Goodwill and other Intangible assets
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)GoodwillAcquisition of Hefeng Pharmaceutical

$
107,968


$
107,968Other intangible assetsPharmaceutical licences

$
799,197


$
799,197Customer contracts


90,729



90,729Trademarks, know-how and patents


99,892



99,892989,818



989,818Accumulated amortization


(364,298
)


(329,784
)Net

$
625,520


$
660,034
 
 15
 
 During the three months ended March 31, 2010 and 2009, amortization amounted to $34,514 and $29,024, respectively.
 
 9.
Property, plant and equipment, net
 
 Property, plant and equipment are stated at cost, as follows:
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Costs :-Buildings

$
12,331,575


$
12,331,575Plant and machinery


1,292,775



1,291,734Furniture, fixtures and equipment


411,950



374,615Motor vehicles


367,132



367,13214,403,432



14,365,056Accumulated depreciation


(2,725,901
)


(2,544,420
)11,677,531



11,820,636Construction in progress


351,053



351,053Net

$
12,028,584


$
12,171,689
 
 (a)
An analysis of buildings, plant and machinery pledged to banks for banking loans (Note 13(d)(i)) is as follows :-
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Costs :-Buildings

$
7,409,774


$
7,409,774Accumulated depreciation


(1,336,845
)


(1,290,533
)Net

$
6,072,929


$
6,119,241
  (b)
Construction in progress
 
 Construction in progress mainly represents expenditures in respect of the construction of a new production line and improving the manufacturing process.
  16
  10.
Land use rights
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Land use rights

$
15,362,549


$
16,039,294Accumulated amortization


(2,143,727
)


(2,059,541
)Net

$
13,218,822


$
13,979,753
 
 The Company has obtained land use rights from the relevant PRC land authority for a period of 40 to 70 years to use the land on which the office premises, production facilities and warehouse of the Company are situated. As of March 31, 2010 and December 31, 2009, land use rights with carrying amount of $6,168,310 and $6,205,140 respectively were pledged to a bank for the bank loans granted to the Company (Note 13(d)(ii)).
 
 During the three months ended March 31, 2010 and 2009, amortization amounted to $108,355 and $83,873, respectively.
 
 During the period ended March 31, 2010, land use right with carrying amounts of $652,576 were disposed of at consideration, net direct costs, of $697,495 (RMB4,754,560) resulting gain of $44,919.
 
 11.
Amounts due to directors
 
 The amounts due to directors are unsecured and repayable on demand. Except for the amounts of $632,264 as of March 31, 2010 and $836,084 as of December 31, 2009, which were interest bearing at fixed rate ranging from 3.2% to 8.16% per annum, the remaining balances are interest-free.
 
 12.
Amounts due from/to related companies
 
 The related companies are controlled by certain of the Company’s directors including Mr. Tang Hui Tian. These amounts are interest-free, unsecured and payable on demand.
 
 13.
Secured bank loans
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Short-term loans - Note 13(a)

$
6,572,160


$
7,070,940Current maturities of long-termbank loan


54,651



65,129$
6,626,811


$
7,136,069Long-term bank loans - Note 13(b)


3,686,608



3,697,086Less: current maturities


(54,651
)


(65,129
)$
3,631,957


$
3,631,957
 
 17
 
 (a)
The weighted average interest rates for short-term loans as of March 31, 2010 and December 31, 2009 were 7.11% and 7.14% per annum respectively.
 
 (b)
Except for loans of $3,227,400 as of March 31, 2010 which were interest bearing at fixed rates ranging from 6.48% to 9.855% per annum, the remaining balances as of March 31, 2010 were interest bearing at variable rates ranging from HIBOR plus 5.841% to HIBOR plus 7.02% per annum respectively.
 
 (c)
As of March 31, 2010, the Company’s banking facilities were composed of the following:-
 
 AmountFacilities granted

Granted


Utilized


UnusedSecured bank loans

$
10,258,768


$
10,258,768


$
-
 
 (d)
As of March 31, 2010, The above bank loans were secured by the following :-
 
 (i)
Property, plant and equipment with carrying value of $6,072,929 (Note 9);
 
 (ii)
Land use rights with carrying value of $6,168,310 (Note 10);
 
 (iii)
Buildings and land use rights owned by a related company which is controlled by certain of the Company's directors.
 
 (e)
Long-term borrowings are repayable as follows : -
 
 March 31,


December 31,2010


2009(Unaudited)


(Audited)Within one year

$
66,386


$
65,129After one year but within two years


1,758,710



1,757,354After two years but within three years


1,691,054



1,689,590After three years but within four years


83,501



81,920After four years but within five years


86,957



88,429After five years


-



14,664$
3,686,608


$
3,697,086
 
 During the reporting periods, there was no covenant requirement under the banking facilities granted to the Company.
  18
 
 14.
Other loans
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Interest bearing- staff - Note 14(a)

$
273,497


$
377,067- third parties - Note 14(a)


1,227,072



1,544,0911,500,569



1,921,158Non interest bearing- third parties


-



440,100$
1,500,569


$
2,361,258
 
 (a)
Interest bearing at a fixed rate of 4% per annum.
 
 (b)
All the other loans are unsecured and repayable on demand.
 
 15.        Warrant liabilities
 
 As of December 30, 2009, the Company completed a private placement of 2,489,370 shares of common stock and five-year warrants to purchase up to 1,244,368 shares of common stock (“First Batch Warrants”) at an exercise price of $3.81 per share for gross proceeds of $6,322,952 which includes related issuance expenses of $1,016,290. In accordance with FASB ASC 815, these warrants are not considered indexed to the Company’s own stock and should be classified as financial derivative liabilities at fair value for each reporting period.  However, the Company considered the amount to be immaterial to the financial statements for the year ended December 31, 2009 as the fair value of First Batch Warrants was $1,294,142 as of December 31, 2009, thus, the net proceeds were allocated to First Batch Warrants resulting in the entire amount recorded as equity.
 
 Upon the completion of a private placement as of February 1, 2010 as stated in Note 17(a), of which five-year warrants to purchase up to 514,933 shares of common stock (“Second Batch Warrants”) were issued to investors and should be classified as financial derivative liabilities at fair value for each reporting period in accordance with FASB ASC 815, the Company determined that the aggregate fair value of warrants issued as of February 1, 2010 was material to the financial statements for the three months ended March 31, 2010.  Accordingly, a reallocation was made for the fair value of First Batch Warrants as of December 31, 2009 amounting to $1,294,142 from the Company’s equity to warrant liabilities as of February 1, 2010.  For the Second Batch Warrants, part of the net proceeds amounting to $561,277, representing the fair value as of February 1, 2010, was allocated to warrant liabilities at initial recognition.
 
