a50165726.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
 
For the quarterly period ended: December 31, 2011
 
or
 
[   ] 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: 001-34711
 
CHINA JO-JO DRUGSTORES, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
98-0557852
(State or other jurisdiction of incorporation of
(I.R.S. Employer
origination)
Identification Number)
 
Room 507-513, 5th Floor A Building, Meidu Plaza
 
Gongshu District, Hangzhou, Zhejiang Province
 
People's Republic of China
N/A
(Address of principal executive offices)
(Zip code)
 
+86 (571) 88077078
(Registrant's telephone number, including area code)
 
 
(Former name, former address and former fiscal year,
if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [   ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]  No [   ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer [   ]
Accelerated filer [   ]
     
 
Non-accelerated filer [   ]
Smaller reporting company [X]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  [   ]  No [X]
 
 
1

 
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 13,531,579 shares issued and outstanding as of February 10, 2012.

 
2

 
 
TABLE OF CONTENTS
 
 
   
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3

 
 
CAUTION REGARDING FORWARD-LOOKING INFORMATION
 
All statements contained in this Quarterly Report on Form 10-Q ("Form 10-Q") for China Jo-Jo Drugstores, Inc., other than statements of historical facts, that address future activities, events or developments are forward-looking statements, including, but not limited to, statements containing the words "believe," "anticipate," "expect" and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially.
 
Such risks include, among others, the following: national and local general economic and market conditions: our ability to sustain, manage or forecast our growth; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.
 
Consequently, all of the forward-looking statements made in this Form 10-Q are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.
 
 
4

 

PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
 
             
             
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(UNAUDITED)
 
             
   
DECEMBER 31,
   
MARCH 31,
 
    2011     2011  
                 
ASSETS
               
                 
CURRENT ASSETS
               
Cash
  $ 4,339,666     $ 6,489,905  
Restricted cash
    1,451,564       921,876  
Trade accounts receivable, net
    7,374,177       1,484,850  
Inventories
    7,361,719       4,617,420  
Other receivables
    1,214,408       1,049,564  
Advances to suppliers, net
    14,086,803       16,528,772  
Other current assets
    2,906,589       8,364,267  
Total current assets
    38,734,926       39,456,654  
                 
PROPERTY AND EQUIPMENT, net
    15,303,962       5,471,432  
                 
OTHER ASSETS
               
Long term deposit
    2,635,206       2,540,758  
Prepaid - noncurrent
    6,752,564       6,075,478  
Intangible assets, net
    2,881,237       390,302  
Total other assets
    12,269,007       9,006,538  
                 
Total assets
  $ 66,307,895     $ 53,934,624  
                 
LIABILITIES AND EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable, trade
  $ 5,518,920     $ 3,530,204  
Notes payable
    4,836,702       2,704,680  
Other payables
    1,651,888       627,734  
Other payables - related parties
    880,058       880,058  
Customer deposits
    1,883,966       2,038,608  
Taxes payable
    1,259,043       1,624,558  
Accrued liabilities
    305,154       311,639  
Total current liabilities
    16,335,731       11,717,481  
                 
Purchase option derivative liability
    36,834       153,226  
Total liabilities
    16,372,565       11,870,707  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY
               
Preferred stock; $0.001 par value; 10,000,000 shares authorized;
         
nil issued and outstanding as of December 31, 2011
         
and March 31, 2011
    -       -  
Common stock; $0.001 par value; 250,000,000 shares authorized;
         
13,559,088 and 13,530,477 shares issued and outstanding as of
         
December 31, 2011 and March 31, 2011, respectively
    13,559       13,530  
Additional Paid-in capital
    16,409,543       16,333,956  
Statutory reserves
    1,309,109       1,309,109  
Retained earnings
    29,737,898       23,287,474  
Accumulated other comprehensive income
    2,466,228       1,119,848  
Total stockholder's equity
    49,936,337       42,063,917  
                 
NONCONTROLLING INTEREST
    (1,007 )     -  
         Total equity     49,935,330       42,063,917  
                 
Total liabilities and equity
  $ 66,307,895     $ 53,934,624  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5
 
 
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
 
   
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 
(UNAUDITED)
 
                         
   
Three months ended December 31,
   
Nine months ended December 31,
 
   
2011
   
2010
   
2011
   
2010
 
REVENUES, NET
 
$
25,643,949
   
$
18,042,309
   
$
69,296,755
   
$
48,927,907
 
                                 
COST OF GOODS SOLD
   
18,817,080
     
12,713,181
     
49,342,667
     
34,576,771
 
                                 
GROSS PROFIT
   
6,826,869
     
5,329,128
     
19,954,088
     
14,351,136
 
                                 
SELLING EXPENSES
   
2,498,892
     
1,337,055
     
6,588,686
     
3,339,928
 
GENERAL & ADMINISTRATIVE EXPENSES
   
2,175,615
     
1,227,520
     
4,570,919
     
2,758,654
 
OPERATING EXPENSES
   
4,674,507
     
2,564,575
     
11,159,605
     
6,098,582
 
                                 
INCOME FROM OPERATIONS
   
2,152,362
     
2,764,553
     
8,794,483
     
8,252,554
 
                                 
OTHER INCOME (EXPENSE), NET
   
16,343
     
112,736
     
222,929
     
60,985
 
CHANGE IN FAIR VALUE OF PURCHASE OPTION DERIVATIVE LIABILITY
   
19,404
     
119,595
     
116,392
     
91,546
 
                                 
INCOME BEFORE INCOME TAXES
   
2,188,109
     
2,996,884
     
9,133,804
     
8,405,085
 
                                 
PROVISION FOR INCOME TAXES
   
610,910
     
759,431
     
2,684,463
     
2,387,719
 
                                 
NET INCOME
   
1,577,199
     
2,237,453
     
6,449,341
     
6,017,366
 
                                 
ADD: NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(3,217
   
-
     
1,083
     
-
 
                                 
NET INCOME ATTRIBUTABLE TO CHINA JO-JO DRUGSTORES, INC.
   
1,573,982
     
2,237,453
     
6,450,424
     
6,017,366
 
                                 
OTHER COMPREHENSIVE INCOME
                               
Foreign currency translation adjustments- China Jo-Jo Drugstores, Inc.
   
262,892
     
514,170
     
1,346,380
     
1,168,202
 
Foreign currency translation adjustment- noncontrolling interest
   
31
        -      
(10
      -  
                                 
COMPREHENSIVE INCOME
 
$
1,836,905
   
$
2,751,623
   
$
7,796,794
   
$
7,185,568
 
                                 
WEIGHTED AVERAGE NUMBER OF SHARES
                               
Basic
   
13,557,379
     
13,500,002
     
13,546,570
     
13,220,002
 
Diluted
   
13,557,379
     
13,500,002
     
13,546,570
     
13,220,002
 
                                 
EARNINGS PER SHARES
                               
Basic - attributable to controlling interest
 
$
0.12
   
$
0.17
   
$
0.48
   
$
0.46
 
Diluted - attributable to controlling interest
 
$
0.12
   
$
0.17
   
$
0.48
   
$
0.46
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6

 
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
 
   
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
   
Nine months ended
 
   
December 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
6,449,341
   
$
6,017,366
 
Adjustments to reconcile net income to net cash
               
(used in) provided by operating activities:
               
Depreciation and amortization
   
2,065,451
     
627,387
 
Stock compensation
   
75,616
     
80,445
 
Bad debt expense
   
543,435
     
130,170
 
Change in fair value of purchase option derivative liability
   
(116,392
)
   
(91,546
Changes in operating assets:
               
Accounts receivable, trade
   
(5,082,547
)
   
(2,292,087
)
Inventories
   
1,497,076
     
(1,257,608
)
Other receivables
   
(636,952
)
   
(351,317
)
Advances to suppliers
   
3,000,229
     
(10,724,139
)
Other current assets
   
5,635,292
     
(501,851
)
Long term deposit
   
(17,790
)
   
-
 
Prepaid - noncurrent
   
153,828
     
(337,058
)
Changes in operating liabilities:
               
Accounts payable, trade
   
5,554,243
     
1,935,978
 
Other payables and accrued liabilities
   
(862,802
)
   
(282,608
)
Customer deposit
   
(213,660
   
-
 
Taxes payable
   
(366,393
)
   
(38,313
)
Net cash provided by operating activities
   
17,677,975
     
(7,085,181
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Payments and advance on property and equipment purchases
   
(11,727,452
)
   
(2,096,497
)
Net payments for business acquisitions
   
(3,297,561
)
   
(593,440
Net cash provided by (used in) investing activities
   
(15,025,013
)
   
(2,689,937
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Change in restricted cash
   
(496,520
   
(417,930
)
Payments on notes payable
   
(4,452,229
)
   
1,149,847
 
Proceeds from equity financing
   
-
     
15,708,608
 
Proceeds from short-term loans
   
-
     
(890,160
)
Payments on other payables-related parties
   
-
     
(54,942
)
Net cash (used in) provided by financing activities
   
(4,948,749
)
   
15,495,423
 
                 
EFFECT OF EXCHANGE RATE ON CASH
   
145,548
     
332,488
 
                 
(DECREASE) INCREASE IN CASH
   
(2,150,239
)
   
6,052,793
 
                 
CASH, beginning of period
   
6,489,905
     
801,593
 
                 
CASH, end of period
 
$
4,339,666
   
$
6,854,386
 
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid for interest
 
$
-
   
$
23,587
 
Cash paid for income taxes
 
$
3,254,843
   
$
2,474,812
 
Non-cash financing activities
               
Notes payable transferred to accounts payable vendors
 
$
6,480,692
   
$
3,649,312
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
7

 
 
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
Note 1 – DESCRIPTION OF BUSINESS AND ORGANIZATION
 
China Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated in Nevada on December 19, 2006, originally under the name “Kerrisdale Mining Corporation.” On September 24, 2009, the Company changed its name to “China Jo-Jo Drugstores, Inc.” in connection with a share exchange transaction as described below.
 
On September 17, 2009, the Company completed a share exchange transaction with Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”), whereby 7,900,000 shares of common stock were issued to the stockholders of Renovation in exchange for 100% of the capital stock of Renovation. The completion of the share exchange transaction resulted in a change of control. The share exchange transaction was accounted for as a reverse acquisition and recapitalization and, as a result, the condensed consolidated financial statements of the Company (the legal acquirer) are, in substance, those of Renovation (the accounting acquirer), with the assets and liabilities, and revenues and expenses, of the Company being included effective from the date of the share exchange transaction. Renovation has no substantive operations of its own except for its holdings of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”) and Zhejiang Shouantang Medical Technology Co., Ltd. (“Shouantang Technology”), its wholly-owned subsidiaries.
 
