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:September 30, 2009





Or




 ̈
            Transition
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
transition period from ______________ to _______________








CHINA
JO-JO DRUGSTORES, INC.







(Exact
name of registrant as specified in Charter)




Nevada
                  
                  333-147698
                  
                  98-0557852(State
      or other jurisdiction of
                    incorporation
      or organization)
                  
                  (Commission
      File No.)
                  
                  (IRS
      Employee Identification
No.)




Room
507-513, 5th Floor A Building, Meidu Plaza


Gongshu
District, Hangzhou, Zhejiang Province, P.R. China




(Address
of Principal Executive Offices)




+86
(571) 88077078





(Registrant’s
Telephone number)




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  ̈ 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  ̈ (Do
      not check if a smaller reporting company)
            
            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





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each issuer’s classes of common stock, as of
the latest practicable date: 20,000,000 issued and outstanding as of November
12, 2009.





Transitional
Small Business Disclosure Form (Check one): Yes x No  ̈







TABLE
OF CONTENTS


QUARTERLY
REPORT ON FORM 10-Q


FOR
SIX MONTHS ENDED SEPTEMBER 30, 2009





PagePART
      I
                FINANCIAL
      INFORMATION
                
                F-1Item
      1.
                Financial
      Statements (unaudited)
                
                F-1Consolidated
      Balance Sheets
                
                F-1Consolidated
      Statements of Income and Other Comprehensive Income
      (unaudited)
                
                F-2Consolidated
      Statements of Shareholders’ Equity
                
                F-3Consolidated
      Statements of Cash Flows (unaudited)
                
                F-4Notes
      to the Consolidated Financial Statements
                
                F-5Item
      2.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                4Item
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                11Item
      4.
                Controls
      and Procedures
                
                11PART
      II
                OTHER
      INFORMATION
                
                12Item
      1.
                Legal
      Proceedings
                
                12Item
      1A.
                Risk
      Factors
                
                12Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                32Item
      3.
                Defaults
      Upon Senior Securities
                
                33Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                
                33Item
      5.
                Other
      Information
                
                33Item
      6.
                Exhibits
                
                33Signatures
                
                
                35


2





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.


3





PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements


CHINA JOJO DRUGSTORS, INC AND SUBSIDIARIES
 (FORMERLY
KNOWN AS KERRISDALE MINING CORP)
 
 CONSOLIDATED
BALANCE SHEETS
 AS OF
SEPTEMBER 30, 2009 AND MARCH 31, 2009
 
 September
      30,
                      
                      
                      March
      31,2009
                      
                      
                      2009(Unaudited)ASSETSCURRENT
      ASSETSCash
                      
                      $
                      819,800
                      
                      
                      $
                      996,302Restricted
      cash
                      
                      
                      308,006
                      
                      
                      
                      -Accounts
      receivable, trade
                      
                      
                      1,296,309
                      
                      
                      
                      1,265,110Inventories
                      
                      
                      3,314,802
                      
                      
                      
                      2,793,101Other
      receivables
                      
                      
                      362,019
                      
                      
                      
                      67,079Other
      receivables - related parties
                      
                      
                      3,824
                      
                      
                      
                      2,432Advances
      to suppliers
                      
                      
                      6,731,624
                      
                      
                      
                      5,485,113Advances
      to suppliers - related parties
                      
                      
                      2,388,161
                      
                      
                      
                      1,797,104Other
      current assets
                      
                      
                      936,238
                      
                      
                      
                      564,379Total
      current assets
                      
                      
                      16,160,783
                      
                      
                      
                      12,970,620EQUIPMENT,
      net
                      
                      
                      965,750
                      
                      
                      
                      979,432OTHER
      ASSETS:Long
      term deposit
                      
                      
                      2,574,516
                      
                      
                      
                      2,015,149Total
      other assets
                      
                      
                      2,574,516
                      
                      
                      
                      2,015,149Total
      assets
                      
                      $
                      19,701,049
                      
                      
                      $
                      15,965,201LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT
      LIABILITIESShort
      term loans
                      
                      $
                      1,467,000
                      
                      
                      $
                      1,465,000Notes
      payable
                      
                      
                      308,006
                      
                      
                      
                      -Accounts
      payable, trade
                      
                      
                      5,926,743
                      
                      
                      
                      5,939,237Other
      payables
                      
                      
                      223,340
                      
                      
                      
                      404,731Other
      payables - related parties
                      
                      
                      327,161
                      
                      
                      
                      326,715Taxes
      payable
                      
                      
                      827,120
                      
                      
                      
                      811,316Accrued
      liabilities
                      
                      
                      439,920
                      
                      
                      
                      360,655Total
      liabilities
                      
                      
                      9,519,290
                      
                      
                      
                      9,307,654COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITYCommon
      stock; $0.001 par value; 75,000,000 shares authorized; 20,000,000 and
      15,800,000 shares issued and outstanding as of September 30, 2009 and
      March 31, 2009, respectively
                      
                      
                      20,000
                      
                      
                      
                      15,800Paid-in
      capital
                      
                      
                      867,884
                      
                      
                      
                      661,800Statutory
      reserves
                      
                      
                      1,309,109
                      
                      
                      
                      1,309,109Retained
      earnings
                      
                      
                      8,336,032
                      
                      
                      
                      5,033,275Accumulated
      other comprehensive loss
                      
                      
                      (351,266
                      )
                      
                      
                      (362,437
                      )Total
      shareholders' equity
                      
                      
                      10,181,759
                      
                      
                      
                      6,657,547Total
      liabilities and shareholders' equity
                      
                      $
                      19,701,049
                      
                      
                      $
                      15,965,201
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-1
 
 CHINA
JOJO DRUGSTORS, INC AND SUBSIDIARIES
 (FORMERLY
KNOWN AS KERRISDALE MINING CORP)
 
 CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
 FOR THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (Unaudited)
 
 Three
      months ended
                    
                    
                    Six
      months endedSeptember
      30,
                    
                    
                    September
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008REVENUES
                    
                    $
                    12,258,573
                    
                    
                    $
                    10,383,170
                    
                    
                    $
                    23,940,037
                    
                    
                    $
                    21,533,559COST
      OF GOODS SOLD
                    
                    
                    8,759,697
                    
                    
                    
                    7,598,068
                    
                    
                    
                    17,417,265
                    
                    
                    
                    15,901,507GROSS
      PROFIT
                    
                    
                    3,498,876
                    
                    
                    
                    2,785,102
                    
                    
                    
                    6,522,772
                    
                    
                    
                    5,632,052SELLING
      EXPENSES
                    
                    
                    596,382
                    
                    
                    
                    434,282
                    
                    
                    
                    1,074,159
                    
                    
                    
                    793,443GENERAL
      & ADMINISTRATIVE EXPENSES
                    
                    
                    565,134
                    
                    
                    
