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

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

For the transition period from _________________ to _________________

Commission File Number: 000-54076

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

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

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

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

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

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

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 August 15, 2012 was 59,664,480.

INDEX

i

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

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

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

YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

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

2

PART I. FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS

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

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

3

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

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

4

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

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

5

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

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

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

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

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

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          a)      Basis of Preparation and Presentation

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

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

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The as consolidated balance sheet information as of December 31, 2011 (except for restated amounts) was derived from the audited consolidated financial statements included in Form 10-K except the restatements included in Note 4.

6

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

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

          b)      Use of Estimates

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

Warrants that could require cash settlement or have anti-dilution price protection provisions are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in other income (expense) in our statement of loss and comprehensive loss in each subsequent period. In general, warrants with anti-dilution provisions are measured using the Black-Scholes valuation model. The methodology based, in part, upon inputs for which there is little or no observable market data, requiring the Group to develop its own assumptions. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates, however these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions are used, the warrant liability and the change in estimated fair value could be materially different. Also see Note 11.

          c)      Cash and Cash Equivalents

The Group considers all highly liquid investments with initial maturities of six months or less to be cash equivalents. As of June 30, 2012 and December 31, 2011, $4,132,363 and $3,112,249, respectively were held under personal named accounts of certain officers of the Group, which are used for cash receipts from sales and purchases of inventory.

          d)      Accounts Receivable

As of June 30, 2012 and December 31, 2011, the allowance for doubtful accounts was $378,118 and $375,405, respectively.

          e)      Revenue Recognition

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

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

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

7

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

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

          f)      Foreign Currency Translation

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

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

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

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

Rates applicable to periods presented:

          g)      Recent Accounting Pronouncements

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

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

8

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

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

          h)      Business and Economic Risks

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

          i)      Fair Value Measurements

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

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

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

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

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

The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the six months ended June 30, 2012 and the year ended December 31, 2011, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3)

          j)      Liquidity

Cash and cash equivalents on June 30, 2012 was approximately $4.6 million. The Group has negative working capital of approximately $1.2 million. The Group intends to meet its cash requirements through the use of existing cash on hand and short-term borrowing.

9

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

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

          k)      Earnings per share

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

          l)      Reclassification

The Group reclassified certain items in the December 31, 2011 and June 30, 2011 condensed consolidated financial statements for comparative purposes to conform to the current year presentation.

3. RELATED PARTIES

Accounts Receivable From a Related Party And Prepayments to a Related Party

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

Due From Related Parties

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

10

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

3. RELATED PARTIES (CONT'D)

Due to Shareholder

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

4. RESTATEMENTS

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

1. The Group discovered in May 2012 that an adjustment to sales of approximately $700,000 and cost of sales of approximately $1,500,000 was reflected in the statement of operations for the three months ended March 31, 2011, which subsequently affected the statement of operations for six months ended June 30, 2011. The sales and cost of sales were related to operations in December 2010.

2. The Group discovered in April 2012 that it incorrectly recorded warrants issued in private placement in additional-paid-in-capital. The warrants should be treated under ASC 815-10. The Group decreased additional-paid-in-capital by approximately $3,000,000 and increased derivative liability by the same amount. In connection with this error, the change in fair value of the derivative liability between grant date and June 30, 2011 was calculated to be $832,845. As a result, the Group recorded an adjustment to derivative gain of the same amount.

3. The Group corrected an under-accrual of income tax liability of approximately $290,000. In addition, the Group corrected the Value Added Tax reserve, which was offset against reversal of prior year's reserve based on the tax certification the Group obtained from the tax bureau. The net impact was approximately $170,000.

4. The Group discovered in April 2012 that it incorrectly recorded a discount on convertible notes in equity. The Group corrected a previously calculated discount on convertible notes from equity into convertible promissory notes in the amount of $113,747.

