UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.  20549




FORM 10-Q/A


(Amendment No. 1)





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




For the quarterly period ended December 31, 2010




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




For the transition period from _________________ to _________________




Commission File Number: 000-54076










FIRST CHINA PHARMACEUTICAL GROUP, INC.


(Exact name of registrant as specified in its charter)




Nevada
74-3232809(State or other jurisdiction of

incorporation or organization)
(I.R.S. Employer

Identification Number)





Number 504, West Ren Min Road,


Kunming City, Yunnan Province


People’s Republic of China, 650000


(Address of principal executive offices)





852-2138-1668


(Registrant’s telephone number, including area code)




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x  No   ̈




Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ̈  No   ̈




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




Large accelerated filer   ̈

Accelerated filer   ̈Non-accelerated filer   ̈

Smaller reporting company  x(Do not check if a smaller reporting company)




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




The number of shares outstanding of the registrant’s common stock at February 18, 2011 was 55,000,000.












INDEX





PagePART I - FINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS

3Unaudited Consolidated Balance Sheets as of December 31, 2010 and March 31, 2010

3Unaudited Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended December 31, 2010 and 2009

4Unaudited Consolidated Statements of Shareholders' Equity

5Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2010 and 2009

6Notes to Unaudited Consolidated Financial Statements

7ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

23ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

30ITEM 4.

CONTROLS AND PROCEDURES

30PART II - OTHER INFORMATIONITEM 1.

LEGAL PROCEEDINGS

32ITEM 1A.

RISK FACTORS

32ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

32ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

32ITEM 4.

REMOVED AND RESERVED

32ITEM 5.

OTHER INFORMATION

32ITEM 6.

EXHIBITS

33SIGNATURES

34





EXPLANATORY NOTE




First China Pharmaceutical Group, Inc. (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q which was originally filed with the Securities and Exchange Commission (“SEC”) on February 22, 2011 (the “Original Form 10-Q”) to incorporate the Company’s revisions and responses to a letter of comment from the staff of the SEC dated as of March 11, 2011.




Except for the amended disclosures made in response to the letter of comment from the staff of the SEC, the information in this Form 10-Q/A has not been updated to reflect events that occurred after February 22, 2011, the filing date of the Original Form 10-Q.  Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Form 10-Q, including any amendments to those filings. The only section that has been amended is “Item 1. Financial Statements.”   As a result of these modifications, the certifications required pursuant to the Sarbanes-Oxley Act of 2002, filed as Exhibits 31.1, 31.2, 32.1, and 32.2, have been re-executed and re-filed as of the date of this Amendment No. 1.





Except as set forth above, all other information in the Company’s Original Form 10-Q remains unchanged. The Company has re-filed the entire Form 10-Q in order to provide more convenient access to the amended information in context.




i




Cautionary Notice Regarding Forward-Looking Statements





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





This Quarterly Report contains certain forward-looking statements.  When used in this Quarterly Report, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar expressions are intended to identify forward-looking statements.  They also include statements containing anticipated business developments, a projection of revenues, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.





The forward-looking statements in this Quarterly Report are based upon management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to them.  These statements are not statements of historical fact.  Forward-looking statements involve risks and uncertainties, some of which are not currently known to us that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements.  These forward-looking statements are based on our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and our future financial condition and results.





We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this filing might not occur.  We qualify any and all of our forward-looking statements entirely by these cautionary factors.  As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on our behalf.  You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein.





2





PART I. FINANCIAL INFORMATION




ITEM 1.        FINANCIAL STATEMENTS




FIRST CHINA PHARMACEUTICAL GROUP, INC.


CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2010 AND MARCH 31, 2010


(Stated in US Dollars)


(Unaudited)


At


AtDecember 31,


March 31,Notes


2010


2010$


$ASSETSCurrent AssetsCash and cash equivalents





1,125,056



7,331Restricted Cash





503,118



-Due from a related party

3



16,514,662



-Prepaid and deferred expenses





17



233Inventories

4



6,912,658



-Account Receivables





2,385,821Total current assets





27,441,332



7,564Goodwill

5



7,616,646



-Plant and equipment, net

6



2,006



-Intangible assets, net

7



2,268



-TOTAL ASSETS





35,062,252



7,564LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent LiabilitiesShort-term borrowings

8



812,491



-Notes Payable

10



1,266,904



-Other payable and accrued liabilities

9



12,012,719



14,663Due to a related party





15,579



11,512Income tax payable





3,114,235



-Account payable





10,250



-Total Current Liabilities





17,232,178



26,175Non Current LiabilitiesConvertible Promissory Notes





862,088



-Total Non Current Liabilities





862,088



-TOTAL LIABILITIES





18,094,266



26,175COMMITMENTS AND CONTINGENCIES

15



-



-STOCKHOLDERS’ EQUITYCommon stockCommon stock, $0.001 par value; 200,000,000 shares authorized; 55,000,000 and 60,000,000 shares issued and outstanding, respectively

11



55,000



45,000Treasury Shares

12



5,000



-Additional paid-in capital





14,990,000



5,000Retained earnings





1,717,581



(68,611
)Accumulated other comprehensive income- foreign currency translation adjustments





200,405



-TOTAL STOCKHOLDER’S EQUITY





16,967,986



(18,611
)TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY





35,062,252



(7,564
)





See accompanying notes to the financial statements





3




FIRST CHINA PHARMACEUTICAL GROUP LIMITED


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


FOR THE THREE MONTHS AND NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)


(Unaudited)


Three months ended


Nine months endedDecember 31,


December 31,Notes


2010


2009


2010


2009$


$


$


$Sales (Gross)





6,377,529



-



7,398,087



-Costs of sales





(4,281,553
)


-



(5,102,538
)


-Gross profit





2,095,976



-



2,295,549



-Web design





(29,330
)






(29,330
)Legal and accounting





(152,480
)


(2,250
)


(156,343
)


(7,750
)Selling expenses





(4,437
)


-



(4,437
)


-Administrative expenses





(120,278
)


(923
)


(121,675
)


(3,106
)Depreciation and amortization





(2,175
)


-



(2,175
)


-Other income


13



303,570



-



303,576



-Other operating expenses






(21,830
)






(32,502
)


-Income from operations






2,069,016



(3,173
)


2,252,663



(10,856
)Interest income






24



-



24



-Interest expense






(12,157
)


-



(12,157
)


-Other income






-



-



-



-Income before tax






2,056,883



(3,173
)


2,240,530



(10,856
)Income tax


14



(394,343
)


-



(454,338
)


-Net income






1,662,540



(3,173
)


1,786,192



(10,856
)Other comprehensive income- foreign currency translation adjustments






166,064



-



200,405



-Comprehensive income






1,828,604



(3,173
)


1,986,598



(10,856
)Earnings per share


18



0.0305



(0.0018
)