                    291,147
                    
                    
                    
                    930,344
                    
                    
                    
                    503,601OPERATING
      EXPENSES
                    
                    
                    1,161,516
                    
                    
                    
                    725,429
                    
                    
                    
                    2,004,503
                    
                    
                    
                    1,297,044INCOME  FROM
      OPERATIONS
                    
                    
                    2,337,360
                    
                    
                    
                    2,059,673
                    
                    
                    
                    4,518,269
                    
                    
                    
                    4,335,008OTHER
      INCOME (EXPENSE), NET
                    
                    
                    3,608
                    
                    
                    
                    (6,047
                    )
                    
                    
                    10,243
                    
                    
                    
                    (15,638
                    )INCOME
      BEFORE INCOME TAXES
                    
                    
                    2,340,968
                    
                    
                    
                    2,053,626
                    
                    
                    
                    4,528,512
                    
                    
                    
                    4,319,370PROVISION
      FOR INCOME TAXES
                    
                    
                    637,372
                    
                    
                    
                    476,709
                    
                    
                    
                    1,225,755
                    
                    
                    
                    1,001,634NET
      INCOME
                    
                    
                    1,703,596
                    
                    
                    
                    1,576,917
                    
                    
                    
                    3,302,757
                    
                    
                    
                    3,317,736OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustments
                    
                    
                    12,591
                    
                    
                    
                    1,448
                    
                    
                    
                    11,171
                    
                    
                    
                    21,634COMPREHENSIVE
      INCOME
                    
                    $
                    1,716,187
                    
                    
                    $
                    1,578,365
                    
                    
                    $
                    3,313,928
                    
                    
                    $
                    3,339,370BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
                    
                    
                    16,400,000
                    
                    
                    
                    15,800,000
                    
                    
                    
                    16,100,000
                    
                    
                    
                    15,800,000BASIC
      AND DILUTED EARNING PER SHARE
                    
                    $
                    0.10
                    
                    
                    $
                    0.10
                    
                    
                    $
                    0.21
                    
                    
                    $
                    0.21
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-2
 
 CHINA JOJO DRUGSTORS, INC AND SUBSIDIARIES
 (FORMERLY
KNOWN AS KERRISDALE MINING CORP)
 
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 AccumulatedCommon
      Stock
                        
                        
                        
                        
                        
                        Retained
      Earnings
                        
                        
                        otherNumber
      of
                        
                        
                        
                        
                        
                        Paid-in
                        
                        
                        Statutory
                        
                        
                        
                        
                        
                        comprehensiveshares
                        
                        
                        Amount
                        
                        
                        capital
                        
                        
                        reserves
                        
                        
                        Unrestricted
                        
                        
                        income/(loss)
                        
                        
                        TotalsBALANCE,
      March 31, 2008
                        
                        
                        15,800,000
                        
                        
                        $
                        15,800
                        
                        
                        $
                        661,800
                        
                        
                        $
                        606,665
                        
                        
                        $
                        (1,077,797
                        )
                        
                        $
                        (390,125
                        )
                        
                        $
                        (183,657
                        )Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,317,736
                        
                        
                        
                        
                        
                        
                        
                        3,317,736Adjustment
      of statutory reserve
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        325,343
                        
                        
                        
                        (325,343
                        )
                        
                        
                        
                        
                        
                        
                        -Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        21,634
                        
                        
                        
                        21,634BALANCE,
      September 30, 2008 (unaudited)
                        
                        
                        15,800,000
                        
                        
                        $
                        15,800
                        
                        
                        $
                        661,800
                        
                        
                        $
                        932,008
                        
                        
                        $
                        1,914,596
                        
                        
                        $
                        (368,491
                        )
                        
                        $
                        3,155,713Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,495,780
                        
                        
                        
                        
                        
                        
                        
                        3,495,780Adjustment
      of statutory reserve
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        377,101
                        
                        
                        
                        (377,101
                        )
                        
                        
                        
                        
                        
                        
                        -Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        6,054
                        
                        
                        
                        6,054BALANCE,
      March 31, 2009
                        
                        
                        15,800,000
                        
                        
                        $
                        15,800
                        
                        
                        $
                        661,800
                        
                        
                        $
                        1,309,109
                        
                        
                        $
                        5,033,275
                        
                        
                        $
                        (362,437
                        )
                        
                        $
                        6,657,547Shares
      issued for reorganization on September 17, 2009
                        
                        
                        4,200,000
                        
                        
                        
                        4,200
                        
                        
                        
                        (4,200
                        )
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        -Stock-based
      compensation
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        202,120
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        202,120Net
      income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,302,757
                        
                        
                        
                        
                        
                        
                        
                        3,302,757Shareholder
      contribution
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        8,164
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        8,164Foreign
      currency translation adjustments
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        11,171
                        
                        
                        
                        11,171BALANCE,
      September 30, 2009 (unaudited)
                        
                        
                        20,000,000
                        
                        
                        $
                        20,000
                        
                        
                        $
                        867,884
                        
                        
                        $
                        1,309,109
                        
                        
                        $
                        8,336,032
                        
                        
                        $
                        (351,266
                        )
                        
                        $
                        10,181,759
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
 
 CHINA JOJO DRUGSTORS, INC AND SUBSIDIARIES
 (FORMERLY
KNOWN AS KERRISDALE MINING CORP)
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 (Unaudited)
 
 2009
                            
                            
                            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                            
                            $
                            3,302,757
                            
                            
                            $
                            3,317,736Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                            
                            
                            249,774
                            
                            
                            
                            179,301Stock
      compensation
                            
                            
                            126,325
                            
                            
                            
                            -Change
      in operating assetsAccounts
      receivable, trade
                            
                            
                            (29,456
                            )
                            
                            
                            (90,162
                            )Inventories
                            
                            
                            (517,606
                            )
                            
                            
                            511,901Other
      receivables
                            
                            
                            (294,688
                            )
                            
                            
                            (10,721
                            )Other
      receivables - related parties
                            
                            
                            (1,388
                            )
                            
                            
                            165,103Advances
      to suppliers
                            
                            
                            (1,238,348
                            )
                            
                            
                            (3,776,895
                            )Advances
      to suppliers - related parties
                            
                            
                            (588,282
                            )
                            
                            
                            (641,987
                            )Other
      current assets
                            
                            
                            (371,913
                            )
                            
                            
                            48,399Long
      term deposit
                            
                            
                            (556,313
                            )
                            
                            
                            -Change
      in operating liabilitiesAccounts
      payable, trade
                            
                            
                            287,247
                            
                            
                            
                            290,776Other
      payables and accrued liabilities
                            
                            
                            (27,164
                            )
                            
                            
                            9,703Other
      payables-related parties
                            
                            
                            -
                            
                            
                            
                            (7,257
                            )Customer
      deposits
                            
                            
                            -
                            
                            
                            