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

6. The Group discovered in June 2012 that it had incorrectly calculated the other comprehensive income for the six and three months ended June 30, 2011 because of differing exchange rates were used. In addition, the change in other comprehensive income should be an expense instead of an income. Therefore, the Group corrected the change in other comprehensive income by approximately $358,000 for the six months ended June 30, 2011 and approximately $184,000 for the three months ended June 30, 2011.

The audited financial statements as of December 31, 2011 have been restated to correct the following errors:

7. The Group discovered in June 2012 that it had overstated the Value Added Tax liability for the nine months ended December 31, 2011 due to incorrect assumptions used in estimating the Group's overall exposure. In addition, the 2010 Value Added Tax accrual should be reversed pursuant to the tax certificate the Group received in 2012. Therefore, the Group had reduced the liability by approximately $7.5 million.

8. The Group discovered in June 2012 that it had incorrectly recorded amount under Due From Shareholder due to the factor described above. The Value Added Tax prior to 2011 was recorded under Due From Shareholder due to consideration that the shareholder collected cash receipts on the Group's behalf. Therefore, the Group had reduced the Due From Shareholder by approximately $7.2 million.

9. The Group had discovered in June 2012 that the above two restatements had a net income statement impact of approximately $300,000.

11

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

4. RESTATEMENTS (CONT'D)

12

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

4. RESTATEMENTS (CONT'D)

13

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

4. RESTATEMENTS (CONT'D)

14

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

5. CONCENTRATION OF CREDIT RISK

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

The Group has a diverse customer base predominantly in the Yunnan Province. For the six months ended June 30, 2012 three customers exceeded 5% of the Group’s total revenues, one of which is a related party, represented 16% of total revenues. For the six months ended June 30, 2011 there were no customers exceeding 5% of the Group’s total revenues.

The Group relies on supplies from numerous vendors. For the six months ended June 30, 2012 three vendors exceeded 5% of the Group’s total purchases, of which one is a related party, represented 20% of total purchases. For the six months ended June 30, 2011 no vendor exceeded 5% of the Group’s total purchases.

6. PREPAYMENTS

7. NOTES RECEIVABLE

15

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

8. NOTES PAYABLE, LOANS PAYABLE AND SHORT TERM BORROWINGS

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

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

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

On March 19, 2012, the Group issued a promissory note to the Belmont Group Ltd., in the principal amount of $500,000, with interest on the unpaid principle at a rate of 12.0% simple interest per annum. The Note matures on March 19, 2013. As of June 30, 2012, the Group has drawn $150,000 and owes additional accrued interest of $5,097 under the Note.

On January 13, 2012, the Group executed a loan agreement with Fudian Bank for approximately $1,200,000. The loan carries a variable interest rate adjusted monthly based upon one hundred thirty percent of the prevailing rate set by the Peoples Bank of China. The Group is responsible to pay interest on a monthly basis, and the principal is due on January 6, 2013. The loan is guaranteed by Kunming City DGTW Trading Co., a non-related third party.

On June 8, 2012, the Group entered into a lending agreement with Yunnan Hengan Investment Co. for approximately $1,600,000 of which $1,255,370 has been drawn down. The loan matures on December 8, 2012. Interest rate is based on prevailing interest rate set by the People’s Bank of China, with comparable terms.

16

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

9. CONVERTIBLE PROMISSORY NOTES

On October 3, 2010, the Group issued a convertible promissory note in the principal amount of up to $400,000, with interest on the unpaid principal at a rate of 5.0% simple interest per annum. The Note matures on October 3, 2015. The outstanding principal and accrued but unpaid interest thereon may be converted (1) upon a qualified debt or equity financing, in which case the holder of the Note would receive for the same promissory note or class and series of stock, respectively, issued in such qualified financing; (2) upon mutual agreement by the holder and the Company, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price; or (3) upon a reorganization, consolidation or merger of the Group, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price. On October 4, 2010, the note was assigned to another party (“Note I”), and on January 21, 2011, the note holder agreed to extend the total funds available to the Group to $500,000. As of June 30, 2012, the Group has drawn $495,000 under Note I and no share conversion occurred.