 The fair value of the warrants was calculated using the binomial model. The assumptions that were used to calculate fair value of First Batch Warrants and Second Batch Warrants as of March 31, 2010 are as follows:
 
 - Expected volatility of 60%
 - Expected dividend yield of 0%
 - Risk-free interest rate of 3.379%
 - Expected lives of 4.74 years and 4.84 years for First Batch Warrants and Second Batch Warrants respectively
 - Exercise price of $3.81 per share
 
 As of March 31, 2010, the fair value of warrant liabilities was $2,144,202 and corresponding loss on change in fair value of warrant liabilities of $288,783 was recognized in the Company’s statement of operations for the three months ended March 31, 2010.
 
 Warrants issued and outstanding, all of which are exercisable at March 31, 2010, are summarized as follows:
 
 Number of sharesFirst Batch Warrants


1,244,368Second Batch Warrants


514,9331,759,301
 
 19
 16.
Commitments and contingencies
 
 a.
Capital commitment
 
 As of March 31, 2010, the Company had no capital commitments in respect of the acquisition of property, plant and equipment which were contracted for but not provided in the condensed consolidated financial statements.
 
 b.                              Operating lease commitments
 
 As of March 31, 2010, the Company had non-cancelable operating leases for its retail shops and future minimum lease payments to be paid are as follows: -
 
 Year2010

$
491,7112011


477,1372012


335,5552013 and afterward


51,701$
1,356,104
 
 The rental expense relating to the operating leases was $108,124 and $53,938 for the period ended March 31, 2010 and 2009 respectively.
 
 c.
Operating lease arrangement
 
 As of March 31, 2010, the Company leases its retail stores in PRC under an operating lease arrangement until 2010. Future minimum lease payments to be received under non-cancelable operating lease are as follows:-
 
 March 31,

2010

(Unaudited)


December 31,

2009

(Audited)Within one year

$
3,330


$
11,903
 
 17.
Common stock and additional paid-in capital
 
 AdditionalNumber of





paid-inshares


Amount


capitalBalance, January 1, 2010


37,089,370


$
37,089


$
14,920,899Reclassification - Note 15


-



-



(1,294,142
)Private placement - Note 17(a)


1,029,970



1,030



1,752,831Balance, March 31, 2010


38,119,340


$
38,119


$
15,379,588
 
 (a)
As of February 1, 2010, the Company completed a private placement of 1,029,970 shares of common stock and warrants to purchase up to 514,933 shares of common stock at an exercise price of $3.81 per share for gross proceeds of $2,616,108 which includes related issuance expenses of $300,970.  In accordance with FASB ASC 815, these warrants are not considered indexed to the Company’s own stock and should be classified as financial derivative liabilities at fair value for each reporting period. Part of the net proceeds amounting to $561,277 was allocated to warrant liabilities with the remaining balance of $1,753,861 recorded in the Company’s equity at initial recognition.
 
 20
 
 18.
Defined contribution plan
 
 Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 30.5% to employees’ salaries and wages to a defined contribution retirement scheme organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC.  The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan.  No forfeited contribution is available to reduce the contribution payable in the future years.  The defined contribution plan contributions were charged to the consolidated statements of income. The Company contributed $144,704 and $163,814 for the three months ended March 31, 2010 and 2009, respectively.
 
 19.
Segment information
 
 The Company uses the “management approach” in determining reportable operating segments.  The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments.  Management, including the chief operating decision maker, reviews operating results solely by monthly revenue of Pharmaceutical distribution, retail pharmacy and manufacturing segments and operating results of the Company and, as such, the Company has determined that the Company has three operating segments as defined by FASB ASC 280, “Segments Reporting” (previously SFAS 131)”: Pharmaceutical distribution, retail pharmacy and manufacturing pharmacy.
 
 Pharmaceutical Distribution


Retail pharmacy


Manufacturing pharmacy


Eliminations


TotalThree months ended March 31,


Three months ended March 31,


Three months ended March 31,


Three months ended March 31,


Three months ended March 31,(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)2010


2009


2010


2009


2010


2009


2010


2009


2010


2009Revenue fromexternal customers

$
23,218,923


$
23,465,567


$
8,902,624


$
6,887,544


$
1,907,331


$
1,989,282


$
-


$
-


$
34,028,878


$
32,342,393Revenue from


























--



--Inter-segment


6,474,509



5,615,609



-



-



174,217



-



(6,648,726
)


(5,615,609
)


-



-Interest income


-



-



-



-



119



106



-



-



119



106Interest expenses


202,097



228,121



22,727



10,872



22,005



44,152



-



-



246,829



283,145Amortization


100,225



75,753



-



-



42,644



37,1448



-



-



142,869



112,897Depreciation


97,755



45,440



1,290



920



82,436



112,581



-



-



181,481



158,941Segment profit


3,422,095



4,070,251



1,870,571



1,637,150



1,009,245



989,678



-



-



6,301,911



6,697,079Expenditure forsegment assets

$
2,708


$
3,090



34,627


$
-


$
1,041


$
11,020


$
-


$
-


$
38,376


$
14,110
 
 Pharmaceutical distribution
Retail pharmcy
Manufacturing pharmcay
TotalMarch 31,
December 31,
March 31,
December 31,
March 31,
December 31,
March 31,
December 31,2010
2009
2010
2009
2010
2009
2010
2009(Unaudited)
(Audited)
(Unaudited)
(Audited)
(Unaudited)
(Audited)
(Unaudited)
(Audited)Segment assets
$71,282,196
$68,252,951
$12,296,115
$9,184,032
$16,396,108
$10,319,034
$99,974,419
$87,756,017
 
 
 21
 
 
 A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.
 
 Three months endedMarch 31,(Unaudited)2010


2009Total consolidated revenue

$
34,028,878


$
32,342,392Total profit for reportable segments


6,301,911


$
6,697,079Unallocated amounts relating to operations:Change in fair value of warrant liabilities


(288,783
)


-Finance costs


(2,341
)


-Other general expenses


(261,117
)


(1,927
)Income before income taxes

$
5,749,670


$
6,695,152
 
 March 31,


December 31,2010


2009(Unaudited)


(Audited)AssetsTotal assets for reportable segments


99,974,419


$
87,756,017Cash and cash equivalents


797,967



5,078,973Other receivables


225,802



225,802100,998,188


$
93,060,792
 
 All of the Company’s long-lived assets and revenues classified based on the customers are located in the PRC.
 20.         Subsequent events
 
 As of February 28, 2010, the Company entered into an agreement with Liuzhou Shi Wubaitang Medical Chain Store Company Limited ( in Chinese "柳州市伍百堂醫藥連鎖有限公司”) (“Wubaitang”) for the acquisition of retail chain stores business of Wubaitang at a cash consideration of RMB16,592,374 (equivalent to $2,434,101), which was fully settled and recorded as “deposit for acquisition of retail chain stores business” in the condensed consolidated balance sheet as of March 31, 2010.  The acquisition was completed in April, 2010.  Disclosure of certain information for the acquisition in accordance with ASC 805 “Business Combinations” has not been included in this condensed consolidated financial statements as the required financial information for such disclosure is not yet available at the date of this Form 10-Q.
 
