First China Pharma Announces Audited Financials and Issues Guidance

KUNMING, CHINA--(Marketwire -05/01/12)- First China Pharmaceutical Group, Inc. (FCPGE.OB - News) ("First China" or the "Company"), a rapidly growing and technologically advanced pharmaceutical distribution company based in Yunnan, China, today announced its audited financial results for the nine-month transition period ended December 31, 2011.

Understanding FCPG Financial Data Presented in the Annual 10K FilingIn an 8K filed on May 10, 2011, the Company gave formal notice that it changed its year end from March 31 to December 31. This change was made to have the FCPG group of companies all have the same year end, which simplifies the accounting and audit processes.

The audit conducted by the Company's new auditors, EFP Rotenberg, was for the 9 month transition period April 1, 2001 to December 31, 2011. The audit was conducted over this 9 month period as the Company's previous auditors, Parker Randall, had completed a 12 month audit from the period April 1, 2010 to March 31, 2011. As per audit requirements, the financial statements reported in the 10K that was filed May 1, 2011 reflect the 9 month transition period from April 1 to December 31, 2011 and the 12 month period ending March 31, 2011. While this is required by audit standards it essentially compares a 12 month period to a 9 month period.

To provide a comparative view of the Company's financial statements, a comparison of the full fiscal years (January 1 to December 31) for the years 2010 and 2011 are provided in this news release. When comparing the FCPG financial statements for the fiscal years 2010 to 2011 it is important to keep in mind that prior to September 15, 2010, FCPG was a private company. This means that for 2010 there were only 3.5 months of costs associated with operating a public company while in 2011 there are 12 months. This is the primary reasons for the significant increase in administrative costs year over year.

There is one key item on the Company's financial statements that have shown a significant increase in net income, a $2.410 million "Derivative Gain". This amount is a non cash increase to the income statement that is a result of the Black Scholes derivative valuation of the warrants issued by the Company in relation to the financing in April 2011. The valuation of these warrants is required by US GAAP and can produce either a non cash gain or loss; depending upon the fair market value of the common stock. This is a non cash transaction and does not positively affect the Company's working capital.

Fiscal 2011 HighlightsFirst China is pleased to advise that its focus and investments on expanding sales in Yunnan province has led to doubling sales for the same period as last year. The April 2011 financing has enabled First China to hire additional sales staff, broaden the product line, increase inventory and refine computer systems. While sales were at a record high this quarter, gross profit was down from the same period in 2010. The reduction in the Company's profit margin is primarily due to a reduction in the prices required by the Chinese government for certain pharmaceuticals and increased costs associated with the operation of a public company. As part of the Chinese government's mandate to significantly increase per capital spending on pharmaceuticals, they have put pressure on the companies who carry pharmaceuticals and other health care providers to reduce drug pricing in order to bring down the rising cost of health care for all Chinese. This has led to a decline in profit margins but an opportunity to increase sales.

Fiscal 2011 Business Highlights2011 saw dramatic changes for FCPG. A financing in April 2011 grossed the Company approximately $4 million, well short of the $10 million it was targeting. The financing fell short of its objective largely due to the negative press regarding accounting issues with several Chinese based U.S. listed companies. In order to bolster investor confidence the Company changed auditors from a Hong Kong based firm that was not subject to PCAOB inspection to EFP Rotenberg, a US based firm headquartered in Rochester New York. The transition in auditors took longer than expected and was slowed down by Chinese New Year. The Company is confident that this move will demonstrate its commitment to US financial markets and the corporate governance that shareholders expect. The Company was also pleased to have Jack Zwick join the Board in 2011. Mr. Zwick is a CPA with extensive accounting, audit and board experience. The Company will look to add more individuals to the Board in 2012 that will add to the leadership and stewardship that is currently in place.

The majority of the proceeds from the financing were deployed to broaden the Company's product line and to carry more inventory. Additionally, it enabled FCPG to hire additional sales staff and refine computer systems. This injection of capital was instrumental in the Company being able to double sales over fiscal 2010.

Like the rest of the industry, the Company experienced declining profit margins. This was largely due to two factors. Expenses related to the operation and management of a public company increased costs but the primary reason for the reduction in margins industry-wide was the Chinese government arbitrarily reducing the cost of many drugs. The Chinese government undertook the reduction of pharmaceutical prices was to fulfill part of a government priority to increase per capita expenditures on pharmaceuticals and health care. The Company is undertaking a number of initiatives that focus on increasing profit margins, including importing products from the West and drop-shipping orders when possible.

In late 2011 the Company stopped its re-organization that would have moved the head office and sales function to Hong Kong. While this move would have significantly reduced the taxes paid by the Company, after some fundamental changes to the Chinese tax code the cost and risk outweighed any benefits that could potentially be achieved.

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First China Pharma Announces Audited Financials and Issues Guidance