                            112,089Taxes
      payable
                            
                            
                            14,688
                            
                            
                            
                            68,237Net
      cash provided by operating activities
                            
                            
                            355,633
                            
                            
                            
                            176,223CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
                            
                            
                            (22,239
                            )
                            
                            
                            (17,236
                            )Additions
      to leasehold improvements
                            
                            
                            (211,496
                            )
                            
                            
                            (143,743
                            )Net
      cash used in investing activities
                            
                            
                            (233,735
                            )
                            
                            
                            (160,979
                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
                            
                            
                            (307,838
                            )
                            
                            
                            -Payments
      on short-term loans
                            
                            
                            (1,466,200
                            )
                            
                            
                            (508,060
                            )Proceeds
      from short-term loans
                            
                            
                            1,466,200
                            
                            
                            
                            508,060Net
      cash used in financing activities
                            
                            
                            (307,838
                            )
                            
                            
                            -EFFECT
      OF EXCHANGE RATE ON CASH
                            
                            
                            9,438
                            
                            
                            
                            21,573(DECREASE)
      INCREASE IN CASH
                            
                            
                            (176,502
                            )
                            
                            
                            36,817CASH,
      beginning of period
                            
                            
                            996,302
                            
                            
                            
                            878,948CASH,
      end of period
                            
                            $
                            819,800
                            
                            
                            $
                            915,765
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-4


CHINA
JO-JO DRUGSTORES, INC. AND SUBSIDARIES
 (FORMERLY
KNOWN AS KERRISDAL MINING CORP)
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (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 HK”), and Renovation HK
became a wholly-owned subsidiary of the Company. On the closing date, the
Company issued 15,800,000 of its common stock to Renovation HK’s stockholders in
exchange for 100% of the capital stock of Renovation HK. Prior to the share
exchange transaction, the Company had 4,200,000 shares of common stock issued
and outstanding. After the share exchange transaction, the Company had
20,000,000 shares of common stock outstanding and Renovation HK’s stockholders
owned 79% of the issued and outstanding shares. The management members of
Renovation HK became the directors and officers of the Company.  The
share exchange transaction was accounted for as a reverse acquisition and
recapitalization and, as a result, the consolidated financial statements of the
Company (the legal acquirer) is, in substance, those of Renovation HK (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
HK was incorporated on September 2, 2008, under the laws of Hong Kong Special
Administrative Region (“Hong Kong”). Renovation HK has no substantive operations
of its own except for its holding of Zhejiang Jiuxin Investment Management Co.,
Ltd. (“Jiuxin Management”), its wholly-owned subsidiary. Through Jiuxin
Management, the Company controls three companies that operate a chain of
pharmacies in the People’s Republic of China (“PRC” or “China”), namely,
Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), Hangzhou
Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”)
and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou
Service”, and collectively with Jiuzhou Pharmacy and Jiuzhou Clinic as “HJ
Group”).
 
 Jiuxin
Management was established in the PRC by Renovation HK on October 14, 2008, as a
wholly foreign owned enterprise (“WFOE”), with registered capital of $4,500,000.
Renovation HK is required by the PRC company law to pay 15% of the registered
capital by December 31, 2009 and the balance to be paid within two years. Jiuxin
Management has no substantive operations of its own except for entering into
certain exclusive agreements with HJ Group and performing its obligations
thereunder.
 
 Jiuzhou
Pharmacy is a PRC limited liability company established in Zhejiang Province on
September 9, 2003 with registered capital of $605,000 (RMB 5,000,000). It is
engaged in the retail sales of prescription and non prescription drugs,
traditional Chinese medicine and general merchandise in the PRC.
 
 Jiuzhou
Clinic is a PRC general partnership established in Zhejiang Province on October
10, 2003. It is engaged in providing both traditional and western medical
services in the PRC.
 
 Jiuzhou
Service is a PRC limited liability company established in Zhejiang Province on
November 2, 2005 with registered capital of $60,500 (RMB 500,000). It is engaged
in providing medical-related management consulting services in the
PRC.
 
 All three
HJ Group companies are under the common control of the same three owners (the
“Owners”). Each HJ Group company holds the licenses and approvals necessary to
operate its business in China.
 
 The
paid-in capital of all three HJ Group companies was funded by individuals who
were the majority shareholders of Renovation HK prior to the share exchange
transaction with the Company. PRC law currently has limits on foreign ownership
of companies in certain industries, including those of HJ Group. To comply with
these foreign ownership restrictions, on August 1, 2009, Jiuxin Management
entered into the following exclusive agreements with HJ Group and the Owners
(collectively the “Contractual Arrangements”):
  F-5
 
 (1) Consulting Services
Agreement, through which Jiuxin Management has the right to advise,
consult, manage and operate all three HJ Group companies, and collect and own
all of their net profits;
 
 (2) Operating Agreement,
through which Jiuxin Management has the right to recommend director candidates
and appoint the senior executives of HJ Group, approve any transactions that may
materially affect the assets, liabilities, rights or operations of HJ Group, and
guarantee the contractual performance by HJ Group of any agreements with third
parties, in exchange for a pledge by each HJ Group company of its accounts
receivable and assets;
 
 (3) Proxy Agreement,
under which the Owners have vested their collective voting control over the
three HJ Group companies to Jiuxin Management and will only transfer their
respective equity interests in HJ Group to Jiuxin Management or its
designee(s);
 
 (4) Option Agreement,
under which the Owners have granted Jiuxin Management the irrevocable right and
option to acquire all of their equity interests in HJ Group; and
 
 (5) Equity Pledge
Agreement, under which the Owners have pledged all of their rights,
titles and interests in HJ Group to Jiuxin Management to guarantee the
performance of their obligations under the Consulting Services
Agreement.
  As a
result of the Contractual Arrangements, which obligate the Company to absorb all
of the risk of loss from HJ Group’s activities and enables the Company to
receive all of HJ Group’s expected residual returns, the Company accounts for
each HJ Group company as a variable interest entity (“VIE”) under Financial
Accounting Standards Board (FASB)’s accounting standard. Accordingly, the
financial statements of HJ Group are consolidated into the financial statements
of the Company.
 
