UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




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




For the
quarterly period 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:   Yesx    Noo




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 Rule
12b-2 of the Exchange Act).  Yeso Nox




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







Part
      I -- Financial Information
              1Item
      1.  Financial Statements
              1Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              22Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
              31Item
      4T.  Controls and Procedures
              31Part
      II – Other Information
              32Item
      1.  Legal Proceedings
              32Item
      1A.  Risk Factors
              32Item
      2.  Unregistered shares of Equity Securities and Use of
      Proceeds
              32Item
      3.  Defaults Upon Senior Securities
              32Item
      4.  (Reserved and Removed)
              32Item
      5.  Other Information
              33Item
      6.  Exhibits
              33















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.’s
              common
      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.’s
              common 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
Baicaotang Medicine Limited (the “Company”), formerly known as Purden Lake
Resource Corp. which change its name on December 24, 2009, 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 distribution, retail and production of drugs
in the People’s Republic of China (the “PRC”).





Currently
the Company has five subsidiaries:





Company
      name
            
            Place/date
      of
              incorporation
      or
              establishment
            
            The
      Company's
              effective
      ownership
              interest
            
            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




China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





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, Baicaotang Medicine, Baicaotang Retail and
Hefeng.  All significant inter-company accounts and transactions have
been eliminated in consolidation.





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.




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.





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.






8


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)




3.
              Summary
      of significant accounting policies
(cont’d)


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.






9


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)


3.
            Summary
      of significant accounting policies
(cont’d)





Recently issued accounting
pronouncements





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.





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.







10




China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)


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





China
Baicaotang Medicine Limited is subject to the United States of America Tax law
at tax rate of 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 period.





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.





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
rates 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 transit 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.





11


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





5.
            Income
      taxes (cont’d)





PRC
(cont’d)





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
            
            $
            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





During
the three months ended March 31, 2010 and 2009, amortization amounted to $34,514
and $29,024, respectively.






12


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)










9.
            Property,
      plant and equipment, net





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.





13


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





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 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 Company’s directors collectively
inclusive of Tang Hui Tian. These amounts are interest-free, unsecured and
repayable on demand.







14


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)


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-term
              bank
      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





(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 right owned by a related company which is controlled by
      certain of the Company's directors.









15


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





13.
              Secured
      bank loans (Cont'd)


(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.




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.








16


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





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 a gross proceed of $6,322,952 with related issuance expenses of $1,016,290.
In accordance with ASC 815, these warrants are not considered indexed to the
Company’s own stock and should be classified as derivative financial liability
at fair value for each reporting period.  However, the Company
considered that the amount is 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 proceed was not allocated to
First Batch Warrants with whole amount recorded in the Company’s
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 derivative financial liability at fair value for each reporting
period in accordance with ASC 815, the Company considered that the aggregate
fair value of warrants issued as of February 1, 2010 was material to the
financial statements for three months ended March 31,
2010.  Accordingly, 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 proceed 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 recognised 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





17


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





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 payment 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








18




China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





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 a gross
      proceed of $2,616,108 with related issuance expenses of
      $300,970.  In accordance with ASC 815, these warrants are not
      considered indexed to the Company’s own stock and should be classified as
      derivative financial liability at fair value for each reporting period.
      Part of the net proceed amounting to $561,277 was allocated to warrant
      liabilities with remaining balance of $1,753,861 recorded in the Company’s
      equity at initial recognition.








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


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)








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 pharmacy segments
and operating results of the Company and, as such, the Company has determined
that the Company has three operating segments as defined by 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








20


China
BCT Pharmacy Group, Inc.
 (Formerly
named China Baicaotang Medicine Limited)
 Notes
to Condensed Consolidated Financial Statements
 (Unaudited)
 (Stated
in US Dollars)





19.           Segment
information (Cont’d)





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.




21


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.




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 product,
included 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 instrument 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. 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.






22




Retail
pharmacy segment:




BCT
Retail operates a large regional wholesale 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 based upon the type of 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 breakdown of account receivables for our retail
pharmacy segment as of March 31,  2010:





As
      of March 31,2010
      ‘000
            
            
            
            2009PayorNational
      Program
            
            $
            220
            
            
            
            -




Our billing system does not have the capacity to
generate an ageing schedule for our receivables.The payment from the
National Program is made on a lump sum basis after they are
approved.  At the end of each month, we reconcile our records with
those of the National Program.  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 med-card
reimbursement under the national insurance scheme is assured.




Manufacturing
pharmacy segment:




Located
in Donglan District, Guangxi province and built on approximately 40,000 square
meters of land which we own, Hefeng Pharmaceutical has four product processing
units inclusive of Chinese herbal medicine abstraction unit; granular
formulation unit, pill formulation unit and liquid formulation unit. We
manufacture and sell both the generic and clinic drugs all over the
China.  For the three months ended March 31, 2010, our manufacturing
pharmacy 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. 2010
is the second year that a centralized tendering is performed under New Rural
Corporative Health Insurance Plan. As the biggest winner of last year’s
contract, we have been making excessive effort on preparation for this year’s
bid and expect to win more contracts for this year. We believe this newly arisen
business opportunity will increase the total segment revenue from
5%-10%.