0.0391



(0.0060
)BasicWeighted average number of common shares outstanding






60,000,000



1,800,000



50,869,565



1,800,000





See accompanying notes to the financial statements





4





FIRST CHINA PHARMACEUTICAL GROUP LIMITED


STATEMENTS OF SHAREHOLDERS’ EQUITY


(Stated in US Dollars)


(Unaudited)





AccumulatedAdditional





otherCommon stock


Treasury


paid-in


Retained


comprehensiveShares


Amount


Shares


capital


earnings


Income


Total$


$


$


$


$


$Balance, March 31, 2010


45,000,000



45,000



-



5,000



(68,611
)


-



(18,611
)New issue of common stock


15,000,000



15,000



-















15,000Net income


-



-



-



-



123,652



-



123,652Foreign currency translation adjustments


-



-



-



14,985,000



-



34,341



15,019,341Balance, September 30, 2010


60,000,000



60,000



-



14,990,000



55,041



34,341



15,139,382Cancellation of common stock


(5,000,000
)


(5,000
)


5,000



-



-



-



-Increase in additional paid-in capital


-



-



-



-



-



-



-Net income


-



-



-







1,662,540



-



1,662,540Foreign currency translation adjustments


-



-



-



-



-



166,064



166,064Balance, December 31, 2010


55,000,000



55,000



5,000



14,990,000



1,717,581



200,405



16,967,986




See accompanying notes to the financial statements





5




FIRST CHINA PHARMACEUTICAL GROUP LIMITED


CONSOLIDATED STATEMENT OF CASH FLOWS


FOR THE NINE MONTHS ENDED DECEMBER 31, 2010 AND 2009


(Stated in US Dollars)


(Unaudited)




Nine months endedDecember 31,2010


2009$


$Cash Flows from Operating ActivitiesNet income


1,786,192



(10,856
)Adjustments to reconcile net income to net cash provided by operating activities:


-



- -Depreciation and amortization


2,175



-Changes in operating assets and liabilities:Due from a related party


(65,641
)


-Due to a related party


4,067



-Inventories


(110,456
)


-Increase (decrease) in other payable and accrued liabilities


(2,226,365
)


6,187(Increase) decrease in prepaid expenses


216



637Notes payable


(40,367
)


-Account Payables


10,250



-Accounts Receivables


(2,385,820
)Income tax payable


3,114,235



-Net cash provided by (used in) operating activities


88,485



(4,032
)Cash Flows from Investing ActivitiesPurchase of plant and equipment


(2,237
)


-Cash received in acquire investments


509,922



-Net cash provided by investing activities


507,684



-Cash flows from financing activitiesRepayment of borrowings


(38,548
)


-Convertible Promissory Note


862,088



-Decrease (increase) in restricted cash


(503,118
)


-Increase in due to stockholder


-



9,839Net cash provided by financing activities


320,422



9,839Effect of foreign currency translation on cash and cashequivalents


201,134



-Net decrease in cash and cash equivalents


1,117,725



5,807Cash and cash equivalents - beginning of period


7,331



7,681Cash and cash equivalents - end of period


1,125,056



13,488Supplemental disclosures for cash flow information:Cash paid for:Interest


-



-Income taxes


-



-





See accompanying notes to the financial statements





6





FIRST CHINA PHARMACEUTICAL GROUP LIMITED




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(Stated in US Dollars)


(Unaudited)




1.
ORGANIZATION AND PRINCIPAL ACTIVITIES





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





First China Pharmaceutical Group limited (the “FCPG HK”) was incorporated in Hong Kong on April 29, 2010 under the Companies Ordinance of Hong Kong. FCPG HK acts as the holding company.





Kun Ming Xin Yuan Tang Pharmacies Co. Ltd. (“XYT”) was established under the laws of the People’s Republic of China (“PRC”) on November 12, 2002 with a paid-in capital of RMB 2,000,000 as of December 31, 2010. The head office and warehouse are located at Number 304, West Ren Min Road, Kunming City, Yunnan Province, PRC.





On June 25, 2010, FCPG HK acquired XYT, of which became FCPG HK’s wholly owned subsidiary.





Pursuant to a share sale agreement dated July 5, 2010, the sole shareholder of FCPG HK Group, Mr. Douglas Billingsley sold all of his shares to Mr. Zhen Jiang Wang for considerations. Mr. Zhen Jiang Wang became the sole shareholder of the FCPG HK Group, among which are FCPG HK, and XYT.





On August 23, 2010, the Company entered into a voluntary share exchange agreement with FCPG HK Group (Exchange Agreement). Accordingly, additional 15,000,000 shares of the Company would be issued to Mr. Zhen Jiang Wang, the sole selling shareholder of FCPG HK Group, in exchange for 100% of the issued and outstanding common stock of FCPG HK Group. The newly issued shares would represent 25% of the Company’s issued and outstanding common stock.





On September 15, 2010, the closing date of the Exchange Agreement, Mr. Zhen Jiang Wang owns 25% of the Company’s issued and outstanding common stock. FCPG HK and XYT became the Company’s wholly owned subsidiaries, and the Company acquired the business and operations of FCPG HK and XYT. However, the business and operations of the group are conducted solely through XYT.





Later on, as per a condition of closing the Exchange Agreement dated August 23, 2010, Mr. Zhen Jiang Wang was appointed to the Company’s Board of Directors as Chairman, Mr. Aidan Hwuang resigned as the Company’s President, Chief Financial Officer and Secretary, and Mr. Roderick Macutay resigned from the Board of Directors.





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





7




2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





(a)
Basis of Preparation and Presentation





On September 15, 2010, FCPG US acquired FCPG HK and XYT.  The consolidated statements of income and comprehensive income and conceded statements of cash flows of the companies (including the Company and FCPG HK, XYT) now comprising the group (the “Group”) have been prepared throughout the periods for the three months ended and nine months ended to December 31, 2010 and 2009. The pre-control profits of FCPG HK had been eliminated under US GAAP, the post-control profits for the three months ended and nine months ended to December 31, 2010 was generalize from XYT from September 16, 2010 to December 31, 2010.





The consolidated balance sheets of the Group as at December 31, 2010 and March 31, 2010 have been prepared to present the position of the assets and liabilities of the Group as at the respective dates.




The Group’s consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for illustrative of interim conceded financial information.




This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Group, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC (“PRC GAAP”), the accounting standards used in the places of their domicile.  The accompanying financial statements reflect necessary adjustments not recorded in the books of account of the Company to present them in conformity with US GAAP.





In the opinion of the management of the Group, 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.





(b)
Use of Estimates





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





(c)
Concentration of Credit Risk





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





No single external customer exceeded 10% of the Group’s total revenue for the periods presented.





8




The Company relies on supplies from numerous vendors. The Company had one vendor that accounted for approximately 25% of total purchases for the nine months ended December 31, 2010.





(d)
Risk Factors and Liquidity Section.





The Company can utilize the retained earnings to pay for dividend to its parent company outside of PRC provided it fulfills the relevant foreign exchange regulations as promulgated by State Administration of Foreign Exchange (SAFE).