 Note 2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 The reporting
entities
 
 The
Company’s consolidated financial statements of reflect the activities of the
Company and the following subsidiary and VIEs:
 
 Subsidiaries
                    
                    Incorporated in
                    
                    Percentage of OwnershipRenovation
      HK
                    
                    Hong
      Kong
                    
                    100.00%Jiuxin
      Management
                    
                    PRC
                    
                    100.00%Jiuzhou
      Pharmacy
                    
                    PRC
                    
                    VIE
      by Contractual ArrangementsJiuzhou
      Clinic
                    
                    PRC
                    
                    VIE
      by Contractual ArrangementsJiuzhou
      Service
                    
                    PRC
                    
                    VIE
      by Contractual
Arrangements
 
 Basis of presentation and
consolidation
 
 The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements include the financial statements of the
Company, its wholly-owned subsidiary and its VIEs. All significant inter-company
transactions and balances between the Company, its subsidiary and VIEs are
eliminated upon consolidation.
  F-6
 
 Consolidation of variable
interest entities
 
 In
accordance with FASB’s accounting standard, 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 that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service
are each a VIE and that the Company’s wholly owned subsidiary, Jiuxin
Management, absorb a majority of the risk of loss from the activities of these
three companies, and enable the Company to receive a majority of their
respective expected residual returns. Accordingly, the Company accounts for each
of these three companies as a VIE. As the companies are under common control,
the consolidated financial statements have been prepared as if the transactions
had occurred retroactively as to the beginning of the reporting period of these
consolidated financial statements.
 
 Use of
estimates
 
 The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles 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. For example, the Company estimates its allowance for doubtful
accounts and useful lives of plant and equipment. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
 
 Fair values of financial
instruments
 
 The
accounting standards regarding fair value of financial instruments and related
fair value measurements defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and enhances disclosures
requirements for fair value measures. The carrying amounts reported in the
balance sheets for current receivables, payables and short term loans qualify as
financial instruments and are a reasonable estimate of fair value 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
are defined as follow:
 
 ·
              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.
 
 The
Company did not identify any other assets and liabilities that are required to
be presented on the balance sheet at fair value.
 
 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.
  F-7
 
 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 immaterial.
 
 The
Company’s revenue is net of value added tax (“VAT”) collected on behalf of 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 balance sheet
until it is paid to the tax authorities.
  Cash
 
 Cash
consists of cash on hand, cash in the drugstores, and cash at
banks.
 
 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.
 
 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.
 
 Management
regularly reviews aging of receivables and changes in payment trends by its
customers, and records a reserve when they believe collection of amounts due are
at risk. Accounts considered uncollectible are written off. Historically, the
amount of bad debt write-off has been immaterial and the Company has been able
to collect substantially all amounts due from these parties. As of September 30,
2009 and March 31, 2009, management concluded all amounts are collectible and
allowance for doubtful accounts deemed not necessary.
 
 Inventories
 
 Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average cost method. Market is the lower of replacement cost or net realizable
value. The Company carries out physical inventory counts on a monthly basis at
each store and warehouse location to ensure that the amounts reflected in the
consolidated financial statements at each reporting period are properly stated
and valued. The Company records write-downs to inventories for shrinkage losses
and damaged merchandise that are identified during the inventory
counts.
 
 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
following estimated useful lives of the assets, taking into consideration the
assets’ estimated residual value. Leasehold improvements are amortized over the
shorter of 5 years or the lease term of the underlying assets. Following
are the estimated useful lives of the Company’s other property and
equipment:
 
 Estimated Useful
  LifeLeasehold
      improvements
              5   yearsMotor
      vehicles
              5   yearsOffice
      equipment & furniture
              3-5   years
  F-8
 
 Maintenance,
repairs and minor renewals are charged to expense as incurred. Major 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, at
least annually, but more often 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. Based on its review, the Company believes that, as of September
30, 2009 and March 31, 2009, there was no impairment.
 
 Income
taxes
 
 The
Company records income taxes pursuant to FASB’s accounting standard for income
taxes. The FASB’s accounting standard requires 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 plus deferred taxes.
 
 A tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. FASB’s accounting standard also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosures, and transition. The adoption had no affect on the Company’s
financial statements. There are no deferred tax amounts at September 30, 2009
and March 31, 2009.
  The
charge for taxation is based on the results for the year as adjusted for items,
which are non-assessable or disallowed. It is calculated using tax rates that
have been enacted or substantively enacted by the balance sheet
date.
 
 Deferred
tax is accounted for using the balance sheet liability method in respect of
temporary differences arising from differences between the carrying amount of
assets and liabilities in the financial statements and the corresponding tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probable that
taxable profit will be available against which deductible temporary differences
can be utilized. Deferred tax is calculated at the tax rates that are expected
to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when related
items are credited or charged directly to equity, in which case the deferred tax
is also dealt with in equity.
 
 Value Added Tax
(VAT)
 
 Sales
revenue represents the invoiced value of goods, net of a value-added tax (VAT).
All of the Company’s products that are sold in the PRC are subject to a Chinese
value-added tax on the gross sales price. The value-added tax rate varies from
9% to 17%, depending on the type of products sold. This VAT may be offset by VAT
paid by the Company on raw materials and other materials included in the cost of
producing their finished products. The Company recorded VAT payable and VAT
receivable net of payments in the accompanying financial statements. The VAT tax
return is filed offsetting the payables against the receivables.
 
 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 Financial
Accounting Standards Board'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.
  F-9
 
 Advertising and promotion
costs
 
 Advertising
and promotion costs are expensed as incurred. Advertising and promotion costs
amounted to $28,676 and $34,782 for the three months ended September 30, 2009
and 2008, respectively. Advertising and promotion costs amounted to
$126,108 and $55,990 for the six months ended September 30, 2009 and 2008,
respectively. Advertising 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 according to FASB’s accounting standard.
Vendor allowances reduce the carrying value of inventories and 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 costs.
 
 For the
three months ended September 30, 2009 and 2008, the Company recognized vendor
allowances of $59,978 and $56,907 in cost of goods sold, respectively.
For the six months ended September 30, 2009 and 2008, the Company recognized
vendor allowances of $106,780 and $113,007 in cost of goods sold,
respectively.
 
 Distribution
costs
 
 Distribution
costs represent the costs of transporting the merchandise from warehouses to
stores. These costs are expensed as incurred and are included in sales,
marketing and other operating expenses.
 
 Operating
leases
 
 The
Company leases premises for retail drugstores, warehouses and offices under
non-cancelable operating leases. Operating lease payments are expensed on a
straight-line basis over the term of lease. A majority of the Company’s retail
drugstore leases have a 3 to 5-year term with a renewal option upon the expiry
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.
 
 Commitments and
contingencies
 
 Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
other sources are recorded when it is probable that a liability has been
incurred and the amount of the assessment can be reasonably estimated.
Historically, the Company has experienced no product liability or malpractice
claims.
 
 Foreign currency
translation
 
 The
Company uses the United States dollar (“U.S. dollars” or “USD”) for financial
reporting purposes. The Company’s subsidiary and VIEs maintain their books and
records in their functional currency, being the primary currency of the economic
environment in which their operations are conducted.
  F-10
 
 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 statement 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
subsidiaries’ and VIEs’ financial statements are recorded as accumulated other
comprehensive income.
 