 The Company has evaluated subsequent events through the filing date of this Form 10-Q and has determined that there were no other subsequent events to recognize or disclose in these financial statements.
 22
 
 
 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 filed with the Securities and Exchange Commission, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.
 
 Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.
 
 Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
 
 23
 
 Overview
 
 Business Review
 
 We are engaged in pharmaceutical distribution, retail pharmacy and manufacture of pharmaceuticals  through our three subsidiaries Liuzhou BCT, Hefeng Pharmaceutical, and BCT Retail, each of which is located in Guangxi Province, China.
 
 We have integrated operations in the following three business segments.
 
 Pharmaceutical distribution segment:
 
 We provide a comprehensive offering of pharmaceutical and healthcare products, including branded and generic prescription medicines, over-the counter medicines, Western and Chinese medicines, as well as personal care products and medical supplies, Chinese herbs, and medical instruments from manufacturers and suppliers through distribution to its customers, including hospitals, retail drug stores, other pharmaceutical wholesalers, clinics, medical centers, and individuals located mainly in Guangxi Province except for the other pharmaceutical wholesalers. Over 8,000 products are distributed in compliance with China’s regulations over the pharmaceutical industry.  For the 3 months ended March 31, 2010, our pharmaceutical distribution segment accounted for approximately 68.2% of our total revenue after elimination of inter-segment sales.
 
 Revenue derived from Chinese herbal medicine, family planning products, medical instruments, injection drugs and other packaged medicine drugs constituted 1.02%, 0.10%, 0.70%, 36.47% and 54.00% of our pharmaceutical distribution segment’s total revenue in three months ended March 31, 2010, respectively.  The terms of our distribution agreements vary between suppliers and vary in terms of payment period, arrangement of delivery, pricing and quality requirements.  The general payment period terms vary from advance deposit, to cash on delivery, and to payment up to 90 days from the date of delivery, and the payment can be settled by means of bank collection, remittance, bills payable, postal check.
 
 Retail pharmacy segment:
 
 BCT Retail operates a large regional pharmacy retail network in Guangxi province, consisting as of March 31, 2009 of 96 directly owned retail stores in Guangxi province under the registered name “Baicaotang 百草堂.” Our retail stores provide high-quality convenient and professional pharmaceutical services, and supply a wide variety of medicines for selling prescription medicines, over-the-counter medicines, Chinese herbal medicine, roughly processed Chinese herbal medicine, family planning products, and other pharmaceutical products and healthcare products. Revenue from the retail pharmacy segment is generated by cash sales or medi-card reimbursement from the national insurance scheme.There is no difference in the sales price of our products in our medi-care qualified stores between cash and medi-card payment.  No co-payment is collected with respect to payments by medi-card. For the three months ended March 31, 2010, our retail pharmacy segment accounted for approximately 26.1% of our total revenue after elimination of the inter-segment sales.
 
 The following table sets forth the accounts receivables from the National Program for our retail pharmacy segment as of March 31,  2010:
 
 As of March 31,2010‘000



2009PayorNational Program

$
220



-
 
 Our billing system does not currently have the capacity to generate an aging schedule for all of our receivables. Nevertheless, we are able to create aging schedules by reference to data from our accounting system. The payment from the National Program is made on a lump sum basis after the invoices are approved.  At the end of each month, we reconcile our records with those of the National Program and send invoices to it for reimbursement.  Once amounts are confirmed by the National Program, such amounts due for the current month are available for reimbursement.  No allowance for bad debts has been made as medi-card reimbursement under the national insurance program is assured.
  24
 
 Manufacturing segment:
 
 On December 31, 2007, in order to diversify its business activities, Liuzhou BCT entered into an agreement with Li Jing Hua to acquire 100% of Hefeng Pharmaceutical at a consideration of RMB36,340,064 (equivalent to $4,982,223) which was satisfied by issuance of 13.44% of the registered capital of Liuzhou BCT.  The acquisition was completed on January 2, 2008.  Located in Donglan District, Guangxi province and built on approximately 40,000 square meters of land which we own the use rights, Hefeng Pharmaceutical has four product processing units: (1) Chinese herbal medicine abstraction unit for raw material and medicine paste with 670 tons of annual abstraction capacity; (2) granular formulation unit with an annual production capacity of 0.25 billion packages; (3) pill formulation unit with annual production capacity of 0.36 billion pills, and (4) liquid formulation unit with an annual production capacity of 0.1 billion injections. We manufacture and sell both the generic and clinic drugs all over the China.  For the three months ended March 31, 2010, our manufacturing segment accounted for approximately 5.6% of our total revenue after elimination of the inter-segment sales.
 
 Growth Strategy
 
 Distribution segment
 
 We pursue a stable and organic growth strategy for our distribution business segment. One component of this strategy is to participate in the centralized tendering process conducted under the New Rural Cooperative Health Insurance Plan.  This Program provides for centralized tenders for supplying drugs to hospitals and medical centers in counties, but outside cities which are tendered separately. In this tender, we won distribution rights in six counties and townships, which entitled us to distribute drugs to all the rural hospitals and medical centers in each county. We began supplying these institutions in August, 2009. The distribution rights granted in each tender extend until the next tender.  The upcoming 2010 tender is the second tender in this program. We will continue to bid aggressively in these tenders for rural hospitals and medical centers.
 
 Retail Segment
 
 We pursue a fast expansion strategy for our retail segment by merger and acquisition activities. We believe now is a good time to consolidate the retail market and leverage our strong brand name to rapidly acquire market share in this market.  We currently plan to selectively acquire drugstore chains or independently operated drugstores that complement our existing store network or help us to establish a presence in new markets. In particular, we plan to grow through first acquiring similar businesses in the rural areas and the cities in Guangxi province and then acquiring business targets outside of the Guangxi province. We target retail chains or individual stores in prime locations and with good brand names, well-developed facilities and customer bases that are complementary to ours, and which are commercially attractive. We believe that our relationship with many industry participants and our knowledge of, and operational expertise in, the drugstore market in China will assist us in making acquisitions. We also believe that we can rapidly and successfully integrate newly acquired stores into our current distribution network and quickly realize operating and financial benefits.
 