Retail
Segment




We pursue
a fast expansion strategy for our retail segment by merger and acquisition
activities. We believe now is high time to consolidate the retail market and
leverage our strong brand name to rapidly acquire market shares in this market.
We plan to acquire and open 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.






23




Manufacturing
Segment




We pursue
an organic growth strategy for our manufacturing business segment. We having
employed more working capital on developing new client accounts to expend
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.




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 pharmacy segment to our distribution pharmacy segment. External
segment revenue refers to segment revenue after inter-segment
elimination.





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
            
            
            
            6.134,028
            
            
            
            100.0
            
            
            
            32,342
            
            
            
            100.0Inter-segment
      revenue
            
            $
            6,649
            
            
            
            N/A
            
            
            $
            5,616
            
            
            
            N/A






24




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:





Three
      months ended March 31,2010
      ‘000
            
            
            %
      of Sales
            
            
            
            2009
      ‘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.  We also deferred some of our sales
to the second quarter of 2010 in order to postpone the payment of VAT
tax.




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 March 31,
2010. The increase 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.




The
following table sets forth revenue from our retail pharmacy segment by existing
stores and new opened during each period.





Three
      months ended March 31,2010
      ‘000
            
            
            
            2009
      ‘000Existing
      stores
            
            $
            8,332
            
            
            $
            6,887New
      stores
            
            
            570
            
            
            
            0Total
            
            $
            8,902
            
            
            $
            6,887No
      of stores
            
            
            66
            
            
            
            61






25




Manufacturing
pharmacy segment




Revenue
from our manufacturing pharmacy 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 pharmacy 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 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 slightly 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. 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.




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
decrease in gross profit margin was primarily attributed to our marketing sales
campaign during the three months ended March 31, 2010.






26




Manufacturing
pharmacy 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 increase was mainly due to the concentration of
more products with a higher profit margin.




Selling and Administrative
Expenses. Selling 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.




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.




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.






27




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
pharmacy segment




Our
income before income tax from manufacturing pharmacy 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 was $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 2009 we had cash of $13.0
million and $13.3 million, respectively.




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.






28





For
      the three months
                Ended
      March 31,2010
      ‘000
            
            
            
            2009
      ‘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 pharmaceutical 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
2010 compared to $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 account receivable repayment 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.




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 $5.5 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
of fiscal period 2010, compared to $3.4 million provided by financing activities
for fiscal period 2009 represent an increase of cash used in financing
activities by $5.8 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.






29




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 estimated 48 stores already acquired this year) in 2010 and
2011.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.




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




Goodwill




We
account goodwill in accordance with the provisions of ASC 805, “Goodwill and
Intangible Assets” (“ASC 805”). We conduct impairment test on an annual basis
and, in addition, if we notice any indication of impairment, we conduct such
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 conduct an impairment test as
of March 31, 2010 and no impairment loss was identified.




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 evaluates 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




Depreciation




Depreciation
is provided on 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 to those previously estimated, or
it will write-off or write-down technically obsolete or non-strategic assets
that have been abandoned or sold.




Allowances
for doubtful account




We
establishes the general provisioning policy to make allowance equivalent to 40%
of gross amount of trade receivables due between half and one year and 100% of
gross amount of accounts receivable due over 1 year.  Additional
specific provision is made against trade receivables whenever they are
considered to be doubtful. 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 repayment.




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.






30




Recognition
of revenue




Revenue
is recognized when the significant risks and rewards of ownership have been
transferred to the buyer at the time when the products are delivered to its
customers, the sales price is fixed or determinable and collection is reasonably
assured. The majority of company’s revenue results from the contracts with
hospitals which are government-owned and large distributors, No sales return is
allowed except for those drugs furnished that are not in conformity with the
quality requirement as governed by the relevant authority nor do we provide for
any allowance granted for the goods not being sold before the date of expiration
by the customers




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.  In
additions to the reasons set forth below, there is also a strong reliance on the
external consultants, including our attorneys, to review and edit the annual and
quarterly filings and to ensure compliance with SEC disclosure
requirements.




There
have not been any changes in our internal control over financial reporting (as
such term is defined in Rules 13a-15(f) under the Exchange Act) during our most
recently completed fiscal quarter which is the subject of this
report  that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.






31




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.






32




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







33




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:
      May 20, 2010
            By:
            /s/
      Hui Tian TangHui
      Tian TangChief
      Executive Officer and Chairman(principal
      executive officer)By:
            /s/
      Xiaoyan ZhangXiaoyan
      ZhangChief
      Financial Officer(principal
      financial and accounting officer)