The Company is primarily in the retail drugstore business in the People’s Republic of China (“China” or the “PRC”). A majority of the Company’s pharmacies are operated by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company which the Company controls through contractual arrangements.  Shanghai Lydia Grand Pharmacy Co., Ltd. (“Shanghai Lydia”), a wholly-owned subsidiary of Jiuzhou Pharmacy, operates one store location in Shanghai. On July 29, 2011, Shanghai Lydia obtained control of Shanghai Bieyanghong Zhongxing Grand Pharmacy Co. Ltd. (“Bieyanghong Zhongxing”), which also operates one pharmacy in Shanghai (see Note 16 – Business Combination), and Bieyanghong Zhongxing subsequently changed its name to Shanghai Lydia Zhongxing Grand Pharmacy Co., Ltd. (“Shanghai Zhongxing”). One drugstore is operated by Hangzhou Quannuo Grand Pharmacy Co., Ltd. (“Hangzhou Quannuo”), a wholly-owned subsidiary of Zhejiang Quannuo Internet Technology Co., Ltd. (“Quannuo Technology”), which is wholly-owned by Shouantang Technology.
 
The Company also operates two medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service”), both of which are also controlled by the Company through contractual arrangements. In addition, Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd. (“Jiuxin Qianhong”), which is wholly-owned by Jiuxin Management, is operating a cultivation project of herbal plants used for traditional Chinese medicine (“TCM”), and Tonglu Lydia Agriculture Development Co., Ltd. (“Tonglu Lydia”), which is wholly-owned by Shouantang Technology, will do the same in the future.
 
On August 25, 2011, Jiuzhou Pharmacy completed its acquisition of Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”), which is licensed to distribute prescription and non-prescription pharmaceutical products throughout China (See Note 16 – Business Combination).
 
 
8

 
 
On December 20, 2011, Renovation established Hangzhou Jiutong Medical Technology Co., Ltd. (“Jiutong Medical”) as a wholly-owned subsidiary to process herbal plants, mainly cultivated by Jiuxin Qianhong, into TCM.
 
The accompanying consolidated financial statements reflect the activities of the Company and each of the following entities:
  
Entity Name
 
Background
 
Ownership
Renovation HK
 
Incorporated in Hong Kong SAR on September 2, 2008
 
100%
           
Jiuxin Management
 
Established in the PRC on October 14, 2008
Deemed a wholly foreign owned enterprise (“WFOE”) under PRC law
Registered capital of $4,500,000 fully paid
 
100%
           
Shouantang Technology
 
Established in the PRC on July 16, 2010 by Renovation with registered capital of $20 million
Deemed a WFOE under PRC law
$11 million of registered capital paid as of March 31, 2011, the balance of $9 million due by July 16, 2012 
To carry out internet pharmacy business, is cooperating with the Company’s online store in China to develop its business
 
100%
           
Jiuxin Qianhong
 
Established in the PRC on August 10, 2010 by Jiuxin Management
Registered capital of RMB 10,000,000 Renminbi (“RMB”) fully paid
To carry out cultivation of TCM herbal plants
 
100%
           
Quannuo Technology
 
Established in the PRC on July 7, 2009
Registered capital of RMB 10,000,000 fully paid.
Acquired by Shouantang Technology in November 2010 
To develop software for internet pharmacy business, which is cooperating with the Company’s online store in China to develop its business
 
100%
           
Hangzhou Quannuo
 
Established in the PRC on July 8, 2010 by Quannuo Technology
Registered capital of RMB 800,000 fully paid
Operates one “Quannuo Grand Pharmacy” as a Jiuzhou Pharmacy franchise store in Hangzhou
 
100%
 
 
9

 
 
Tonglu Lydia
 
Established in PRC on June 24, 2011 by Shouantang Technology
Registered capital of RMB 5,000,000 fully paid
To carry out cultivation of TCM herbal plants
 
100%
           
Jiuzhou Pharmacy (1)
 
Established in the PRC on September 9, 2003
Registered capital of RMB 5 million fully paid
Operates the “Hangzhou Jiuzhou Grand Pharmacy” stores in and around Hangzhou
 
VIE by contractual 
arrangements (2)
           
Jiuzhou Clinic (1)
 
Established in the PRC as a general partnership on October 10, 2003
Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
 
VIE by contractual
arrangements (2)
           
Jiuzhou Service (1)
 
Established in the PRC on November 2, 2005
Registered capital of RMB 500,000 fully paid
Operates a medical clinic adjacent to one of Jiuzhou Pharmacy’s stores
 
VIE by contractual 
arrangements (2)
           
Shanghai Lydia
 
Established in the PRC on January 31, 2011 by Jiuzhou Pharmacy
Registered capital of RMB 1,000,000 fully paid 
Operates the “Lydia Grand Pharmacy” store in Shanghai
 
VIE by contractual
arrangements as a
wholly-owned subsidiary
of Jiuzhou Pharmacy (2)
           
Jiuxin Medicine
 
Established in the PRC on December 31, 2003
Business license transferred to Jiuzhou Pharmacy in April 2011
Registered capital of RMB 10 million fully paid
To carry out pharmaceutical distribution services
 
VIE by contractual
arrangements as a
wholly-owned subsidiary
of Jiuzhou Pharmacy (2)
           
Shanghai Zhongxing
 
 
Established in the PRC on June 19, 2006
Registered capital of RMB 1 million fully paid on May 23, 2006
Operates the “Zhongxing Grand Pharmacy” store in Shanghai City
 
VIE by contractual
arrangements as a
 controlled entity
 of Jiuzhou Pharmacy
 through Shanghai
 Lydia (2)
           
Jiutong Medical
 
Established in the PRC on December 20, 2011 by Renovation with registered capital of $5 million
$2 million of registered capital paid as of December 31, 2011, the balance of $3 million due by December 20, 2013 
To process herbal plants, mainly cultivated by Jiuxin Qianhong, into TCM
 
100%
 
(1)
Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service have been under the common control of the same three owners (the “Owners”) since their respective establishment dates, pursuant to agreements amongst the Owners to vote their interests in concert as memorialized in a voting agreement. Based on such voting agreement, the Company has determined that common control exists among these three companies in accordance with generally accepted accounting standards. Operationally, the Owners have operated these three companies in conjunction with one another since each company’s respective establishment date. Shanghai Lydia, and Jiuxin Medicine are also deemed under the common control of the Owners as they are each wholly-owned by Jiuzhou Pharmacy, while Shanghai Zhongxing is deemed under the common control of the Owners as it is controlled by Jiuzhou Pharmacy through Shanghai Lydia.
 
(2)
To comply with certain foreign ownership restrictions of pharmacy and medical clinic operators, Jiuxin Management entered into a series of contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service on August 1, 2009. These contractual arrangements are comprised of five agreements: consulting services agreement, operating agreement, equity pledge agreement, voting rights proxy agreement and option agreement. As a result of these agreements, which obligate Jiuxin Management to absorb all of the risks of loss from the activities of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and enable the Company (through Jiuxin Management) to receive all of their expected residual returns, the Company accounts for each of these three companies (as well as each subsidiary of Jiuzhou Pharmacy) as a variable interest entity (“VIE”) under the accounting standards of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, as well as the subsidiaries and entity under the control of Jiuzhou Pharmacy (Shanghai Lydia, Jiuxin Medicine and Shanghai Zhongxing), are consolidated into the financial statements of the Company.
 
Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation and consolidation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. These condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2011 filed with the SEC on June 29, 2011. Operating results for the three and nine months ended December 31, 2011 may not be necessarily indicative of the results that may be expected for the full year.
 
 
10

 
 
The condensed consolidated financial statements include the financial statements of the Company, its subsidiaries and VIEs. All significant inter-company transactions and balances between the Company, its subsidiaries and VIEs are eliminated upon consolidation.
 
Consolidation of variable interest entities
 
In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
 
The Company has concluded, based on its contractual arrangements, that Jiuzhou Pharmacy (including its subsidiaries and controlled entity), Jiuzhou Clinic and Jiuzhou Service are each a VIE and that the Company’s wholly-owned subsidiary, Jiuxin Management, absorbs a majority of the risk of loss from the activities of these companies, and enable the Company, through Jiuxin Management, to receive a majority of their expected residual returns.
 
Additionally, as Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are under common control, the condensed consolidated financial statements have been prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these condensed consolidated financial statements.
 
Control and common control is defined under the accounting standards as “an individual, enterprise, or immediate family members who hold more than 50 percent of the voting ownership interest of each entity.” Because the Owners collectively own 100% of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and have agreed to vote their interests in concert since the establishment of each of these three companies as memorialized the voting rights proxy agreement, the Company believes that the Owners collectively have control and common control of the three companies. Accordingly, the Company believes that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service were constructively held under common control by Jiuxin Management as of the time the contractual agreements were entered into, establishing Jiuxin Management as their primary beneficiary. Jiuxin Management, in turn, is owned by Renovation, which is owned by the Company.
 
Although the Company has determined that the accounting standards regarding consolidation of VIEs do not provide for retroactive accounting treatment, Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service in substance were controlled by the Owners on September 9, 2003, October 10, 2003, and November 2, 2005, the establishment dates of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, respectively. Such common control conditions resulted in the share exchange transaction being a capital transaction in substance, reflected as a recapitalization, and the Company has accordingly recorded the consolidation of Renovation at its historical cost.
 
 
11

 
 
Risks and uncertainties
 
The operations of the Company are located in the PRC. Accordingly, the Company’s business, financial condition, and results of operations may be influenced by the political, economic, and legal environments in the PRC, as well as by the general state of the PRC economy. The Company’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company’s results may be adversely affected by changes in the political, regulatory and social conditions in the PRC, and by changes in governmental policies or interpretations with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things. Although the Company has not experienced losses from these situations and believes that it is in compliance with existing laws and regulations including the organization and structure disclosed in Note 1, this may not be indicative of future results.
 
The Company has significant cash deposits with suppliers in order to obtain and maintain inventory. The Company’s ability to obtain products and maintain inventory at existing and new locations is dependent upon its ability to post and maintain significant cash deposits with its suppliers. In the PRC, many vendors are unwilling to extend credit terms for product sales which require cash deposits to be made. The Company does not generally receive interest on any of its supplier deposits and such deposits are subject to loss as a result of the creditworthiness or bankruptcy of the party who holds such funds, as well as the risk from illegal acts such as conversion, fraud, theft or dishonesty associated with the third party. If these circumstances were to arise, the Company would find it difficult or impossible, due to the unpredictability of legal proceedings in China, to recover all or a portion of the amount on deposit with its vendors.
 