On December 22, 2010, the Group issued a convertible promissory note (“Note II”) in the principal amount of $500,000, with interest on the unpaid principal at a rate of 5.0% simple interest per annum. The Note matures on December 22, 2015. The outstanding principal and accrued but unpaid interest thereon may be converted (1) upon a qualified debt or equity financing, in which case the holder of the Note would receive for the same promissory note or class and series of stock, respectively, issued in such qualified financing; (2) upon mutual agreement by the holder and the Group, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price; or (3) upon a reorganization, consolidation or merger of the Group, in which case the holder would receive a number of shares of common stock based on a conversion price equal to the trailing volume weighted average price. As of June 30, 2012, the Group has drawn $500,000 under the Note and no share conversion occurred.

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

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

17

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

10. COMMON STOCK

Issuance of Private Offering Units

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

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

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

11. STOCK PURCHASE WARRANTS

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

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

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

18

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

11. STOCK PURCHASE WARRANTS (CONT'D)

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

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

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

12. SHARE-BASED PAYMENT FOR CONSULTANT SERVICE

As of May 6, 2011, the Group entered into a Board Advisory Agreement (the “Agreement”) with Jack Zwick, whereby Mr. Zwick consented to serve as a director of the Group. Pursuant to the Agreement, Mr. Zwick will receive two hundred thousand (200,000) shares of Group common stock, vesting monthly over a period of two years, in addition to his service fee of $2,000 per month. The share-based award was valued on May 6, 2011 using the ending market price of common stock. Expense related to the share-based compensation for the six months ended June 30, 2012 and June 30, 2011 was approximately $34,000 and $10,000, respectively.

The Group had added two new board members. They were each awarded 100,000 shares over two years in connection with their service as of June 26, 2012. No expense was recorded for six months ended June 30, 2012. The Group valued the share-based award using the ending market price of common stock as of June 26, 2012. The Group anticipates the monthly expense to be approximately $2,000.

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

13. TAX

Corporate Income Tax (“CIT”)

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

Value Added Tax (“VAT”)

Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value added tax in accordance with Chinese Laws. The value added tax standard rate is 17% of the gross sale price, and the Group records its revenue net of VAT. A credit is available whereby VAT paid on the purchase of inventory can be used to offset the VAT on the sales. In addition, the Group had estimated a VAT liability based on sales that excluded small scale taxpayors. The liability is relieved upon receiving a tax bureau certification indicating the Group's tax status is current.

14. COMMITMENTS AND CONTINGENCIES

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

Due to city-wide reconstruction and expansion of space, the Group entered into a lease agreement effective September 1, 2012. The future minimum annual payment will be approximately RMB 900,000, or approximately $143,000. The lease expires on August 30, 2013.

Rent Expense for the six months ended June 30, 2012 and 2011 was approximately $25,000 and $15,000 respectively.

15. RETIREMENT PLAN

The Group contributes on a monthly basis to defined contribution retirement benefit plans organized by relevant municipal and provincial governments. The municipal and provincial governments assume the retirement benefit obligations payable to all existing and future retired employees under these plans. The Group has no further obligation for post-retirement benefits beyond the contributions made. Expenses for six months ended June 30, 2012 and 2011 was approximately $10,000 and $22,000, respectively.

16. SUBSEQUENT EVENT

In August 2012, the Group entered into a loan agreement with the Bank of Communications for RMB 12,000,000 or approximately $2,000,000 to purchase inventory. The loan carries an annual interest rate of 9.17% with monthly interest payment. The principal is due within one year.

