- Amended Annual Report (10-K/A)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No. 4)

(Mark One)

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

For the fiscal year ended December 31, 2011

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

For the transition period from ________ to __________

Commission file number 033-10893

China BCT Pharmacy Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-8067060
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

No. 102, Chengzhan Road

Liuzhou City, Guangxi Province, P.R.C. 545007

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: Tel.: (86) 772-363-8318

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $32,759,371 computed by reference to $2.09 as of June 30, 2011, which is less than $75 million.

As of March 29, 2012 there were 38,154,340 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None

CHINA BCT PHARMACY GROUP, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010

TABLE OF CONTENTS

Explanatory Note		1

PART II

Item 9A.	Controls and Procedures	3

PART IV

Item 15.	Exhibits, Financial Statement Schedules	5

Explanatory Note

China BCT Pharmacy Group, Inc. (the “Company,” “we,” “us” or “our”) is filing this Amendment No. 4 on Form 10-K/A to our Annual Report on Form 10-K for the year ended December 31, 2011, originally filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2012 (the “Original Form 10-K”) to revise Item 9A regarding Controls and Procedures. No other changes to the Original Form 10-K, Amendment No. 1, filed on April 6, 2012, Amendment No. 2, filed on April 25, 2012, or Amendment No. 3, filed on June 12, 2012, have been made and this Amendment No. 4 does not otherwise modify or update in any way disclosures made in the Original Form 10-K, Amendment No. 1, Amendment No. 2 or Amendment No. 3.

CAUTIONARY STATEMENT

This annual report contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales, profitability and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and (e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” or the negative of these words or other variations on these words or comparable terminology. In particular, these include statements relating to future actions, future performance, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results.

Any or all of our forward-looking statements in this annual report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this annual report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur and you should not place undue reliance on these forward-looking statements.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

We maintain “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have carried out an evaluation as required by Rule 13a-15(d) under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on an evaluation of our disclosure controls and procedures as of December 31, 2011 covered by this report (and the financial statements contained in the report), our Chief Executive Officer and Chief Financial Officer originally determined that our current disclosure controls and procedures were effective. However, in connection with the evaluation as required by Rule 13a-15(d) of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012, our Chief Executive Officer and Chief Financial Officer subsequently determined that our disclosure controls and procedures were not effective as of December 31, 2011, as evidenced by instances of non-conformity with US GAAP in draft financial statements furnished to our independent registered accounting firm in connection with their attest procedures. These included: (i) non-compliant initial disclosures resulting from improper valuations in connection with the acquisition of retail stores that did not adequately consider the possibility of separately identifiable intangible assets acquired in the transactions as required by FASB ASC Topic 805 “Business Combination”; (ii) improper treatment of payments made in connection with the acquisition of retail stores, where certain payments were initially treated as additional consideration, but should have been treated as compensation for services, and (iii) improper accounting treatment and valuation of convertible preferred shares that was not initially in compliance with FASB ASC 815 “Derivatives and Hedging” or ASR 268 (Securities and Exchange Commission, Financial Reporting Codification, Section No. 211, Redeemable Preferred Stocks). After review of these matters with our independent registered accounting firm, we corrected the effects of the initial improper recording of these matters and concluded there we no further material errors in our financial statements prior to including them in our periodic filings with the Commission. In addition, as noted below, the Company has retained a third-party US GAAP consultant who will review our processes and proposed accounting treatments prior to their being provided to our auditors.

Additionally, upon the Company’s re-assessment of its internal control over financial reporting, the following material weaknesses and significant deficiencies contributed to management’s conclusion that the Company’s internal control over financial reporting was not effective as of December 31, 2011:

Timeliness – There are a few matters for which we need to improve our efficiency and timeliness to allow management to analyze results and prepare financial statements in an efficient, accurate and timely manner. For instance, we did not timely record certain items nor were we able to close our books in a timely fashion at the end of each month. Specifically, certain bank transactions and inventory received prior to year-end were not recorded until after the end of the applicable month or fiscal year, respectively. Additionally, certain recurring entries not recorded at each reporting period were instead recorded as adjustments during the course of preparing our annual and quarterly financial statements for inclusion in our SEC filings. The above items represent both material weaknesses and significant deficiencies. These items have now been corrected.

Accuracy/Detail – There were instances in our records that lacked sufficient detail, accuracy and/or consistency in the maintenance of the Company’s financial records. Examples of these matters include the following:

(i) Our records relating to accounts receivable in one of our sales departments in the pharmaceutical distribution segment were combined for all customers and did not show detail on a customer-by-customer basis. This material weakness has now been corrected.

(ii) There were errors that were made in the preparation of our inventory report that did not match the inventory count sheet. We have taken corrective measures to prevent the recurrence of this material weakness and the result will be checked at the time of annual inventory taken at the end of 2012.

(iii) Our depreciation records have been maintained on Excel spreadsheets and did not reflect the necessary detail with regard to our fixed assets. Instead, we should have maintained these records within the basic accounting system and in sufficient detail to maximize accuracy and efficiency in our financial reporting for depreciable assets. This material weakness has now been corrected .

(iv) We used only two sets of computer-generated sequential numbers for various types of inventory movement activities each for multiple types of documents instead of a different set of numbers for each document type. This increased the risk for confusion and errors in researching and filing. We have addressed this material weakness as we now use a different set of numbers for each document type.

(v) Our policies and procedures for journal entries were not followed in certain instances resulting in entries without proper documentation and/or proper approval, and some improper entries. This material weakness has now been corrected.

(vi) We did not have separate accounts for various receivable accounts, which was a significant deficiency in our internal controls as it resulted in audit adjustments and affected the accuracy and timeliness of our financial reporting. This process has now been corrected.

(vii) Another significant deficiency in our internal controls was that related party transactions were not properly segregated from other general ledger accounts and were instead comingled with other accounts making it difficult to properly track those transactions for reporting and disclosure purposes. This process has now been corrected.

(viii) We were not consistent in which accounts were used for the recording of certain expenses. This significant deficiency has now been corrected.

Reconciliation Matters – We did not properly reconcile the year-end general ledger balance to the inventory listing for its pharmaceutical distribution segment, nor did it properly reconcile the fixed asset detail records to the prior year audited final financials resulting in numerous adjustments. We believe that these were material weaknesses in our controls. Further, we identified as a significant deficiency, that many prior year audit adjustments were not properly recorded and the opening retained earnings balance for fiscal 2011 needed to be reconciled to take those adjustments into account. Management has been making improvements to these processes, starting with incorporation of the audit adjustments at the consolidated level after which we will address the other necessary process changes.

Company Policies – The Company has determined that many of its policies and systems need to be revised to be brought into line with best practices. For instance, the Company has determined that it needs to revise its depreciation policy, its capitalization policy (i.e., what to expense and what to capitalize), its policy regarding accrual accounting of expenses for interim reporting purposes, its record retention policy, its policy regarding year-end sales cutoffs and its policies regarding contributions to the PRC’s Social Insurance. These reflect both material weaknesses and significant deficiencies in our controls. The company policies have been revised accordingly.

Financial/GAAP Experience – The Company has concluded that its internal personnel lack sufficient experience and knowledge in U.S. GAAP and the related rules promulgated by the SEC. This is a material weakness in our internal controls. Accordingly, the Company acknowledges that outside specialists and additional training need to be utilized to correct this and to bring the internal staff up-to-date on U.S. GAAP and related accounting rules and procedures and is seeking to engage a qualified third-party to provide such training and specialists.

Despite the non-conformity with US GAAP in draft financial statements and the above weaknesses in our internal control over financial reporting, the Company’s management nevertheless concluded that the financial statements filed with the SEC present fairly, in all material respects, the Company’s financial position, and results of operations and cash flows for the periods presented in conformity with US GAAP. The Company came to this conclusion after reviewing the financial statements in connection with the annual audits and quarterly reviews performed by its independent registered public accounting firm. In connection with such review, the Company was able to identify the instances of non-conformity with GAAP.

Internal Controls Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, 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 degree of compliance with the policies or procedures may deteriorate.

In connection with the filing and preparation of this annual report, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on management’s assessment using those criteria, management originally concluded that our internal control over financial reporting was effective as of December 31, 2011. However, management subsequently re-assessed our internal control over financial reporting as of March 31, 2012 and determined that our internal control over financial reporting was not effective as of December 31, 2011, as evidenced by instances of non-conformity with US GAAP in draft financial statements furnished to our independent registered accounting firm in connection with their attest procedures. As noted above, the Company’s management nevertheless has concluded that the financial statements included in this Annual Report on Form 10-K/A present fairly, in all material respects, the Company’s financial position, and results of operations and cash flows for the periods presented in conformity with U.S. GAAP and did so at the time of the original filing of the Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting; however, as noted above, since the fourth quarter of fiscal year 2011, we have identified certain matters that constituted a material weakness in our internal control over financial reporting. Specifically, we lacked certain procedures and policies to ensure proper and efficient financial reporting and we lacked sufficient accounting personnel with the appropriate level of knowledge, experience and training in US GAAP and SEC reporting requirements. We have taken, and are taking, certain actions to remediate this material weakness related to our lack of US GAAP experience. As of the date of this Amended Annual Report on Form 10-K/A, we have initiated on-the-job training in US GAAP and related matters for our staff and we also adopted and implemented internal policies regarding capitalization, depreciation, and monthly closing of the financial books to address weaknesses relating to those matters. Additionally, we are currently in the process of identifying qualified consultants to assist the Company with US GAAP compliance until such time as we are able to train and develop our internal resources in this area. So far we have engaged an outside consulting professional firm to assist in the review of our financial statements for our upcoming Quarterly Report on Form 10-Q.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed as part of this Report:

1. Financial Statements.

Incorporated by reference from the financial statements and notes thereto that are set forth in Item 8 of this Annual Report on Form 10-K.

2. Financial Statement Schedules.

No schedules have been filed because they are not applicable or not required, or the information is included in the Consolidated Financial Statements or Notes thereto.

(b) Exhibits.

2.1	Share Exchange Agreement dated December 23, 2009 (1)

3.1	First Amended and Restated Certificate of Incorporation (2)

3.2	By-laws (3)

4.1	Form of Warrant (1)

4.2	Form of Co-Placement Agent Warrant (4)

4.3	Certificate of Designation of Series A Convertible Preferred Shares (2)

10.1	Subscription Agreement Dated October 23, 2009 (1)

10.2	Co-Placement Agent Agreement Dated October 21, 2009 (5)

10.3	Escrow Deposit Agreement Dated October 21, 2009 (1)

10.4	Earn-In Agreement dated October 22, 2009 (1)

10.5	Share Transfer Agreement dated as of April 1, 2008 (5)

10.6	Shares Pledge Agreement dated May 3, 2008 (1)

10.7	Shares Pledge Agreement dated March 31, 2009 (1)

10.8	Shares Repurchase Agreement dated July 31, 2008 (1)

10.9	Loan Agreement and Pledge Agreement dated December 19, 2008 by and among Liuzhou Baicaotang, Baicaotang Property Development Limited and Liuzhou City Commercial Bank (5)

10.10	Loan Agreement and Pledge Agreement dated December 29, 2008 by and among Liuzhou Baicaotang, Baicaotang Property Development Limited and Rural Credit Cooperatives (5)

10.11	Loan Agreement and Pledge Agreement dated January 8, 2009 by and among Liuzhou Baicaotang, Baicaotang Property Development Limited and Agricultural Bank of China (5)

10.12	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated February 13, 2006 (5)

10.13	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated March 27, 2006 (5)

10.14	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated April 6, 2006 (5)

10.15	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated May 18, 2006 (5)

10.16	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated December 6, 2006 (5)

10.17	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated December 29, 2008 (5)

10.18	Loan Agreement dated February 8, 2007 by and between Huitian Tang and Industrial and Commercial Bank of China Guangxi Branch (5)

10.19	Confirmation Agreement dated December 31, 2008 by and among Huitian Tang, Liuzhou Baicaotang and Liuzhou Baicaotang Guigang Branch (5)

10.20	Loan Agreement dated February 12, 2007 by and between Youru Jiang and Industrial and Commercial Bank of China Guangxi Branch (5)

10.21	Confirmation Agreement dated December 31, 2008 by and among Youru Jiang, Liuzhou Baicaotang and Liuzhou Baicaotang Guigang Branch (5)

10.22	Lock-Up Agreement, dated December 23, 2009 (5)

10.23	Employment Agreement dated May 18, 2010 by and between Guangxi Liuzhou Baicaotang Medicine, Ltd., China BCT Pharmacy Group, Inc. and Huitian Tang (6)