Members of the current management team own controlling interests in the Company and are also the Owners of the VIEs in the PRC.  The Company only controls the VIEs through contractual arrangements which obligate it to absorb the risk of loss and to receive the residual expected returns.  As such, the controlling shareholders of the Company and the VIEs could cancel these agreements or permit them to expire at the end of the agreement terms, as a result of which the Company would not retain control of the VIEs.
 
Use of estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made in the preparation of the accompanying consolidated financial statements relate to the assessment of the carrying values of accounts receivable and related allowance for doubtful accounts, useful lives of property and equipment, lives of intangible assets, business combinations, goodwill, and fair value of purchase option derivative liability. Because of the use of estimates inherent in the financial reporting process, actual results could materially differ from those estimates.
 
 
12

 
 
Fair values of financial instruments
 
The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The carrying amounts reported in the accompanying consolidated balance sheets for receivables, payables, notes payable and short-term loans qualify as financial instruments and are a reasonable estimate of fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
 
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
 
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.
 
Goodwill and other intangible assets
 
The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed is recognized as goodwill.  Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis in the fourth quarter or more frequently if there are indications of impairment. For purposes of the goodwill impairment test, a two-step test is used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
 
 
13

 
 
Intangibles other than goodwill
 
Intangible assets that are acquired individually or as part of a group of assets, other than those acquired in a business combination are initially recorded at their fair value. The cost of a group of assets acquired in a transaction is allocated to the individual assets based on their relative fair values. Goodwill does not arise in such a transaction. Intangible assets that are acquired in a business combination are accounted for in accordance with ASC Topic 805, Business Combinations.
 
The estimated useful lives of the Company’s intangible assets are as follows:
 
 
Estimated Useful Life
Goodwill
Indefinite
Licenses and permits
Indefinite
Software
3 years
 
The Company evaluates intangible assets for impairment whenever events or changes in circumstances indicate that the assets might be impaired. 
 
There was no indication of impairment during the three and nine months ended December 31, 2011.
 
Revenue recognition
 
Revenue from sales of prescription medicine at the drugstores is recognized when the prescription is filled and the customer picks up and pays for the prescription.
 
Revenue from sales of other merchandise at the drugstores is recognized at the point of sale, which is when the customer pays for and receives the merchandise.
 
Revenue from medical services is recognized after the service has been rendered to the customer.
 
Revenue from sales of merchandise to non-retail customers is recognized when the following conditions are met: (1) persuasive evidence of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement); (2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received by the customer at its designated location in accordance with the sales terms; (3) the sales price is fixed or determinable; and (4) collectability is probable. Historically, sales returns have been de minimis.
 
The Company’s revenue is net of value added tax (“VAT”) collected on behalf of PRC tax authorities in respect of the sale of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the accompanying consolidated balance sheets until it is paid to the relevant PRC tax authorities.
 
Cash and cash equivalents
 
Cash and cash equivalents include cash on hand, cash on deposit with banks and credit and debit card sales transactions which settle within seven days of the fiscal year-end. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
 
 
14

 
 
Restricted cash
 
The Company’s restricted cash consists of cash in a bank as security for its notes payable. The Company has notes payable outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable are generally short term in nature due to their short maturity period of six to nine months; thus, restricted cash is classified as a current asset.
 
Accounts receivable
 
Accounts receivable represent amounts due from banks relating to retail sales that are paid or settled by the customers’ debit or credit cards, amounts due from government social security bureaus relating to retail sales of drugs, prescription medicine, and medical services that are paid or settled by the customers’ medical insurance cards, and amounts due from non-retail customers for sales of merchandise.
 
Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances. Under the aging method, bad debt percentages determined by management, based on historical experience and current economic climate, are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. At each reporting period, the allowance balance is adjusted to reflect the amount computed as a result of the aging method. When facts subsequently become available to indicate that the allowance provided requires an adjustment, a corresponding adjustment is made to the allowance account as a change in estimate. The ultimate collection of the Company’s accounts receivable may take one year. Delinquent account balances are reserved after management determines that the likelihood of collection is not probable, and known bad debts are written-off against allowance for doubtful accounts when identified. No allowance was reserved as of December 31, 2011 and March 31, 2011, respectively.
 
Inventories
 
Inventories are stated at the lower of cost or market. Cost is determined using the first in first out method (“FIFO”). Market is the lower of replacement cost or net realizable value. The Company records write-downs to inventories for shrinkage losses and damaged merchandise that are identified.  Historically, these amounts have not been material to the consolidated financial statements.
 
 
15

 
 
Property and equipment
 
Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold improvements are amortized over the shorter of lease term or remaining lease period of the underlying assets. Following are the estimated useful lives of the Company’s property and equipment:
 
 
Estimated Useful Life
Buildings
35 years
Leasehold improvements
3-5 years
Motor vehicles
5 years
Office equipment and furniture
3-5 years
 
Maintenance, repairs and immaterial renewals are charged to expense as incurred. Material additions and betterment to property and equipment are capitalized.
 
Impairment of long-lived assets
 
The Company evaluates long-lived tangible and intangible assets for impairment, whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability is measured by comparing the asset’s net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. No indication of impairment was noted as of December 31, 2011.    
 
Notes payable
 
During the normal course of business, the Company issues Bank Acceptance Bills as a payment method to settle outstanding accounts payables to various material suppliers. The Company recorded such Bank Acceptance Bills as notes payables. The notes payable are generally short term in nature due to their short maturity period of six to nine months.
 
Income taxes
 
The Company records income taxes pursuant to the accounting standards for income taxes. These standards require the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due and the net change in deferred taxes.  A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.  As of December 31, 2011 and March 31, 2011, the Company's deferred tax assets amount to $230,046 and $0, respectively.
 
No significant penalties or interest relating to income taxes were incurred during the three and nine months ended December 31, 2011 and 2010.
 
All of the tax returns of the Company, since inception, are subject to examination by the tax authorities.
 
 
16

 
 
Stock-based compensation
 
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with the FASB’s accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
 
Advertising and promotion costs
 
Advertising and promotion costs are expensed as incurred, and amounted to $388,051 and $169,609 for three months ended December 31, 2011 and 2010, respectively, and $636,848 and $312,267 for the nine months ended December 31, 2011 and 2010. Advertising and promotion costs consist primarily of print and television advertisements.
 
Pre-opening costs
 
Expenditures related to the opening of new drugstores, other than expenditures for property and equipment, are expensed as incurred. 
 
Vendor allowances
 
The Company accounts for vendor allowances by reducing the carrying value of inventories which are subsequently transferred to cost of goods sold when the inventories are sold, unless those allowances are specifically identified as reimbursements for advertising, promotion and other services, in which case they are recognized as a reduction of the related advertising and promotion or other service costs.
 
Distribution costs
 
Distribution costs represent the costs of transporting merchandise from warehouse to stores. These costs are expensed as incurred and are included in sales and marketing costs.
 
Foreign currency translation
 
The Company uses the United States dollar (“U.S. dollars” or “USD”) for financial reporting purposes. The Company’s subsidiaries and VIEs maintain their books and records in their functional currency the Renminbi (“RMB”), being the currency of the PRC.
 
 
17

 
 
In general, for consolidation purposes, the Company translates the assets and liabilities of its subsidiaries and VIEs into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statements of income and cash flows are translated at average exchange rates during the reporting period. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the financial statements of the subsidiaries and VIEs are recorded as accumulated other comprehensive income.
 
The balance sheet amounts with the exception of equity at December 31, 2011 and March 31, 2011 were translated at 1 RMB to $0.1573 USD and at 1 RMB to $0.1527 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the nine months ended December 31, 2011 and 2010 were at 1 RMB to $0.1556 USD and at 1 RMB to $0.1484 USD, respectively.
 
Concentrations and credit risk
 
Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company has cash balances at financial institutions located in Hong Kong and the PRC. Balances at financial institutions in Hong Kong may, from time to time, exceed Hong Kong Deposit Protection Board’s insured limits. Balances at financial institutions and state-owned banks within the PRC are not covered by insurance. As of December 31, 2011 and March 31, 2011, the Company had deposits totaling $5,520,222 and $7,068,093 that were not covered by insurance, respectively. To date, the Company has not experienced any losses in such accounts.
 
For the three months ended December 31, 2011, two vendors collectively accounted for 34% of the Company’s total purchases and 4% of total advances to suppliers. For the three months ended December 31, 2010, three vendors collectively accounted for 28% of the Company’s total purchases and 11% of total advances to suppliers.
 
For the nine months ended December 31, 2011, two vendors collectively accounted for 25% of the Company’s total purchases and 4% of total advances to suppliers. For the nine months ended December 31, 2010, three vendors collectively accounted for 35% of the Company’s total purchases and 27% of total advances to suppliers.
 
Noncontrolling interest
 
As of December 31, 2011, 1% of the equity interests of Shanghai Zhongxing was owned by Shanghai Bieyanghong Grand Pharmacy Co., Ltd. and not under the Company's control.
 
 
18

 
 
Business combinations
 
The Company accounts for business combinations using the acquisition method of accounting. The acquisition method requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date.
 
Reclassifications
 
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no effect on net income or cash flows.
 
Note 3 – OTHER CURRENT ASSETS
 
Other current assets consist of the following:
 
   
December 31,
2011
   
March 31,
2011
 
Prepaid rental expenses
 
$
2,134,165
   
$
1,316,626
 
Lease rights transfer fees (1)
   
400,697
     
380,981
 
Security deposit with vendor
   
-
     
4,581,132
 
Prepaids and other current assets
   
371,727
     
166,148
 
Advance to contractor
   
-
     
1,919,380
 
Total
 
$
2,906,589
   
$
8,364,267
 
 
(1)
Lease rights transfer fees are paid by the Company to secure store rentals in coveted areas. These additional costs of acquiring the right to lease new store locations are capitalized and amortized over the period of the initial lease term.
 