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

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

Overview

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

          As a result of the Exchange Transaction, through our wholly-owned subsidiary, XYT, we engage in drug logistics and distribution in Yunnan Province, China. We distribute medicines to local distributors, pharmacies, hospitals, and clinics. XYT carries approximately 7,500 products, of which approximately 1,500 are over-the-counter drugs, approximately 1,500 are prescription drugs, approximately 3,000 are Chinese patent medicines, and approximately 1,500 are supplements. Currently, XYT services approximately 5,800 customers through a sales network that covers the entire Yunnan Province of China. XYT has a strategic advantage over its competitors in Yunnan Province because XYT obtained government approval to conduct business over the internet. XYT received the License of Internet Drug Information Service issued by the Yunnan Food and Drug Administration in October 2009. This license enables XYT to bypass municipal and county pharmaceutical distributors, market XYT’s product line, provide pricing information and provide products directly to retailers. Bypassing these layers of distribution enables XYT to offer products to its customers at a significantly lower price than its major competitors while maintaining its margins. In October 2011, we were awarded the IDTSL, a key national license which permits us to accept orders and transact payments over the internet. The new license complements our existing Internet Drug Information Service License that enables us to market and advertise our products, along with accepting orders and transacting payments, over the internet.

          We are focused to expand our customer base within Yunnan province and to expand of our product selection. We will grow our customer base through leveraging our online platform. The IDTSL offers us broad national exposure to an audience that for the first time can now directly access, submit orders and transact payments for purchases from our product catalogue over the internet. We will expand our inventory through short term financing. The additional inventory will allow XYT to not only sell more products to our existing customers, but also attract more customers that currently do not purchase from XYT.

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

Comparison of the Six Months Ended June 30, 2012 and 2011

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

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          Sales

          Sales increased from $19.0 million for the six months ended June 30, 2011 to $26.2 million for the six months ended June 30, 2012, representing an increase of $7.2 million or 38%. The majority of our sales remain in patented Chinese herbal medicine. The increase can be attributed to three factors. Our internet platform enables existing customers to place more orders more frequently. In addition, our customers ordered more products from us due to our expanded inventory. The number of sales orders we processed increased by 100% for the six months in 2012 compare to 2011. Lastly, our Chinese natural herb product line in 2012 was more mature than 2011.

          Cost of sales

          Cost of sales increased from $16.4 million for the six months ended June 30, 2011 to $23.7 million for the six months ended June 30, 2012, representing an increase of $7.3 million or 45%. Cost of sales consists primarily of material cost which is directly attributable to the selling of pharmaceutical products. This increase in cost of goods is directly related to the increase in sales.

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

          Gross profit

          Gross profit decreased from $2.6 million for the six months ended June 30, 2011 to $2.5 million for the six months ended June 30, 2012, representing a decrease of approximately $100,000 or 4%. The decrease in gross margin is attributed to two factors. The Chinese government is going through medical reform with one of the goals is to control retail drug prices. It had negatively impacted our margin because the ceiling placed on our retailer customer base. In addition, in 2012, the Company is focusing to increase net income through volume instead of high margin products. Two factors drove our gross margin down amid an increase in sales.

          Selling, general and administrative expenses

          Selling, general and administrative expenses decreased by 31% to $1 million for the six months ended June 30, 2012 from $1.7 million for the six months ended June 30, 2011. The decrease was due to professional fees incurred in 2011 related to the private placement.

          Derivative gain/ (loss)

          Derivative loss was approximately $703,000 for the six months ended June 30, 2012 compared to approximately $832,000 gain for the six months ended June 30, 2011. It is the result of the Black-Scholes derivative valuation of the warrants issued by the Company in relation to the private placement in April 2011. The valuation of these warrants is required by US GAAP and can produce either a non cash gain or loss; depending upon the fair market value of the common stock. This is a non cash transaction and does not affect the Company’s working capital.

          Value added tax

          The value added tax reserve was approximately $547,000 for the six months ended June 30, 2012 compared to approximately $170,000 for the six months ended June 30, 2011. The Company establishes a reserve for the current period VAT, while offsetting it with prior period reserve reversals. The reversal of prior reserves occurs once the Company obtains tax bureau certifications that indicates the Company is current with its VAT tax. For the six months ended June 30, 2012 and 2011, the reversal of value added tax exceeded current period accrual, which resulted in a source of income.