 We intend to expend a total of RMB 174 million, or approximately $25.5 million for the opening of 360 additional chain stores in 2010 and 2011 including an extra 160 stores in 2010 strategically located across rural areas in Guangxi province to build up an extensive rural retail network in order to enjoy explosive demands created by implement of the policy of New Rural Corporative Health Insurance Plan. In March 2010, we successfully acquired 30 stores in Luzhou area, and we believe this is a good start to achieve our ambitious expansion strategy set for 2010.  In order to satisfy and fully implement our growth strategy, we will need to raise money, through equity or debt financing, either in a private placement or a public offering.  However, there are no assurances that such financing will be available or available on terms acceptable to us.  To the extent that we require additional financing in the future and are unable to obtain such additional financing, we may not be able to fully implement our growth strategy.
 
 Manufacturing Segment
 
 We pursue an organic growth strategy for our manufacturing business segment. We have employed more working capital on developing new client accounts to expand further our sales network. Benefiting from China’s healthcare reform, hospitals’ drug usage has increase dramatically. We will also take this opportunity to further reinforce our sales and marketing.
  25
 
 Affect of Price Controls on Our Operating Results
 A number of our pharmaceutical products, primarily those included in the national and provincial medical insurance catalogs, are subject to price controls in the form of fixed retail prices or retail price ceiling controls administered by the Price Control Office under the National Development and Reform Commission, or the NDRC, and provincial price control authorities. Approximately 60% to 70% of our total retail sales are subject to these price controls.  The retail prices of these products are also subject to periodic downward adjustments as the PRC governmental authorities seek to make pharmaceutical products more affordable to the general public.  Any future price controls or government mandated price reductions may cause potential variability of our earnings and cash flows.
 
 RESULTS OF OPERATIONS
 
 The following table sets forth the key components of our results of operations for the periods indicated .
 
 Three months ended March 312010


2009‘000


% of total sales



‘000


% of total salesSales revenue

$
34,029





$
32,342Cost of sales


25,167



74.0



23,494



72.7Gross profit


8,862



26.0



8,848



27.3Operating expensesAdministrative expenses


1,642



4.8



996



3.1Selling expenses


1,027



3.0



858



2.72,669



7.8



1,854



5.7Income from operations


6,193



18.2



6,994



21.6Interest income


51



0.1



-



-Other income


98



0.3



-



-Change in fair value of warrants-liabilities


(289
)


0.8



-



-Other expenses


(39
)


0.1



(3
)Finance costs


(264
)


0.8



(296
)


0.9Income before income taxes


5,750



16.9



6,695



20.7Income taxes


(1,506
)


4.4



(1,688
)


5.2Net income

$
4,244



12.5


$
5,007



15.5Other comprehensive incomeForeign currency translation adjustments


25



-



(37
)


-Total comprehensive income

$
4,269



12.6


$
4,970



15.4
 
 The table below sets forth a breakdown of our external segment revenue after elimination of inter-segment sales, and each segment revenue item as a percentage of our total revenue, as well as our inter-segment sales for the three months ended March 31, 2010 and March 31, 2009.  For the 3 months ended March 31, 2010, we had approximately $6.6 million of inter-segment revenue, which includes approximately $6.4 million in sales from our pharmaceutical distribution segment to our retail pharmacy segment, and approximately $0.2 million in sales from our manufacturing segment to our distribution pharmacy segment. External segment revenue refers to segment revenue after inter-segment elimination.
  26
 
 March 312010


2009External Segment revenue


‘000


%



‘000


%Pharmaceutical distribution

$
23,219



68.2


$
23,466



72.6Retail pharmacy


8,902



26.1



6,887



21.3Manufacturing pharmacy


1,907



5.7



1,989



6.1$
34,028



100.0


$
32,342



100.0Inter-segment revenue

$
6,649



N/A


$
5,616



N/A
 
 Sales Revenue.
 
 During the three months ended March 31, 2010, we had sales revenue of $34.0 million, as compared to sales revenue of $32.3 million during the three months ended March 31, 2009, an increase of $1.7 million or approximately 5.2%. This increase was mainly attributable to an increase in sales revenue of $2.0 million from our retail segments during the period
 
 Pharmaceutical distribution segment
 
 We derive the majority of our revenue from our pharmaceutical distribution segment from sales of pharmaceutical products to our customers. We distribute a comprehensive offering of pharmaceutical and health care products, including branded and generic prescription medicines, over-the-counter medicines, Western and TCM medicines, as well as personal care products and medical supplies.
 
 The following table sets forth revenue from our pharmaceutical distribution operations by category of customers:
 
 2010



2009Three monthsended March 31,‘000


% of Sales



‘000


% of SalesHospitals

$
18,407



79.3


$
14,750



62.9Other drug stores


151



0.6



60



0.3Clinics and health care centre


977



4.2



1,261



5.4Distributors and others


3,684



15.9



7,395



31.4Total

$
23,219



100.0


$
23,466



100.0
 
 Revenue from our pharmaceutical distribution segment decreased slightly by 1.3% from $23.5 million for the three months ended March 31, 2009 to $23.2 million for the three months ended March 31, 2010. The slightly decrease in sales revenue from our pharmaceutical distribution segment was attributed primarily to the decrease of $3.7 million in sales to distributors as a result of more of our resources being allocated for the development of hospital customers. In addition, the 2011 centralized tendering season started in the first quarter of 2010.  In order to be competitive in the bidding process, we shortened our trade payable period, gave better credit terms to our hospital clients and increased the number of products available through our distribution network.  As a result there was an increased demand for cash from our operating activities during the first quarter of 2010.  In order to maintain our cash from operating activities, we postponed the payment of VAT tax by deferring some of our sales in the amount of $1.5 million to the second quarter of 2010.  We delayed such sales by holding the goods without dispatching them from our warehouse pending the beginning of next month.  Other than this instance, we have not undertaken any other deferral of sales in the past.
 
 Retail pharmacy segment.
 
 Revenue from our retail pharmacy segment increased by 29.0% from $6.9 million for the three months ended March 31, 2009 to $8.9 million for the three months ended March 31, 2010. The increase in revenue resulted from the increase in sales volume by $1.9 million and the general increase in our prices by approximately $0.03 million. The slight increase in our retail prices was the result of the adjustment of our selling prices in accordance with the increased cost of merchandise. The increase in sales volume was partly contributed by the sales derived through medi-care insurance cards as a result of an increase in the portion of pharmacy products entitled to be reimbursed by the PRC government, as well as an increase in the number of people covered by insurance. Further, in the first quarter of 2010 we held increased marketing campaigns with our vendors to boost sales. In addition, revenues derived from six stores which opened in the second half of 2009 also contributed to the growth of the sales.
  27
 
 The following table sets forth revenue from our retail pharmacy segment by existing stores and new opened during each period.
 