10.24	Employment Agreement dated May 18, 2010 by and between Forever Well Asia Pacific Limited, China BCT Pharmacy Group, Inc. and Xiaoyan Zhang (6)

10.25	Earn-in Agreement dated December 30, 2009 (7)

10.26	Shares Pledge Agreement dated May 3, 2008 (7)

10.27	Shares Pledge Agreement dated March 31, 2009 (7)

10.28	Termination Agreement dated March 2, 2010 (7)

10.29	Share Transfer Agreement by and between Wenheng He and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.30	Share Transfer Agreement by and between Junwen Jia and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.31	Share Transfer Agreement by and between Qifeng Jiang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.32	Share Transfer Agreement by and between Youru Jiang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.33	Share Transfer Agreement by and between Jinghua Li and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.34	Share Transfer Agreement by and between Chunlin Liu and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.35	Share Transfer Agreement by and between Gongchun Liu and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.36	Share Transfer Agreement by and between Yuangang Meng and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.37	Share Transfer Agreement by and between Yujing Tan and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.38	Share Transfer Agreement by and between Yuanjian Ye and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.39	Share Transfer Agreement by and between Bangfu Wang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.40	Share Transfer Agreement by and between Wende Wei and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.41	Share Transfer Agreement by and between Xiaojian Yang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.42	Share Transfer Agreement by and between Qingqiu Zhang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.43	Share Transfer Agreement by and between Ming’an Zhao and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.44	Amendment No. 1 to Earn-in Agreement, by and between Xiaoyan Zhang and the Buyers named thererin, dated May 19, 2010 (5)

10.45	Amended and Restated Shares Pledge Agreement by and between Guangxi Liuzhou Baicaotang Medicine Ltd. and Liuzhou Baicaotang Property Management Ltd, dated May 19, 2010 (5)

10.46	Amended and Restated Shares Pledge Agreement by and between Guangxi Liuzhou Baicaotang Medicine Ltd. and Liuzhou Baicaotang Property Management Ltd, dated May 19, 2010 (5)

10.47	Proxy Agreement by and between Guangxi Liuzhou Baicaotang Medicine Ltd. and Liuzhou Baicaotang Property Management Ltd., dated May 19, 2010 (5)

10.48	Form of sales agreement with related parties (7)

10.49	Independent Director Agreement of Simon Choi (8)

10.50	Independent Director Agreement of Manwai Chiu (8)

10.51	Independent Director Agreement of Kam-Cheung Chin (13)

10.52	2010 Omnibus Securities and Incentive Plan (9)

10.53	Stock Option Agreement between the Registrant and Huitian Tang made as of June 27, 2010 (9)

10.54	Stock Option Agreement between the Registrant and Xiaoyan Zhang made as of June 27, 2010 (9)

10.55	Stock Option Agreement between the Registrant and Eng Leong Lee made as of July 16, 2010 (7)

10.56	Stock Option Agreement between the Registrant and Simon Choi made as of July 16, 2010 (7)

10.57	Stock Option Agreement between the Registrant and Manwai Chiu made as of July 16, 2010 (7)

10.58	Non-Disclosure and Non-Competition Agreement dated May 18, 2010 by and between Guangxi Liuzhou Baicaotang Medicine, Ltd. and Huitian Tang (7)

10.59	Non-Disclosure and Non-Competition Agreement dated May 18, 2010 by and between Guangxi Liuzhou Baicaotang Medicine, Ltd. and Xiaoyan Zhang (7)

10.60	Asset Transfer Agreement dated February 28, 2010 by and between Liuzhou Wubaitang Medicine Chain Store Co., Ltd. and Liuzhou Baicaotang Medicine Retail Limited (7)

10.61	Asset Transfer Agreement dated March 29, 2010 by and between Zhaoping County Laobaixin Pharmacy Chain Store Co., Ltd. and Liuzhou Baicaotang Medicine Retail Limited (7)

10.62	Asset Transfer Agreement dated April 25, 2010 by and between Lai Bing Peng Fei Pharmacy Chain Store Co., Ltd. and Liuzhou Baicaotang Medicine Retail Limited (7)

10.63	Form of Retail Chain Leasing Contract (7)

10.64	Entrust Shareholding Agreement Between Liuzhou BCT Shareholders and Ms. Xiaoyan Zhang on Ingenious Dated July 21, 2008 (11)

10.65	Series A Convertible Preferred Shares Purchase Agreement, by and between the Company and Milestone Longcheng Limited (10)

10.66	Registration Rights Agreement, by and between the Company and Milestone Longcheng Limited (10)

10.67	Shareholders Agreement, by and among the Company, Milestone Longcheng Limited, certain shareholders of the Company and Mr. Huitian Tang as representative for the shareholders (10)

10.68	Form of Stock Option Agreement – Not Granted Pursuant to 2010 Omnibus Securities and Incentive Plan (12)

10.69	Form of Stock Option Agreement Pursuant to 2010 Omnibus Securities and Incentive Plan (12)

14	Code of Ethics and Business Conduct (8)

21	List of Subsidiaries (4)

31.1	Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2	Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

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

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

101.INS	XBRL Instance Document.**

101.SCH	XBRL Taxonomy Extension Schema Document.**

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**

	(1)	Incorporated by reference to the Company’s Form 8-K filed on December 31, 2009.
	(2)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed on March 3, 2011.
	(3)	Incorporated by reference to the Company’s Form SB-2 filed on August 22, 2007.
	(4)	Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on March 3, 2010.
	(5)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed on May 27, 2010.
	(6)	Incorporated by reference to the Company’s Form 8-K filed on May 21, 2010.
	(7)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed July 29, 2010.
	(8)	Incorporated by reference to the Company’s Form 8-K filed on June 9, 2010.
	(9)	Incorporated by reference to the Company’s Form 8-K filed on June 29, 2010.
	(10)	Incorporated by reference to the Company’s Form 8-K filed on January 18, 2011.
	(11)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed October 20, 2010
	(12)	Incorporated by reference to the Company’s Form 8-K filed on December 19, 2011.
	(13)	Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 30, 2012.

* Filed herewith.

** Previously furnished with Amendment No. 3 to the Company’s Annual Report on Form 10-K/A filed on June 12, 2012, and incorporated herein by reference.

China BCT Pharmacy Group, Inc.

Consolidated Financial Statements

Index to Consolidated Financial Statements

		Pages

Report of Independent Registered Public Accounting Firm		F-1

Consolidated Statements of Income and Comprehensive Income		F-2

Consolidated Balance Sheets		F-3 - F-4

Consolidated Statements of Cash Flows		F-5 - F-6

Consolidated Statements of Stockholders’ Equity		F-7

Notes to Consolidated Financial Statements		F-8 - F-32

Report of Independent Registered Public Accounting Firm

To the Directors and Stockholders of

China BCT Pharmacy Group, Inc.

We have audited the accompanying consolidated balance sheets of China BCT Pharmacy Group, Inc. and its subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income and comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.

PKF

Certified Public Accountants

A Professional Corporation

Glendale, California

March 30, 2012

F-1

China BCT Pharmacy Group, Inc.

Consolidated Statements of Income and Comprehensive Income

(Stated in US Dollars)

	Year ended December 31,
	2011			2010

Sales revenue	$	257,487,138		$	200,813,260
Cost of sales		195,670,634			151,988,552
Gross profit		61,816,504			48,824,708

Operating expenses
Administrative expenses		12,406,676			8,097,374
Selling expenses		7,210,359			5,350,258
Total operating expenses		19,617,035			13,447,632

Income from operations		42,199,469			35,377,076

Non-operating income (expense)
Interest income		60,479			11,651
Other income		159,062			168,732
Change in fair value of warrant liabilities		1,082,202			582,226
Other expenses		(502,729	)		(462,989	)
Finance costs		(892,172	)		(878,390	)
Exchange income (loss)		120,519			(23,608	)
Total non-operating income (expense)		27,361			(602,378	)

Income before income taxes		42,226,830			34,774,698
Income taxes		(11,036,300	)		(9,086,106	)
Net income		31,190,530			25,688,592
Other comprehensive income
Foreign currency translation adjustments		4,481,290			2,317,595

Total comprehensive income	$	35,671,820		$	28,006,187

Earnings per share: basic and diluted	$	0.72		$	0.67

Weighted average number of shares
outstanding: basic		38,154,340			38,063,507

Weighted average number of shares
outstanding: diluted		38,156,873			38,415,441

Reconciliation of net income to income applicable to common stock:
Net income		31,190,530			25,688,592
Less: dividends and accretion on preferred stock		3,890,037			-
Income applicable to common stock	$	27,300,493		$	25,688,592

See the accompanying notes to consolidated financial statements.

F-2

China BCT Pharmacy Group, Inc.

Consolidated Balance Sheets

(Stated in US Dollars)

	Year ended December 31,
	2011		2010
Assets
Current assets
Cash and cash equivalents	$	31,479,528	$	20,157,112
Restricted cash		1,052,096		1,334,868
Accounts receivable, net		118,406,001		68,664,308
Bills receivable		33,052		-
Amounts due from related companies		255,169		3,784,069
Other receivables, prepayments and deposits		5,750,056		3,332,747
Inventories		14,183,052		10,776,877
Deferred income taxes		927,860		207,222
Total current assets		172,086,814		108,257,203

Property, plant and equipment, net		18,097,062		14,605,888
Land use rights, net		13,584,135		13,422,048
Long-term deposits		7,070,400		3,482,200
Goodwill		540,157		560,418
Other intangible assets, net		504,948		581,481
Deferred income taxes		667,509		629,798
Other investment		31,424		-

Total assets	$	212,582,449	$	141,539,036

See the accompanying notes to consolidated financial statements.

F-3

China BCT Pharmacy Group, Inc.

Consolidated Balance Sheets (Cont’d)

(Stated in US Dollars)

	As of December 31,
	2011		2010
Liabilities and stockholders’ equity

Liabilities
Current liabilities
Accounts payable	$	42,290,191	$	35,497,337
Bills payable		2,104,192		2,669,752
Other payables and accrued expenses		5,490,237		4,856,956
Amounts due to directors		168,246		190,484
Amounts due to related companies		37,604		139,219
Income tax payable		2,726,869		2,564,359
Secured bank loans		9,036,060		8,898,218
Other loans		200,956		162,664
Retirement benefit costs		46,854		33,412
Total current liabilities		62,101,209		55,012,401

Secured long-term bank loans		206,767		1,941,606
Warrant liabilities		190,991		1,273,193
Retirement benefit costs		177,368		213,763

Total liabilities		62,676,335		58,440,963

Commitments and contingencies (Note 19)

Convertible redeemable preferred stock
Series A convertible redeemable preferred stock: $0.001 par value; 20,000,000 shares authorized; 9,375,000 and zero shares issued and outstanding as of December 31, 2011 and 2010, respectively		33,385,903		-

Stockholders’ equity
Common stock: $0.001 par value; 150,000,000 and 100,000,000 shares authorized; 38,154,340 shares issued and outstanding as of December 31, 2011 and 2010		38,154		38,154
Additional paid-in capital		18,273,766		16,633,411
Statutory and other reserves		6,851,002		4,585,854
Accumulated other comprehensive income		8,909,155		4,427,865
Retained earnings		82,448,134		57,412,789

Total stockholders’ equity		116,520,211		83,098,073

Total liabilities and stockholders’ equity	$	212,582,449	$	141,539,036

See the accompanying notes to consolidated financial statements.

F-4

China BCT Pharmacy Group, Inc.