 FASB’s
accounting standard, “Reporting Comprehensive Income”, requires disclosure of
all components of comprehensive income and loss on an annual and interim basis.
Comprehensive income and loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The Company’s accumulated other comprehensive income
only consist of changes in foreign currency exchange rates. Accumulated other
comprehensive loss in the statement of shareholders’ equity amounted to $351,266
and $362,437 as of September 30, 2009 and March 31, 2009, respectively. The
balance sheet amounts with the exception of equity at September 30, 2009 and
March 31, 2009 were translated at 1 RMB to $0.1467 USD and at 1 RMB to $0.1465
USD, respectively. The average translation rates applied to income and cash flow
statement amounts for the six months ended September 30, 2009 and 2008 were at 1
RMB to $0.14662 USD and at 1 RMB to $0.14516 USD, respectively.
 
 Concentrations and credit
risk
 
 The
Company’s operations are all carried out 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, and by the general state
of the PRC’s economy. The Company’s operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in the North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environments
and foreign currency exchange. The Company’s results may be adversely affected
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
  Certain
financial instruments, which subject the Company to concentration of credit
risk, consist of cash. Balances at financial institutions or state owned banks
within the PRC are not covered by insurance. As of September 30, 2009 and March
31, 2009, the Company had deposits totaling $1,105,074 and $995,448 that are not
covered by insurance, respectively. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant risks on its
cash in bank accounts.
 
 For the
three months and six months ended September 30, 2009 and 2008, all of the
Company’s sales and purchases arose in the PRC. No major customers accounted for
more than 10% of the Company’s total revenues for the three months and six
months ended September 30, 2009 and 2008, respectively.
 
 For the
three months ended September 30, 2009 and 2008, one vendor accounted for 20% of
the Company’s total purchases and 9% of the total accounts payable; and 16% of
the Company’s total purchases and 8% of the total accounts payable,
respectively.
 
 For the
six months ended September 30, 2009 and 2008, one vendor accounted for 20%of the
Company’s total purchases and 7% of the total accounts payable; and 19% of the
Company’s total purchases and 8% of the total accounts payable,
respectively.
 
 Recently issued accounting
pronouncements
 
 In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. On July 1, 2009, the Company adopted this
accounting standard, but it did not have a material impact on the disclosures
related to its consolidated financial statements.
  F-11
 
 In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009, and the Company does not expect this
standard to have a material effect on its consolidated financial
statements.
 
 In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within this accounting
standard. Further, this accounting standard requires a company to perform a
qualitative analysis when determining whether or not it must consolidate a VIE.
It also requires a company to continuously reassess whether it must consolidate
a VIE. Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and the
Company is currently assessing the impact of adoption this
standard.
 
 In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
 
 In
October 2009, FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.
 
 Note
3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 Interest
paid for the three months ended September 30, 2009 and 2008, amounted to $17,299
and $10,761, respectively. Interest paid for the six months ended September 30,
2009 and 2008, amounted to $35,510 and $21,338, respectively.
 
 Income
taxes paid for the three months ended September 30, 2009 and 2008 amounted to
$692,146 and $422,961, respectively. Income taxes paid for the six months ended
September 30, 2009 and 2008 amounted to $1,164,653 and $997,255,
respectively.
    Note
4 – ADVANCES TO SUPPLIERS
 
 Advances
to suppliers are money deposited with or advanced to outside vendors or related
parties on 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.
  F-12
 
 This
amount is refundable and bears no interest. As of September 30, 2009 and March
31, 2009, advances to suppliers, including advances to related parties, amounted
to $9,119,785 and $7,282,217, respectively.
 
 Note
5 - PROPERTY AND EQUIPMENT
 
 Property
and equipment consists of the following:
 
 September 30,
                    2009
                  
                  
                  March 31,
                    2009(Unaudited)Leasehold
      improvements
                  
                  $
                  2,272,313
                  
                  
                  $
                  2,057,892Furniture
      and equipment
                  
                  
                  326,151
                  
                  
                  
                  304,709Motor
      Vehicles
                  
                  
                  163,891
                  
                  
                  
                  162,443Total
                  
                  
                  2,762,355
                  
                  
                  
                  2,525,044Less:
      Accumulated depreciation and amortization
                  
                  
                  1,796,605
                  
                  
                  
                  1,545,612Property
      and equipment, net
                  
                  $
                  965,750
                  
                  
                  $
                  979,432
 
 Total
depreciation expense for property and equipment for the three months ended
September 30, 2009 and 2008 was $127,714 and $104,800, respectively. Total
depreciation expense for property and equipment for the six months ended
September 30, 2009 and 2008 was $248,747 and $179,301, respectively. No
depreciation expense was included in cost of goods sold for the years presented
because the Company’s business does not involve manufacturing of merchandise and
the amount of depreciation of property and equipment utilized in acquiring,
warehousing and transporting the merchandise to locations ready for sale is not
material.
 
 Note
6 – LONG TERM RENTAL DEPOSITS
 
 Long term
rental deposits are money deposited 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 six months’ rent being paid up front plus additional deposits. As
of September 30, 2009 and March 31, 2009, the long term rental deposit amounted
to $2, 574,516 and $2,015,149, respectively.
 
 Note
7 – SHORT TERM LOANS
 
 Short
term loans represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks.
Short term bank loans at September 30, 2009 and March 31, 2009, consisted of the
following:
 
 September 30, 2009
                            
                            
                            March 31,
                              2009(Unaudited)Hangzhou
      Bank, due  February 2, 2010annual
      interest at 4.86%, secured by thepersonal
      properties of some of the Company’s directors
                            
                            $
                            880,200
                            
                            
                            $
                            879,000Hangzhou
      Bank, due March 13, 2010annual
      interest at 4.86%, secured by thepersonal
      properties of some of the Company’s directors
                            
                            $
                            586,800
                            
                            
                            $
                            586,000Total
                            
                            $
                            1,467,000
                            
                            
                            $
                            1,465,000
  F-13
 
 Interest
expense for the three months ended September 30, 2009 and 2008 amounted to
$17,299 and $10,761, respectively. Interest expense for the six months ended
September 30, 2009 and 2008 amounted to $35,510 and $21,338,
respectively.
 
 Note
8 - TAXES
  Income
Tax
 
 The
Company is registered in Nevada whereas its subsidiary, Renovation HK, is
registered in Hong Kong, and all of the Company’s business operations are
conducted through Renovation HK’s subsidiary, Jiuxin Management and the three
PRC VIEs, Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service. Jiuxin
Management and the VIEs are subject to PRC tax laws.
 
 Beginning
January 2008, the Chinese Enterprise Income Tax (“EIT”) law replaced China’s
former income tax laws. The standard EIT rate of 25% replaced the 33% rate
previously applicable to enterprises. Therefore, starting from January 2008
Jiuzhou Pharmacy has been subject to an effective tax rate of 25%.
 
 Jiuzhou
Clinic and Jiuzhou Service are subject to the regular income tax rate of 25% in
calendar year 2008 and 2009.
 