Pursuant to the domestic wages and salaries of foreign employees outside of the PRC as well as other rightful earnings (dividends, bonus and profits, etc) of shareholders outside of the PRC may be remitted freely out of PRC after taxes have been paid in accordance with the provisions of the Chinese tax law with a tax certificates.





Since the Company does not have any debt that is generated outside the PRC and does not have any employee located outside PRC, the management does not aware of any risk of paying in foreign currency in respect of those employee-related and debt-settlement amount due to any other party located outside PRC.





According to the Bankruptcy law of PRC, XYX, as a WFOE, needs to have the debt and creditors be settled in priority as set out by the relevant Bankruptcy law in China and its immediate equity holder, that is, the FCPG HK, located in Hong Kong, would be last one to be entitled to any residual interest of the entity. Such priority of payment and distribution in case of liquidating XYT does not have any different priority in respect of PRC nationals or foreigner. The priority is based on status of being creditors and other requirements as set out the Bankruptcy law in China which does not have any discrimination or preference in respect of whether the party is being PRC nationals or foreigner.





(e)
Cash and Cash Equivalents





The Group considers all highly liquid investments with initial maturities of six months or less to be cash equivalents.





(f)
Restricted Cash





Deposits in banks for securities of notes payable that are restricted in use are classified as restricted cash under current assets.





(g)
Trade and Other Receivables





Trade and other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less allowance for impairment. An allowance for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is the difference between the receivable’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate computed at initial recognition. The amount of the allowance is recognised in the statement of income and comprehensive income.





(h)
Inventories





Inventories are stated at the lower of cost and net realisable value. Cost is determined using the weighted average basis. The cost of inventories, principally comprising purchase cost and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.





9





During the reporting periods, the Group did not make any allowance for slow-moving or defective inventories.





(i)
Plant and Equipment





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





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





Office equipment


331/3
%Other equipment


20
%Motor vehicles


25
%





(j)
Intangible Assets





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





(k)
Impairment of Long-lived Assets





Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets. No impairment of long-lived assets was recognized for any of the periods presented.





(l)
Revenue Recognition





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





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





(m)
Advertising expenses





Advertising expenses are charged to expense as incurred. No advertising expenses were incurred during the three months and nine months ended December 31, 2010 and 2009.





10




(n)
Income taxes





The Group uses the asset and liability method of accounting for income taxes pursuant to SFAS No. 109 “Accounting for Income Taxes”.  Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.





(o)
Comprehensive Income





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





(p)
Foreign Currency Translation





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





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





Exchange rates applied for the foreign currency translation during the period are as follows:





USD to RMB





December 31, 2010


March 31, 2010Closing rate


6.6227



6.8263





Three Months to

December 31, 2010


Nine Months to

December 31,2010Average rate


6.6619



6.6619




11





USD to HKD





December 31, 2010


March 31, 2010Closing rate


7.7833



7.7638





Three Months to

December 31,2010


Nine Months to

December 31, 2010Average rate


7.7691



7.7691





HK$ is pegged to US$ and hence there is no significant translation adjustment impact on these financial statements.





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





(q)
Financial instruments





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





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





(r)
Recent Accounting Pronouncements





In April 2009, the FASB issued FSP 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, FSP 157-4 requires comparative disclosures only for periods ending after initial adoption.





In May 2009, the FASB issued FSP SFAS 165 “Subsequent Events”. The objective of this Statement is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for the interim and annual periods ending after June 15, 2009, which is now codified as FASB ASC 855 “Subsequent Events”. The adoption of FASB ASC 855 did not have a material impact on the Company’s financial position, results of operations and cash flows. Effective February 24, 2010, the Company adopted Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements”, which removes the requirement to disclose the date through which subsequent events have been evaluated.





12





In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”. This statement is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a 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. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and is required to be adopted by the Company in the first quarter of fiscal year 2011. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date.





In June 2009, the FASB issued SFAS No.167, “Amendments to FASB Interpretation No.46(R)”, which is codified as ASC 810. ASC 810 amends FASB Interpretation No.46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. Under ASC 810, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. ASC 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance.





ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities. ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. ASC 810 is effective for the Company in the first quarter of fiscal 2011.





In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No 162”, which supersedes all existing non-SEC accounting and reporting standards. The codification does not change GAAP but rather organizes it into a new hierarchy with two levels: authoritative and non-authoritative. All authoritative GAAP carries equal weight and is organized in a topical structure.





In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value”, which is codified as ASC 820, “Fair Value Measurements and Disclosures”. This Update provides amendments to ASC 820-10, Fair Value Measurements and Disclosures –Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of ASC 820. The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability.





The amendments in this Update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the assets are required are Level 1 fair value measurements. ASC 820 is effective for the first reporting period (including interim periods) beginning after August 28, 2009.




13




In September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic 740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”, and it provides implementation guidance on accounting for uncertainty in income taxes effective for interim and annual reporting period ending on or after September 15, 2009.





In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”)”. ASU 2009-17 amends the variable-interest entity guidance in FASB ASC 810-10-05-8 to clarify the accounting treatment for legal entities in which equity investors do not have sufficient equity at risk for the entity to finance its activities without financial support. ASU 2009-17 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. ASU 2009-17 is effective for the Company in the first quarter of fiscal 2011.





The Company does not anticipate that the adoption of the above recent accounting pronouncements will have a material impact on these financial statements.





3.
DUE FROM A RELATED PARTY





The amount due from a related party, Mr. Zhen Jiang Wang who is the major equity holder of the Company as of December 31, 2010, is interest free, unsecured and repayable on demand.





We have referred to SAB Topics 4E and 4G and find that the scenario and background described therein, which is related to capital contribution or unpaid equity of an enterprises, is not applicable in the item as presented under 'Amount due from Shareholder' as presented in the financial statements due to the different nature and background that give rise to such amount.


The amount as appeared in an item " Amount due from shareholders’ here, in fact represents the situation where the shareholder of the Company, Mr. Wang, has collected certain trade receivables on behalf of the subsidiaries of the Company, XYT, while XYT conducts business in China, whereas also Mr. Wang would settle on behalf of the Company, for certain trade payables. Therefore, we suppose the satiation is not the same as any capital contribution commitment or unpaid subscription as outlined by SAB 4E or 4G.





In such circumstances, we would include an enhanced disclosure note in financial statements to describe in detail the nature, amount and origin of such amount.  Of course, the Company would have the control measures to manage and eliminate such amount being owed by shareholder to the Company as part of the corporate governance.


The Company will settle such “Amount due from shareholders” by dividend payable or authorize Mr. Wang to make prepayment to the suppliers.





4.
INVENTORY





At


AtDecember 31,


March 31,2010


2010$



$Finished goods


6,912,658



-




14




5.
GOODWILL




Goodwill was initially recognized from the premium paid over the value of net asset of the FCPG HK (XYT) as at the acquisition date, September 15, 2010.





In accordance to the Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS No. 142, it requires goodwill to be subsequently tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired.





The impairment test for goodwill has been performed and there is no indication of impairments post acquisition date.