Consolidated Statements of Cash Flows

(Stated in US Dollars)

	Year ended December 31,
	2011			2010

Cash flows from operating activities :
Net income	$	31,190,530		$	25,688,592
Adjustments to reconcile net income to net
cash (used in) provided by operating activities :
Depreciation and amortization		1,442,311			1,188,505
Deferred income taxes		(726,806	)		(91,463	)
Loss on sale of property, plant and equipment		176,312			-
Gain on sale of land use right		-			(44,919	)
Goodwill impairment		37,355
Change in fair value of warrant liabilities		(1,082,202	)		(582,226	)
Share-based compensation		1,640,355			1,253,858
Allowance for doubtful accounts		367,989			78,068
Changes in operating assets and liabilities, net of effects of acquisitions
Accounts receivable		(44,063,988	)		(31,464,010	)
Bills receivable		(32,552	)		-
Other receivables, prepayments and deposits		(1,598,394	)		(708,878	)
Inventories		(2,164,927	)		1,273,013
Accounts payable		10,128,630			15,365,984
Bills payable		(653,000	)		350,228
Other payables and accrued expenses		(466,503	)		1,665,804
Income tax payable		55,544			1,938,527
Retirement benefit costs		(31,867	)		(22,049	)
Total adjustments		(36,971,743	)		(9,799,558	)
Net cash flows (used in) provided by operating activities		(5,781,213	)		15,889,034

Cash flows from investing activities :
Addition of property, plant and equipment		(4,071,623	)		(450,106	)
Payments to acquire retail stores		-			(6,037,743	)
Proceeds from sale of property, plant and equipment		5,921			-
Long-term deposits		(3,365,600	)		(3,379,100	)
Proceeds from sale of land use right		-			697,495
Payments to acquire intangible assets		(18,253	)		-
Net cash from acquisition of distribution chains		36,502			-
Other investment		(31,362	)		-
Net cash flows used in investing activities	$	(7,444,415	)	$	(9,169,454	)

See the accompanying notes to consolidated financial statements.

F-5

China BCT Pharmacy Group, Inc.

Consolidated Statements of Cash Flows (Cont’d)

(Stated in US Dollars)

	Year ended December 31,
	2011			2010

Cash flows from financing activities :
Advance/ repayment activities with related companies, net	$	(5,037,674	)	$	620,549
Net proceeds from placement of preferred stock		29,495,866			-
Proceeds received from private placement		-			2,315,138
Restricted cash		330,517			(138,823	)
Proceeds from bank loans		9,888,040			8,039,160
Repayments of bank loans		(11,838,221	)		(8,329,434	)
Repayments of other loans		-			(2,238,759	)
Repayments to directors		(28,689	)		(830,557	)
Proceeds from other loans		-			35,208
Net cash flows provided by financing activities		22,809,839			(527,518	)

Effect of foreign currency translation on cash and cash equivalents		1,738,205			660,892

Net increase in cash and cash equivalents		11,322,416			6,852,954

Cash and cash equivalents - beginning of year		20,157,112			13,304,158

Cash and cash equivalents - end of year	$	31,479,528		$	20,157,112

Supplemental disclosures for cash flow information :
Cash paid for
- Interest	$	799,339		$	951,670
- Income taxes	$	11,681,301		$	7,255,019

Non-cash financing and investing activities:
Dividends and accretion on preferred stock	$	3,890,037		$	-

See the accompanying notes to consolidated financial statements.

F-6

China BCT Pharmacy Group, Inc.

Consolidated Statements of Stockholders’ Equity

(Stated in US Dollars)

										Accumulated
					Additional			Statutory		other
	Common stock				paid-in			and other		comprehensive		Retained
	No. of shares		Amount		capital			reserves		income		earnings			Total

Balance, January 1, 2010		37,089,370	$	37,089	$	14,920,899		$	2,605,901	$	2,110,270	$	33,704,150		$	53,378,309
Net income		-		-		-			-		-		25,688,592			25,688,592
Foreign currency translation adjustments		-		-		-			-		2,317,595		-			2,317,595
Appropriation to reserves		-		-		-			1,979,953		-		(1,979,953	)		-
Share-based compensation		-		-		1,253,858			-		-		-			1,253,858
Reclassification		-		-		(1,294,142	)		-		-		-			(1,294,142	)
Private placement		1,029,970		1,030		1,752,831			-		-		-			1,753,861
Shares issued for the payment of placement service		35,000		35		(35	)		-		-		-			-

Balance, December 31, 2010		38,154,340		38,154		16,633,411			4,585,854		4,427,865		57,412,789			83,098,073
Net income		-		-		-			-		-		31,190,530			31,190,530
Foreign currency translation adjustments		-		-		-			-		4,481,290		-			4,481,290
Appropriation to reserves		-		-		-			2,265,148		-		(2,265,148	)		-
Share-based compensation		-		-		1,640,355			-		-		-			1,640,355
Dividend on preferred stock		-		-		-			-		-		(1,250,000	)		(1,250,000	)
Accretion of preferred stock to redemption		-		-		-			-		-		(2,640,037	)		(2,640,037	)

Balance, December 31, 2011		38,154,340	$	38,154	$	18,273,766		$	6,851,002	$	8,909,155	$	82,448,134		$	116,520,211

See the accompanying notes to consolidated financial statements.

F-7

China BCT Pharmacy Group, Inc.

Notes to Consolidated Financial Statements

December 31, 2011 and 2010

1.	Corporate information

(i)

China BCT Pharmacy Group, Inc. (the “Company”), formerly known as Purden Lake Resource Corp. whose name changed to China Baicaotang Medicine Limited on jDecember 24, 2009 and then to China BCT Pharmacy Group, Inc. on March 25, 2010, was incorporated in the State of Delaware on November 30, 2006 as a limited liability company with authorized capital stock consisting of 100,000,000 shares of common stock, par value $0.001. Prior to the completion of reverse takeover transaction (“RTO”) on December 30, 2009 as mentioned in Note 2 (iv), the Company was a development stage company for acquisition, exploration and development of natural resource properties. Since the completion of the RTO, the Company has engaged in distribution, retail and production of pharmaceutical drugs in the People’s Republic of China (the “PRC”).

(ii)	Forever Well Asia Pacific Ltd. (“Forever Well”) was incorporated in Hong Kong on January 10, 2008 as a limited liability company with authorized, issued, paid up capital of HK$10,000, and 10,000 common shares of HK$1 par value each. The principal activity of Forever Well is investment holding.

(iii)

Ingenious Paragon Global Limited (“Ingenious”) was incorporated in the British Virgin Islands (the “BVI”) on May 29, 2008 as a limited liability company with authorized, issued, paid up capital of $50,000, and 50,000 common shares of $1 par value each. Prior to the completion of RTO on December 30, 2009, the 50,000 common shares were held by Xiaoyan Zhang, Chief Financial Officer of the Company.

(iv)

Guangxi Liuzhou Baicaotang Medicine Co., Ltd. (“Liuzhou BCT”) was established on April 3, 1986 in the PRC as a state-owned enterprise. On June 20, 2001, Liuzhou BCT was transformed into a joint stock enterprise through management buyout by its management and employees. On December 29, 2007, Liuzhou BCT was transformed into a limited liability company. Liuzhou BCT is engaged in the distribution of pharmaceutical drugs in the PRC. Before the acquisition by Forever Well as stated in Note 2(ii), the registered and paid up capital was RMB10,000,000 which were held as to 23.83% by Huitian Tang, 13.44% by Jinghua Li, 10.81% by Wende Wei, 6.81% by Youru Jiang, 6.81% by Chunlin Liu and 6.81% by Bangfu Wang, who are also directors of Ingenious and Liuzhou BCT. The remaining 31.49% was held by nine stockholders, who are employees of Liuzhou BCT.

(v)	Guangxi Liuzhou Baicaotang Medicine Retail Chain Co., Ltd. (“BCT Retail”), a wholly owned subsidiary of Liuzhou BCT, was established on October 30, 2001 with registered and paid up capital of RMB300,000. BCT Retail is engaged in the retail sales of pharmaceutical drugs in the PRC.

(vi)

Guangxi Hefeng Pharmaceutical Co., Ltd. (“Hefeng Pharmaceutical”) was established on September 18, 2000 with registered and paid up capital of RMB5,000,000. Hefeng Pharmaceutical is engaged in the production and sale of drugs for healing of hepatitis, cough, and Parkinson’s disease in the PRC. On December 31, 2007, Liuzhou BCT entered into an agreement with Jinghua Li to acquire his entire interest in Hefeng Pharmaceutical at a consideration of RMB36,340,064 (equivalent to $4,982,223) which was satisfied by issuance of 13.44% shares of Liuzhou BCT. The acquisition was completed on January 2, 2008, which was the date Liuzhou BCT obtained the control over Hefeng Pharmaceutical by appointing directors onto the board of directors of Hefeng Pharmaceutical.

F-8

2.	Reorganization

The China BCT Pharmacy Group, Inc, and its subsidiaries Liuzhou BCT, Ingenious, Forever Well, and BCT Retail reorganized their group structure (the “Reorganization”) as follows:

(i)

Due to certain regulatory restrictions on a wholly owned foreign enterprise or its wholly owned subsidiary to hold over 50% equity interest in any PRC company which operates more than 30 drug stores in the PRC (the “Drug Stores Restrictions”), Liuzhou BCT sold its 51% equity interest in BCT Retail to Liuzhou Baicaotang Property Management Company Ltd. (“Baicaotang Property”), of which the directors of Ingenious are the controlling stockholders of Baicaotang Property, at a consideration of RMB153,000 on April 1, 2008. Afterwards, Baicaotang Property pledged its 51% equity interest in BCT Retail to Liuzhou BCT to secure a loan, amounting to RMB153,000, granted by Liuzhou BCT to Baicaotang Property up to December 31, 2015 for the acquisition of the 51% equity interest in BCT Retail. According to a Repurchase Agreement dated July 31, 2008, Liuzhou BCT was entitled to a preemptive right to repurchase the 51% equity interest in BCT Retail from Baicaotang Property up to the earlier of December 31, 2017 or the removal of the Drug Stores Restrictions. Before the execution of the preemptive right by Liuzhou BCT, the rights and obligations as a stockholder of the 51% equity interest in BCT Retail are still vested in Liuzhou BCT and the appointment of the board of directors and management is controlled by Liuzhou BCT.

(ii)	On March 28, 2008, Forever Well entered into an agreement with the stockholders of Liuzhou BCT to acquire their entire equity interest in Liuzhou BCT at a cash consideration of RMB10,000,000, which is the registered and fully paid up capital of Liuzhou BCT.

(iii)

On June 30, 2008, Ingenious acquired the entire equity interest in Forever Well at a cash consideration of HK$10,000, which is the issued and fully paid up capital of Forever Well.

(iv)	On December 23, 2009, the Company entered into a Share Exchange Agreement with the shareholders of Ingenious to acquire 100% of the issued and outstanding common shares in Ingenious by issuing 32,000,000 shares of the Company’s common stock, par value $0.001 per share (the “Exchange Transaction”).

Following the completion of the Exchange Transaction on December 30, 2009, 2,900,000 shares of the Company’s common stock of $0.001 each, which were held by the Company’s shareholder, Lisa Lopomo, were cancelled on December 30, 2009.

The Exchange Transaction, which was completed on December 30, 2009, constituted a RTO and thereafter Ingenious became a wholly owned subsidiary of the Company.

(iv)

On December 23, 2009, the Company’s Chief Financial Officer, Xiaoyan Zhang entered into an Earn-In Agreement with the former stockholders of Liuzhou BCT of which the former stockholders of Liuzhou BCT are given the rights to acquire 22,480,000 common shares (Earn-In Shares) of the Company at $300,000 based on their former respective equity interest in Liuzhou BCT immediately before the acquisition by Forever Well as stated in Note 2 (ii) provided that the Company meets the profit targets, representing audited net income of $26 million for 2010 and $28 million for 2011. The former stockholders are allowed to acquire 50% and 50% of Earn-In Shares upon meeting the profit targets for 2010 and 2011, respectively.

Upon the completion of Reorganization on December 23, 2009, the Company, Forever Well, Liuzhou BCT, BCT Retail and Hefeng Pharmaceutical are under common control of Huitian Tang, Jinghua Li, Wende Wei, Youru Jiang, Chunlin Liu and Bangfu Wang, who are the directors of the Company and Liuzhou BCT. The acquisition of Ingenious, Forever Well and Liuzhou BCT has been accounted for as a combination of entities under common control.

F-9

3.	Acquisition

During the year ended 2011, the Company acquired the businesses of two sub-distributors and one vendor engaged in packaging of Chinese traditional herbs. The acquisitions were structured in such a manner that the Company assumed liabilities equal to the estimated fair value of the assets acquired. No additional consideration was paid, or is payable. The following summarizes the major class of assets acquired and liabilities assumed at the date of acquisition:

Cash	$	36,502
Accounts receivable		4,737,280
Inventory		751,112
Other current assets (a)		5,724,522
Property, plant and equipment		35,006
Account payables		(1,783,102	)
Other current liabilities (b)		(9,501,320	)

Net assets acquired	$	-

(a) Includes amounts due from the Company of $5,397,757 that are eliminated in consolidation.

(b) Includes amounts due to the Company of $4,127,756 that are eliminated in consolidation.