 The
following table reconciles the US statutory rates to the Company's effective tax
rate for the six months ended September 30, 2009 and 2008:
  2009
                    
                    
                    2008U.S.
      Statutory rates
                    
                    
                    34
                    %
                    
                    
                    34
                    %Foreign
      income not recognized in USA
                    
                    
                    (34
                    )
                    
                    
                    (34
                    )China
      income taxes
                    
                    
                    25
                    
                    
                    
                    25Other(a)
                    
                    
                    1
                    
                    
                    
                    (2
                    )Effective
      tax rate
                    
                    
                    26
                    %
                    
                    
                    23
                    %
 
 (a)
              The
      1% and 2% represents the expenses (income) incurred by the Company that
      are not subjected to PRC income
tax.
 
 Value Added
Tax
 
 Sales of
birth control related products are not subject to VAT, while Chinese herbs are
subject to 13% VAT and all other sales are subject to 17% VAT. VAT on sales and
on purchases amounted to $1,939,037 and $1,390,706 for the three months ended
September 30, 2009, respectively, and $1,693,521 and $1,009,692 for the three
months ended September 30, 2008, respectively. VAT on sales and on purchases
amounted to $3,833,589 and $2,851,769 for the six months ended September 30,
2009, respectively, and $3,539,472 and $2,395,904 for the six months ended
September 30, 2008, respectively.
 
 Sales and
purchases are recorded net of VAT collected and paid as the Company acts as an
agent for the government. VAT taxes are not impacted by the income tax
holiday.
 
 Taxes
payable at September 30, 2009 and March 31, 2009 consisted of the
following:
 
 September
      30,
                          2009
                        
                        
                        March
      31,
                          2009(Unaudited)VAT
                        
                        $
                        165,891
                        
                        
                        $
                        196,784Income
      tax
                        
                        
                        639,529
                        
                        
                        
                        588,681Others
                        
                        
                        21,700
                        
                        
                        
                        25,851Total
      taxes payable
                        
                        $
                        827,120
                        
                        
                        $
                        811,316
 
 F-14
 
 Note
9 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
  Amounts
receivable from and payable to related parties are summarized as
follows:
 
 September 30, 2009
                      
                      
                      March 31, 2009(Unaudited)Amounts
      due from directors (1):
                      
                      $
                      3,824
                      
                      
                      $
                      2,432Amount
      due to director (2):
                      
                      $
                      327,161
                      
                      
                      $
                      326,715Advances
      to supplier (3):
                      
                      $
                      2,388,161
                      
                      
                      $
                      1,797,104
 
 (1)
              Represents
      interest free loans to two directors of the Company, Li Qi and Chongan
      Jing. The loans are due upon
demand.
  (2)
              Represents
      leasehold improvement expenses paid by a director of the Company, Lei Liu,
      on behalf of the Company. The amount is interest free and due upon
      demand.(3)
              Represents
      prepayment for inventory purchase made to a supplier, which was formerly
      owned by some of the Company’s directors. The Company will collect
      inventory from the supplier.
 
 The
Company’s purchase from the related party supplier amounted to $626,317 and
$713,799 for the three months ended September 30, 2009 and 2008, respectively,
and $1,001,068 and $801,270 for the six months ended September 30, 2009 and
2008, respectively.
 
 The
Company also leases premises from a director (see Note 14 below).
  Note
10 – EARNINGS PER SHARE
 
 The
Company reports earnings per share in accordance with the provisions of 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 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.
 
 The
following is a reconciliation of the basic and diluted earnings per share
computation:
 
 2009
                        (Unaudited)
                      
                      2008
                        (Unaudited)For
      the three months ended September 30, 2009 and 2008Net
      income for earnings per share
                      
                      $
                      1,703,596
                      
                      
                      $
                      1,576,917Weighted
      average shares used in basic computationBasic
      and Diluted
                      
                      
                      16,400,000
                      
                      
                      
                      15,800,000Earnings
      per shareBasic
      and Diluted
                      
                      $
                      0.10
                      
                      
                      $
                      0.10
  F-15
 
 2009
                      (Unaudited)
                    
                    2008
                      (Unaudited)For
      the six months ended September 30, 2009 and 2008Net
      income for earnings per share
                    
                    $
                    3,302,757
                    
                    
                    $
                    3,317,736Weighted
      average shares used in basic computationBasic
      and Diluted
                    
                    
                    16,100,000
                    
                    
                    
                    15,800,000Earnings
      per shareBasic
      and Diluted
                    
                    $
                    0.21
                    
                    
                    $
                    0.21
 
 Note
11 – SHAREHOLDERS’ EQUITY
 
 Stock Based
Compensation
 
 On
September 1, 2009, pursuant to agreements entered on July 30, 2009, shareholders
of Renovation HK sold shares of Renovation HK to service providers
including the Company’s chief financial officer and legal counsel which, after
the share exchange transaction between the Company and Renovation HK on
September 17, 2009, collectively represent 2.50% of the Company’s issued and
outstanding common stock.
 
 Using the
fair value of services provided as of September 30, 2009, the Company estimated
that the total stock compensation expense to be recognized from these
transactions was $202,120. The Company recognized $126,325 as stock compensation
expense during the three and six months ended September 30, 2009. The remaining
$75,795 was applied to accrued legal fees, which were expensed
during the year ended March 31, 2009.
 
 Shareholders
Contribution
 
 On June
8, 2009, the three Owners of Jiuzhou Pharmacy acquired 100% equity interests of
Kuaileren Pharmacy Co., Ltd. (“Kuaileren”) from its owner for stock
consideration.  On August 21, 2009, the three Owners contributed their
100% equity interests of Kuaileren to Jiuzhou Pharmacy, and Kuaileren became a
wholly-owned subsidiary of Jiuzhou Pharmacy. The registered capital of Kuaileren
is $15,000 (RMB 100,000). The transfer of the equity interest has been treated
as a contribution to owner’s equity and has been valued at $8,164, the estimated
fair value of the equity interest transferred.
 
 Statutory
Reserves
 
 Statutory
reserves represent restricted retained earnings. Based their legal formation,
all PRC entities are required to set aside 10% of their net incomes as reported
in their statutory accounts on an annual basis to the Statutory Surplus Reserve
Fund (the “Reserve Fund”). Once the total set-aside in the Reserve Fund reaches
50% of an entity’s registered capital, further appropriations are discretionary.
The Reserve Fund can be used to increase the entity’s registered capital upon
approval by relevant government authorities and to eliminate its future losses
under PRC GAAP upon a resolution by its board of directors. The Reserve Fund is
not distributable to shareholders except in the event of
liquidation.
 
 The
Company has fulfilled the 50% registered capital requirement as of March 31,
2009. Therefore, during the six months ended September 30, 2009,
no additional appropriations to the statutory reserves were made from
unrestricted earnings.
 