 2010



2009Three monthsended March 31,‘000



‘000Existing stores

$
8,332


$
6,887New stores


570



0Total

$
8,902


$
6,887No of stores


66



61
 
 Manufacturing segment
 
 Revenue from our manufacturing segment decreased by 5% from $2.0 million for the three months ended March 31, 2009 to $1.9 million for the three months ended March 31, 2010. The reduction was mainly due to the shift of partial sales through our Pharmaceutical distribution network.  For the three months ended March 31, 2010, $0.2 million of inter-segment sales was derived from our manufacturing segment selling to our distribution segment., which did not occur during the same period of 2009.
 
 Cost of Sales. Cost of Sales was $25.2 million for the three months ended March 31, 2010 as compared to $23.5 million for the three months ended March 31, 2010. Our cost of sales consist of the cost of merchandise and raw materials and other costs. Other costs include direct labor, depreciation and other costs. The increase was primarily due to an increase in the costs of purchasing merchandise following the increase in our revenue.
 
 Gross Profit.
 
 Gross profit was $8.9 million for the three months ended March 31, 2010 as compared to $8.8 million for the three months ended March 31, 2009, representing an increase of $0.1 million or approximately 0.2%.  Our gross profit margin was 26.0% and 27.4% for the three months ended March 31, 2010 and March 31, 2009 respectively. The gross profit margin was relatively stable in which we maintain the margin between our cost of purchasing pharmaceutical products from our suppliers and our prices of pharmaceutical products sold to our hospital, pharmaceutical distributor and other customers. For hospital customers, we establish a pricing range aligned with our suppliers through the PRC Government-mandated collective tender process. For other pharmaceutical product distributors, we arrange three party negotiations with distributors and suppliers. The slight decrease in profit margin was mainly attributed to the reduction of gross profit margin from our distribution segment.
 
 Pharmaceutical distribution segment
 
 The respective gross profit margin for our pharmaceutical distribution segment was approximately 20.8% and 22.5% for the three months ended March 31, 2010 and 2009, respectively. The cost of sales includes only the cost of merchandise.  In order to penetrate and capture the growth of the medical insurance scheme, we attempted to satisfy the demand of hospital customers by both the high profit margin and low profit margin products. Further, we did procure from other eligible supplier within the medicine catalogue but at lower margins because of pre-determined/set pricing under the medicine catalogue. This resulted in slight decrease in the gross profit margin for the three months ended March 31, 2010 compared to the same period in 2009.
  28
 
 Retail pharmacy segment
 
 The respective gross margin for our retail pharmacy segment was approximately 31.5% and 34.2% for the three months ended March 31, 2010 and 2009, respectively. The cost of sales includes only the cost of merchandise, and we adjust the retail price in accordance with the cost of merchandise.  The decrease in gross profit margin was primarily attributed to the reduction in prices in connection with our marketing sales campaign during the three months ended March 31, 2010.
 
 Manufacturing segment
 
 The respective gross profit margin for our manufacturing segment was approximately 64.1% and 61.0% for the three months ended March 31, 2010 and 2009, respectively.  The change was not related to the change in the cost of overhead.  We believe this increase was due to management focus on optimizing our product portfolio to higher margin products
 
 Selling, Research and Development and Administrative Expenses - Combined
 
 Selling, research and development and administrative expenses totaled $2.7 million for the three months ended March 31, 2010, as compared to $1.9 million for the three months ended March 31, 2009, representing an increase of $0.8 million or approximately 42.1%. The increase was attributed to the increase of administrative expenses and selling expenses by $0.6 million and $0.2 million respectively.
 
 Selling Expenses
 
 Selling expenses increased by 19.6% from $0.9 million for the three months ended March 31, 2009 to $1.0 million for the three months ended March 31, 2010. The increase was primarily due to the increase in our marketing staff’s wages and salaries, payment for staff welfare in connection with our increased sales and marketing activities. The percentage of our distribution and selling expenses to our total revenue gradually increased from 2.7% to 3.0% and was primarily due to the increase of our efforts to penetrate and capture market share and the development of our acquisition strategy.
 
 Pharmaceutical distribution segment
 The selling expenses of our pharmaceutical distribution segment increased by 27.1% from $0.48 million for the three months ended March 31, 2009 to $0.61 million for the three months ended March 31, 2010. The increase was primarily due to the increase in our marketing staff’s wages and salaries, and payment for staff welfare in connection with our marketing activities by $0.2 million
  Retail pharmacy segment
  The selling expenses of our retail pharmaceutical distribution segment increased by 8.3% from $0.36 million for the three months ended March 31, 2009 to $0.39 million for the three months ended March 31, 2010. The increase was primarily due to the increase in our salaries of retail staff by $0.08 million in connection with our increased sales and offset by the reduction in repairs of our stores which took place for the period ended March 31, 2009.
  Manufacturing segment
  The selling expenses of our retail pharmaceutical distribution segment was relatively stable and the respective amount of expenses was $0.02 million both  for the period ended March 31, 2009 and 2010.
 
 Administrative expenses
 
 Administrative expenses increased by 64.9% from $1.0 million for the three months ended March 31, 2009 to $1.6 million for the three months ended March 31, 2010. The increase in administrative expenses for the three months  ended March 31, 2010 was primarily due to an increase in staff cost inclusive of wages and salaries and staff benefits, and the rental expenditures resulted from the renewal of lease and the opening of new stores. Further, there was increase in the incurrence of fees in connection with the compliance of being a public company. The percentage of our administrative expenses to our total revenue increased slightly from 3.1% in 2009 to 4.8% in 2010.
 
 29
  Pharmaceutical distribution segment
 
 The administrative expenses of our pharmaceutical distribution segment increased by 28.9% from $0.76 million for the three months ended March 31, 2009 to $0.98 million for the three months ended March 31, 2010. The increase was primarily due to the increase in staff cost inclusive of wages and salaries and staff benefit by $0.16 million. In addition, there is general increase in consultancy fee, office expenses, depreciation
 
 Retail pharmacy segment
 
 The administrative expenses of our retail pharmaceutical distribution segment increased by 237.5.% from $0.08 million for the three months ended March 31, 2009 to $0.27 million for the three months ended March 31, 2010. The increase was primarily attributable to the increase of our staff welfare to staff by $0.16 million. In addition, the increase was contributed by the increase of rental charges by $0.03 million upon the opening of new stores and the renewal of lease agreements.
 