In order to complement the existing store network and help the company to establish a presence in new markets, the Company selectively acquired retail drugstores in both rural and urban areas of Guangxi province. The Company targeted retail stores in prime locations with good brand names, well-developed facilities and customer bases. The Company acquired certain chain stores successively during 2010 as follows:

On February 28, 2010, the Company entered an agreement with Liuzhou City Wubaitang Medical Chain Store Co., Ltd. ( 柳州市伍佰堂医药连锁有限公司 ) for the purchase of thirty retail chain stores including the leases of the premises, inventories, and furniture, fixtures and equipment. The Company has paid total consideration for the transaction of $2,495,431 (equivalent to RMB16,482,375). The transaction was completed on April 1, 2010.

On March 29, 2010, the Company entered an agreement with Zhaoping County Laobaixin Pharmacy Chain Store Co., Ltd. ( 昭平县老百姓大药房连锁有限公司 ) for the purchase of eighteen retail chain stores including the leases of the premises, inventories, and furniture, fixtures and equipment. The Company has paid total consideration for the transaction of $640,206 (equivalent to RMB4,228,573). The transaction was completed on May 1, 2010.

On April 25, 2010, the Company entered an agreement with Lai Bing Peng Fei Pharmacy Chain Store Co., Ltd. ( 來宾腾飞药业连锁有限公司 ) for the purchase of eleven retail chain stores including the leases of the premises, inventories, and furniture, fixtures and equipment. The Company has paid total consideration for the transaction of $1,286,301 (equivalent to RMB8,496,044). The transaction was completed on April 1, 2010.

On September 19, 2010, the Company entered an agreement with Guangxi San Le Da Uao Fang Pharmacy Chain Store Co., Ltd. ( 广西三乐大药房连锁有限责任公司 ) for the purchase of fifteen retail chain stores including the leases of the premises, inventories, and furniture, fixtures and equipment. The Company has paid total consideration for the transaction of $715,208 (equivalent to RMB 4,723,969). The transaction was completed on October 1, 2010.

On September 20, 2010, the Company entered an agreement with Rong Shui Sian Jiu Zhou Pharmacy Chain Store Co., Ltd. ( 融水县九州医药连锁有限公司 ) for the purchase of eighteen retail chain stores including the leases of the premises, inventories, and furniture, fixtures and equipment. The Company has paid total consideration for the transaction of $900,598 (equivalent to RMB5,948,459). The transaction was completed on October 1, 2010.

F-10

The following table summarizes the allocation of the purchase price reflecting the amounts of each major class of assets acquired and liabilities assumed at the date of acquisition of the above acquisitions:

Assets
Inventory	$	3,053,859
Furniture, fixtures and equipment, net		2,386,782
VAT Recoverable		144,654
Goodwill		452,449

Net assets acquired	$	6,037,744


Cash paid for acquisition	$	6,037,744

As of December 31, 2010, the consolidated balance sheet includes goodwill identified upon the above acquisitions amounting to $452,449 which represents the excess of the purchase price over the fair value of the identifiable net assets acquired.

The Company with advice from an independent appraiser has identified all assets acquired including intangible assets which meet either the separability criterion or the contractual-legal criterion in accordance with FASB ASC 805 as of the date of acquisition. No significant identifiable intangible assets inclusive of trademark, product licenses and customers contracts were identified and recognized.

4.	Summary of significant accounting policies

Basis of consolidation

The consolidated financial statements include the accounts of China BCT Pharmacy Group., Inc. and its subsidiaries; Ingenious, Forever Well, Liuzhou BCT, BCT Retail and Hefeng Pharmaceutical. All significant inter-company accounts and transactions have been eliminated in consolidation.

Use of estimates

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the exclusive reference of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernment entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of US federal securities laws are also sources of authoritative US GAAP for SEC registrants. The Company’s financial statements are prepared in accordance with US GAAP, which may require the use of management estimates and assumptions. The accounts and estimates include, but are not limited to, the valuation of accounts receivable and inventories, the estimation on useful lives of property, plant and equipment and intangible assets, and goodwill impairment. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less. As of December 31, 2011 and 2010, cash and cash equivalents were mainly denominated in Renminbi (“RMB”) and United States dollars were placed with banks in the PRC and Hong Kong. For those denominated in RMB, they are not freely convertible into foreign currencies and the remittance of these funds out of the PRC is subject to exchange control restrictions imposed by the PRC government. The remaining insignificant balance of cash and cash equivalents were denominated in Hong Kong dollars.

F-11

Restricted Cash

Restricted cash represents amounts set aside by the Company in accordance with the Company’s debt agreements with certain financial institutions. These cash amounts are designated for the purpose of paying down the principal amounts owed to the financial institutions, and these amounts are held at the same financial institutions with which the Company has debt agreements in the PRC. Due to the short-term nature of the Company’s debt obligations to these banks, the corresponding restricted cash balances have been classified as current assets in the consolidated financial statements.

Allowance for doubtful accounts

The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivable. A considerable amount of judgment is required in assessing the amount of the allowance. The Company considers the historical level of credit losses of all segments (pharmaceutical distribution, retail pharmacy and manufacturing) and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate resulting in their inability to make payments, a higher allowance may be required.

The Company's general credit sales policy is to provide its customers with credit ranging from one month to six months. Within the period, the Company does not consider the receivables overdue and it does not record any bad debt provision. When sales occur, the Company automatically grants its customers credit for one month to three months. An extended credit period of three to six months may be given upon sales managers’ approvals. Therefore, any receivables within six months do not have any provision for bad debt. Any receivable ranging from six months up to one year, are considered overdue, and will be subject to a bad debt provision of 40%.

As of December 31, 2011, 75% of the Company's accounts receivable was derived from hospitals, community service centers and clinics. In the PRC, all hospitals and community service centers are owned or controlled by the PRC government. The Company believes that it is highly unlikely that a liquidation of one of its hospital customers will occur, and that the recovery of debts from hospitals is highly assured. Therefore, it is within the Company's customary practice to grant a longer credit period to those accounts.

Based on the above assessment, management established the general provisioning policy to make allowance equivalent to 40% of gross amount of accounts receivable due between half and one year and 100% of gross amount of accounts receivable due over 1 year. Additional provisions are made against accounts receivable whenever they are considered doubtful.

Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from three to six months in the normal course of business. The Company does not accrue interest on accounts receivable.

Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by management and no significant additional bad debts have been written off. This general provisioning policy has not changed since establishment and management considers that the aforementioned general provisioning policy is adequate and not too excessive and does not expect it to be changed in the near future.

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined on weighted average basis and includes all expenditures incurred in bringing the goods in a saleable condition to the point of sale. The Company’s inventory reserve requirements generally fluctuate based on projected demands, market conditions and product life cycles. In determining the adequate level of inventories to have on hand, management makes judgments as to the projected inventory demands as compared to the current or committed inventory levels. Inventory quantities and expiration dates are reviewed regularly and provisions for excess or obsolete inventory are recorded based on the expiration dates and the Company’s forecast of future demand and market conditions.

F-12

No provision for excess or obsolete inventory was made for the years ended December 31, 2011 and 2010.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Cost of major improvements are capitalized, and cost of normal repairs and maintenance are expensed as incurred.

Depreciation is computed on the straight-line method over the following estimated useful lives:

	Annual rate			Residual value

Buildings and improvements		2.54% - 9.84	%	Nil - 2		%
Plant and machinery		7.00% -18.40	%	Nil - 10		%
Motor vehicles		6.00% -18.40	%		10	%
Furniture, fixtures and equipment		6.00% -18.40	%		10	%

Cost and related accumulated depreciation of property sold or otherwise disposed are removed from the accounts, and any resulting gain or loss is included in non-operating income (expense).

Goodwill and other intangible assets

Goodwill represents the excess of the purchase price and other acquisition related costs over the estimated fair value of the net tangible and intangible assets acquired. Under FASB ASC 805, goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. All other intangible assets, pharmaceutical licenses, customer contracts, trademarks, technology know-how and patents, are amortized over their estimated useful lives, which range from one to ten years.

Management assesses potential impairments to intangible assets at least annually, or when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of the acquired businesses, market conditions and other factors. During the year ended December 31, 2011, the Company recorded an impairment loss of $37,355.

Land use right

Land use rights are stated at cost less accumulated amortization. Amortization is computed using the straight-line method over the terms of the leases ranging from forty to seventy years. The leases term are obtained from the relevant PRC land authority.

Impairment of long-lived assets

Long-lived assets are tested for impairment in accordance with FASB ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets”. The Company periodically evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. During the reporting periods, the Company has not identified any indicators that would require testing for impairment.

Revenue recognition

Revenue from sales of the Company’s products in both pharmaceutical distribution and manufacturing segments is recognized upon customer acceptance. This occurs at the time of delivery to the customer, provided persuasive evidence of an arrangement exists, such as a signed sales contract. The significant risks and rewards of ownership are transferred to the customer at the time when the products are delivered and there is no significant post-delivery obligation to the Company. In addition, the sales price is fixed or determinable and the collection is reasonably assured. The Company does not provide its customers with contractual rights of return for products. When there are significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled. The Company evaluates the terms of the sales agreement with its customers in order to determine whether any significant post-delivery performance obligations exist. Currently sales under both pharmaceutical distribution and manufacturing segments do not include any terms which may impose any significant post-delivery performance obligations on the Company.

F-13

Revenue from sales of the Company’s products in its retail segment is recognized upon customer acceptance. This occurs at the time when the product is purchased by the customers at company-owned retail stores, and there is no significant post-delivery obligation, and collection is reasonably assured. The Company does not have a return policy allowing customers to return the products sold. When there are any significant post-delivery performance obligations, revenue is recognized only after such obligations are fulfilled. The Company evaluates the rules and regulations relating to the retail sales of drugs in the PRC in order to determine whether any significant post-delivery performance obligations exist. Currently, the rules and regulations relating to the retail sales of drugs in the PRC do not include any provisions which may impose significant post-delivery performance obligations on the Company.

Revenue from the sales of the Company’s products represents the invoiced value of goods, net of the value-added tax (“VAT”). All of the Company’s products that are sold in the PRC are subject to the Chinese value-added tax at a rate of 17 percent of the gross sales price. This VAT collected on sales may be offset by the VAT paid on purchases of raw and other materials that are included in the cost of producing the Company’s finished products.

Advertising, research and development expenses

Advertising and research and development expenses are expensed as incurred.

Retirement benefit costs

Liuzhou BCT adopted a retirement plan to provide eligible employees who were hired prior to April 23, 2002. These eligible employees are entitled to receive certain amounts of retirement benefits upon termination or retirement from the Company. The amounts are based on the employees’ years of service in Liuzhou BCT up to April 23, 2002. The obligation for retirement benefit costs is recorded at the present value of the cost that is expected to settle the obligation and is recognized when the retirement plan is approved. The employees hired after April 23, 2002 are not entitled to this retirement plan.

As of December 31, 2011, the discount rate of 7.73% (2010: 5.81%), which represented the Company’s weighted average borrowing rate of Renminbi loans in the PRC, was adopted to calculate the present value of retirement benefits cost. An analysis of the provision for retirement benefit costs for the years ended December 31, 2011 and 2010 is as follows:

	As of December 31,
	2011			2010

Balance at beginning of year	$	247,175		$	260,478
Imputed interest		17,117			17,591
Payments		(48,984	)		(39,639	)
Translation adjustments		8,914			8,745
Balance at end of year	$	224,222		$	247,175

Shipping and handling costs

Shipping and handling costs of $842,878 and $679,185 for the years ended December 31, 2011 and 2010, respectively, are expensed as incurred and are included in selling expenses.

F-14

Vendor allowances

The Company receives allowances from certain vendors. These allowances are received for a variety of buying activities such as the volume purchase allowance associated with the vendor programs. Consideration received from a vendor is a reduction in the cost of the inventory and is recognized as a reduction in the cost of goods sold. The Company also receives promotional allowance funds for specific vendor-sponsored programs per the applicable agreements. These promotional allowance funds are recognized as a reduction in the cost of goods sold as the program occurs.

Store opening costs

Costs incurred in connection with store start-up, such as travel for recruitment, training and setup for new store openings costs are expensed as incurred.

Income taxes

The Company uses the asset and liability method of accounting for income taxes pursuant to FASB ASC 740 "Income Taxes”. Under the asset and liability method of FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carry forwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Dividends

Dividends are recorded in the Company’s financial statements in the period in which they are declared.