Note 4 – PROPERTY AND EQUIPMENT
 
Property and equipment consist of the following:
 
   
December 31,
2011
   
March 31,
2011
 
Buildings
 
$
1,104,310
   
$
-
 
Leasehold improvements
   
12,268,543
     
3,481,773
 
Office equipment and furniture
   
3,782,326
     
867,304
 
Motor vehicles
   
388,824
     
269,275
 
Total
   
17,544,003
     
4,618,352
 
Less: Accumulated depreciation
   
(4,479,843
)
   
(2,661,615
)
Construction-in-progress
   
2,239,802
     
3,514,695
 
Property and equipment, net
 
$
15,303,962
   
$
5,471,432
 
 
Construction-in-progress as of December 31, 2011, included leasehold improvements in progress at the newly leased store locations. These stores are currently under remodeling and are not in operation.  For the three and nine months ended December 31, 2011, $1,104,310 and $8,214,368 were transferred from CIP to buildings and leasehold improvements. No such transfer occurred for the three and nine months ended December 31, 2010. No depreciation is provided for construction-in-progress until such time as the assets are completed and placed into service.
 
 
19

 
 
Total depreciation expense for property and equipment was $900,759 and $89,006 for the three months ended December 31, 2011 and 2010, respectively, and $1,719,343 and $393,708 for the nine months ended December 31, 2011 and 2010, respectively.
 
Note 5 – ADVANCES TO SUPPLIERS
 
Advances to suppliers consist of deposits with or advances to outside vendors for future inventory purchases. Most of the Company’s vendors require a certain amount of money to be deposited with them as a guarantee that the Company will receive its purchase on a timely basis. This amount is refundable and bears no interest.   As of December 31, 2011 and March 31, 2011, the allowance for advances to suppliers amounted to $340,965 and $0, respectively.
 
Note 6 – LONG TERM DEPOSITS, LANDLORDS
 
Long term deposits are funds deposited with or advanced to landlords for securing retail store leases for which the Company does not anticipate applying or being returned within the next twelve months. Most of the Company’s landlords require a minimum of nine months’ rent being paid upfront plus additional deposits.
 
Note 7 – PREPAID - NONCURRENT
 
Prepaid – noncurrent consist of the following:
 
   
December 31,
2011
   
March 31,
2011
 
Prepayment for lease of land use right – noncurrent (1)
 
$
5,387,525
   
$
5,497,358
 
Lease rights transfer fees-noncurrent (2)
   
440,010
     
578,120
 
Prepayment made for equipment
   
786,500
     
-
 
Other prepaid – noncurrent
   
138,529
     
-
 
Total
 
$
6,752,564
   
$
6,075,478
 
 
(1)
This is a payment made to the local government in connection with entering into a 30-year operating land lease agreement.
   
(2)
Lease rights transfer fees are paid by the Company to secure store rentals in coveted areas. These additional costs of acquiring the right to lease new store locations are capitalized and amortized over the period of the initial lease term.
 
 
20

 
 
Note 8 – INTANGIBLE ASSETS
 
Net intangible assets consist of the following at:
 
   
December 31, 2011
   
March 31, 2011
 
Goodwill on acquisition of Jiuxin Medicine
 
$
1,394,360
   
$
-
 
Goodwill on acquisition of Shanghai Zhongxing
   
69,197
     
-
 
Licenses and permits
   
1,130,503
     
-
 
Software
   
459,483
     
446,059
 
Total goodwill and other intangible assets
   
3,053,543
     
446,059
 
Less: accumulated amortization
   
(172,306
)
   
(55,757
)
Intangible assets, net
 
$
2,881,237
   
$
390,302
 
 
Amortization expense for the three months ended December 31, 2011 and 2010 amounted to $38,217 and $0, respectively, and $113,629 and $0 for the nine months ended December 31, 2011 and 2010, respectively.
 
Note 9 – TAXES
 
Income tax
 
Entity
 
Income Tax Jurisdiction
Jo-Jo Drugstores
 
United States
Renovation
 
Hong Kong
All other entities
 
PRC
 
The following table reconciles the U.S. statutory tax rates to the Company's effective tax rate for the three and nine months ended December 31, 2011 and 2010:
 
   
For the three months ended
December 31
   
For the nine months ended
December 31
 
   
2011
   
2010
   
2011
   
2010
 
U.S. Statutory rates
   
34
%
   
34
%
   
34
%
   
34
%
Foreign income not recognized in the U.S.
   
(34
)
   
(34
)
   
(34
)
   
(34
)
China income taxes
   
25
     
25
     
25
     
25
 
Non deductible expenses
   
3
     
-
     
4
     
3
 
Effective tax rate
   
28
%
   
25
%
   
29
%
   
28
%
 
Jo-Jo Drugstores is incorporated in the U.S. and incurred a net operating loss for income tax purposes for 2010. As of December 31, 2011, the estimated net operating loss carryforwards for U.S. income tax purposes amounted to $1,200,000 which may be available to reduce future years’ taxable income. These carryforwards will expire, if not utilized by 2031. Management believes that the realization of the benefits arising from this loss appears to be uncertain due to the Company’s limited operating history and continuing losses for U.S. income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at December 31, 2011. The net change in the valuation allowance for the nine months ended December 31, 2011 and 2010 was an increase of approximately $131,000 and $232,000, respectively. Management reviews this valuation allowance periodically and makes adjustments as necessary.
 
 
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The Company had cumulative undistributed earnings of foreign subsidiaries of approximately $31 million as of December 31, 2011, which are included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations.  Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings.
 
Taxes payable at December 31, 2011 and March 31, 2011 consist of the following:
 
   
December 31,
2011
   
March 31,
2011
 
VAT
 
$
369,984
   
$
421,562
 
Income tax
   
840,096
     
1,146,453
 
Others
   
48,963
     
56,543
 
Total taxes payable
 
$
     1,259,043
   
$
     1,624,558
 
 
Note 10 – POSTRETIREMENT BENEFITS
 
Regulations in the PRC require the Company to contribute to a defined contribution retirement plan for all permanent employees. The contribution for each employee is based on a percentage of the employee’s current compensation as required by the local government. The Company contributed $157,247 and $34,686 for the three months ended December 31, 2011 and 2010, respectively, and $373,474 and $75,446 for the nine months ended December 31, 2011 and 2010, respectively, in employment benefits and pension.
 
Note 11 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
Amounts receivable from and payable to related parties are summarized as follows:
 
   
December 31,
2011
   
March 31,
2011
 
Amount due to directors (1):
 
$
880,058
   
$
   800,058
 
 
(1) 
As of December 31, 2011 and March 31, 2011, amount due to directors represents advances from the Owners to the Company to meet its approved PRC registered capital requirements and for operating cash flow.
 
As of December 31, 2011 and March 31, 2011, notes payable totaling $4,836,702 and $1,609,336 were secured by the personal properties of certain of the Company’s shareholders, respectively.
 
 
22

 
 
One of the Company’s retail spaces and its corporate office are leased from Lei Liu, a director of the Company, under long-term operating lease agreements from August 2010 to August 2012 and from January 2011 to December 2012, respectively. The rent expense amounted to $47,100 and $45,000 for the three months ended December 31, 2011 and 2010, respectively. The rent expense amounted to $140,040 and $133,524 for the nine months ended December 31, 2011 and 2010, respectively. Rent paid to Mr. Liu amounted to $0 for the three months ended December 31, 2011 and 2010; and $0 and $44,190 for the nine months ended December 31, 2011 and 2010, respectively.
 
Note 12 – PURCHASE OPTION DERIVATIVE LIABILITY
 
In connection with the public offering of the Company’s common stock that closed on April 28, 2010, the Company issued to its underwriters, Madison Williams and Company and Rodman & Renshaw, LLC, an option for $100 to purchase up to a total of 105,000 shares of common stock (3% of the shares sold in the public offering) at $6.25 per share (125% of the price of the shares sold in the public offering). The option is exercisable commencing on October 23, 2010 and expires on April 22, 2015.
 
The Company is treating the common shares underlying the option as a derivative liability as the strike price of the option is denominated in U.S. dollars, a currency other than the Company’s functional currency, the Chinese RMB. As a result, the option is not considered indexed to the Company’s own stock, and as such, all future changes in the fair value of the option are recognized currently in earnings until such time as the option is exercised or expired.
 
On April 22, 2010, the issue date of the option, the Company classified the fair value of this option as a liability resulting in a decrease of additional paid-in capital of $402,451 and the establishment of $402,451 in liability to recognize the option’s fair value. The Company recognized a gain of $19,404 and $116,392 from the change in fair value of the option liability for the three and nine months ended December 31, 2011, respectively, and a gain of $119,595 and $91,546 for the three and nine months ended December 31, 2010, respectively.
 
This option does not trade in an active securities market, and as such, the Company estimates its fair value using the Black-Scholes Option Pricing Model (the “Black-Scholes Model”) as of December 31, 2011 using the following assumptions:
 
   
Underwriter
 
   
Purchase Option
 
   
December 31,
 
   
2011 (1)
 
Stock price
 
$
1.14
 
Exercise price
 
$
6.25
 
Annual dividend yield
   
0
%
Expected term (years)
   
3.30
 
Risk-free interest rate
   
0.36
Expected volatility
   
99
%
 
(1)
As of December 31, 2011, the option to purchase 105,000 shares of common stock had not been exercised.
 
 
23

 
 
Expected volatility is based on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the term of the option. The Company believes this method produces an estimate that is representative of future volatility over the expected term of this option. The expected life is based on the remaining term of the option. The risk-free interest rate is based on U.S. Treasury securities according to the remaining term of the option.
 
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Depending on the product and the terms of the transaction, the fair values of option liability are modeled using a series of techniques, including closed-form analytic formula, such as the Black-Scholes Model, which does not entail material subjectivity because the methodology employed does not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets.
 
The fair value of the 105,000 shares underlying the option outstanding as of December 31, 2011 was determined using the Black-Scholes Model, with certain inputs significant to the valuation methodology as level 2 inputs, and the Company recorded the change in fair value in earnings. As a result, the option liability is carried on the consolidated balance sheets at fair value.
 
Note 13 – STOCKHOLDER’S EQUITY
 
Common stock
 
On April 9, 2010, the Company effected a 1-for-2 reverse split of its issued and outstanding shares of common stock and a proportional reduction of its authorized shares of common stock. All share and per share amounts used in the Company’s consolidated financial statements and accompanying notes have been retroactively restated to reflect the 1-for-2 reverse stock split.
 
On April 28, 2010, the Company closed a public offering of 3.5 million shares of common stock at $5.00 per share with gross proceeds of approximately $17.5 million.
 
Stock-based compensation
  
On March 15, 2010, the Company entered into a service agreement with a non-executive director and agreed to issue 6,897 shares of restricted common stock for his annual service. The terms of the service agreement was continued on March 15, 2011, and 11,268 shares of restricted common stock to be issued accordingly. The trading value of the Company’s common stock on March 15, 2011 and 2010 was $3.55 and $5.80, respectively. Accordingly, $10,082 and $10,080 were charged to general and administrative expense for the three months ended December 31, 2011 and 2010, respectively, and $30,137 and $30,137 were charged for the nine months ended December 31, 2011 and 2010, respectively.
 