 There are
no legal requirements in the PRC to fund these statutory reserves by transfer of
cash to any restricted accounts, and therefore, the Company does not do so.
These statutory reserves are not distributable as cash dividends.
 
 Note
12 - POSTRETIREMENT BENEFITS
 
 Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. The contribution is based on a
percentage required by the local government and the employees' current
compensation. The Company contributed $18,712 and $16,046 in employment benefits
and pension during the three months ended September 30, 2009 and 2008,
respectively. The Company contributed $34,141 and $31,506 in employment benefits
and pension during the six months ended September 30, 2009 and 2008,
respectively.
  F-16
 
 Note
13 - SEGMENTS
  The
Company sells prescription and over the counter medicines, traditional Chinese
medicines, which are medicines derived from Chinese herbs, dietary
supplements, medical devices, etc. The class of customer, selling practice and
distribution process are the same for all products. The Company’s chief
operating decision-makers (i.e. the chief executive officer and his direct
reports) review financial information presented on a consolidated basis,
accompanied by disaggregated information about revenues by product lines for
purposes of allocating resources and evaluating financial performance. There are
no segment managers who are held accountable for operations, operating results
and plans for levels or components below the consolidated unit level. 
Based on qualitative and quantitative criteria established by FASB’s accounting
standard, “Disclosures about Segments of an Enterprise and Related Information”,
the Company considers itself to be operating within one reportable
segment.
  The
Company does not have long-lived assets located in foreign countries. In
accordance with the enterprise-wide disclosure requirements of FASB’s accounting
standard, the Company's net revenue from external customers by main product is
as follows:
  Three
      months Ended September 30,2009
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)Prescription
      Drugs
                  
                  $
                  4,331,805
                  
                  
                  $
                  3,724,974Over
      The Counter (OTC) Drugs
                  
                  
                  3,886,065
                  
                  
                  
                  2,756,878Nutritional
      Supplements
                  
                  
                  1,587,452
                  
                  
                  
                  1,822,542Traditional
      Chinese Medicine Products
                  
                  
                  1,385,108
                  
                  
                  
                  1,179,314Medical
      Devices
                  
                  
                  336,242
                  
                  
                  
                  352,768Sundry
      Products and Others
                  
                  
                  731,901
                  
                  
                  
                  546,694Total
                  
                  $
                  12,258,573
                  
                  
                  $
                  10,383,170
 
 Six
      months Ended September 30,2009
                  
                  2008(Unaudited)
                  
                  
                  (Unaudited)Prescription
      Drugs
                  
                  $
                  8,792,359
                  
                  
                  $
                  7,929,827Over
      The Counter (OTC) Drugs
                  
                  
                  7,379,364
                  
                  
                  
                  5,350,659Nutritional
      Supplements
                  
                  
                  3,333,917
                  
                  
                  
                  4,211,343Traditional
      Chinese Medicine Products
                  
                  
                  2,639,882
                  
                  
                  
                  1,789,611Medical
      Devices
                  
                  
                  662,819
                  
                  
                  
                  850,621Sundry
      Products and Others
                  
                  
                  1,131,696
                  
                  
                  
                  1,401,498Total
                  
                  $
                  23,940,037
                  
                  
                  $
                  21,533,559
 
 Note
14 - COMMITMENTS AND CONTINGENCIES
 
 Operating lease
commitments
 
 The
Company recognizes lease expense on a straight line basis over the term of the
lease in accordance to FASB’s accounting standard. The Company has entered into
various tenancy agreements for the lease of store premises. The Company’s leases
do not contain any escalating lease payments or contingent rental payments
terms.
 
 Jiuzhou Pharmacy
leases a retail space and its corporate office space from Lei Liu, a
director of the Company, under long-term operating lease agreements beginning
August 2008 to August 2010 and from January 2008 to March 2012, respectively.
The rent for the retail space and the corporate office are $43,983 and
$36,598 for three months ended September 30, 2009 and 2008, respectively.
The rent for the retail space and the corporate office are $87,972 and $101,612
for six months ended September 30, 2009 and 2008, respectively. For the three
months and six months ended September 30, 2009 and 2008, no rent was paid to Mr.
Liu.
  F-17
 
 The
Company’s commitments for minimum rental payments under its lease for the next
five years and thereafter are as follows:
 
 Period ending March 31,
                    
                    Amount2010
                    
                    $
                    606,6592011
                    
                    $
                    1,044,6972012
                    
                    $
                    763,1342013
                    
                    $
                    478,1452014
                    
                    $
                    344,185Thereafter
                    
                    $
                    70,032
 
 Rental
expense for the three months ended September 30, 2009 and 2008 amounted to
$258,152 and $245,338, respectively. Rental expense for the six months ended
September 30, 2009 and 2008 amounted to $510,093 and $456,021,
respectively.
 
 Logistics Services
Commitments
 
 On
January 1, 2009 the Company entered into a one-year agreement for logistics
services (“Logistics Agreement”) with Zhejiang Yingte Logistics Co., Ltd.
(“Yingte”) to provide logistics and other related services. Pursuant to the
Logistics Agreement, Yingte accepts goods from the Company’s suppliers, stores
and then deliver the goods to the Company’s store locations as directed by the
Company, for which the Company is required to pay Yingte 1% of the purchase
price of the delivered goods. The Company is obligated to pay a minimum of RMB
2,900,000 annually (1% of RMB 290 million: the total minimum amount of goods to
be delivered under the Logistics Agreement).
 
 As of
September 30, 2009, the Company did not have any contingent
liabilities.
 
 Legal
Proceedings
 
 The
Company is not aware of any legal proceedings in which any director, officer,
owner of record or beneficial owner of more than five percent of any class of
voting securities of the Company, or any affiliate of such director, officer, or
security holder, is a party adverse to the Company or has a material interest
adverse to the Company.
 
 Note
15 – SUBSEQUENT EVENT
 On
October 27, 2009, the Company was made a party to a series of amendments to the
contractual arrangements with HJ Group. Specifically, four of the five
agreements comprising the contractual arrangements – namely, the consulting
services agreement, the operating agreement, the option agreement and the voting
rights proxy agreement – were amended to remove a provision which
terminated these agreements on May 1, 2010 unless the Company completed a
financing of at least $25 million and listed its common stock on the Nasdaq
Capital Market by such date. As amended:
 
 ·
                  the
      consulting services agreement shall remain in effect for the maximum
      period of time permitted by law, unless sooner terminated by Jiuxin
      Management or if either Jiuxin Management or an HJ Group company becomes
      bankrupt or insolvent, or otherwise dissolves or ceases business
      operations;
 
 ·
                  the
      operating agreement shall remain in effect unless terminated by Jiuxin
      Management;
 
 ·
                      the
      option agreement shall remain in effect for the maximum period time
      permitted by law; and·
                      the
      voting rights proxy agreement shall remain in effect for the maximum
      period of time permitted by
law.
 The
Company has performed an evaluation of subsequent events through November 16,
2009, the date these consolidated financial statements were
issued.