AtDecember 31,2010$Goodwill


7,616,646Goodwill Impairment


-Goodwill net


7,616,646





6.
PLANT AND EQUIPMENT, NET





At


AtDecember 31,


March 31,2010


2010$


$CostOffice equipment


13,199



-Other equipment


30,632



-Motor vehicles


-



-Total


43,831



-Accumulated depreciation


(41,825
)


-Property, plant and equipment, net


2,006



-




15




7.
INTANGIBLE ASSET, NET





At


AtDecember 31,


March 31,2010


2010$


$Cost


8,426



-Accumulated amortization


(6,158
)


--Intangible asset, net


2,268



-





8.
SHORT-TERM BORROWINGS





The details of short-term borrowings as of December 31, 2010 are as follows:





Nature

Annual

Interest

Rate

Period

Outstanding

loan

amount


Collateral$Bank loan


7.97
%
27/04/2010 – 26/04/2011


52,044



N/ABank loan


5.31
%
07/12/2010 – 06/12/2011


760,447



N/A812,491





9.
OTHER PAYABLE AND ACCRUED LIABILITIES





At


AtDecember 31,


March 31,2010


2010$


$Rental payable


60,836



-Other payables


740,108



-Staff costs payables


31,870



-Value added tax payable


11,179,905



--12,012,719



-





10.
NOTES PAYABLE





The notes payable which were issued by the Company with bank guarantees are secured by the restricted cash.





16




11.
COMMON STOCK





For the period nine months ended December 31, 2010 and 2009 there were 200,000,000 shares authorized; 55,000,000 and 60,000,000 shares issued and outstanding, respectively.





The market share price for FCPG on December 31, 2010 was $1.77 per share and the quoted market price is from OTCBB Market.





12.
TREASURY SHARES





On November 11, 2010, 2,500,000 shares of Roderick C. Macutay and 2,500,000 shares of Tina S. Suava had been cancelled and returned to the Company as Treasury Shares.





13.
OTHER INCOME





Other income represents the exchange gain of FCPG HK, which is the gain on the exchange of Renminbi for Hong Kong dollar due to depreciation in the Hong Kong dollar (home currency) for receivables.





14.
INCOME TAX





XYT, a company organized under the laws of the People’s Republic of China (“PRC”) is subject to PRC Enterprises Income Tax ("EIT") with the tax rate of 25%.





FCPG HK was incorporated in Hong Kong under the Companies Ordinance of Hong Kong is subject to HK Profit tax with the tax rate of 16.5%.





A reconciliation of the tax expense applicable to income before tax using the statutory rate to the tax expense at the effective tax rate is as follows:





Nine months endedDecember 31,2010


2009$


$Income before tax


2,240,530



-Tax at the statutory rate


454,338



-Effective income tax expenses


454,338



-





There was no deferred tax during the periods and as at the balance sheet dates.





15.
COMMITMENTS AND CONTINGENCIES





XYT leases the office and warehouse under non-cancelable operating lease agreement that expires in 2018.





17




The company is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of its respective registered capital.  These reserves are not distributable as cash dividends.  The board of directors of a wholly foreign-owned enterprise has the discretion to allocate a portion of its after-tax profits to its staff welfare and bonus funds.  After the allocation of relevant welfare and funds, the equity owners can distribute the rest of the after-tax profits provided that all the losses of the previous fiscal year have been made up.





16.
RELATED PARTY TRANSACTIONS





Apart from the transactions and balances disclosed elsewhere in the financial statements, the Company had no material transactions with its related parties during the periods presented.





17.
SEGMENT INFORMATION





No segment information is disclosed as the Company is engaged in the sales of Chinese patent drug, antibiotics, bio-chemicals, chemical preparations and biological. The nature of the products, the type of their customers and their distribution methods are substantially similar. The Company operates in a single segment in the PRC.  All of long-lived assets are located in the PRC.





18.
EARNINGS PER SHARE





The Company reports basic earnings per share in accordance with ASC Topic 260, “Earnings Per Share”.  Basic earnings/(loss) per share is computed by dividing net income/ (loss) by weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period. Common equivalent shares are excluded from the computation in periods for which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and, accordingly, are excluded from the calculation.  At December 31, 2010, the Company had 200,000,000 common shares authorized; 60,000,000 and 60,000,000 common shares issued and outstanding respectively.





19.
SUPPLEMENTAL PRO FORMA FINANCIAL STATEMENTS





The following supplemental pro forma consolidated financial statements give effect to the acquisition of Kun Ming Xin Yuan Tang Pharmacies Co., Ltd. (“Target”) by First China Pharmaceutical Group, Inc. (“FCPG”) via the acquisition of First China Pharmaceutical Group Limited (“Parent”) by FCPG.  Target is a 100% wholly owned subsidiary of Parent.




Pursuant to a Share Exchange Agreement dated August 23, 2010, FCPG, a public corporation incorporated in Nevada on July 31, 2007, acquired 100% of the issued and outstanding shares of Parent, a private company formed in Hong Kong on April 29, 2010, in exchange for 15,000,000 shares of common stock of FCPG, representing 25% of its total issued and outstanding shares at the time.




The share exchange transaction between Parent and FCPG is considered an acquisition and was accounted for as such with FCPG being treated as the accounting and legal parent and Parent being treated as the accounting and legal subsidiary. This means the consolidated results of operations of FCPG going forward will include those of FCPG for the period from its inception on July 31, 2007 and those of Parent since the date of the acquisition, September 15, 2010.




18





The following pro forma consolidated balance sheet includes the balance sheets of FCPG and Target as of March 31, 2009, as if the acquisition of Target occurred on that date.




The pro forma consolidated balance sheet and statement of operations should be read in conjunction with the separate historical audited financial statements for both FCPG and Target, as follows:




(i) for FCPG, audited financial statements for the years ended March 31, 2010 and 2009, as filed in FCPG’s annual report on Form 10-K on May 10, 2010;




(ii) for Target, audited financial statements as of and for the years ended December 31, 2009, 2008 and 2007, as filed as Exhibit 99.1(a) of FCPG’s current report on Form 8-K on September 21, 2010, as amended.





The fiscal year ends of FCPG and Target are March 31 and December 31, respectively.  The pro forma balance sheet and earnings (loss) per share data of FCPG and Target are indicative of their consolidated financial position, had the acquisition occurred on March 31, 2009.


19





FIRST CHINA PHARMACEUTICAL GROUP, INC.