 
24

 
 
On May 1, 2010, the Company agreed to issue 2,340 shares of common stock to its legal counsel as partial payment for six months of legal services. The trading value of the Company’s common stock on May 1, 2010 was $4.80. Accordingly, $7,488 and $11,232 was charged to general and administrative expense for the three and nine months ended December 31, 2010, respectively.
 
On May 1, 2010, the Company agreed to issue 6,000 shares of common stock to an employee as partial payment for compensation. The trading value of the Company’s common stock on May 1, 2010 was $4.80. Accordingly, $0 and $4,800 were charged to general and administrative expense for the three months ended December 31, 2011 and 2010, respectively, and $2,400 and $12,000 were charged for the nine months ended December 31, 2011 and 2010, respectively.
 
On May 14, 2010, the Company entered into an agreement pursuant to which the Company agreed to issue 10,000 shares of restricted common stock in connection with the services of Mr. Bennet P. Tchaikovsky as chief financial officer through April 27, 2011, upon the adoption of a stock incentive plan (the “Plan”). The trading value of the Company’s common stock on May 14, 2010 was $4.66. Accordingly, $0 and $3,444 were charged to general and administrative expense for the three and nine months ended December 31, 2011, respectively, and $11,748 and $31,665 were charged for the three and nine months ended December 31, 2010, respectively.
 
On May 14, 2010, the Company also agreed to issue to Mr. Tchaikovsky 4,000 shares of restricted common stock from the Plan as a bonus. The trading value of the Company’s common stock on May 14, 2010 was $4.66. Accordingly, $18,640 was charged to general and administrative expense for the three and nine months ended December 31, 2010, respectively.
 
On November 1, 2010, the Company agreed to issue 2,340 shares of common stock to its legal counsel as partial payment for six months of legal services. On May 1, 2011, the Company agreed to issue an additional 2,340 shares of common stock to its legal counsel as partial payment for another six months of legal services. The terms of the service agreement was continued on November 1, 2011, and 2,340 shares of restricted common stock to be issued accordingly. The trading value of the Company’s common stock on November 1, 2011, May 1, 2011 and November 1, 2010 were $1.66, $2.71 and $5.00, respectively. Accordingly, $2,363 and $9,576 was recorded as service compensation expense for the three and nine months ended December 31, 2011.
 
On August 1, 2011, the Company appointed Mr. Ming Zhao as its chief financial officer, and in connection therewith, entered into an agreement pursuant to which the Company agreed to issue to Mr. Zhao 40,000 shares of restricted common stock under the Plan, to be vested in eight equal quarterly installments over two years. The trading value of the Company’s common stock on August 1, 2011 was $1.70. Accordingly, $8,500 and $14,136 was charged to general and administrative expense for the three and nine months ended December 31, 2011, respectively.
 
 
25

 
 
On August 1, 2011, the Company appointed Mr. Tchaikovsky to its board of directors, and in connection therewith, entered into an agreement pursuant to which the Company agreed to issue to Mr. Tchaikovsky 5,883 shares of its restricted common stock under the Plan. The trading value of the Company’s common stock on August 1, 2011 was $1.70. Accordingly, $2,501 and $4,159 was charged to general and administrative expense for the three and nine months ended December 31, 2011, respectively.
 
On August 1, 2011, the Company entered into an agreement pursuant to which the Company agreed to issue 4,613 shares of restricted common stock under the Plan in connection with Mr. Tchaikovsky’s services as chief financial officer from April 28, 2011 to August 1, 2011. The trading value of the Company’s common stock on April 28, 2011 was $2.71. Accordingly, $0 and $12,500 was charged to general and administrative expense for the three and nine months ended December 31, 2011, respectively.
 
Statutory reserve
 
Statutory reserves represent restricted retained earnings. Based on their legal formation, each of the Company’s subsidiaries and VIEs in the PRC is required to set aside 10% of its net income as reported in their statutory accounts on an annual basis to the Statutory Surplus Reserve Fund (the “Reserve Fund”). Once the total amount set aside in the Reserve Fund reaches 50% of the entity’s registered capital, further appropriations become discretionary. The Reserve Fund can be used to increase the entity’s registered capital upon approval by relevant government authorities or eliminate its future losses under PRC GAAP upon a resolution by its board of directors. The Reserve Fund is not distributable to shareholders, as cash dividend or otherwise, except in the event of liquidation.
 
Appropriations to the Reserve Fund are accounted for as a transfer from unrestricted earnings to statutory reserves. During the nine months ended December 31, 2011 and 2010, no appropriation was made to the statutory reserves by any of the Company’s operating subsidiaries and VIEs in the PRC. Any subsidiary or VIE still in developmental stage also did not allocate any contribution to the Reserve Fund during such periods.
 
There are no legal requirements in the PRC to fund the Reserve Fund by transfer of cash to any restricted accounts, and the Company does not do so.
 
Note 14 – EARNINGS PER SHARE
 
The Company reports earnings per share in accordance with the provisions of the FASB’s related accounting standard. This standard requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution, but includes vested restricted stocks and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.
 
 
26

 
 
The following is a reconciliation of the basic and diluted earnings per share computation:
 
   
Three months ended
December 31,
   
Nine months ended
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net income attributable to controlling interest
 
$
1,573,982
   
$
2,237,453
   
$
6,450,424
   
$
6,017,366
 
Weighted average shares used in basic computation
   
13,557,379
     
13,500,002
     
13,546,570
     
13,220,002
 
Diluted effect of purchase options
   
-
     
-
     
-
     
-
 
Weighted average shares used in diluted computation
   
13,557,379
     
13,500,002
     
13,546,570
     
13,220,002
 
Earnings per share – Basic:
                               
Net income before noncontrolling interest
 
$
0.12
   
$
0.17
   
$
0.48
   
$
0.46
 
Add: Net loss attributable to noncontrolling interest
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
 
Net income attributable to controlling interest
 
$
0.12
   
$
0.17
   
$
0.48
   
$
0.46
 
Earnings per share – Diluted:
                               
Net income before noncontrolling interest
 
$
0.12
   
$
0.17
   
$
0.48
   
$
0.46
 
Add: Net loss attributable to noncontrolling interest
 
$
0.00
   
$
0.00
   
$
0.00
   
$
0.00
 
Net income attributable to controlling interest
 
$
0.12
   
$
0.17
   
$
0.48
   
$
0.46
 
 
For the three and nine months ended December 31, 2011, 105,000 shares underlying outstanding purchase options were excluded from the diluted earnings per share calculation as they are anti-dilutive.    
 
Note 15 – SEGMENTS
 
The Company sells prescription and over-the-counter medicines, TCM, dietary supplement, medical devices, and sundry items. The class of customers, selling practice and distribution process are the same for all products.  Based on qualitative and quantitative criteria established by the FASB’s accounting standard, “Disclosures about Segments of an Enterprise and Related Information,” the Company considers itself to be operating within one reportable segment.
 
 
27

 
 
The Company does not have long-lived assets located outside the PRC. In accordance with the enterprise-wide disclosure requirements of FASB’s accounting standard, the Company's net revenue from external customers through its retail stores by main products is as follows:
 
 
   
Three Months Ended
   
Nine months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Prescription Drugs
 
$
   7,614,912
   
$
6,517,673
   
$
 24,772,923
   
$
18,808,425
 
Over-The-Counter (OTC) Drugs
   
        4,832,509
     
5,121,520
     
              16,381,025
     
16,462,132
 
Nutritional Supplements
   
       1,618,888
     
1,247,007
     
6,102,186
     
4,746,812
 
TCM
   
       3,538,194
     
2,484,452
     
   8,540,874
     
5,161,941
 
Sundry Products
   
          268,181
     
277,308
     
       942,169
     
926,312
 
Medical Devices
   
251,223
     
195,378
     
1,088,987
     
623,314
 
Chinese white liquor
   
-
     
-
     
-
     
-
 
Total
 
$
18,123,907
   
$
15,843,338
   
$
57,828,164
   
$
46,728,936
 
 
The Company's net revenue from external customers through wholesales by main products is as follows:
 
 
   
Three Months Ended
   
Nine months Ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Prescription Drugs
 
$
      6,082,045
   
$
-
   
$
      9,295,287
   
$
-
 
Over-The-Counter (OTC) Drugs
   
      1,264,050
     
-
     
      1,942,169
     
-
 
Nutritional Supplements
   
          1,294
     
-
     
               7,330
     
-
 
TCM
   
     152,718
     
-
     
          189,491
     
-
 
Sundry Products
   
            245
     
-
     
                  586
     
-
 
Medical Devices
   
        19,690
     
-
     
            33,728
     
-
 
Chinese white liquor
   
-
     
2,198,971
     
-
     
2,198,971
 
Total
 
$
7,520,042
   
$
2,198,971
   
$
11,468,591
   
$
2,198,971
 
 
The Company believes that the acquisition of Jiuxin Medicine created a second reportable segment for financial reporting purposes, and reports on its two segments, wholesale and retail sales as above. The Company is continuing to integrate the books and records of Jiuxin Medicine and expects to disclose more complete segment information in future filings.
 
Note 16 – BUSINESS COMBINATION
 
Quannuo Technology
 
On November 19, 2010, Shouantang Technology entered into equity ownership transfer agreements with the owners of Quannuo Technology to acquire 100% of equity interests of Quannuo Technology and its subsidiary, Hangzhou Quannuo. Quannuo Technology develops software for online drugstores.
 
Shouantang Technology acquired all assets and assumed all liabilities of Quannuo Technology. The consideration of the transaction included a cash payment of $606,800 (RMB 4,000,000) to pay off outstanding loans with the former owners, with the excess capitalized by the Company as intangible assets of approximately $443,125. Amortization expense of the software acquired was $38,217 and $113,629 for the three and nine months ended December 31, 2011.
 
Shanghai Zhongxing
 
On July 29, 2011, Shanghai Lydia obtained control of Shanghai Zhongxing pursuant to an agreement entered into on the same date to acquire 99% of the equity interests of Shanghai Zhongxing for a total consideration of $76,874 (RMB 495,000), including $30,284 (RMB 195,000) for Mr. Xiuyan Liu’s 39%, and $46,590 (RMB 300,000) for Mr. Xudong Fan’s 60%.
 