 Manufacturing segment
 
 The administrative expenses of our manufacturing segment increased by 17.0.% from $0.16 million for the three months ended March 31, 2009 to $0.17 million for the three months ended March 31, 2010. The increase was primarily attributable to the increase of depreciation upon the increase of acquisition of the plant and equipment by $0.2 million and offset by the reduction in office expenses.
 
 Research and development
 We only incur the expenditures on research and development for our manufacturing segment. In prior years, most expenditure was spent in connection with the initial phase of research and the feasibility of development, however, we did not have any expenditures for research and development during the three months ended March 31, 2010 or the three months ended March 31, 2009.
 
 Change in fair value of warrants
 
 For the three months ended March 31, 2010, we incurred a non-cash charge of $0.3 million unrelated to the our operations which resulted from the change in fair value of warrants issued to investor in conjunction with the Company’s issuance of warrants in December 2009 and February 2010 pursuant to provisions of FAB ASC Topic 85, “Derivative and Hedging”   The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders.
 
 Income before income tax
 
 As a result of the foregoing, our income before income tax decreased by 13.4% to $5.8 million for the three months ended march 31, 2010 compared to was $6.7 million for the same period in 2009.  Despite the increase in our sales, the reduction in income before income tax was mainly attributed to:
 
 ·
improved cash management;
 
 ·
a decrease in our wholesale pharmacy segment’s gross profit margin to 17% for the first quarter of 2010 from 18.5% in the first quarter of 2009.  This decrease was caused by our expansion of our product portfolio sold to hospitals in order to stimulate sales;
 
 ·
an increase in our staff costs related to  expanding our business;
 
 ·
costs associated with soliciting acquisition targets;
 
 ·
an increase in costs related to being a public company; and
 
 ·
charges related to the changes in fair value of warrants.
 
 30
 
 Pharmaceutical distribution segment
 
 Our income before income tax from distribution operations decreased by 12.5% from $4.0 million for the three months ended March 31, 2009, to $3.5 million for the three months ended March 31, 2010. The profit margin decreased to 14.7% from 17.4%
 
 Retail pharmacy segment
 
 Our income before income tax from retail pharmacy segment operations increased by 12.5% from $1.6 million for the three months ended March 31, 2009, to $1.8 million for the three months ended March 31, 2010. The profit margin decreased to 21.0% from 23.8%.
 
 Manufacturing segment
 
 Our income before income tax from manufacturing segment operations remained the same in the amount of $1.0 million for the three months ended March 31, 2010 and 2009 respectively. The profit margin was increased to 52.9% from 49.8%
 
 Net Income.
 
 As a result of the above factors, we had net income of $4.2 million for the three months ended March 31, 2010 as compared to $5.0 million for the three months ended March 31, 2009, representing a decrease of $0.8 million or approximately 16%.  For the three months ended March 31, 2009 our net income was impacted by a non-cash charge of $0.3 million unrelated to our operations.  Excluding this $0.3 million non-cash charge, our net income for the three months ended March 31, 2010 would have been $4.5 million, representing a decrease of 10% from the same period in 2009.
 
 Earning per share
 
 For the three months ended March 31, 2010, our earnings per share were $0.11, representing a decrease of 31.3%, compared the same period in 2009.
 
 Liquidity and Capital Resources
 
 Our principal source of funds are cash generated from operations and various short-term and long-term bank loan borrowings and certain credit facilities inclusive of bills payable, as well as cash contributions from certain directors and related companies.  Our primary liquidity requirements are to finance working capital, to fund the payment of interest and principal due on indebtedness and to finance acquisitions or organic growth to expand our facilities and operations. As of March 31, 2010, $6.6 million of our indebtedness was due within one year and $3.6 million was due within longer than one year.  During the period ended 2010 we did not experience any difficulties in renewing our bank loans with our lenders.
 
 Restricted cash and cash equivalents.
 
 Our restricted cash consists of collateral we provide for bills payable.  As of March 31, 2010 and December 31, 2009, our restricted cash was approximately $0.8 million and $1.2 million, respectively.  As of March 31, 2010 and December 31, 2009 we had cash of $13.0 million and $13.3 million, respectively, exclusive of restricted cash.
  31
 
 We believe that our existing sources of liquidity, along with cash expected to be generated from services will be sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements for at least the next twelve months. We will continue to monitor our expenditures and cash flow position.
 
 2010



2009For the three monthsEnded March 31,‘000



‘000Net cash provided by/(used in) operating activities

$
3,909


$
(4,059
)Net cash (used in)/provided by investing activities


(1,774
)


3,658Net cash (used in)/provided by financing activities


(2,430
)


3,350Foreign currency translation


24



(3
)Net increase (decrease) in cash and equivalents


(271
)


2,946Cash and cash equivalents, beginning of period


13,304



1,265Cash and cash equivalents, end of period


13,033



4,211
 
 Operating Activities
 
 We primarily derive our cash flow from operating activities from the sale of our products and services in our three segments.  Our cash used in operating activities is primarily from the purchase of raw materials and products, distribution and selling expenses and general administrative expenses and taxes.  Cash flows from our operations can be significantly affected by factors such as the timing of payment of accounts receivables and the payment of our accounts payables to suppliers.
 
 Cash from operating activities is primarily affected by our pharmaceutical distribution segment, which has a high demand on working capital while the retail pharmacy segment generates primarily cash and a minority of accounts receivable pending reimbursements for medi-card payments. Because our manufacturing segment accounted for only 5.6% of our revenues in 2010, it does not have a significant impact on cash from operating activities.
 
 Cash provided by operating activities was $3.9 million for the three months ended March 31, 2010 compared to negative $4.0 million used in operating activities for fiscal 2009, representing an increase of $7.9 million. Operating cash flows for 2010 reflects primarily net cash receipts derived from business operations. For the three months ended March 31, 2009 the cash used in operating activities was mainly attributed to the slowdown of accounts receivable payment, which increased to 94 days for the three months ended March 31, 2010 as compared to 70 days for the three months ended March 31, 2009.  The increase in turnover days was attributable to an increase in the portion of our sales to hospital under our pharmaceutical distribution operation segment when the business to hospital started to grow rapidly. For the three months ended March 31, 2010, the growth became stable and the extent of affect is lesser and resulted in an substantial increase in cash provided by operating activities.
 
 For our  pharmacy distribution segment, accounts receivable turnover days for the three months ended March 31, 2010 were 124 as compared to 84 in 2009.  The increase was due to the increase in the portion of our sales to hospitals from 62.9% for the three months ended March 31, 2010 to 79.3% for the three months ended March 31, 2009 Hospitals have comparatively longer payment cycles. Many hospitals have undertaken construction and expansion work which  has resulted in the slow down of their payments.  However, in the PRC, all hospitals are owned or controlled by the PRC government.  We believe that it is highly unlikely that a liquidation of one of our hospital customers will occur, and that the recovery of accounts receivable from hospitals is highly secure.  Therefore, it is our customary practice to grant a longer credit period.  There have been no instances of write-offs of any receivables owed by a hospital.
 