PRO FORMA CONSOLIDATED BALANCE SHEET




Target(FCPG HK


Pro-Forma


Pro-FormaFCPG Inc


Group)


Adjustments


ConsolidatedMarch 31,


December 31,


March 31,


March 31,2009


2008


2009


2009(A)


(B)


(Note2)$


$


$


$ASSETSCurrent AssetsCash and cash equivalents

$
7,681


$
80,857





$
88,538Restricted cash


-



782,565






782,565Due from a related party


-



2,498,924






2,498,924Inventories


-



4,875,494






4,875,494Prepaid expenses


974



-






974Other receivables


-



-






-Accounts receivables


-Plant and equipment, net


-



7,196






7,196Intangible assets, net


-



3,958






3,958Goodwill


-



-
(a)


12,665,589



12,665,589Goodwill Impairment


-



-







-TOTAL ASSETS

$
8,655


$
8,248,994


$
12,665,589


$
20,923,238LIABILITIESCurrent LiabilitiesAccounts payable and accrued liabilities and other

$
9,063


$
3,318,973
(b)


343,155


$
3,671,191Short term borrowings


-



-







-Income tax payable


-



835,137







835,137Notes payable


-



1,760,473







1,760,473Due to related party


1,673



-







1,673Total Current Liabilities


10,736



5,914,583



343,155



5,925,319STOCKHOLDERS' EQUITYCapital StockAuthorized – 100,000,000 common shares $0.001 par value; 1,800,000 issued and outstanding


1,800



266,101
(a)


15,000



282,901(a)


(266,101
)


(266,101
)Additional Paid-in Capital


48,200



-
(a)


14,985,000



15,033,200Retained Earnings (Deficit)


(52,081
)


1,948,825
(a)


(1,948,825
)


(52,081
)(b)


(343,155
)


(343,155
)Effect of Foreign Currency Translation Adjustments


-



119,485
(a)


(119,485
)


—TOTAL STOCKHOLDERS’ EQUITY


(2,081
)


2,334,411



12,322,434



14,654,764TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
8,655


$
8,248,994


$
12,665,589


$
20,923,238




(a) – Refer to Note 2(C) to the pro forma financial statements.




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





20




FIRST CHINA PHARMACEUTICAL GROUP, INC.


PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS


The following unaudited pro forma consolidated results of operations assume that the acquisition of XYT was completed as of March 31, 2009 (dollars in thousands except per share data):





Three Months Ended


Nine Months EndedDecember 31,


December 31,2010


2009


2010


2009Sales (Gross)

$
6,377,528



6,512,337



21,034,754



19,524,619Net income


2,055,970



406,107



3,284,735



2,294,515Earnings per common share - basic and diluted


0.0343



0.0068



0.0547



0.0382





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





21




PRO FORMA CONSOLIDATED NOTES TO FINANCIAL STATEMENTS





NOTE 1 – Share Exchange Transaction





On September 15, 2010, FCPG, a public shell company, closed a share exchange agreement with Target and Parent, each a private corporation, whereby 100% of the shares of Target were exchanged for 15,000,000 shares of FCPG common stock.  There was no change in beneficial ownership of FCPG as a result of the transaction and accordingly, the acquisition of Parent by FCPG is considered a purchase and was accounted for as such.





For the purposes of these pro forma financial statements, a pro forma consolidated statement was used for Kun Ming Xin Yuan Tang Pharmacies Co., Ltd. (“Target”) as Target has historical operations rather than First China Pharmaceutical Group Limited. (“Parent”), as Parent was formed on April 29, 2010 and has no historical operations which add value to these pro forma financial statements.





NOTE 2 - Pro Forma Adjustments





The pro forma adjustments to the consolidated balance sheet give effect to the acquisition of Target as if the transactions had occurred at the companies’ respective balance sheet dates of their respective most recent audits.





A.
Derived from the audited balance sheet of FCPG as of March 31, 2009.





B.
Derived from the audited balance sheet of Target as of December 31, 2008.





C.
Pro forma adjustment to issue 15,000,000 common shares of FCPG for 100% of outstanding shares of Parent valued at $15,000,000 being the consideration given in the transaction valued at the market price on the date of the transaction being $1.00 per share. The quoted market price is from OTCBB Market.





D.
Pro forma adjustment to reflect the bonus payments to be paid to Mr. Wang as contemplated by the Share Exchange Agreement. On September 15, 2010, FCPG closed a Share Exchange Agreement with the exception of bonus payments based on two percent of the quarterly gross sales of XYT to be paid to Mr. Zhen Jiang Wang. Gross sales of XYT for 2008 is $ 17,157,747, bonus payments to be paid to Mr. Wang is $ 343,155.




NOTE 3- Goodwill




Goodwill was initially recognized from the premium paid over the value of net asset of the FCPG HK (XYT) as at the acquisition date, September 15, 2010.




According to ASC 350-20-35-30, goodwill of a reporting unit shall be tested for impairment on an annual basis and between annual tests in certain circumstances. The annual goodwill impairment test may be performed any time during the fiscal year provided the test is performed at the same time every year. Different reporting units may be tested for impairment at different times.




22




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




The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report.  In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.  We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.  Our actual results could differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report.  See also Risk Factors in  our Current Report on Form 8-K filed September 21, 2010, as amended.




Overview





First China Pharmaceutical Group, Inc. (“FCPG” or the “Company”), formerly known as E-Dispatch Inc., was incorporated under the laws of the State of Nevada on July 31, 2007.  On September 15, 2010, we closed a voluntary share exchange transaction pursuant to a Share Exchange Agreement, dated August 23, 2010 (the “Exchange Transaction”), by and among FCPG, First China Pharmaceutical Group Limited, a Hong Kong company (“FCPG HK”), and Kun Ming Xin Yuan Tang Pharmacies Co. Ltd., a company organized under the laws of the People’s Republic of China (“PRC”) and wholly owned subsidiary of FCPG HK (“XYT”).  Prior to the Exchange Transaction, we were a development stage company engaged in developing a cell phone-based taxi dispatch system, and a public reporting “shell company,” as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended.  As a result of the Exchange Transaction, the FCPG HK stockholder acquired approximately 25% of our issued and outstanding common stock, FCPG HK and XYT became our wholly-owned subsidiaries, and we acquired the business and operations of FCPG HK and XYT.





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





Our continuing strategy is to build a nationwide pharmaceutical distribution network throughout China.  Over the next 12 months XYT plans to expand its customer base through the use of the following tactics: broadening of the current product line will attract more large customers that currently do not utilize XYT and benefit from  internet ordering and the lower prices that XYT offers; providing computers to customers will also attract new customers as XYT’s management is unaware of any other pharmaceutical distribution company providing this benefit; supplementing  XYT’s current sales force with the addition of at least two additional sales teams that will make calls directly to hospitals, medical clinics and pharmacies.  XYT anticipates that each sales team will be composed of a sales manager and 10 sales people.




On November 3, 2010, we entered into a letter of intent to acquire 100% of the interests of De Xin Pharmacy located in Kunming City, the capital of Yunnan Province.  De Xin Pharmacy was founded in 1993, primarily as a retail operation focused on both Chinese and Western medicine, and is centrally positioned in the Golden Resources Shopping Mall in Kunming City.  In addition, on November 29, 2010, we entered into a letter of intent to acquire 100% of the interests of Shandong Run Kang Pharmaceutical Co. Inc. (“Run Kang”) of Jinan City, in the Shandong Province of China.  Run Kang was founded in 2006 and is principally focused on the distribution of Western medicinal products and drugs as well as traditional Chinese remedies to regional pharmacies, clinics and hospitals.