 
28

 
 
Jiuxin Medicine
 
On August 25, 2011, Jiuzhou Pharmacy completed its acquisition of Jiuxin Medicine. Jiuxin Medicine is a wholesale drug distributor and is licensed to distribute prescription and non-prescription pharmaceutical products throughout China. Jiuzhou Pharmacy acquired all assets and assumed all liabilities of Jiuxin Medicine. The consideration of the transaction included a cash payment of $4,665,000 (RMB 30,000,000). The excess purchase price over the fair value of the assets acquired was capitalized by the Company as goodwill and totaled $1,378,404.
 
The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed at the date of acquisition:
 
Total purchase price
 
$
4,665,000
 
         
Allocation of the purchase price to assets and liabilities at fair value:
       
Cash and cash equivalents
 
$
910,857
 
Notes receivable
   
16,350
 
Accounts receivable
   
3,582,440
 
Inventories
   
4,069,960
 
Advances on inventory purchases
   
1,920,413
 
Other assets, current
   
220,390
 
Current assets
   
10,720,410
 
Property, plant and equipment
   
181,626
 
Licenses and permits
   
1,077,771
 
Other noncurrent assets
   
262,539
 
Total assets
   
12,242,346
 
         
Accounts payable
   
4,220,762
 
Tax receivable
   
(43,506
)
Accrued liabilities and other liabilities, current
   
4,778,494
 
Total liabilities
   
8,955,750
 
         
Net assets acquired at fair value
 
$
3,286,596
 
         
Goodwill
 
$
1,378,404
 
 
The following unaudited pro forma condensed income statement for the three and nine months ended December 31, 2011 and 2010 were prepared under generally accepted accounting principles, as if the acquisition of Jiuxin Medicine had occurred the first day of the respective periods. The pro forma information may not be indicative of the results that actually would have occurred if the acquisition had been in effect from and on the date indicated.
 
 
29

 
 
Pro Forma
 
Three Months Ended
December 31,
   
Nine months Ended
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Revenue
 
$
25,643,949
   
$
18,911,464
   
$
77,908,303
   
$
58,145,311
 
Gross profit
   
6,826,869
     
5,359,725
     
20,081,224
     
15,492,598
 
Net income
   
1,577,199
     
2,198,704
     
 6,292,004
     
5,775,838
 
Net income per share – basic
 
$
0.12
   
$
0.16
   
$
0.46
   
$
0.44
 
Net income per share – diluted
 
$
0.12
   
$
0.16
   
$
0.46
   
$
0.44
 
Weighted average shares outstanding – basic
   
13,557,379
     
13,500,002
     
13,546,570
     
13,220,002
 
Weighted average shares outstanding – diluted
   
13,557,379
     
13,500,002
     
13,546,570
     
13,220,002
 
 
Note 17 – COMMITMENTS AND CONTINGENCIES
 
Operating lease commitments
 
The Company leases premises for retail drugstores and offices under non-cancelable operating leases. The Company also leases land from a local government for cultivation of TCM herbs. Operating lease payments are expensed over the term of lease. A majority of the Company’s retail drugstore leases have a 3- to 10-year term with a renewal option upon the expiration of the lease. The Company has historically been able to renew a majority of its drugstores leases. Under the terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the lease. Land leased from government is amortized on a straight-line basis over a 30-year term.
 
The Company recognizes lease expense on a straight line basis over the term of its leases in accordance with the relevant accounting standards.
 
The Company’s commitments for minimum rental payments under its leases for the next five years and thereafter are as follows:
 
Periods ending December 31,
 
Amount
 
2012
 
$
4,088,300
 
2013
   
3,797,808
 
2014
   
3,332,830
 
2015
   
2,910,703
 
2016
   
1,894,343
 
Thereafter
   
4,080,701
 
 
Total rent expense amounted to $948,783 and $624,177 for the three months ended December 31, 2011 and 2010, respectively, and $2,617,520 and $1,619,987 for the nine months ended December 31, 2011 and 2010, respectively.
 
 
30

 
 
As of December 31, 2011 and 2010, prepayment on retail and office leases amounted to $2,134,165 and $1,426,557, respectively.
 
Note 18 – SUBSEQUENT EVENT
 
On January 16, 2012, the Company granted a total of 297,000 shares of restricted common stock under the Plan to a group of 46 employees. These restricted shares will vest on January 16, 2015, provided that the employees are still working for the Company on such date.
 
 
31

 
 
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following management's discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this item. In addition to historical information, the following discussion contains certain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions. These statements may be identified by the use of words such as "may", "will", "could", "expect", "anticipate", "intend", "believe", "estimate", "plan", "predict", and similar terms or terminology, or the negative of such terms or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable assumptions within the bound of our knowledge of our business, our actual results could differ materially from those discussed in these statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the "Risk Factors" section of our annual report on Form 10-K for the year ended March 31, 2011 and filed with the SEC on June 29, 2011. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information becomes available or other events occur in the future.
 
Our financial statements are prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the United States. See "Exchange Rates" below for information concerning the exchanges rates at which Renminbi ("RMB") were translated into U.S. Dollars at various pertinent dates and for pertinent periods.
 
Overview
 
We are primarily an operator of retail pharmacies based in Zhejiang Province, China. Our drugstores provide customers with a wide variety of medicinal products, including prescription and OTC drugs, nutritional supplements, traditional Chinese medicine (“TCM”), personal care products, family care products, medical devices, as well as convenience products including consumable, seasonal and promotional items. We briefly offered baijiu, or Chinese white liquor, at some of our pharmacies from December 2010 to February 2011, but did not sell any during the nine months ended December 31, 2011. Each store typically carries approximately 2,500 to 7,000 different products, and presently average approximately 300 square meters. As of December 31, 2011, all stores except for one were operated by Jiuzhou Pharmacy, which we control through contractual arrangements, as well as its subsidiary, Shanghai Lydia Grand Pharmacy Co., Ltd. ("Shanghai Lydia"), and a company under its control.

In addition to these products, we have licensed doctors of both western medicine and TCM staffed at three medical clinics and at our pharmacies for consultation, examination and treatment of common ailments at scheduled hours. The medical clinics are operated by Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd., both of which we also control through contractual arrangements.

In addition to pharmacies and medical clinics, we plan to distribute herbal plants being cultivated on leased land at our pharmacies and to third parties. In August 2010, we established Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd. (“Jiuxin Qianhong”) as a wholly-owned subsidiary to operate this cultivation project. Currently, more than ten herbal plants, including fructus rubi, white atractylodes rhizome and atractylodes macrocephala, are being cultivated on approximately 48 acres. As herbs usually take one to several years to become mature, we have harvested limited quantities of herbs to date for distribution to third-party vendors.
 
Since May 2010, we have been operating an online drugstore (www.dada360.com) that sells non-prescription drugs (including over-the-counter drugs and nutritional supplements). In July 2010, we established Zhejiang Shouantang Pharmaceutical Technology Co., Ltd. (“Shouantang Technology”) as a wholly-owned subsidiary and acquired Zhejiang Quannuo Internet Technology Co., Ltd. (“Quannuo Technology”) in November 2010 to operate the website and provide software and technical support. As part of our acquisition of Quannuo Technology, we also acquired its wholly-owned subsidiary, Hangzhou Quannuo Grand Pharmacy Co., Ltd. (“Hangzhou Quannuo”), and the “Quannuo Grand Pharmacy” store. Other than activities relating to investing and financing the working capital of Quannuo Technology and coordinating short-term inter-company loans, Shouantang Technology has had no separate operations of its own as of December 31, 2011. In June 2011, we established Tonglu Lydia Agriculture Development Co., Ltd. (“Tonglu Lydia”) as a wholly-owned subsidiary of Shouantang Technology to undertake herbal cultivation similar to that by Jiuxin Qianhong. As of the date of this report, however, Tonglu Lydia has had no operation as it has not been able to locate and lease suitable land for cultivation.

Jiuzhou Pharmacy’s subsidiary Hangzhou Kuaileren Grand Pharmacy Co., Ltd. (“Kuaileren”) was formally dissolved on April 9, 2011 and its assets have been transferred to Jiuzhou Pharmacy. Prior to its dissolution, Kuaileren operated a “Kuaileren Grand Pharmacy” store, which store now operates as a “Jiuzhou Grand Pharmacy” store.

On April 15, 2011, Jiuzhou Pharmacy entered into an equity ownership transfer agreement with the owners of Zhejiang Jiuxin Medicine Co., Ltd. (“Jiuxin Medicine”) to acquire their equity interests in Jiuxin Medicine for RMB 50 million. On April 15, 2011, the business license of Jiuxin Medicine was transferred to Jiuzhou Pharmacy. On August 25, 2011, Jiuzhou Pharmacy completed its acquisition of Jiuxin Medicine for RMB 30 million, and Jiuxin Medicine became a whole-owned subsidiary of Jiuzhou Pharmacy. Jiuxin Medicine is a wholesale drug distributor and is licensed to distribute prescription and non-prescription pharmaceutical products throughout China. In addition to its wholesale business, Jiuxin Medicine services our logistics needs and its facility serves as our primary distribution center.

On July 29, 2011, Shanghai Lydia obtained control of Shanghai Bieyanghong Zhongxing Grand Pharmacy Co. Ltd. (“Bieyanghong Zhongxing”) pursuant to an agreement entered into on the same date to acquire 99% of its equity interests from two of its owners. Bieyanghong Zhongxing, which has changed its name to Shanghai Lydia Zhongxing Grand Pharmacy Co., Ltd., operates one pharmacy in Shanghai.

On December 20, 2011, Renovation established Hangzhou Jiutong Medical Technology Co., Ltd. (“Jiutong Medical”) as a wholly-owned subsidiary to process herbal plants, mainly cultivated by Jiuxin Qianhong, into TCM.
 
 
32

 

Critical Accounting Policies and Estimates
 
In preparing our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we are required to make judgments, estimates and assumptions that affect: (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenue and expenses during each reporting period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ materially from those estimates.

We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial statements.
 
When reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements. We have not made any material changes in the methodology used in our accounting policies which are consistent with those discussed in our annual report on Form 10-K for the year ended March 31, 2011.

The critical accounting policies and related judgments and estimates are identified in Note 2 to our unaudited consolidated financial statements accompanying in this report

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued Accounting Standard Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 created a uniform framework for applying fair value measurement principles for companies around the world and clarified existing guidance in US GAAP. ASU 2011-04 is effective for the first reporting annual period beginning after December 15, 2011 and shall be applied prospectively. We do not expect the adoption of this ASU to have any material effect on our consolidated financial statements.