 For our retail segment, accounts receivable turnover days for the three months ended March 31, 2010 were 3 days as compared to 6 days in 2009.  We generally receive cash from the customer at our retail store except for our medi-care qualified stores.  The accounts receivable comprised only the medi-card reimbursement under the national program.  The increase in sales was mainly derived by the increase in the number of stores opened since the three months ended March 31, 2009, although not all the newly opened stores were medi-care qualified stores.  Thus, the increase in the number of medi-care qualified stores is not in line with the increase in the number of stores.  This resulted in the reduction in accounts receivable turnover days between the periods.
  32
  For our manufacturing segment, the accounts receivable turnover days for the three months ended March 31, 2010 were 155as compared to 118in 2009.  The increase was due to the extension of credit to our customers based on the payment history of the customers.
 
 Investing Activities
 
 Our cash flow from investing activities primarily consists of purchases of property, plant and equipment and disposal of leasehold land. Cash used in investing activities was $1.8 million for the three months of 2010, compared to $3.7 million of cash provided by investing activities for the same period in 2009, representing an increase of $2.2 million. The increase in cash used was primarily due to the deposit paid for the acquisition of the chain stores and was partly offset by the proceeds from the disposal of land. Further, the reduction in repayment from related companies also contributed to the increase in cash used in investing activities.
 
 Financing Activities
 
 Our cash from financing activities is derived primarily from the proceeds and from repayment of bank borrowings and dividends paid to former shareholders of the company. Cash used in financing activities was $2.4 million for the three months ending March 31, 2010, compared to $3.4 million provided by financing activities for the same period in 2009 represent an increase of cash used in financing activities by $1.0 million. The substantial increase was primarily due to the increase in net repayment of loans to bank, related and other parties. The increase was offset partially by the proceeds of a private placement of common stock and warrants amounting to $2.3 million in February 2010.
 
 Working capital
 
 Our working capital as of March 31, 2010 and December 31, 2009 was $35 million and $29.6 million respectively.  Our working capital is critical to our financial performance.  We must maintain sufficient liquidity and financial flexibility to continue our daily operations.  Our sales practices with hospitals in our pharmaceutical distribution segment , which have a longer term of repayment when compared with other customers and the increase in the proportion of our sales to hospitals have resulted in a significant demand for working capital.
 
 The following table sets forth account s receivable from our pharmaceutical distribution operations by category of customers:
 As of March 31,
As of December 31,2010


2009


2008'000



‘000



‘000Hospitals


24,763



27,445



11,171Other drug stores


31



15



29Clinics and health care centre


481



189



148Distributors and others


6,445



4,474



7,287Total

$
31,720


$
32,123


$
18,
 
 We intend to expend a total of RMB 174 million, or approximately $25.5 million for the opening of 360 additional chain stores (including the stores already acquired this year) in 2010 and 2011.  In order to satisfy and fully implement our growth strategies, we will need to raise capital, through equity or debt financing, either in a private placement or a public offering.  However, there are no assurances that such financing will be available or available on terms acceptable to us.  To the extent that we require additional financing in the future and are unable to obtain such additional financing, we may not be able to fully implement our growth strategies.
  33
 
 Borrowings and Credit Facilities
 
 The short-term bank borrowings outstanding as of March 31, 2010 were $6.6 million while long term bank borrowings outstanding as of March 31, 2010 were $3.7 million. The loans are from various financial institutions and represent the maximum amount of each facility. The loans bore an average interest rate of 7.11% and 7.14% per annum, for these two periods respectively, and it was adjusted from quarterly to annually in accordance with the loan rate of the People’s Bank of China. These loans do not contain any financial covenants or restrictions. The loans were secured by the land use right, property plant and equipment of the Company and the properties from related-parties.
 
 The short-term borrowings have one year terms and expire at various times throughout the year. These facilities contain no specific renewal terms.
 
 The long-term borrowings have three to seven years terms. Part of the borrowings will be expired in various time in one year’s time and part of the borrowings was repayable by monthly installments within the five years time before the expired period.
 
 These loans do not contain any financial covenants or restrictions. The loans are secured by the land use rights, property, plant and equipment of the Company and the properties from related-parties.
 
 In addition to bank borrowings mentioned above, we have trade credit facilities in the amount of $0.8 million as at March 31, 2010 and $0.7 million was utilized as at March 31, 2010.  The facilities are secured by land use rights, property and equipment of the Company.
 
 Critical Accounting Estimates
 
 This section should be read together with the Summary of Significant Accounting Policies included as Notes to the consolidated financial statements included in our financial statements.  Our consolidated financial information has been prepared in accordance with generally accepted accounting principles in the United States, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
  When reviewing our financial statements, you should consider (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.
 
 Goodwill
 
 We account for goodwill in accordance with the provisions of FASB ASC 805, “Goodwill and Intangible Assets” (“ASC 805”). We perform an impairment analysis on an annual basis and, in addition, if we notice any indication of impairment, we conduct that test immediately. The application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units and the determination of the fair value of each reporting unit. Fair value is primarily determined by computing the future discounted cash flows expected to be generated by the reporting unit that are believed to be reasonable under current and forecasted circumstances, the results of which form the basis for making judgments about carrying values of the reported net assets of our reporting units. We conducted an impairment test as of March 31, 2010 and no impairment loss was identified.
 
 34
  Long-lived assets
 
 Long-lived assets are tested for impairment in accordance with ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets” (previously SFAS No. 144).  We periodically evaluate potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  The application of the impairment test requires judgment inclusive of the future cash flow attributable from the use of the asset. If the asset is determined not to be recoverable, it is considered to be impaired and the impairment to be recognized.
 
 Depreciation
 
 Property, plant and equipment is depreciated on a straight-line basis over their estimated useful lives.  We determine the estimated useful lives, residual values and related depreciation charges for our property, plant and equipment.  This estimate is based on the historical experience of the actual useful lives and residual values of property, plant and equipment of similar nature and functions. We will revise the depreciation charge where useful lives and residual values are different from those previously estimated, or we will write-off or write-down technically obsolete or non-strategic assets that have been abandoned or sold.
 
 Allowances for doubtful accounts
 
 We establish a general provisioning policy to make the allowance equivalent to 40% of gross amount of accounts receivable due from six months to one year and 100% of gross amount of accounts receivable due over one year.  Additional specific provisions are made against accounts receivable whenever they are considered to be uncollectible. We make judgments over the customer’s ability to pay their outstanding invoices on a timely basis and whether their financial position might deteriorate significantly in the future affecting their capability for repayments.
 