Off-balance sheet arrangements

The Company does not have any off-balance sheet arrangements.

Registration payment arrangement

Contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, are separately recognized and measured when they are probable and reasonably estimable.

Comprehensive income

The Company has adopted FASB ASC 220, “Comprehensive Income”, which establishes standards for reporting and display of comprehensive income (loss), its components and accumulated balances. Components of comprehensive income (loss) include net income (loss) and foreign currency translation adjustments.

Concentrations of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents, restricted cash, accounts receivable and amounts due from related companies. As of December 31, 2011 and 2010, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit standing. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for accounts receivable and maintains an allowance for doubtful accounts of accounts receivable.

During the year ended December 31, 2011 and 2010, no single customer accounted for 10% or more of the Company’s consolidated sales and no single customer constituted 10% or more of the Company’s accounts receivable.

F-15

Foreign currency translation

The functional currency of the Company is RMB which is not freely convertible into foreign currencies. The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders’ equity in the statement of stockholders’ equity.

Basic and diluted earnings per share

The Company reports basic earnings per share in accordance with FASB ASC 260, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of shares outstanding during the reporting period. The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods. Diluted earnings per share is computed using the weighted average number of common shares outstanding plus the effect of dilutive securities outstanding during the reporting periods.

Fair value of financial instruments

FASB ASC 820 requires the disclosure of the estimated fair value of financial instruments including those financial instruments for which the fair value option was not elected. The carrying amounts of both financial assets and liabilities approximate their fair values due to short maturities or the applicable interest rates approximate the current market rates.

Recent accounting standards

In May 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that provides a consistent definition of fair value and common requirements of and disclosure about fair value between GAAP and International Financial Reporting Standards (“IFRS”). The guidance states the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets. Enhanced disclosure requirements will require companies to disclose quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements for recurring Level 3 fair value measurements. For assets and liabilities not recorded at fair value but where fair value is disclosed, companies must report the level in the fair value hierarchy of assets and liabilities. This new guidance is effective for interim and annual periods beginning January 1, 2012, and the Company does not anticipate a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income , which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued 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 , which defers specific requirements to present reclassification adjustments for each component of accumulated other comprehensive income. ASU 2011-05 will be retroactively effective for the Company in the first quarter of 2012. Since the Company already presents single continuous statements of income and comprehensive income, this adoption will not have a material effect on the consolidated financial statements.

F-16

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company plans to adopt ASU 2011-08 for its annual goodwill impairment test conducted in fiscal 2012.

5.	Income taxes

United States

The Company is subject to the United States of America tax law at tax rates up to 34%. No provision for US federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods.

BVI

Ingenious was incorporated in the BVI and, under the current laws of the BVI, is not subject to income taxes.

Hong Kong

Forever Well is subject to the Hong Kong Profits tax at a rate of 16.5%. No provision for the Hong Kong Profits tax has been made as the Company had no taxable income in this jurisdiction since its incorporation.

PRC

Corporate income tax (“CIT”) to Liuzhou BCT and BCT Retail, was charged at a rate of 25% of assessable profits.

In accordance with the Circular of the State Council on Policies and Measures Pertaining to the Development of the Western Region (“DOWR”), the companies are entitled to a preferential rate of 15%. They are engaged in the projects listed in Guiding Catalogue, and the revenue derived therefrom accounts for over 70% of total revenue. Hefeng Pharmaceutical met this DOWR requirement. It was approved by the tax authority and was granted a preferential tax rate of 15% for fiscal years from 2003 to 2010. During the year 2011, Hefeng Pharmaceutical is subject to CIT at a rate of 25% under the tax law.

The components of the provision (benefit) for income taxes are:

	Year ended December 31,
	2011			2010

Current taxes - PRC	$	11,763,106		$	9,177,569
Deferred taxes - PRC		(726,806	)		(91,463	)

	$	11,036,300		$	9,086,106

The effective income tax expense differs from the PRC statutory income tax rate of 25% for the years ended December 31, 2011 and 2010 in the PRC as follows :

	Year ended December 31,
	2011			2010

Provision for income taxes at PRC
statutory income tax rate	$	10,556,708		$	8,693,675
Non-deductible items for tax		1,141,006			1,012,882
Non-assessable items for tax		(301,725	)		(181,743	)
Under provision in prior year		26,915			73,057
Effect on change in tax rate		(165,314	)		-
Tax holiday		-			(538,134	)
Others		(221,290	)		26,369

	$	11,036,300		$	9,086,106

F-17

During the year ended December 31, 2010, the amount of benefit from tax holiday was $538,134 and the effect on earnings per share was $0.01.

FASB ASC 740-10-25 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Under the new CIT Law effective on January 1, 2008, the Company may be deemed to be a resident enterprise by the PRC tax authorities. If the Company was deemed to be resident enterprise, the Company may be subject to the CIT at 25% on the worldwide taxable income and dividends paid from PRC subsidiaries to their overseas holding companies may be exempted from 10% PRC withholding tax. Except for certain immaterial interest income from bank deposits placed with financial institutions outside the PRC, all of the Company’s income is generated from the PRC operation. Given the immaterial amount of income generated from outside the PRC and the PRC subsidiaries do not intend to pay dividend in the foreseeable future, the management considers that the impact arising from resident enterprise on the Company’s financial position is not significant. The management evaluated the Company’s overall tax positions and considered that no additional provision for uncertainty in income taxes is necessary as of December 31, 2011 and 2010.

Deferred tax assets/ (liabilities) as of December 31, 2011 and 2010 are composed of the followings:

	As of December 31,
	2011			2010
The PRC
Current deferred tax assets :
Provision and accrued expenses	$	742,295		$	131,672
Allowance for doubtful debts		185,565			75,550
	$	927,860		$	207,222

Non current deferred tax assets/ liabilities :
Depreciation of property, plant and equipment	$	(147,077	)	$	(32,046	)
Amortization of land use right		538,500			483,356
Amortization of intangible assets		276,086			178,488
	$	667,509		$	629,798

6.	Earnings per share

Basic earnings per share has been computed using the weighted average number of common shares outstanding. Potential dilutive shares are included from the computation of earnings per share as average market price of the Company’s common stock exceeded the weighted average exercise price of such options, warrants, and/or preferred shares.

For the year ended December 31, 2011, dilutive options to purchase 3,660,000 shares (2,533 weighted average shares) were included in the diluted earnings per share calculation, and potentially dilutive options, warrants and preferred shares of 1,125,000, 2,111,235 and 9,375,000, respectively, were excluded from the diluted earnings per share calculation as the average market price of the Company’s common stock did not exceed the weighted average exercise price of such options, warrants and preferred shares, and to have included them would have been anti-dilutive.

F-18

For the year ended December 31, 2010, dilutive warrants to purchase 351,934 shares (351,934 weighted average shares) were included in the diluted earnings per share calculation, and potentially dilutive options and warrants of 1,125,000 and 1,759,301, respectively, were excluded from the diluted earnings per share calculation as the average market price of the Company’s common stock did not exceed the weighted average exercise price of such options and warrants, and to have included them would have been anti-dilutive.

7.	Accounts Receivable, net

	As of December 31,
	2011			2010

Accounts receivables	$	119,010,218		$	68,891,244
Less : allowance for doubtful accounts		(604,217	)		(226,936	)

	$	118,406,001		$	68,664,308

An analysis of the allowance for doubtful accounts for the years ended December 31, 2011 and 2010 is as follows:

	As of December 31,
	2011		2010

Balance at beginning of year	$	226,936	$	144,397
Allowance for doubtful accounts		367,989		78,068
Translation adjustment		9,292		4,471

Balance at end of year	$	604,217	$	226,936

No accounts receivable were pledged as collateral under any loan agreements as of December 31, 2011.

8.	Other receivables, prepayments and deposits

	As of December 31,
	2011		2010

Advances to staff	$	479,332	$	123,500
Prepayments		4,241,956		2,820,372
Other receivables		1,028,768		388,875

	$	5,750,056	$	3,332,747

9.	Inventories

	As of December 31,
	2011		2010

Raw materials	$	1,040,582	$	860,993
Work-in-progress		135,533		160,730
Finished goods		13,006,937		9,755,154

	$	14,183,052	$	10,776,877

F-19

10.	Goodwill and other intangible assets, net

	As of December 31,
	2011		2010

Goodwill
Acquisition of retail stores	$	432,189	$	452,450
Acquisition of Hefeng Pharmaceutical		107,968		107,968

	$	540,157	$	560,418

Other intangible assets
Pharmaceutical licenses	$	799,197		$	799,197
Customer contracts		90,729			90,729
Trademarks, technology know-how and patents		118,146			99,892
		1,008,072			989,818
Accumulated amortization		(503,124	)		(408,337	)

	$	504,948		$	581,481

During the years ended December 31, 2011 and 2010, amortization expense was $95,493 and $79,346, respectively.

The estimated aggregate amortization expenses for other intangible assets for the future years are as follows:

Year

2012	$	92,014
2013		90,399
2014		82,585
2015		79,920
2016		79,920
Thereafter		80,110

	$	504,948

11.	Property, plant and equipment, net

Property, plant and equipment are stated at cost, as follows:
	As of December 31,
	2011			2010

Buildings and improvements	$	13,625,189		$	12,750,902
Plant and machinery		1,552,234			1,453,435
Furniture, fixtures and equipment		5,668,331			3,055,934
Motor vehicles		443,048			420,683

		21,288,802			17,680,954
Accumulated depreciation		(4,511,548	)		(3,437,366	)

		16,777,254			14,243,588
Construction in progress		1,319,808			362,300

	$	18,097,062		$	14,605,888

F-20

(a)

An analysis of buildings, plant and machinery pledged to banks for bank loans (Note 16(d) (i)) is as follows:

	As of December 31,
	2011			2010

Buildings	$	5,471,223		$	6,669,969
Accumulated depreciation		(1,420,229	)		(1,469,600	)

	$	4,050,994		$	5,200,369

(b)

During the reporting periods, depreciation is included in:

	Year ended December 31,
	2011		2010

Cost of sales and overhead expense	$	185,131	$	156,077
Selling expenses		1,970		4,881
Administrative expenses		832,298		627,073

	$	1,019,399	$	788,031

12.	Land use rights, net

	As of December 31,
	2011			2010

Land use rights	$	16,440,340		$	15,848,693
Accumulated amortization		(2,856,205	)		(2,426,645	)

	$	13,584,135		$	13,422,048

The Company has obtained land use rights from the relevant PRC land authority for a period ranging from 40 to 70 years to use the land on which the office premises, production facilities and warehouse of the Company are situated. As of December 31, 2011, and 2010, land use rights with carrying amount of $1,127,907 and $5,239,133, respectively, were pledged to a bank for the loans granted to the Company (Note 16(d) (ii)).

During the years ended December 31, 2011 and 2010, amortization expense was $327,419, and $321,127, respectively.

During the year ended December 31, 2010, land use rights with carrying amounts of $652,576 were sold for $697,495, net of direct costs, resulting in a gain of $44,919.

The estimated aggregate amortization expenses for land use rights for future years are as follows:

Year

2012	$	328,267
2013		328,267
2014		328,267
2015		328,267
2016		328,267
Thereafter		11,942,800

	$	13,584,135

F-21

13.	Other payables and accrued expenses

	As of December 31,
	2011		2010

Accrued staff costs	$	1,948,760	$	1,580,984
VAT and other tax payables		1,570,886		1,086,980
Other payables		874,649		428,455
Deposits received		684,568		962,187
Accrued audit fee		148,220		164,448
Other accrued expenses		263,154		178,006
Registration payment		-		455,896

	$	5,490,237	$	4,856,956

14.	Amounts due to directors

These amounts are interest free, unsecured and repayable on demand, except to the amount of $47,136 and $75,700 as of December 31, 2011 and 2010, which bears interest at a rate of 24% and 6.96% per annum, respectively.

15.	Amounts due from/to related companies

The related companies are controlled by certain of the Company’s directors including Huitian Tang, Chairman and Chief Executive Officer. These amounts are interest free, unsecured and repayable on demand.

16.	Secured bank loans

	As of December 31,
	2011			2010

Short-term loans - Note 16(a)	$	7,227,520		$	7,085,520
Current maturities of long-term bank loan		1,808,540			1,812,698

	$	9,036,060		$	8,898,218

Long-term bank loans - Note 16(b)	$	2,015,307		$	3,754,305
Less: current maturities		(1,808,540	)		(1,812,699	)

	$	206,767		$	1,941,606

(a)

The weighted average interest rates for short-term loans as of December 31, 2011 and 2010 were 7.73% and 5.84% per annum, respectively.