          Income tax expense

          Income tax expense for the six months ended June 30, 2012 was $477,000 compared to income tax expense of $582,000 for the six months ended June 30, 2011. The provision for income tax represents income tax owed in China. The decrease is due to decreased income before tax of XYT. In addition, our effective rate changed from 30% for the six months ended June 30, 2012 to 38% for the six months ended June 30, 2011 due to change in our valuation allowance for the deferred tax asset for loss carryforwards of FCPG HK and FCPG.

          Net income/(loss)

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          Our net income for the six months ended June 30, 2012 was approximately $740,000, a decrease of 47%, from net income of approximately $1,390,000 for the six months ended June 30, 2011. The decrease is attributed to the fluctuation of derivative liability.

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

          Sales

          Sales increased from $11.6 million for the three months ended June 30, 2011 to $14.0 million for the three months ended June 30, 2012, representing an increase of $2.4 million or 21%. The increase for this quarter was not as significant as the increase in the first quarter of 2012. The main reason that limited the Company's ability to expand sales in the second quarter was due to changes in the regulations. In April 2012, the State Food and Drug Administration (SFDA) issued a standard for the allowable level of chromium contained in medicine capsules. The pharmaceutical industry had to adjust the existing process to conform to the new standard. In addition, in May 2012, SFDA began a nationwide quality and safety test of medicine capsules. Both contributed to the uncertainty within the pharmaceutical market. As a result, the sales growth in the second quarter was not as significant as the first quarter.

          Cost of sales

          Cost of sales increased from $10.3 million for the three months ended June 30, 2011 to $12.6 million for the three months ended June 30, 2012, representing an increase of $2.3 million or 22%. Cost of sales consists primarily of material cost which is directly attributable to the selling of pharmaceutical products. This increase in cost of goods is proportional to the increase in sales. Sales rose by 21% and the cost of goods had a corresponding increase of 22%.

          Gross profit

          Gross profit increased from $1.34 million for the three months ended June 30, 2011 to $1.47 million for the three months ended June 30, 2012, representing an increase of approximately $124,000 or 9%. The increase is primarily due to increase in sales while maintaining our gross margin. Our gross margin for 2012 was 10% compared to 12% in 2011. The decrease in gross margin was due to government medical reform and our focus on volume versus high margin products. We anticipate the margin to be in the range of 8% - 10% in the future.

          Selling, general and administrative expenses

          Selling, general and administrative expenses decreased by 42% to $304,000 for the three months ended June 30, 2012 from $526,000 for the three months ended June 30, 2011. In 2011, we incurred significant professional fees related to our private placement.

          Derivative gain/ (loss)

          Derivative gain was $538,000 for the three months ended June 30, 2012 compared to $1 million for the three month ended June 30, 2011. It is the result of the Black-Scholes derivative valuation of the warrants issued by the Company in relation to the private placement in April 2011. The valuation of these warrants is required by US GAAP and can produce either a non cash gain or loss; depending upon the fair market value of the common stock. This is a non cash transaction and does not affect the Company’s working capital.

          Value added tax

          The value added tax reserve was approximately $942,000 for the three months ended June 30, 2012 compared to approximately $170,000 for the three months ended June 30, 2012. The Company establishes a reserve for the current period VAT, while offsetting it with prior period reversals. The reversal of prior reserves occurs once the Company obtains tax bureau certifications that indicates the Company is current with its VAT tax. For the three months ended June 30, 2012 and 2011, the reversal of prior reserve exceeded current period accrual, which resulted in a source of income.

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          Income tax expense

          Income tax expense for the three months ended June 30, 2012 was $281,000 compared to income tax expense of $289,000 for the three months ended June 30, 2011. The provision for income tax represents income tax owed in China. The decrease is due to decreased income before tax of XYT. In addition, our effective rate changed due to change in our valuation allowance for the deferred tax asset of FCPG HK and FCPG.

          Net income/(loss)

          Our net income for the three months ended June 30, 2012 was $2.3 million, an increase of 33%, from net income of $1.7 million for the three months ended June 30, 2011. The decrease is primarily attributed to the fluctuation of the derivative liability.