23





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




Comparison of the Nine Months Ended December 31, 2010 and 2009





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





Nine Months Ended December 312010


2009Statements of Operations DataSales (Gross)

$
7,398,087


$
-Cost of Sales


(5,102,538
)


-Gross Profit


2,295,549



-Selling, general and administrative expenses, and other expenses


(42,886
)


(10,856
)Net Income


1,786,192



(10,856
)Effects of foreign currency translation conversion


200,405



-Comprehensive income


1,986,598



(10,856
)




Sales(Gross)





Our sales of Chinese patent drugs, antibiotics, bio-chemicals, chemical preparations and biologicals for the nine months ended December 31, 2010 totaled US$7,398,087, an increase from US$0 for the nine months ended December 31, 2009.  This increase in sales was due to our acquisition of XYT in September 2010.  XYT experienced an increase in sales due to the growth of its business, sales of higher priced products, and increased selling efforts.  However, the key reason for the improvement was XYT’s ability to market its product line over the internet in 2010.  In November 2009, we received government approval to market XYT’s product line over the internet and began to realize the benefits of internet marketing in the first quarter of 2010.





Cost of sales





Cost of sales for the nine months ended December 31, 2010 was US$5,102,538 and consisted primarily of material cost, labor cost, and related expenses which are directly attributable to the selling of pharmaceutical products.  Cost of sales increased from US$0 for the nine months ended December 31, 2009, and is also related to our acquisition of XYT.  In addition, more efficient order processing using the internet has increased productivity and enabled the Company to order larger inventories and realize volume discounts.




Gross profit





Gross profit for the nine months ended December 31, 2010 was US$2,295,549, an increase from US$0 for the nine months ended December 31, 2009.  The increase in gross profit reflects increased overall sales and cost of sales as described above due to our acquisition of XYT.





Selling, general and administrative expenses, and other expenses





Our selling, general and administrative expenses for the nine months ended December 31, 2010 increased by US$32,021, from the comparable prior period to US$42,886.  This increase reflects the growth of our business due to our acquisition of XYT as compared to the same period in 2009 and the corresponding increases in administrative and operating expenses, legal and accounting expenses and web design expenses, offset, in part, by other income from the gain on exchange of Renminbi for Hong Kong dollar due to depreciation in the Hong Kong dollar for receivables.





Income tax expense





Income tax expense for the nine months ended December 31, 2010 was US$454,338 compared to income tax expense of US$0 for the nine months ended December 31, 2009.  We did not incur any income tax expense for the nine months ended December 31, 2009 as we did not have taxable income during such period.





24




Net income





Net income increased to US$1,786,192 for the nine months ended December 31, 2010 from net loss of US$10,865 for the nine months ended December 31, 2009.  This increase was primarily due to the increase in sales described above due to our acquisition of XYT, offset by corresponding increases in cost of sales, selling, general and administrative expenses, legal and accounting expenses, and web design expenses related to the business of XYT.


Effects of foreign currency translation conversion





We recognized a gain of US$200,405 on the effects of foreign currency conversion for the nine months ended December 31, 2010.  We did not have any operations involving a foreign currency during the nine months ended December 31, 2009.  Accordingly, we recognized a gain of US$0 on the effects of foreign currency conversion for the nine months ended December 31, 2009.





Comprehensive income





Our comprehensive income increased from a comprehensive loss of US$10,865 for the nine month period ended December 31, 2009 to a comprehensive income of US$1,986,598 for the nine months ended December 31, 2010.  The increase is attributable to the above-mentioned increases in sales and gross profits, in addition to the gain recognized on the effects of foreign currency conversion.




Comparison of the Three Months Ended December 31, 2010 and 2009





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




Three Months Ended December 31,2010


2009Statements of Operations DataSales (Gross)

$
6,377,529


$
-Cost of Sales


(4,281,553
)


-Gross Profit


2,095,976



-Selling, general and administrative expenses, and others


(26,960
)


(3,173
)Net Income


1,662,540



(3,173
)Effects of foreign currency translation conversion


166,064



-Comprehensive income


1,828,604



(3,173
)





Sales (Gross)





Our sales of Chinese patent drugs, antibiotics, bio-chemicals, chemical preparations and biologicals for the three months ended December 31, 2010 totaled US$6,377,529, an increase from US$0 for the three months ended December 31, 2009.  This increase in sales was due to our acquisition of XYT in September 2010.  However, the key reason for the improvement was our ability to market its product line over the internet in 2010.  In November 2009, we received government approval to market its product line over the internet and began to realize the benefits of internet marketing in the first quarter of 2010.





Cost of sales





Cost of sales for the three months ended December 31, 2010 was US$4,281,553 and consisted primarily of material cost, labor cost, and related expenses which are directly attributable to the selling of pharmaceutical products.  Cost of sales increased from US$0 for the three months ended December 31, 2009, and is also related to our acquisition of XYT.  In addition, more efficient order processing using the internet has increased productivity and enabled the Company to order larger inventories and realize volume discounts.





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Gross profit





Gross profit for the three months ended December 31, 2010 was US$2,095,930, an increase from US$0 for the three months ended December 31, 2009.  The increase in gross profit reflects increased overall sales and cost of sales as described above due to our acquisition of XYT.





Selling, general and administrative expenses, and others





Our selling, general and administrative expenses for the three months ended December 31, 2010 increased by US$327,411, from the comparable prior period to US$330,584.  This increase reflects the growth of our business due to our acquisition of XYT as compared to the same period in 2009 and the corresponding increases in administrative and operating expenses, legal and accounting expenses and web design expenses, offset, in part, by other income from the gain on exchange of Renminbi for Hong Kong dollar due to depreciation in the Hong Kong dollar for receivables.





Income tax expense





Income tax expense for the three months ended December 31, 2010 was US$394,343 compared to income tax expense of US$0 for the three months ended December 31, 2009.  We did not incur any income tax expense for the three months ended December 31, 2009 as we did not have taxable income during such period.





Net income





Net income increased to US$1,662,540 for the three months ended December 31, 2010 from net loss of US$3,173 for the three months ended December 31, 2009.  This increase was primarily due to the increase in sales described above due to our acquisition of XYT, offset by corresponding increases in cost of sales, selling, general and administrative expenses, legal and accounting expenses, and web design related to the business of XYT.





Effects of foreign currency translation conversion





We recognized a gain of US$166,064 on the effects of foreign currency conversion for the three months ended December 31, 2010.  We did not have any operations involving a foreign currency during the three months ended December 31, 2009.  Accordingly, we recognized a gain of US$0 on the effects of foreign currency conversion for the three months ended December 31, 2009.





Comprehensive income





Our comprehensive income increased from a loss of US$3,173 for the three month period ended December 31, 2009 to US$1,828,604 for the three months ended December 31, 2010.  The increase is attributable to the above-mentioned increases in sales and gross profits, in addition to the increase in gain recognized on the effects of foreign currency conversion.