(b)

The long-term loans as of December 31, 2011 bear interest at variable rates ranging from PRC benchmark rate plus 7.68% per annum.

(c)

As of December 31, 2011, the Company’s banking facilities include the following:

	As of December 31,
	2011				2010
	Bills		Secured		Bills		Secured
	Payable		Bank Loans		Payable		Bank Loans

Granted	$	2,985,280	$	9,242,827	$	1,589,700	$	10,839,824

Amount utilized	$	1,052,096	$	9,242,827	$	1,334,868	$	10,839,824

Unused	$	1,933,184	$	-	$	254,832	$	-

F-22

Some suppliers request the Company to settle accounts payable by issuance of banker’s acceptance bills, which are interest free with maturity of three months from date of issuance. The Company is required to deposit with the banks equal to 50% of the bills amount at the time of issuance and pay bank charges. These deposits will be used to settle the bills at maturity.

(d)

As of December 31, 2011, the above bank loans were secured by the following:

(i)

Property, plant and equipment with carrying value of $4,050,994 (Note 11);

(ii)

Land use rights with carrying value of $1,127,907 (Note 12);

(iii)

Buildings and land use right owned by related companies which are controlled by certain directors.

During the reporting periods, there was no covenant requirement for the banking facilities granted to the Company.

The aggregate maturities of long-term bank loans as of December 31, 2011 are as follows:

Year

2012	$	1,808,540
2013		87,154
2014		94,689
2015		24,924

	$	2,015,307

17.	Other loans

	As of December 31,
	2011		2010

Other loans	$	200,956	$	162,664

All other loans are unsecured and repayable on demand. Other loans bear interest at a fixed rate of 2% per month.

18.	Warrant liabilities

As of December 30, 2009, the Company completed a private placement of 2,489,370 shares of common stock and five-year warrants to purchase up to 1,244,368 shares of common stock (“First Batch Warrants”). The stock was purchased at an exercise price of $3.81 per share for gross proceeds of $6,322,952, which includes issuance expenses of $1,016,290. In accordance with FASB ASC 815, these warrants are not considered indexed to the Company’s own stock and should be classified as financial derivative liabilities at fair value for each reporting period. For the year ended December 31, 2009, the fair value of First Batch Warrants was $1,294,142 and the Company considered the amount to be immaterial to the financial statements. Thus, the net proceeds were allocated to First Batch Warrants resulting in the entire amount recorded as equity.

F-23

Upon the completion of a private placement as of February 1, 2010, five-year warrants to purchase up to 514,933 shares of common stock (“Second Batch Warrants”) were issued to investors and classified as financial derivative liabilities at fair value for each reporting period in accordance with FASB ASC 815. The Company determined that the aggregate fair value of warrants issued as of February 1, 2010 was material to the financial statements for the year ended December 31, 2010. Accordingly, a reallocation was made for the fair value of First Batch Warrants as of December 31, 2009 amounting to $1,294,142 from the Company’s equity to warrant liabilities as of February 1, 2010. For the Second Batch Warrants, part of the net proceeds amounting to $561,277, representing the fair value as of February 1, 2010, were allocated to warrant liabilities at initial recognition.

The fair value of the warrants was calculated using the binomial model. The assumptions used to calculate fair value of First Batch Warrants and Second Batch Warrants as of December 31, 2011 are as follows:

1.	Expected volatility of 38.33% and 38.66% for First Batch Warrants and Second Batch Warrants, respectively.
2.	Expected dividend yield of 0%.

3.	Risk-free interest rate of 0.406% and 0.426% for First Batch Warrants and Second Batch Warrants, respectively.
4.	Expected lives of 3 years and 3.09 years for First Batch Warrants and Second Batch Warrants, respectively.

5.	Exercise price of $3.81 per share.

As of December 31, 2011, the fair value of warrant liabilities was $190,991 and the corresponding gain on the change in fair value of warrant liabilities of $1,082,202 was recognized in the Company’s statement of operations for the year ended December 31, 2011.

Warrants issued and outstanding, all of which are exercisable at December 31, 2011, are summarized as follows:

	Number of shares

First Batch Warrants		1,244,368
Second Batch Warrants		514,933

		1,759,301

19.	Commitments and contingencies

a.	Capital commitment

As of December 31, 2011, the Company had no capital commitments in respect of the acquisition of property, plant and equipment which were contracted for but not provided in the consolidated financial statements.

b.	Operating lease commitments

As of December 31, 2011, the Company had non-cancelable operating leases for its retail stores and future minimum lease payments are as follows:

Year

2012	$	1,287,908
2013		691,703
2014		228,195
2015		79,309
2016		4,792

	$	2,291,907

F-24

The rental expense relating to the operating leases was $1,324,371 and $824,419 for the years ended December 31, 2011 and 2010, respectively.

c.	Operating lease arrangement

As of December 31, 2011, the Company leases its main facility in the PRC under an operating lease arrangement until 2013. Future minimum lease payments to be received under the non-cancelable operating lease are as follows:

Year

2012	$	17,466
2013		3,896

	$	21,362

d.	Employment agreements

During the 2 nd quarter of 2010, the Company entered into employment agreements with Huitian Tang, the Company’s Chairman and CEO, and Xiaoyan Zhang, the Company’s CFO. The employment agreements were approved by the board of directors and the compensation committee. The following is a summary of the material provisions of the employment agreements for Mr. Tang and Ms. Zhang:

On May 18, 2010, the Company entered into a new employment agreement with Mr. Tang to employ him as CEO for a term from January 1, 2010 to January 1, 2012, pursuant to which he will be paid RMB 79,600 ($11,600) per month (or RMB 955,200 ($139,200) per year) and additional share-based compensation based upon its 2010 financial performance (see Note 22). The agreement may be terminated upon mutual agreement between the Company and Mr. Tang in writing. In addition, the Company shall have the right to unilaterally terminate the agreement under certain circumstances, including among other things, (i) serious violations of the labor laws or the rules or regulations of the Company; (ii) causing serious damage to the interests of the Company; or (iii) Mr. Tang is criminally prosecuted under the law.

In 2011, the Board of Directors authorized and approved to increase Mr. Tang’s annual salary from US$139,000 to US$200,000 starting from January 6, 2011.

The Company may also terminate the agreement by serving 30 days’ prior written notice to Mr. Tang or giving Mr. Tang one month’s salary in lieu of notice in any one of the following circumstances: (i) where Mr. Tang, after undergoing a legally prescribed period of medical treatment and recuperation for an illness or a non-work-related injury, remains unable to carry out his job responsibilities; (ii) where Mr. Tang is unable to fulfill the duties of his position to the standards required under the terms of the agreement; or (iii) where the agreement cannot be performed due to any major changes of any objective circumstances, which includes, but is not limited to, a merger of the Company into another business entity, or sale or transfer by the Company of substantial portion of the assets it owns to third parties, a material adjustment in operative policy, or a declaration of bankruptcy, dissolution or liquation by the Company.

Mr. Tang may terminate the agreement during the term upon 30 days prior written notice to the Company. In addition, Mr. Tang may terminate the agreement in certain circumstances, including if (i) the Company fails to pay the social insurance premiums for Mr. Tang in accordance with the law; (ii) the Company forces Mr. Tang to work by means of violence or intimidation; or (iii) the Company fails to pay labor remuneration in full and on time or fails to provide the labor protection or working conditions as agreed under the agreement.

F-25

On May 18, 2010, the Company entered into a new employment agreement with Ms. Zhang to employ her as CFO for a term from January 1, 2010 to January 1, 2012, pursuant to which we have agreed to pay her HKD70,000 ($9,091) per month (or HKD840,000 ($109,092) per year) and additional share-based compensation based upon its 2010 financial performance (see Note 22).

In 2011, the Board of Directors authorized and approved to increase Ms. Zhang’s annual salary from US$109,092 to US$160,000 starting from January 6, 2011.

The agreement may be terminated upon mutual agreement between the Company and Ms. Zhang in writing. In addition, the Company shall have right to unilaterally terminate the agreement under certain circumstances, including, among other things, (i) serious violations of the labor laws or the rules or regulations of the Company; (ii) causing serious damage to the interests of the Company; or (iii) Ms. Zhang is criminally prosecuted under the law.

The Company may terminate the agreement by serving 30 days’ prior written notice to Ms. Zhang or giving Ms. Zhang one month’s salary in lieu of notice in any one of the following circumstances: (i) where Ms. Zhang, after undergoing a legally prescribed period of medical treatment and recuperation for an illness or a non-work-related injury, remains unable to carry out her job responsibilities; (ii) where Ms. Zhang is unable to fulfill the duties of her position to the standards required under the terms of the agreement; or (iii) where the agreement cannot be performed due to any major changes of any objective circumstances, which includes, but is not limited to, a merger of the Company into another business entity, or sale or transfer by the Company of substantial portion of the assets it owns to third parties, a material adjustment in operative policy, or a declaration of bankruptcy, dissolution or liquation by the Company.

Ms. Zhang may terminate the agreement during the term upon 30 days prior written notice to the Company. In addition, Ms. Zhang may terminate the agreement in certain circumstances, including if (i) the Company fails to pay the social insurance premiums for Ms. Zhang in accordance with the law; (ii) the Company forces Ms. Zhang to work by means of violence or intimidation; or (iii) the Company fails to pay labor remuneration in full and on time or fails to provide the labor protection or working conditions as agreed under the agreement.

e.	Distribution agreements

During 2010, the Company entered into separate distribution agreements with three government-owned hospitals, each for a term of three years, pursuant to which the hospitals agreed to further increase our business with them ranging from 30% to 95% of their respective purchase plans for our drugs. We agreed to use our best efforts to fulfill the orders by distributing the drugs under the statutory requirement of the mandated collective tender plan.

During 2011, the Company entered into separate distribution agreements with another three government-owned hospitals for a term of three years, pursuant to which the hospitals agreed to further increase the Company’s business with them from 30% to 40% of their respective purchase plans for its drugs.

In addition to the existing deposits of RMB 23,000,000 ($3,613,760) paid in 2010, the Company made additional deposits totaling RMB 22,000,000 ($3,456,640) for the security of these new distribution agreements entered in 2011. These hospitals are required to repay the deposit amounts in full when the agreements expire or when terminated, which may be done only under certain circumstances. The Company entered into such agreements to pursue relationships with these large hospitals in order to achieve a higher share of these customers’ purchases.

For the years ended December 31, 2011 and 2010, net sales from these government-owned hospital customers was approximately $38,567,000 and $19,074,000, respectively.

F-26

20.	Convertible redeemable preferred stock

On January 18, 2011, the Company entered into a Series A Convertible Preferred Shares Purchase Agreement (the “Purchase Agreement”) with Milestone Longcheng Limited (“Milestone”) pursuant to which Milestone at February 28, 2011 purchased 9,375,000 shares of the Company’s Series A Convertible Preferred Shares, par value $.001 per share (the “Preferred Shares”), for an aggregate purchase price of $30,000,000. The Preferred Shares carry a dividend of 5% and are convertible initially into an equal number of shares of our Common Stock at an initial conversion price of $3.20 per share.

Upon the consummation of a qualified public offering (as defined in the Purchase Agreement) in which the sale price of the Preferred Shares exceeds the product of 2.0 multiplied by the initial conversion price (as adjusted from time to time as provided in the Purchase Agreement), without the payment of additional consideration thereof, all the Preferred Shares shall be automatically converted into Conversion Shares at the then applicable Conversion Rate.

The holders of the Preferred shares may require the Company to redeem all or any portion of the outstanding Preferred Shares upon the occurrence of certain events, including: (a) any change of control of the Company; (b) any substantial asset sale; (c) any consolidation or merger or acquisition or sale of voting securities of the Company resulting in the holders of the issued and outstanding voting securities of the Company immediately prior to such transaction beneficially owning or controlling less than a majority of the voting securities of the continuing or surviving entity immediately following such transaction; (d) any tender offer, exchange offer or repurchase offer for any common shares; (e) cessation of listing of the common shares (or equity securities of an entity that holds all or substantially all the share capital of the Company) on an internationally recognized exchange; (f) it has been three years since the issue date; (g) cessation of provision of services by Mr. Huitian Tang to the Company or any of its Subsidiaries by reason of resignation, discharge, death, disability, retirement or otherwise.