Liquidity and Capital Resources

          Overview

          As of June 30, 2012, we had cash and equivalents on hand of $4.6 million and a working capital deficit of $1.2 million. We believe that our cash on hand and working capital will be sufficient to meet our operational cash requirements through the next 12 months. In order to continue our growth, we will have to obtain additional capital in the form of debt or equity. We are currently seeking both short term working capital as well as significant amounts of long term capital to execute our business plan and ultimately expand the business throughout China.

          Additional capital is required to acquire sufficient inventory to meet growing sales and to broaden our product line. Additional capital is also required to facilitate the ability to obtain exclusivity for the distribution of certain pharmaceutical products, as they require the Company to place large consistent orders with drug manufacturers. To meet our future objectives, we will need to meet our revenue objectives and/or sell additional equity and debt securities, which could result in dilution to current shareholders. The incurrence of indebtedness would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that would restrict its operations. Financing may not be available in amounts or on terms acceptable to the Company, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

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

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

          On January 13, 2012, we executed a loan agreement with Fudian Bank for approximately $1,200,000. The loan carries a variable interest rate adjusted monthly based upon one hundred thirty percent of the prevailing rate set by the Peoples Bank of China. The Company is responsible to pay interest on a monthly basis, and the principal is due on January 6, 2013. The loan is guaranteed by Kunming City DGTW Trading Co., a non-related third party.

          On June 8, 2012, we entered into a lending agreement with Yunnan Hengan Investment Co. for approximately $1,600,000. The loan matures on December 8, 2012. Interest rate is based on prevailing interest rate set by the People’s Bank of China, with comparable terms.

          On August 13, 2012, subsequent to our quarter ended June 30, 2012, we entered into a loan agreement with the Bank of Communications for approximately $2,000,000 to purchase inventory. The loan carries an interest rate of 9.17% with monthly interest payment. The principal is due within one year.

          Substantially all of our revenues are earned by XYT, our PRC subsidiary. However, PRC regulations restrict the ability of our PRC subsidiary to make dividends and other payments to their offshore parent company. Pursuant to PRC regulations, dividends, interests, rent or royalties payable by a foreign-invested enterprise (FIE) to its foreign non-resident investors are subject to a 10% withholding tax unless such foreign investors' jurisdiction has a tax treaty with China that provides for a reduced tax rate. XYT is wholly owned by FCPG HK, which falls under Hong Kong jurisdiction. Hong Kong has a tax treaty with China that reduces the withholding to 5% under certain condition. Dividends are only allowed to be paid out of accumulated earnings determined in accordance with PRC accounting standards, less any statutory reserve funds that are required by law. XYT had not distributed any profits previously. If we decide to distribute profits in the future, XYT will comply with the relevant rules to withdraw statutory reserve funds which will be no lower than 10% of the total amount of profits after payment of tax.

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

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

          Net cash provided by (used in) operating activities

          Net cash used in operating activities for the six months ended June 30, 2012 was $1.7 million, compared to net cash provided by operating activities of $1.9 million for the six months ended June 30, 2011. In 2012, we began to improve our business operations by requiring customers to prepay before we place orders at the suppliers. As a result, we saw significant increase to prepayments and advance receipts.

          Net cash used in investing activities

          Net cash used in investing activities was $252,000 for the six months ended June 30, 2012, compared to net cash used in investing activities of $679,000 for the six months ended June 30, 2011. Investment activities, relate to the purchase of equipment, and finance our notes receivable.

          Net cash used in financing activities

          Net cash provided by financing activities was $2.9 million for six months ended June 30, 2012, compared to net cash used in financing activities of $1.8 million for the six months ended June 30, 2011. In 2012, we paid off a significant amount of our loans payable. In addition, due to increase notes payable at our suppliers' request, we were required to increase our restricted cash. Our restricted cash is released once the notes payable are cleared, which is usually within three to four months.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

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

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Recently Issued Accounting Pronouncements

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

          Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

          We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer along with our Principal Financial Officer, of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of June 30, 2012 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer along with our Principal Financial Officer concluded that our disclosure controls and procedures are not effective as of June 30, 2012 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.