 Allowances for inventories
 
 In assessing the ultimate realization of inventories, we make judgments as to future demand requirements compared to current or committed inventory levels.  We estimate the demand requirements based on market conditions, forecasts over the demand by its customers, sales contracts and orders in hand.  As of March 31, 2010, 1.83% of our inventory will expire within 7 to 9 months time, 8.53% will expire within 10 to 12 months time, 89.10% of inventory will expire in over 1 year. We would estimate the extent of provision made should the inventory fall within 6 months before the expiration upon assessing the capability of selling campaign and the possible return of drugs to the vendors.  As for the drugs which will expire in over half a year’s time, we judge that  the drugs is still marketable and would estimate the provision upon the future demand and the current inventory level.
 
 Recognition of revenue
 
 Revenue is recognized  when the following criteria under Financial Accounting Standards Board(“FASB”) Accounting Standards Codification (“ASC”) 605 “Revenue Recognition” should be met :
 
 1)
Persuasive evidence of an arrangement exists;
 
 2)
Delivery has occurred or services have been rendered;
 
 3)
The seller’s price to the buyer is fixed or determinable; and
 
 4)
Collectability is reasonably assured.
 
 The Group base its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.
 
 Sales of goods  - Pharmaceutical distribution segment
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 We sell a range of pharmaceutical products to various customers and the majority of revenue results from the contracts signed with various distributors and government-owned hospitals.  Sales of goods are recognized upon customers’ acceptance when the goods have been delivered to the premises of customers and the customers have full discretion over the goods and the significant risks and rewards of ownership have been transferred to the customers. Currently, we do not have any sales on consignment and we do not use consignment sales as our sales method.  The price to the buyer is fixed and no cancellation clause exists and there is no right of return except in rare cases where those pharmaceutical goods are damaged during the delivery process.  In the absence of the right of return clause, we estimate that the product return was insignificant other than for returns because of damage arising from delivery. We are not obligated to accept the return should the inventory kept by the customers be excessive or expire without being sold by them.  We do accept return of inventory damaged during delivery. We grant credit to customers with proven payment records. Collectability is assessed by background checks for new customers.
 
 Sales of goods – Retail Pharmacy segment
 
 We operate a chain of retail stores for selling the pharmacy products. Sales of goods are recognized upon customer acceptance when we sell and deliver the products to the individual customers at our stores. We estimate that no significant post-delivery obligations exist.  Retail sales are in cash or medi-insurance card, in which the reimbursement is assured as it is run by the government. No return is allowed after sales.
 
 Sales of goods -  Manufacturing segment
 
 The revenue recognition criteria used with our manufacturing segment are the same as the operation under our pharmaceutical distribution segment except that the only customers are distributors.
 
 During the period ended March 31, 2010, $166,463 worth of goods were returned as a result of damage. We have not sold goods to customers as a result of incentives. We do not grant sales discount or any allowances to customers if they don’t re-sell their goods before the date of expiration. No return of goods is allowed except that the goods are damaged during the delivery process. As the return of goods are not allowed, we only assess and estimate the return solely arising from the damage during the delivery process and the estimate of return is negligible. Thus, we do not assess any return derived from the levels of inventory in the distribution channel, estimated shelf life, and the introduction of new products as the factors are not relevant to us for the estimate of return.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
 Not applicable.
 
 Item 4T. Controls and Procedures.
 
 Based on an evaluation of our disclosure controls and procedures as of March 31, 2010 covered by this report (and the financial statements contained in the report), our chief executive officer and chief financial officer have determined that our current disclosure controls and procedures were not effective.  On December 30, 2009, as a result of the completion of a share exchange agreement between the Company and the shareholder of Ingenious, we acquired operating subsidiaries in the PRC.  Because these operating subsidiaries did not have financial controls and procedures appropriate for subsidiaries of a public company, the Company has began the process of incorporating the operations acquired into its financial systems and upgrading its financial controls and procedures.  The Company has recently engaged Ernst & Young (China) Advisory Limited to work with us to identify the key internal control problems and provide recommendations over the control procedures.  We also rely extensively on external consultants including our attorneys, to review and edit the annual and quarterly filings and to ensure compliance with SEC disclosure requirements, and a valuation specialist with respect to valuation issues.
  36
 
 PART II—OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 
 None.
 
 Item 1A. Risk Factors.
 
 Investing in our common stock involves a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described in our Annual Report on Form 10-K for the fiscal year ended December 31,2009 (the “2009 Form 10-K”), under the caption “Risk Factors,” our Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 2 of Part I of this Quarterly Report on Form 10-Q, our consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes, as well as our Management’s Discussion and Analysis of Financial Condition and Results of Operations and the other information in our 2009 Form 10-K. Readers should carefully review those risks, as well as additional risks described in other documents we file from time to time with the Securities and Exchange Commission.
 
 Item 2. Unregistered shares of Equity Securities and Use of Proceeds
 
 On February 1, 2010, we completed the second closing of a private placement “the Private Placement” which had a first closing on December 30, 2009, pursuant to which we issued and sold of units, consisting of an aggregate of 1,029,970 shares of Common Stock and Investor Warrants to purchase up to 514,933 shares of common stock at a price per share of $3.81 for gross proceeds in the amount of approximately $2,616,108. The issuance of these securities was exempt from registration pursuant to Section 4(2) of, and Regulation D promulgated under the Securities Act. We made this determination based on the representations of the Investors which included, in pertinent part, that such Investors were) “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, and that such Investors were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that the Investors  understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
 
 In connection with the closing of the Private Placement, the Co-Placement Agents received a cash fee equal to 10% of the gross proceeds of the Private Placement plus non-accountable allowance equal to 3% of the gross proceeds, and Agent Warrants to purchase 351,934 shares of our common stock at a price per share of $3.05. The issuance of the Agent Warrants was exempt from registration pursuant to Section 4(2) of the Securities Act.  Such securities qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuance of the securities us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered.  We did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, Co-Placement Agent had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the 1933 Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.”
 
 Item 3. Defaults Upon Senior Securities.
 
 None.
 
 Item 4. (Reserved and Removed)
 
 None.
 
 Item 5. Other Information.
 
 None.
 
 Item 6. Exhibits.
 
 Exhibit No.
Description31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
  37
  SIGNATURES
 
 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 China BCT Pharmacy Group, Inc.Dated: March 9, 2011
By:
/s/ Hui Tian TangHui Tian TangChief Executive Officer and Chairman(principal executive officer)Dated: March 9, 2011
By:
/s/ Xiaoyan ZhangXiaoyan ZhangChief Financial Officer(principal financial and accounting officer)
  38