Liquidity and Capital Resources





Overview





As of December 31, 2010, we had cash and equivalents on hand of US$1,125,056, and working capital of US$10,209,154.  We believe that our cash on hand and working capital will be sufficient to meet our operational cash requirements through June 30, 2011.  If XYT does not meet its revenue objectives over that period, the Company may need to sell additional equity securities, which could result in dilution to current stockholders, or seek additional loans.  The incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that would restrict its operations. Financing may not be available in amounts or on terms acceptable to the Company, if at all.  Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.





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Substantially all of our revenues are earned by XYT, our PRC subsidiary.  However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to their offshore parent company.  Pursuant to the law of PRC on foreign-capital enterprises, when XYT decides to distribute profits, reserve funds and bonus and welfare funds for workers and staff members shall be withdrawn from the profits after a foreign-capital enterprise has paid income tax in accordance with the provisions of the Chinese tax law.  The proportion of reserve funds to be withdrawn shall not be lower than 10% of the total amount of profits after payment of tax; the withdrawal of reserve funds may be stopped when the total cumulative reserve has reached 50% of the registered capital.  The proportion of bonus and welfare funds for workers and staff members to be withdrawn shall be determined by the foreign-capital enterprise of its own accord. Companies may be subject to a fine up to 5,000 RMB as a result of non-compliance of such rules.  The registered capital of XYT is US$260,100.  Shareholders of XYT had not determined the proportion of reserve funds and bonus and welfare funds for workers and staff members, and XYT had not distributed any profits previously.  If we decide to distribute profits in the future, XYT will comply with the relevant rules to withdraw statutory reserve funds which will be no lower than 10% of the total amount of profits after payment of tax.





Our cash needs are primarily for working capital to support our operations, the purchase of inventory and future strategic acquisitions.  We presently finance our operations through revenue from the sale of our products and services, the private placement of equity and debt securities and short-term bank borrowings.  As of December 31, 2010, we had outstanding bank loans from Kunming Wuhua Branch of Fudian Bank in the amounts of US$52,044 and US$760,447, with annual interests rates of 7.97% and 5.31%, respectively, and maturity dates of April 26, 2011 and December 6, 2011, respectively.  We believe that our existing capital resources are sufficient to meet our current obligations and operating requirements, but will not be sufficient to meet our more aggressive growth and acquisition plans and that we will need to raise additional capital in the next 12 months.  In order to meet our planned two to four strategic acquisitions, we estimate requiring US$6 million in capital.  We will consider debt or equity offerings or institutional borrowing as potential means of financing, however, there are no assurances that we will be successful or that we will obtain terms that are favorable to us.





In addition to the US$6 million for acquistions, XYT will also require financing to expand its product line.  Management believes that over a six month period, the Company can expand its product line to approximately 30,000 products at a cost of US$2 to US$2.5 million.  This will allow XYT to not only sell more products to its approximately 4,700 existing customers, but also attract more customers that currently do not utilize XYT.  The bulk of these funds will be utilized to purchase inventory, which will be on a cash basis until a track record is established and net 30 day terms can be negotiated.  The broader product line will include significantly more Western drugs as well as traditional Chinese drugs and herbs.  In addition, the Company may be required to raise capital in order to make acquisitions in furtherance of its growth plan.  Although funds from operations are adequate to conduct the Company’s current operations, it will need to raise capital in order to grow through acquisitions.





Net cash provided by (used in) operating activities





Net cash provided by operating activities for the nine months ended December 31, 2010 was US$88,485, compared to net cash used in operating activities of US$4,032 for the nine months ended December 31, 2009.  This increase in cash used in operating activities was primarily due to net income of US$1,786,192, and decreases in others payable and accrued liabilities of US$2,226,365 partially offset by accounts receivables of US$2,385,820.





Net cash provided by investing activities





Net cash provided by investing activities was US$507,684 for the nine months ended December 31, 2010 and was generated by the acquisition of XYT.  The Company under took no investing activities during the nine months ended December 31, 2009.





Net cash provided by financing activities





Net cash provided by financing activities was US$320,422 for the nine months ended December 31, 2010 and was comprised of a convertible promissory note offset in part by repayment of borrowings from Kunming Wuhua Branch of Fudian Bank and increase in restricted cash.  Net cash provided by financing activities during the nine months ended December 31, 2009 was US$9,839.





Off-Balance Sheet Arrangements





We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.  We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.





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Critical Accounting Policies and Estimates





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





Valuation of accounts receivable





An allowance for impairment of trade and other receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original terms of receivables.  The amount of the allowance is the difference between the receivables’ carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate computed at initial recognition.  The amount of the allowance is recognized in the income statement.




Inventories





Net realizable value of inventories is the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale.  For the years ended March 31, 2010 and 2009, the Company recorded no allowance for slow-moving and obsolete inventories.





Deferred income taxes





Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of income and comprehensive income in the periods that includes the enactment date.





Useful lives of plant and machinery





Depreciation of property, plant and equipment is calculated to write off the cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives.  The principal annual rates are as follows:





Machinery
5 yearsMotor Vehicles
4 yearsOffice equipment
3 years





Recently Issued Accounting Pronouncements





In April 2009, the FASB issued FSP 157-4, Determining Fair Value When The Volume And Level Of Activity For The Asset Or Liability Have Significantly Decreased And Identifying Transactions That Are Not Orderly (“FSP 157-4”).  FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased.  FSP 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly.  FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  FSP 157-4 does not require disclosures for earlier periods presented for comparative purposes at initial adoption.  In periods after initial adoption, FSP 157-4 requires comparative disclosures only for periods ending after initial adoption.  The adoption of the provisions of FSP 157-4 is not anticipated to materially impact on the Company’s results of operations or the fair values of its assets and liabilities.





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In May 2009, the FASB issued FSP SFAS 165 “Subsequent Events.”  The objective of this Statement is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for the interim and annual periods ending after June 15, 2009, which is now codified as FASB ASC 855 “Subsequent Events.”  The adoption of FASB ASC 855 did not have a material impact on the Company’s financial position, results of operations and cash flows.  Effective February 24, 2010, the Company adopted Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements,” which removes the requirement to disclose the date through which subsequent events have been evaluated.  The adoption of the ASU did not have a material impact on the Company’s financial position, results of operations and cash flows.





In June 2009, the FASB issued SFAS No. 166 Accounting For Transfers Of Financial Assets (“SFAS 166”).  This statement is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a 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.  This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, and is required to be adopted by the Company in the first quarter of fiscal year 2011.  Earlier application is prohibited.  This Statement must be applied to transfers occurring on or after the effective date.  The Company does not expect the adoption of SFAS 166 to have a material impact on its financial position, results of operations and cash flows.