In June 2011, the FASB issued Comprehensive Income (Topic 220) — Presentation of Comprehensive Income (ASU No. 2011-05), which updates the Codification to require the presentation of the components of net income, the components of other comprehensive income (OCI) and total comprehensive income in either a single continuous statement of comprehensive income or in two separate, but consecutive statements of net income and comprehensive income. These updates do not affect the items reported in OCI or the guidance for reclassifying such items to net income. These updates to the Codification are effective for interim and annual periods beginning after December 15, 2011. We do not expect the implementation of this guidance to have a material impact on our consolidated financial statements.

In September 2011, the FASB issued Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment (ASU No. 2011-08), which amends ASC 350 to first assess qualitative factors before performing the quantitative goodwill impairment testing. The ASU provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative analysis indicate it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test, which is required under current U.S. GAAP, would not be necessary. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The implementation of the ASU is not expected to have a material impact on our consolidated financial statements.
 
 
33

 

Results of Operations
 
Three months ended December 31, 2011 as compared to the three months ended December 31, 2010
 
The following table summarizes our results of operations for the three months ended December 31, 2011 and 2010:
 
 
Three Months Ended
December 31
 
 
2011
   
2010
 
 
 
 
Amount ($)
   
Percentage
of total
revenue
   
Amount ($)
   
Percentage
of total
revenue
 
Revenue
$
25,643,949
   
100.0
%
 
$
18,042,309
   
100.0
%
Gross profit
$
6,826,869
   
26.6
%
 
$
5,329,128
   
29.5
%
Selling expenses
$
2,498,892
   
9.7
%
 
$
1,337,055
   
7.4
%
General and administrative expenses
$
2,175,615
   
8.5
%
 
$
1,227,520
   
6.8
%
Income from operations
$
2,152,362
   
8.4
%
 
$
2,764,553
   
15.3
%
Other income (expense), net
$
16,343
   
0.1
%
 
$
112,736
   
0.6
%
Change in fair value of purchase option derivative liability
$
19,404
   
0.1
%
 
$
119,595
   
0.7
%
Income tax expense
$
610,910
   
2.4
%
 
$
759,431
   
4.2
%
Net income attributable to controlling interest
$
1,573,982
   
6.1
%
 
$
2,237,453
   
12.4
%
Net loss attributable to noncontrolling interest
$
(3,217
 
0.0
%
 
$
-
   
0.0
%

Revenue. Our revenue increased by $7,601,640 or 42.1 % to $25,643,949 for the three months ended December 31, 2011, from $18,042,309 for the three months ended December 31, 2010, primarily as a result of wholesale revenue from Jiuxin Medicine and sales from new stores opened since December 31, 2010, offset by same-store sales decrease. “Same-store sales” refers to sales in stores that have been operating for one or more years. Same-store sales decreased by $1,872,098, or 10.5%, period over period mainly as a result of shifting certain non-retail sales from Jiuzhou Pharmacy to Jiuxin Medicine. We operated a total of 60 stores as of December 31, 2011, including 2 new stores added during the quarter, as compared to 49 stores as of December 31, 2010. We anticipate that our overall revenue will continue to increase as we open additional stores and our maturing stores are able to accept government insurance.

Gross Profit. Our gross profit increased by $1,497,741 or 28.1 % to $6,826,869 for the three months ended December 31, 2011, from $5,329,128 for the three months ended December 31, 2010. Our gross margin, however, decreased period over period from 29.5% to 26.6 % as a result of lower gross profit margin from Jiuxin Medicine’s wholesale activities.

Selling Expenses. Our selling expenses increased by $1,161,837 or 86.9% to $2,498,892 for the three months ended December 31, 2011, from $1,337,055 for the three months ended December 31, 2010. The increase is primarily a result of operating 60 store locations as compared to 49 stores that we operated as of December 31, 2010. Selling expenses as a percentage of our revenue increased from 7.4% to 9.7% period over period. We expect that our selling expenses will continue to increase as we continue to expand our retail store network and wholesale activities, and as our online pharmacy continues to mature.

General and Administrative Expenses. Our general and administrative expenses increased by $948,095 or 77.2% to $2,175,615 for the three months ended December 31, 2011, from $1,227,520 for the three months ended December 31, 2010. General and administrative expenses as a percentage of our revenue increased from 6.8% to 8.5% period over period. The increase is mainly attributable to the establishment of new subsidiaries in the last calendar year and expenses of being a public company. As we continue to open drugstores, further develop our infrastructure, expand our business and incur expenses related to being a public company, we anticipate that our general and administrative expenses will increase in absolute dollars as well as a percentage of total revenue.
 
Income from Operations. As a result of increased selling expenses and general and administration expenses, our income from operations decreased by $612,191 or 22.1% to $2,152,362 for the three months ended December 31, 2011 from $2,764,553 for the three months ended December 31, 2010. Our operating margin for the three months ended December 31, 2011 and 2010 was 8.4% and 15.3%, respectively.
 
Income Tax Expense. Our income tax expense decreased to $610,910 for the three months ended December 31, 2011, from $759,431 for the three months ended December 31, 2010, as a result of decreased operational income from our pharmacies, offset by increased effective tax rate. Our effective tax rate increased from 25.3% to 27.9% period over period as a result of certain expenses that we incurred in the United States as a public company that are not deductible for tax purposes in China.
 
Net Income Attributable to Controlling Interest. As a result of the foregoing, our net income attributable to controlling interest decreased by $663,471 or 29.7% to $1,573,982 for the three months ended December 31, 2011, from $2,237,453 for the three months ended December 31, 2010.
 
 
34

 
 
Nine months ended December 31, 2011 as compared to the nine months ended December 31, 2010

The following table summarizes our results of operations for the nine months ended December 31, 2011 and 2010.

 
Nine Months Ended
 
 
December 31
 
 
2011
   
2010
 
 
 
 
Amount ($)
 
Percentage
of total
revenue
   
 
 
Amount
 
Percentage
of total
revenue
 
Revenue
$
69,296,755
 
100.0
%
 
$
48,972,907
 
100.0
%
Gross profit
$
19,954,088
 
28.8
%
 
$
14,351,136
 
29.3
%
Selling expenses
$
6,588,686
 
9.5
%
 
$
3,339,928
 
6.8
%
General and administrative expenses
$
4,570,919
 
6.6
%
 
$
2,758,654
 
5.6
%
Income from operations
$
8,794,483
 
12.7
%
 
$
8,252,554
 
16.9
%
Other income (expense), net
$
222,929
 
0.3
%
 
$
60,985
 
0.1
%
Change in fair value of purchase option derivative liability
$
116,392
 
0.2
%
 
$
91,546
 
0.2
%
Income tax expense
$
2,684,463
 
3.9
%
 
$
2,387,719
 
4.9
%
Net income attributable to controlling interest
$
6,450,424
 
9.3
%
 
$
6,017,366
 
12.3
%
Net loss attributable to noncontrolling interest
$
1,083
 
0.0
%
 
$
-
   
%

Revenue. Our revenue increased by $20,368,848 or 41.6% to $69,296,755 for the nine months ended December 31, 2011, from $48,927,907 for the nine months ended December 31, 2010, primarily as a result of same-store sales growth, sales from new stores opened since December 31, 2010, and wholesale revenue from Jiuxin Medicine. Same-store sales increased by $4,504,788, or 9.2 %, period over period, mainly from sales of pharmaceutical products covered by government-sponsored medical insurance programs. Revenue also increased from operating additional new store locations, from 49 stores as of December 31, 2010 to 60 stores as of December 31, 2011, including 7 new stores added and 1 store acquired during the nine months ended December 31, 2011. We anticipate that our overall revenue will continue to increase as we open additional stores and our maturing stores are able to accept government insurance.
 
Gross Profit. Our gross profit increased by $5,602,952 or 39.0% to $19,954,088 for the nine months ended December 31, 2011, from $14,351,136 for the nine months ended December 31, 2010. Our gross margin decreased period over period from 29.3% to 28.8% as a result of the lower profit margin from Jiuxin Medicine’s wholesale activities.

Selling Expenses. Our selling expenses increased by $3,248,758 or 97.3% to $6,588,686 for the nine months ended December 31, 2011, from $3,339,928 for the nine months ended December 31, 2010. The increase is primarily a result of operating 60 store locations as compared to 49 stores that we operated as of September 30, 2010. Selling expenses as a percentage of our revenue increased from 6.8% to 9.5% period over period. We expect that our selling expenses will continue to increase as we continue to expand our retail store network and wholesale activities, and as our online pharmacy continues to mature.

General and Administrative Expenses. Our general and administrative expenses increased by $1,812,265 or 65.7% to $4,570,919 for the nine months ended December 31, 2011, from $2,758,654 for the nine months ended December 31, 2010. General and administrative expenses as a percentage of our revenue increased from 5.6% to 6.6% period over period. The increase is mainly attributable to the establishment of new subsidiaries in the last calendar year and expenses of being a public company. As we continue to open drugstores, further develop our infrastructure, expand our business and incur expenses related to being a public company, we anticipate that our general and administrative expenses will increase in absolute dollars as well as a percentage of total revenues.

Income from Operations. As a result of sales increase, partially offset by increased selling expenses and general and administration expenses, our income from operations increased by $541,929 or 6.6% to $8,794,483 for the nine months ended December 31, 2011, from $8,252,554 for the nine months ended December 31, 2010. Our operating margin for the nine months ended December 31, 2011 and 2010 was 12.7% and 16.9%, respectively.
 
Income Tax Expense. Our income tax expense increased to $2,684,463 for the nine months ended December 31, 2011, from $2,387,719 for the nine months ended December 31, 2010, as a result of increased operational income from our pharmacies and increased effective tax rate. Our effective tax rate increased from 28.4% to 29.4% period over period as a result of certain expenses that we incurred in the United States as a public company that are not deductible for tax purposes in China.
 
Net Income Attributable to Controlling Interest. As a result of the foregoing, our net income attributable to controlling interest increased by $433,058 or 7.2% to $6,450,424 for the nine months ended December 31, 2011, from $6,017,366 for the nine months ended December 31, 2010.