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

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

          Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Changes in Internal Control Over Financial Reporting

          There were no changes in our internal controls over financial reporting that occurred during the three months ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

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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

          Subsequent to our quarter ended June 30, 2012, on August 14, 2012, we issued 360,000 shares of Company common stock to Mr. Greg Tse in connection with Mr. Tse’s service on our Board of Directors and in accordance with Mr. Tse’s Board Advisory Agreement. The issuance of the shares to Mr. Tse was effected without registration in reliance on the exemption afforded by Regulation D and/or Section 4(2) of the Securities Act of 1933, as amended, and the rules promulgated thereunder, and comparable state securities law exemptions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

          None.

ITEM 4. MINE SAFETY DISCLOSURES

          Not applicable.

ITEM 5. OTHER INFORMATION

          Board Advisory Agreement with Greg Tse

          Subsequent to our quarter ended June 30, 2012, on August 14, 2012, we entered into a Board Advisory Agreement (the “Agreement”) with Mr. Greg Tse. Pursuant to the Agreement, in consideration for serving on the Company’s Board of Directors, Mr. Tse will receive: (a) three hundred and sixty thousand (360,000) shares of Company common stock, vesting as to two hundred and seventy thousand (270,000) shares immediately, 45,000 shares on September 1, 2012 and the remaining 45,000 shares on January 1, 2013, subject to Mr. Tse’s continuous service; and (b) a consulting fee of two thousand five hundred dollars ($2,500) per month. The payment to Mr. Tse of his monthly fee is contingent upon the Company closing an equity or debt financing of at least $2,000,000.

          Loan for Purchase of Inventory

          Subsequent to our quarter ended June 30, 2012, on August 13, 2012, we entered into a loan agreement with the Bank of Communications in the PRC for approximately $2,000,000, to purchase inventory. The loan carries an annual interest rate of 9.17% with monthly interest payments. The principle is due within one year.

          Audit Committee’s Conclusion as to Non-Reliance on Previously Issued Financial Statements

          On August 15, 2012, the Audit Committee of the Company’s Board of Directors, after consultation with management of the Company, including the Company’s Chief Financial Officer, concluded that the Company’s audited consolidated financial statements included in the Company’s Transition Report on Form 10-K for the nine months ended December 31, 2011 (the “2011 Transition Report”) filed with the Securities and Exchange Commission (“SEC”) on May 2, 2012, and the Company’s consolidated unaudited financial statements included in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2012 (the “2012 Quarterly Report”) filed with the SEC on May 18, 2012, should be restated to correct certain errors and should no longer be relied upon.

          The Company’s Audit Committee, in consultation with management, concluded that the financial statements included with the 2011 Transition Report and the 2012 Quarterly Report contained certain errors, including (i) an overstatement of the Value Added Tax liability; (ii) an incorrect recording of warrants issued in a private placement in additional-paid-in-capital; (iii) an under-accrual of income tax liability; (iv) an incorrect recording of a discount on convertible notes in equity; (v) an incorrect treatment of warrants and promissory notes as having a dilutive effect in the earnings per share calculation; and (vi) an incorrect calculation of the other comprehensive income for the three and six months ended June 30, 2011 because differing exchange rates were used.

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          The Company’s Audit Committee discussed the foregoing issues, findings and conclusions with EFP Rotenberg, LLP, the Company’s independent certifying accountant (“EFP”).

          In conjunction with EFP, the Company is working diligently to complete the restatement of the above-referenced 2011 Transition Report and 2012 Quarterly Report. The Company expects to file an amended 2011 Transition Report and an amended 2012 Quarterly Report, containing restated financial statements, by no later than September 1, 2012. However, there can be no assurance that such filings will be made within this period.

ITEM 6. EXHIBITS

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

______________
* Filed herewith
**To be provided by amendment

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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.

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