In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which is codified as ASC 810.  ASC 810 amends FASB Interpretation No. 46(R), “Variable Interest Entities” for determining whether an entity is a variable interest entity (“VIE”) and requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE.  Under ASC 810, an enterprise has a controlling financial interest when it has a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE.  ASC 810 also requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining whether it has power to direct the activities of the VIE that most significantly impact the entity’s economic performance.





ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, requires enhanced disclosures and eliminates the scope exclusion for qualifying special-purpose entities.  ASC 810 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  ASC 810 is effective for the Company in the first quarter of fiscal 2011.  The Company is currently evaluating the effect of ASC 810 on its financial statements and results of operation and is currently not yet in a position to determine such effects.





In June 2009, the FASB issued SPAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No 162,” which supersedes all existing non-SEC accounting and reporting standards.  The codification does not change GAAP but rather organizes it into a new hierarchy with two levels; authoritative and non-authoritative.  All authoritative GAAP carries equal weight and is organized in a topical structure.  The adoption of SPAS 168 did not have a material impact on the Company’s financial position, results of operations and cash flows.





In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value,” which is codified as ASC 820, “Fair Value Measurements and Disclosures.”  This Update provides amendments to ASC 820-10, Fair Value Measurements and Disclosures –Overall, for the fair value measurement of liabilities.  This Update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with the principles of ASC 820.  The amendments in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents transfer of the liability.





The amendments in this Update also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the assets are required are Level 1 fair value measurements. ASC 820 is effective for the first reporting period (including interim periods) beginning after August 28, 2009.  The adoption of this Update did not have a significant impact to the Company’s financial statements.





In September 2009, the FASB issued ASU No. 2009-06, “Income Taxes (Topic 740)—Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities,” and it provides implementation guidance on accounting for uncertainty in income taxes effective for interim and annual reporting period ending on or after September 15, 2009.  The adoption of ASU No. 2009-06 did not have any impact on the Company’s financial position, results of operations and cash flows.





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In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”).”  ASU 2009-17 amends the variable-interest entity guidance in FASB ASC 810-10-05-8 to clarify the accounting treatment for legal entities in which equity investors do not have sufficient equity at risk for the entity to finance its activities without financial support.  ASU 2009-17 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009.  ASU 2009-17 is effective for the Company in the first quarter of fiscal 2011.  The Company is currently evaluating the effect of ASU 2009-17 on its consolidated financial statements and results of operation and is currently not yet in a position to determine such effects.





None of the above new pronouncements has current application to us, but may be applicable to our future financial reporting.




ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS




Not Applicable.




ITEM 4.            CONTROLS AND PROCEDURES




Evaluation of Disclosure Controls and Procedures





We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Chief Financial Officer, of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rule 13a-15(e) and 15a-15(e)) as of December 31, 2010 pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, our Principal Executive Officer along with our Principal Financial Officer concluded that our disclosure controls and procedures are not effective as of the end of the period covered by this report in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.




This conclusion is based on findings that constituted material weaknesses.  A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.  These material weaknesses include the following:





i)
We lack personnel with the experience to properly analyze and record complex transactions in accordance with U.S. GAAP.ii)
We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls.  As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.iii)
We have not achieved the optimal level of segregation of duties relative to key financial reporting functions.iv)
We do not have an audit committee or an independent audit committee financial expert.  While not being legally obligated to have an audit committee or independent audit committee financial expert, it is the management’s view that to have an audit committee, comprised of independent board members, and an independent audit committee financial expert is an important entity-level control over our financial statements.v)
We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on our internal control over financial reporting.  Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.





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We are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the near term, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources and personnel to potentially mitigate these material weaknesses.





Changes in Internal Control Over Financial Reporting





There were no changes in our internal controls over financial reporting that occurred during the quarterly period ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.


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PART II - OTHER INFORMATION




ITEM 1.
LEGAL PROCEEDINGS




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




ITEM 1A.
RISK FACTORS




Not Applicable.




ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Convertible Promissory Notes





On October 3, 2010, the Company issued a convertible promissory note to Sierra Growth Inc. (the “Sierra Note”) in the principal amount of up to $400,000, with interest on the unpaid principal at a rate of 5.0% simple interest per annum.  The Sierra Note matures on October 3, 2015.  The outstanding principal and accrued but unpaid interest thereon may be converted (1) upon a qualified debt or equity financing, in which case the holder of the Sierra Note would receive for the same promissory note or class and series of stock, respectively, issued in such qualified financing; (2) upon mutual agreement by the holder and the Company, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price; or (3) upon a reorganization, consolidation or merger of the Company, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price.  We issued the Sierra Note in reliance on Section 506 of Regulation D and/or Regulation S of the Securities Act, and comparable exemptions for sales to "accredited" investors under state securities laws.  On October 4, 2010, Sierra Growth Inc. assigned the Sierra Note to Caledonia Partners LLC, and on January 21, 2011, Caledonia Partners LLC agreed to extend the total funds available to the Company under the Sierra Note to $500,000.  As of January 28, 2011, the Company has drawn $410,000 under the Sierra Note.





On December 22, 2010, the Company issued a convertible promissory note to Caledonia Partners LLC  (the “Caledonia Note”) in the principal amount of up to $500,000, with interest on the unpaid principal at a rate of 5.0% simple interest per annum.  The Caledonia Note matures on December 22, 2015.  The outstanding principal and accrued but unpaid interest thereon may be converted (1) upon a qualified debt or equity financing, in which case the holder of the Caledonia Note would receive for the same promissory note or class and series of stock, respectively, issued in such qualified financing; (2) upon mutual agreement by the holder and the Company, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price; or (3) upon a reorganization, consolidation or merger of the Company, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price.  We issued the Caledonia Note in reliance on Section 506 of Regulation D and/or Regulation S of the Securities Act, and comparable exemptions for sales to "accredited" investors under state securities laws.  As of the date of this Form 10-Q, the Company has not drawn any funds under the Caledonia Note.





ITEM 3.
DEFAULTS UPON SENIOR SECURITIES




None.




ITEM 4.
REMOVED AND RESERVED




ITEM 5.
OTHER INFORMATION




None.





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ITEM 6. EXHIBITS





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





Exhibit

Number

Description2.1

Share Exchange Agreement, dated August 23, 2010 (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on August 24, 2010).3.1

Articles of Incorporation of the Registrant, dated July 31, 2007, including all amendments to date (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed September 21, 2010).3.2

Amended and Restated Bylaws of the Registrant, as amended, dated June 1, 2010 (incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on June 30, 2010).4.1

Form of Stock Specimen (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form S-1 filed on May 28, 2008).10.1

Convertible Promissory Note of the Company, dated October 3, 2010, to Sierra Growth Inc., as amended and assigned to Caledonia Partners LLC*10.2

Convertible Promissory Note of the Company, dated December 22, 2010, to Caledonia Partners LLC31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2

Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *





* Filed herewith


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SIGNATURES




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




FIRST CHINA PHARMACEUTICAL GROUP, INC.Date:  March 31, 2011
/s/ Yi Jia LiName:  Yi Jia LiTitle:  Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer)





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