Liquidity

In summary, our cash flows for the periods indicated are as follows:
 
   
Nine months ended
December 31
 
   
2011
   
2010
 
       
Net cash provided by (used in) operating activities
 
$
17,677,975
   
$
(7,085,181)
 
Net cash used in investing activities
 
$
(15,025,013)
   
$
(2,689,937)
 
Net cash (used in) provided by financing activities
 
$
(4,948,749)
   
$
15,495,423
 

For the nine months ended December 31, 2011, we generated cash from operating activities of $17,677,975, as compared to cash used in operating activities of $7,085,181 for the nine months ended December 31, 2010. The increase is primarily attributable to a decrease in inventory of $2,754,684, a partial liquidation of our advances to suppliers of $13,724,368, a return of other current asset including a vendor security deposit of $6,137,143, and an increase of accounts payable of $3,618,265 as compared to the same period in 2010, offset by an increase in accounts receivable of $2,790,460.
 
 
35

 
 
We used $15,025,013 in investing activities during the nine months ended December 31, 2011, as compared to cash used in investing activities of $2,689,937 during the nine months ended December 31, 2010. The $12,335,076 increase in cash used in investing activities was mainly a result of net payment for business acquisitions of $2,704,121, and an increase in the purchases of property and equipment of $9,630,955.
 
Cash used in financing activities was $4,948,749 for the nine months ended December 31, 2011, primarily from the pay down of notes payable to vendors of $4,452,229. Cash from financing activities for the nine months ended December 31, 2010 was $15,495,423, largely from the equity financing completed in April 2010 which raised approximately $15.7 million in net proceeds, after deducting underwriter discount, commission, and offering expenses.
 
As of December 31, 2011, we had cash of approximately $4,339,666. Our total current assets as of December 31, 2011 were $38,734,926 and our total current liabilities were $16,335,731, which resulted in a net working capital of $22,399,195 as of December 31, 2011.
 
Capital Resources
 
In April 2010, we completed a public offering of 3.5 million shares of our common stock at a price of $5.00 per share resulting in gross proceeds of $17.5 million and net proceeds of $15.7 million after deducting commissions and all other expenses.

On August 25, 2011, we completed our acquisition of Jiuxin Medicine for approximately $4,638,000 (RMB 30,000,000) that was deducted from our prepayment to the sellers of $5,070,880 (RMB 32,800,000). The balance of $432,880 of our prepayment was refunded to us by the sellers on November 9, 2011.
 
On September 8, 2011, we contributed RMB 8,000,000 to complete the registered capital requirement for Quannuo Technology.
 
On December 20, 2011, we contributed $2,000,000 for the registered capital requirement of Jiutong Medical , with a balance of $3,000,000 due by December 20, 2013.
 
We believe that with our current working capital, we will be able to meet these obligations and maintain our operations for at least twelve months. However, if we are to acquire additional businesses or further expand our operations, we may need additional capital.
 
Contractual Obligations and Off-Balance Sheet Arrangements
 
Contractual Obligations
 
When we open store locations, we typically enter into lease agreements that are generally between three to ten years. Our commitments for minimum rental payments under our leases for the next five years and thereafter are as follows:
 
Periods ending December 31, 
 
Amount
 
2012
  $ 4,088,300  
2013
    3,797,808  
2014
    3,332,830  
2015
    2,910,703  
2016
    1,894,343  
Thereafter
    4,080,701  

Logistics Services Commitments
 
All of our logistics requirements were previously outsourced to Zhejiang Yingte Logistics Co., Ltd. (“Yingte Logistics”). In April 2011, we terminated our agreement with Yingte Logistics, and now use the facility of Jiuxin Medicine, which we acquired in August 25, 2011, as our distribution center. Jiuxin Medicine still outsources a majority of delivery functions, including ours, to Yingte Logistics, but is expected to take over such functions as it acquires more delivery trucks within a year.

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

Our subsidiaries and affiliated companies in the PRC maintain their books and records in Renminbi (“RMB”), the lawful currency of the PRC. In general, for consolidation purposes, we translate their assets and liabilities into U.S. Dollars (“USD”) using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of their financial statements are recorded as accumulated other comprehensive income.
 
 
36

 

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements or otherwise disclosed in this report were as follows:

   
December 31,
2011
 
March 31,
2011
 
December 31,
2010
Balance sheet items, except for the
registered and paid-up capital, as of end of
period/year
 
USD1: RMB 0.15730
 
USD1: RMB 0.15270
 
USD1: RMB 0.15170
             
Amounts included in the statement of
operations, statement of changes in
stockholders' equity and statement of cash
flows for the period/ year ended
 
USD1: RMB 0.15560
 
USD1: RMB 0.14909
 
USD1: RMB 0.14836
 
No representation is made that RMB amounts have been, or would be, converted into USD at the above rates.
 
Inflation
 
We believe that inflation has not had a material effect on our operations to date.
 
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.
 
Not applicable.
 
Item 4.   Mine Safety Disclosures.
 
Not applicable.
 
Evaluation of Disclosure Controls and Procedures
 
As of December 31, 2011, we carried out an evaluation, 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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon such evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were ineffective at the reasonable assurance level.
 
In our annual report on Form 10-K for the year ended March 31, 2011, we reported certain weaknesses involving control activities, primarily accounting and finance personnel weaknesses. Our current accounting staff remains relatively inexperienced in U.S. GAAP-based reporting and requires additional training so as to meet with the higher demands necessary to fulfill the requirements of U.S. GAAP-based reporting and SEC rules and regulations.

On August 1, 2011, we retained Mr. Ming Zhao as our chief financial officer. Mr. Zhao is a U.S. licensed certified public accountant, has financial reporting experience, and works on a fulltime basis from our headquarters in Hangzhou. We believe that Mr. Zhao will be able to assist the Company in addressing our accounting and finance personnel weaknesses; however, until an independent evaluation is performed, we cannot give assurance that his hiring alone will remedy such internal control weaknesses.

Management, including our chief executive officer and our chief financial officer, does not expect that our disclosure controls and internal controls will prevent errors and omissions, even as the same are improved to address any deficiencies and/or weaknesses. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and errors and omissions, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
 
Our financial reporting process includes extensive procedures we undertake in order to obtain assurance regarding the reliability of our published financial statements, notwithstanding the material weaknesses in internal control. As a result, management, to the best of its knowledge, believes that (i) this report does not contain any untrue statements of a material fact or omits any material fact and (ii) the financial statements and other financial information included in this report have been prepared in conformity with U.S. GAAP and fairly present in all material aspects our financial condition, results of operations, and cash flows.
 
 
37

 
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted above.
 
PART II – OTHER INFORMATION
 
Item 1.   Legal Proceedings.
 
Except as described below, we know of no material, existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our company.
 
On December 8, 2009, Jiuzhou Pharmacy filed suit against The Ventana Group, LLC and Michael Hom in the California Superior Court for the County of San Mateo (Case Number CV490272), alleging breach of contract of an agreement entered into with the defendants in 2008 and seeking damages of $25,000. The suit was subsequently amended to remove Mr. Hom as a defendant. In May 2010, Jiuzhou Pharmacy sought for default judgment against the remaining defendant, which was granted on July 14, 2010. Jiuzhou Pharmacy is in the process of executing the judgment against the defendant.
 
Item 1A.   Risk Factors.
 
As of and for the three months ended December 31, 2011, there were no material changes in our risk factors from those disclosed in Part I, Item 1A, of our annual report on Form 10-K as of and for the year ended March 31, 2011.
  
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
 
None
 
Item 3.   Defaults upon Senior Securities.
 
None
 
Item 4.   Reserved.
 
Item 5.   Other Information.
 
None 
 
 
38

 
 
Item 6.   Exhibits.
 
EXHIBIT INDEX
 
Exhibit
Number
Description
2
Share Exchange Agreement among Kerrisdale Mining Corporation (“Kerrisdale”), certain of its stockholders, Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”) and its shareholders dated September 17, 2009 (3)
3.1
Articles of Incorporation of Kerrisdale (1)
3.2
Certificate of Amendment to Articles of Incorporation of Kerrisdale filed with the Nevada Secretary of State on July 14, 2008 (2)
3.3
Articles of Merger between Kerrisdale Mining and China Jo-Jo Drugstores, Inc. filed with the Nevada Secretary of State on September 22, 2009 (3)
3.4
Bylaws (1)
3.5
Text of Amendments to the Bylaws (2)
3.6
Certificate of Change Pursuant to NRS 78.209 with an effective date of April 9, 2010 (7)
4.1
Specimen of Common Stock Certificate (1)
4.2
2010 Equity Incentive Plan (10)
10.1
Consulting Services Agreement between Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”) and Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”) dated August 1, 2009 (3)
10.2
Operating Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.3
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.4
Option Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.5
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated August 1, 2009 (3)
10.6
Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership) (“Jiuzhou Clinic”) dated August 1, 2009 (3)
10.7
Operating Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.8
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.9
Option Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.10
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (3)
10.11
Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”) dated August 1, 2009 (3)
10.12
Operating Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.13
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.14
Option Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.15
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (3)
10.16
Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.17
Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.18
Amendment to Option Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.19
Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Pharmacy dated October 27, 2009 (4)
10.20
Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.21
Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.22
Amendment to Option Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.23
Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Clinic dated October 27, 2009 (4)
10.24
Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.25
Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.26
Amendment to Option Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.27
Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou Service dated October 27, 2009 (4)
10.28
Director Offer Letter with Marc Thomas Serrio dated March 15, 2010 (6)
10.29
Indemnification Agreement with Marc Thomas Serrio dated March 15, 2010 (6)
10.30
Loanout Agreement with Worldwide Officers, Inc. dated May 14, 2010 (8)
10.31
Indemnification Agreement with Mr. Bennet Tchaikovsky dated May 14, 2010 (8)
10.32
Loanout Agreement with Worldwide Officers, Inc. dated August 1, 2011 (15)
10.33
Restricted Stock Award Agreement with Worldwide Officers, Inc. dated August 1, 2011 (15)
10.34
Employment Agreement with Mr. Ming Zhao dated August 1, 2011 (15)
10.35
Restricted Stock Award Agreement with Mr. Ming Zhao dated August 1, 2011 (15)
10.36
Director Offer Letter with Mr. Bennet Tchaikovsky dated August 1, 2011 (15)
10.37
Restricted Stock Award Agreement with Mr. Bennet Tchaikovsky dated August 1, 2011 (15)
14
Code of Business Conduct and Ethics (6)
16.1
Letter from Frazer Frost, LLP dated April 25, 2011 (12)
16.2
Letter from Frazer Frost, LLP dated May 19, 2011 (13)
21
List of subsidiaries (14)
31.1
Section 302 Certification by the Corporation’s Chief Executive Officer *
31.2
Section 302 Certification by the Corporation’s Chief Financial Officer *
32.1
Section 906 Certification by the Corporation’s Chief Executive Officer *
32.2
Section 906 Certification by the Corporation’s Chief Financial Officer *
99.1