The redemption price to be paid by the Company for such required redemptions shall be equal to an amount necessary to provide an annual return of fifteen percent (15%) compounded annually on the stated value of the Preferred Shares for the period commencing on February 28, 2011 and ending on the applicable redemption date. The redemption price shall take into account and be credited with any dividends paid during such period.

The conversion price shall be subject to adjustment as follows if any of the events listed below occur prior to the conversion of any Preferred Shares being converted:

(a)

In the event the Company pays a dividend or makes a distribution on its common shares in common shares, subdivides or reclassifies its outstanding common shares into a greater number of shares, or consolidates or reclassifies its outstanding common shares into a smaller number of shares, the conversion price in effect immediately prior to such event shall be adjusted so that the holders of the Preferred Shares thereafter converted shall be entitled to receive the number of common shares of the Company which they would have owned or have been entitled to receive after the occurrence of such event had the Preferred Shares been converted immediately prior to the occurrence of such event.

(b)

In the event the Company issues common shares, issues rights, options or warrants to subscribe for or purchase common shares, or issues or sells other rights for common shares or securities whether or not convertible or exchangeable into common shares for a consideration per share less than the then effective conversion price on the date the Company issues or sells such securities, then in each such case the conversion price in effect immediately prior to the issuance of such securities shall be reduced, concurrently with the issue of such securities, to the price appropriately readjusted.

(c)

In the event the Company’s net income after tax under U.S. GAAP, but excluding the effects of extraordinary gains, and non-cash expenses relating to options and warrants, and qualified public offering related expenses as and when expensed in the Company’s audited annual financial statements for the twelve-month period ending December 31, 2011, and prepared on a pro forma basis, is less than US$31,200,000, the conversion price shall be adjusted, effective on the date of the issuance of the 2011 annual audited financial statements.

(d)

In the event the Company distributes to all holders of its common shares any share capital of the Company (other than common shares) or evidences of indebtedness or cash or other assets (excluding regular cash dividends or distributions paid from retained earnings of the Company and dividends or distributions referred to in (a) above) or rights, options or warrants to subscribe for or purchase any of its securities (excluding those referred to in (b) above) then, in each such case, the conversion price shall be adjusted.

F-27

(e)

In the event any securities of the Company (other than Preferred Shares) , are amended or otherwise modified by operation of their terms or otherwise in any manner whatsoever that results in the reduction of the exercise, conversion or exchange price of such securities payable upon the exercise for, or conversion or exchange into, common shares or other securities exercisable for, or convertible or exchangeable into, common shares and/or such securities becoming exercisable for, or convertible or exchangeable into more shares or a greater amount of such securities which are, in turn exercisable for, or convertible or exchangeable into, common shares, or more common shares, then such amendment or modification shall be treated as if the securities which have been amended or modified have been terminated and new securities have been issued with the amended or modified terms for purposes of Section (b) above.

We classify the Preferred Shares as temporary equity in accordance with ASR 268 (Securities and Exchange Commission, Financial Reporting Codification, Section No. 211, Redeemable Preferred Stocks) because the Preferred Shares contain a conditional obligation that may require us, at the option of the holders, to redeem some or all of these shares by transferring our assets upon the occurrence of certain events that are not solely within the control of the Company.

The initial fair value of the Preferred Shares was $29,495,866 representing the transaction price of $30,000,000, in accordance with the FASB ASC 820-10-30-3, less related issue costs of $504,134.

We evaluated the economic characteristics and risks of the conversion feature as an embedded derivative and determined such economic characteristics and risks are clearly and closely related to the host contract. Therefore, the conversion feature does not meet the requirements of FASB ASC 815-15-25-1.a. for bifurcation and separate fair value accounting.

The Company has elected to adjust the carrying amount of the Preferred Shares at each reporting date by applying periodic accretions, using the interest method, so that the carrying amount will be equal to the possible redemption amount at the earliest determinable redemption date of February 28, 2014. As of December 31, 2011, such accretion amount was $3,890,037 resulting in a carrying amount for the Preferred Shares of $33,385,903 at that date.

21	Statutory and other reserves

Under PRC regulations, Liuzhou BCT, BCT Retail and Hefeng Pharmaceutical may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves can be used to make up cumulative prior year losses and are not distributable in the form of cash dividends.

22.	Stock option arrangements

On June 27, 2010, we adopted the China BCT Pharmacy Group, Inc. 2010 Omnibus Securities and Incentive Plan (the “Plan”) for the benefit of our employees, nonemployee directors and consultants and the employees, nonemployee directors and consultants of its affiliates, for purposes of assisting us to attract, retain and provide incentives to key management employees and nonemployee directors, and consultants of ours and our affiliates, and to align the interests of such individuals with those of our stockholders. Accordingly, the Plan provides for the granting of distribution equivalent rights, incentive stock options, non-qualified stock options, performance share awards, performance unit awards, restricted stock awards, restricted stock unit awards, stock appreciation rights, tandem stock appreciation rights, unrestricted stock awards or any combination of the foregoing, as may be best suited to the circumstances of the particular employee, director or consultant as provided in the Plan.

F-28

On June 27, 2010, we granted options under the Plan to two executive employees. The options vest and become exercisable with respect to all of the shares only if our after-tax net income for fiscal 2010 equals at least U.S. $26,000,000 (excluding any non-cash expenses) (the “2010 Income Target”), determined on the basis of our audited financial statements for our 2010 fiscal year, as confirmed by our independent auditor in their report on said financial statements (the “Audit Report”). If the 2010 Income Target is met, the options shall vest and become exercisable on the date on which the Audit Report is dated, and if the options do not become exercisable due to the failure to meet the 2010 Income Target, the option shall terminate on the date on which the Audit Report is dated.

On July 16, 2010, we entered into separate stock option agreements with each of our three independent directors, Messrs. Lee, Choi and Chiu, which agreements provide for the grant to each such individual of an option to purchase 10,000 shares of our common stock at an exercise price of $4.00 per share. Each option vests and becomes exercisable with respect to all of the shares on June 6, 2011. The exercise price of each option may be paid for in cash or by cancellation of existing shares of our common stock held by the independent directors. Each option terminates on the earlier of (i) July 16, 2015 or (ii) the date as of which the option has been fully exercised.

August 18, 2010, we entered into separate stock agreements with two senior staff, which agreements provide for the grant to each such individual of an option to purchase 10,000 and 5,000 shares separately of our common stock at an exercise price of $5.00 per share. Each option vests and becomes exercisable on January 1, 2012 so as they are employed by the company as of December 31, 2011.

On December 19, 2011, we entered into separate stock option agreements with two executive employees, Mr. Tang and Ms. Zhang, and three independent directors, Messrs. Lee, Choi and Chiu, which agreements provide for the grant to the two executive employees of an option to purchase 1,245,000, 830,000 and each of 10,000 for three independent directors of the shares of our common stock at an exercise price of $2.00 per share. 25% of such options shall vest and become exercisable on June 30, 2013, the second 25% of such options shall vest and become exercisable on December 31, 2013, the third 25% of such options shall vest and become exercisable on June 30, 2014 and the remaining 25% of such options shall vest and become exercisable on December 31, 2014, The vesting schedule requires continued employment and/or director’s services through each applicable vesting date as a condition to the vesting of the applicable installment of such options.

On December 19, 2011, we entered into separate stock option agreements with two senior staff, which agreements provide for the grant to the two senior staff to 30,000 shares of our common stock at an exercise price of $2.00 per share. 25% of such options shall vest and become exercisable on June 30, 2013, the second 25% of such options shall vest and become exercisable on December 31, 2013, the third 25% of such options shall vest and become exercisable on June 30, 2014 and the remaining 25% of such options shall vest and become exercisable on December 31, 2014, The vesting schedule requires continued employment’s services through each applicable vesting date as a condition to the vesting of the applicable installment of such options.

Instead of the China BCT Pharmacy Group, Inc. 2010 Omnibus Securities and Incentive Plan (the “Plan”) the Board also has the authority to grant options that are not under the Plan and under that certain Series A Convertible Preferred Shares Purchase Agreement with Milestone Longcheng Limited (the “Milestone”) dated January 18, 2011, as amended, has committed to grant a number of options upon the seating of a director designated by Milestone and such director was seated on March 17, 2011.

Accordingly, on December 19, 2011, the Company granted options to two executive employees. Agreements provide the grant to both individuals of an option to purchase 762,500 shares each of our common stock at an exercise price of $2.00 per share. 50% of such options shall vest and become exercisable immediately and the remaining 50% of such options shall vest and become exercisable on December 31, 2012.

The fair value of options granted to the two executive employees pursuant to the Plan at the date of grant, June 27, 2010 was $1,774,440. Fair values were estimated using the binominal model. The assumptions that were used to calculate fair value of stock options as of June 27, 2010 were: 0% dividend yield, expected volatility of 30%, risk-free interest rate of 4.78% and expected lives of ten years. The Company expensed $565,763 in share-based compensation for the year ended December 31, 2011 upon the achievement of 2010 Income Target (2010: $1,208,677).

F-29

The fair value of options granted to the three independent directors at the date of grant, July 16, 2010 was $41,010 and was expensed in share-based compensation for the year ended December 31, 2010. Fair values were estimated using the binominal model. The assumptions that were used to calculate fair value of stock options as of July 16, 2010 were: 0% dividend yield, expected volatility of 41.8%, risk-free interest rate of 3.427% and expected lives of ten years.

The fair value of options granted to the two senior staff at the date of grant, August 20, 2010 was $15,365. Fair values were estimated using the binominal model. The assumptions that were used to calculate fair value of stock options as of August18, 2010 were: 0% dividend yield, expected volatility of 51.31%, risk-free interest rate of 2.46% and expected lives of 5 years. The Company expensed $11,194 and $4,171 in share-based compensation for the years ended December 31, 2011 and 2010 over the requisite service period ended December 31, 2011 for both options.

The fair value of options granted to the two executive employees and three independent directors pursuant to the Plan at the date of grant at December 19, 2011 was $1,405,976. Fair values were estimated using the binominal model. The assumptions that were used to calculate fair value of stock options as of December 19, 2011 were: 0% dividend yield, expected volatility of 44.38%, risk-free interest rate of 1.97% and expected lives of ten years. The Company expensed $49,871 in share-based compensation for the year ended December 31, 2011 and the remaining compensation cost of $1,356,105 related to non-vested awards will be recognized over the implied remaining requisite service period of January 1, 2012 through December 31, 2014 for options.

The fair value of options granted to the two senior staff pursuant to the Plan at the date of grant at December 19, 2011 was $19,047. Fair values were estimated using the binominal model. The assumptions that were used to calculate fair value of stock options as of December 19, 2011 were: 0% dividend yield, expected volatility of 44.38%, risk-free interest rate of 1.97% and expected lives of ten years. The Company expensed $673 in share-based compensation for the year ended December 31, 2011 and the remaining compensation cost of $18,374 related to non-vested awards will be recognized over the implied remaining requisite service period of January 1, 2012 through December 31, 2014 for options.

The fair value of options granted to the two executive employees other than the Plan at the date of grant was $1,012,854 and was expensed in share-based compensation for the year ended December 31, 2011. Fair values were estimated using the binominal model. The assumptions that were used to calculate fair value of stock options as of December 19, 2011 were: 0% dividend yield, expected volatility of 44.38%, risk-free interest rate of 1.97% and expected lives of ten years.

The company expensed the above options in share-based compensation included in administrative expense in the amount of $1,640,355 and $1,253,858 for the years ended December 31, 2011 and 2010, respectively.

There were no options granted with exercise prices below the market value of the stock at the grant date. All outstanding options at December 31, 2011 had no intrinsic value because the Company’s stock price was lower than all option exercise prices. A summary of the Company’s stock options issued and outstanding as of and for the year ended December 31, 2011, is presented below:

	Number of options		Exercise Price

Stock options granted and outstanding		3,660,000	$	2.00
Stock options granted and outstanding		15,000	$	5.00
Stock options granted and outstanding		1,110,000	$	4.00

23.	Defined contribution plan

Pursuant to the relevant PRC regulations, the Company is required to make contributions at a rate of 30.5% to employees’ salaries and wages to a defined contribution retirement plan organized by a state-sponsored social insurance plan in respect of the retirement benefits for the Company’s employees in the PRC. The only obligation of the Company with respect to the retirement plan is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the consolidated statements of income. The Company contributed $719,873 and $883,118 for the years ended December 31, 2011 and 2010, respectively.

F-30

24.	Segment information

The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews the operating results solely by monthly net sales of pharmaceutical distribution, retail pharmacy and manufacturing segments and the operating results of the Company. As such, the Company has determined that the Company has three operating segments as defined by FASB ASC 280, “Segments Reporting”: Pharmaceutical distribution, retail pharmacy and manufacturing.

	Year ended December 31,
	2011		2010

Sales revenue
Pharmaceutical distribution	$	190,662,940	$	145,390,262
Retail pharmacy		53,266,572		44,593,533
Manufacturing		13,557,626		10,829,465

	$	257,487,138	$	200,813,260

	Year ended December 31,
	2011		2010

Operating income
Pharmaceutical distribution	$	28,895,330	$	23,085,979
Retail pharmacy		9,480,261		8,860,674
Manufacturing		7,020,705		5,401,924

	$	45,396,296	$	37,348,577

	Year ended December 31,
	2011		2010

Depreciation and amortization expenses
Pharmaceutical distribution	$	593,284	$	543,707
Retail pharmacy		223,356		73,545
Manufacturing		625,671		571,253

	$	1,442,311	$	1,188,505

	Year ended December 31,
	2011		2010

Assets
Pharmaceutical distribution	$	164,525,782	$	108,182,966
Retail pharmacy		21,748,464		16,860,112
Manufacturing		19,389,356		16,386,308

	$	205,663,602	$	141,429,386

F-31

A reconciliation is provided for unallocated amounts relating to corporate operations which are not included in the segment information.

	Year ended December 31,
	2011			2010

Total consolidated net sales	$	257,487,138		$	200,128,260

Total profit for reportable segments	$	45,396,296		$	37,348,577
Unallocated amounts relating to
operations:
Change in fair value of warrant liabilities		1,082,202			582,226
Interest income		42,146			8
Other income		169,580			212
Share-based compensation		(1,640,355	)		(1,253,858	)
Provision for registration payment		-			(455,896	)
Other general expenses		(2,821,001	)		(1,443,464	)
Finance costs		(2,038	)		(3,107	)

Income before income taxes	$	42,226,830		$	34,774,698

	Year ended December 31,
	2011		2010
Assets

Total assets for reportable segments	$	205,663,602	$	141,429,386
Cash and cash equivalents		6,918,847		109,650

	$	212,582,449	$	141,539,036

All of the Company’s long-lived assets and net sales classified based on the customers are located in the PRC.

25.	Related party transactions

Apart from the transactions as disclosed elsewhere in these consolidated financial statements, the Company has entered into the following transactions with its related parties:

Sales to related companies of which certain of the Company’s directors had controlling interests.

Name of related companies	Year ended December 31,
	2011		2010

Liucheng Medicine Company	$	48,483	$	325,881
Guangxi Tianhu Medicine Limited	$	642,526	$	9,632
Wuxuan Baicaotang Medicine Limited	$	4,836	$	29,618
Guangxi Liuzhou Baicaotang Medicine Limited, Guigang Branch	$	1,065,208	$	3,311,379

26.	Subsequent events

The Company has evaluated its activities subsequent to December 31, 2011 and has concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.

F-32

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on October 9, 2012.

	CHINA BCT PHARMACY GROUP, INC.

	/s/ Huitian Tang
	By: Huitian Tang
	Chief Executive Officer and Director (principal executive officer)

EXHIBIT INDEX

2.1	Share Exchange Agreement dated December 23, 2009 (1)

3.1	First Amended and Restated Certificate of Incorporation (2)

3.2	By-laws (3)

4.1	Form of Warrant (1)

4.2	Form of Co-Placement Agent Warrant (4)

4.3	Certificate of Designation of Series A Convertible Preferred Shares (2)

10.1	Subscription Agreement Dated October 23, 2009 (1)

10.2	Co-Placement Agent Agreement Dated October 21, 2009 (5)

10.3	Escrow Deposit Agreement Dated October 21, 2009 (1)

10.4	Earn-In Agreement dated October 22, 2009 (1)

10.5	Share Transfer Agreement dated as of April 1, 2008 (5)

10.6	Shares Pledge Agreement dated May 3, 2008 (1)

10.7	Shares Pledge Agreement dated March 31, 2009 (1)

10.8	Shares Repurchase Agreement dated July 31, 2008 (1)

10.9	Loan Agreement and Pledge Agreement dated December 19, 2008 by and among Liuzhou Baicaotang, Baicaotang Property Development Limited and Liuzhou City Commercial Bank (5)

10.10	Loan Agreement and Pledge Agreement dated December 29, 2008 by and among Liuzhou Baicaotang, Baicaotang Property Development Limited and Rural Credit Cooperatives (5)

10.11	Loan Agreement and Pledge Agreement dated January 8, 2009 by and among Liuzhou Baicaotang, Baicaotang Property Development Limited and Agricultural Bank of China (5)

10.12	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated February 13, 2006 (5)

10.13	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated March 27, 2006 (5)

10.14	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated April 6, 2006 (5)

10.15	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated May 18, 2006 (5)

10.16	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated December 6, 2006 (5)

10.17	Loan Agreement by and between Jinghua Li and Guangxi Hefeng Pharmaceutical Co., Limited dated December 29, 2008 (5)

10.18	Loan Agreement dated February 8, 2007 by and between Huitian Tang and Industrial and Commercial Bank of China Guangxi Branch (5)

10.19	Confirmation Agreement dated December 31, 2008 by and among Huitian Tang, Liuzhou Baicaotang and Liuzhou Baicaotang Guigang Branch (5)

10.20	Loan Agreement dated February 12, 2007 by and between Youru Jiang and Industrial and Commercial Bank of China Guangxi Branch (5)

10.21	Confirmation Agreement dated December 31, 2008 by and among Youru Jiang, Liuzhou Baicaotang and Liuzhou Baicaotang Guigang Branch (5)

10.22	Lock-Up Agreement, dated December 23, 2009 (5)

10.23	Employment Agreement dated May 18, 2010 by and between Guangxi Liuzhou Baicaotang Medicine, Ltd., China BCT Pharmacy Group, Inc. and Huitian Tang (6)

10.24	Employment Agreement dated May 18, 2010 by and between Forever Well Asia Pacific Limited, China BCT Pharmacy Group, Inc. and Xiaoyan Zhang (6)

10.25	Earn-in Agreement dated December 30, 2009 (7)

10.26	Shares Pledge Agreement dated May 3, 2008 (7)

10.27	Shares Pledge Agreement dated March 31, 2009 (7)

10.28	Termination Agreement dated March 2, 2010 (7)

10.29	Share Transfer Agreement by and between He Wenheng and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.30	Share Transfer Agreement by and between Jia Junwen and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.31	Share Transfer Agreement by and between Jiang Qifeng and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.32	Share Transfer Agreement by and between Youru Jiang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.33	Share Transfer Agreement by and between Jinghua Li and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.34	Share Transfer Agreement by and between Chunlin Liu and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.35	Share Transfer Agreement by and between Gongchun Liu and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.36	Share Transfer Agreement by and between Yuangang Meng and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.37	Share Transfer Agreement by and between Yujing Tan and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.38	Share Transfer Agreement by and between Yuanjian Ye and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.39	Share Transfer Agreement by and between Bangfu Wang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.40	Share Transfer Agreement by and between Wende Wei and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.41	Share Transfer Agreement by and between Xiaojian Yang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.42	Share Transfer Agreement by and between Qingqiu Zhang and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.43	Share Transfer Agreement by and between Ming’an Zhao and Forever Well Asia Pacific Limited dated March 18, 2008 (5)

10.44	Amendment No. 1 to Earn-in Agreement, by and between Xiaoyan Zhang and the Buyers named thererin, dated May 19, 2010 (5)

10.45	Amended and Restated Shares Pledge Agreement by and between Guangxi Liuzhou Baicaotang Medicine Ltd. and Liuzhou Baicaotang Property Management Ltd. dated May 19, 2010 (5)

10.46	Amended and Restated Shares Pledge Agreement by and between Guangxi Liuzhou Baicaotang Medicine Ltd. and Liuzhou Baicaotang Property Management Ltd. dated May 19, 2010 (5)

10.47	Proxy Agreement by and between Guangxi Liuzhou Baicaotang Medicine Ltd. and Liuzhou Baicaotang Property Management Ltd., dated May 19, 2010 (5)

10.48	Form of sales agreement with related parties (7)

10.49	Independent Director Agreement of Simon Choi (8)

10.50	Independent Director Agreement of Manwai Chiu (8)

10.51	Independent Director Agreement of Kam-Cheung Chin (13)

10.52	2010 Omnibus Securities and Incentive Plan (9)

10.53	Stock Option Agreement between the Registrant and Huitian Tang made as of June 27, 2010 (9)

10.54	Stock Option Agreement between the Registrant and Xiaoyan Zhang made as of June 27, 2010 (9)

10.55	Stock Option Agreement between the Registrant and Eng Leong Lee made as of July 16, 2010 (7)

10.56	Stock Option Agreement between the Registrant and Simon Choi made as of July 16, 2010 (7)

10.57	Stock Option Agreement between the Registrant and Manwai Chiu made as of July 16, 2010 (7)

10.58	Non-Disclosure and Non-Competition Agreement dated May 18, 2010 by and between Guangxi Liuzhou Baicaotang Medicine, Ltd. and Huitian Tang (7)

10.59	Non-Disclosure and Non-Competition Agreement dated May 18, 2010 by and between Guangxi Liuzhou Baicaotang Medicine, Ltd. and Xiaoyan Zhang (7)

10.60	Asset Transfer Agreement dated February 28, 2010 by and between Liuzhou Wubaitang Medicine Chain Store Co., Ltd. and Liuzhou Baicaotang Medicine Retail Limited (7)

10.61	Asset Transfer Agreement dated March 29, 2010 by and between Zhaoping County Laobaixin Pharmacy Chain Store Co., Ltd. and Liuzhou Baicaotang Medicine Retail Limited (7)

10.62	Asset Transfer Agreement dated April 25, 2010 by and between Lai Bing Peng Fei Pharmacy Chain Store Co., Ltd. and Liuzhou Baicaotang Medicine Retail Limited (7)

10.63	Form of Retail Chain Leasing Contract (7)

10.64	Entrust Shareholding Agreement Between Liuzhou BCT Shareholders and Ms. Xiaoyan Zhang on Ingenious Dated July 21, 2008 (11)

10.65	Series A Convertible Preferred Shares Purchase Agreement, by and between the Company and Milestone Longcheng Limited (10)

10.66	Registration Rights Agreement, by and between the Company and Milestone Longcheng Limited (10)

10.67	Shareholders Agreement, by and among the Company, Milestone Longcheng Limited, certain shareholders of the Company and Mr. Huitian Tang as representative for the shareholders (10)

10.68	Form of Stock Option Agreement – Not Granted Pursuant to 2010 Omnibus Securities and Incentive Plan (12)

10.69	Form of Stock Option Agreement Pursuant to 2010 Omnibus Securities and Incentive Plan (12)

14	Code of Ethics and Business Conduct (8)

21	List of Subsidiaries (4)

31.1	Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2	Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

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

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

101.INS	XBRL Instance Document.**

101.SCH	XBRL Taxonomy Extension Schema Document.**

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.**

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.**

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.**

	(1)	Incorporated by reference to the Company’s Form 8-K filed on December 31, 2009.
	(2)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed on March 3, 2011.
	(3)	Incorporated by reference to the Company’s Form SB-2 filed on August 22, 2007.
	(4)	Incorporated by reference to the Company’s Registration Statement on Form S-1 filed on March 3, 2010.
	(5)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed on May 27, 2010.
	(6)	Incorporated by reference to the Company’s Form 8-K filed on May 21, 2010.
	(7)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed July 29, 2010.
	(8)	Incorporated by reference to the Company’s Form 8-K filed on June 9, 2010.
	(9)	Incorporated by reference to the Company’s Form 8-K filed on June 29, 2010.
	(10)	Incorporated by reference to the Company’s Form 8-K filed on January 18, 2011.
	(11)	Incorporated by reference to the Company’s Registration Statement on Form S-1/A, filed October 20, 2010.
	(12)	Incorporated by reference to the Company’s Form 8-K filed on December 19, 2011.
	(13)	Incorporated by reference to the Company’s Annual Report on Form 10-K filed on March 30, 2012.

* Filed herewith.

** Previously furnished with Amendment No. 3 to the Company’s Annual Report on Form 10-K/A filed on June 12, 2012, and incorporated herein by reference.

China BCT Pharmacy (CE) (USOTC:CNBI)
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