F-18


Item
2. Management’s Discussion and Analysis or Plan of Operation.





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 the Company's current report on Form 8-K filed with the SEC
on September 24, 2009.  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
were translated into U.S. Dollars at various pertinent dates and for pertinent
periods.





Overview




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 HK”) a Hong Kong
company, and Renovation HK became a wholly-owned subsidiary of the Company. On
the closing date, the Company issued 15,800,000 of its common stock to
Renovation HK’s stockholders in exchange for 100% of the capital stock of
Renovation HK. Prior to the share exchange transaction, the Company had
4,200,000 shares of common stock issued and outstanding. After the share
exchange transaction, the Company had 20,000,000 shares of common stock
outstanding and Renovation HK’s stockholders owned 79% of the issued and
outstanding shares. The management members of Renovation HK became the directors
and officers of the Company.  The share exchange transaction was
accounted for as a reverse acquisition and recapitalization and, as a result,
the consolidated financial statements of the Company (the legal acquirer) is, in
substance, those of Renovation HK (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
HK is a holding company that, through its wholly-owned PRC subsidiary, Zhejiang
Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”),
controls three PRC companies, namely Hangzhou Jiuzhou Grand Pharmacy Chain Co.,
Ltd. (“Jiuzhou
Pharmacy”), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western
Medicine General Partnership (“Jiuzhou Clinic”), and
Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“Jiuzhou Service”), by
a series of contractual arrangements. All of our business operations are carried
out by HJ Group. Throughout this Form 10-Q, Jiuzhou Pharmacy, Jiuzhou Clinic and
Jiuzhou Service are sometimes collectively referred to “HJ Group,” and
Renovation HK, Jiuxin Management and HJ Group are sometimes collectively
referred to as “Grand
Pharmacy Group.”





The contractual arrangements with HJ Group are necessary to comply
with Chinese laws limiting foreign ownership of certain companies. Through these
contractual arrangements, we have the ability to substantially influence the
daily operations and financial affairs of the three HJ Group companies, appoint
their senior executives and approve all matters requiring approval of their
equity owners. As a result of these contractual arrangements, which enable us to
control HJ Group, we are considered the primary beneficiary of HJ Group. Please
see Note 1 to our consolidated financial statements for the three months ended
September 30, 2009, for the impact of the contractual arrangements on our
consolidated financial statements.


4





Subsequent
Event





As
reported in our current report on Form 8-K filed on October 30, 2009, on October
27, 2009, we were made a party to a series of amendments to the contractual
arrangements with HJ Group. Specifically, four of the five agreements comprising
the contractual arrangements – namely, the consulting services agreement, the
operating agreement, the option agreement and the voting rights proxy agreement
– were amended to remove a provision terminating these agreements on May 1, 2010
unless we complete a financing of at least $25 million and the listing of our
common stock on the Nasdaq Capital Market by such date. As amended:





·
            the
      consulting services agreement shall remain in effect for the maximum
      period of time permitted by law, unless sooner terminated by Jiuxin
      Management or if either Jiuxin Management or an HJ Group company becomes
      bankrupt or insolvent, or otherwise dissolves or ceases business
      operations;





·
            the
      operating agreement shall remain in effect unless terminated by Jiuxin
      Management;





·
            the
      option agreement shall remain in effect for the maximum period time
      permitted by law; and





·
            the
      voting rights proxy agreement shall remain in effect for the maximum
      period of time permitted by law.





Critical
Accounting Policies and Estimates





In
preparing our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, which requires us 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
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 these accounting policies during the past
eighteen months.




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 immaterial.


5





Our revenue
is net of value added tax (“VAT”) collected on behalf of 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 balance sheet until it is
paid to the tax authorities.





Vendor
allowances





The
Company accounts for vendor allowances according to FASB’s accounting standard.
Vendor allowances reduce the carrying value of inventories and 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 costs.





Depreciation and
Amortization





Our
non-current assets include property and equipment, including leasehold
improvements, long term deposits and long term advances to suppliers. We
depreciate our equipment assets using the straight-line method over the
estimated useful lives of the assets. We make estimates of the useful lives of
the equipment (including the salvage values), in order to determine the amount
of depreciation expense to be recorded during any reporting period. We amortize
leasehold improvements of our retail drugstores and other business premises over
the shorter of five years or lease term. A majority of our leases have a
five-year term. We estimate the useful lives of our other property and equipment
at the time we acquire the assets based on our historical experience with
similar assets as well as anticipated technological and other changes. If
technological changes were to occur more rapidly than anticipated or in a
different form than anticipated, we may shorten the useful lives assigned to
these assets as appropriate, which will result in the recognition of increased
depreciation and amortization expense in future periods. There has been no
change to the estimated useful lives and salvage values during the six months
ended September 30, 2009 and 2008.





Impairment of Long-Lived
Assets





We
evaluate our long lived tangible and intangible assets for impairment, at least
annually, but more often 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. Based on its review, we believe that, as of September 30, 2009,
there was no impairment.





Inventories





We state
our inventory at the lower of cost or market. Cost is determined using the
weighted average cost method. Market is the lower of replacement cost or net
realizable value. We carry out physical inventory counts on a monthly basis at
each store and distribution location to ensure that the amounts reflected in the
consolidated financial statements at each reporting period are properly stated
and valued. We record write-downs to inventory for shrinkage losses and
damaged merchandise that are identified during the inventory counts. The
inventory write downs for the six months ended September 30, 2009 and 2008 have
been immaterial.





Recent
Accounting Pronouncements





In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. On July 1, 2009, the Company adopted this
accounting standard, but it did not have a material impact on the disclosures
related to its consolidated financial statements.


6





In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009, and the Company does not expect this
standard to have a material effect on its consolidated financial
statements.





In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within this accounting
standard. Further, this accounting standard requires a company to perform a
qualitative analysis when determining whether or not it must consolidate a VIE.
It also requires a company to continuously reassess whether it must consolidate
a VIE. Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and the
Company is currently assessing the impact of adoption this
standard.





In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.





In
October 2009, FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing.  This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation.  This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.





Results
of Operations





Results
of Operations - Three Months ended September 30, 2009 as compared to Three
Months ended September 30, 2008





Revenue.Our revenue increased by 18.1% to $12,258,573 for the three months ended
September 30, 2009 from $10,383,170 for the three months ended September 30,
2008 due to operating additional store locations. We operated 22 stores as of
September 30, 2009, as compared to 13 stores as of September 30, 2008. We
anticipate that our overall revenue will continue to increase as we open
additional stores.





Gross Profit.Our gross profit increased by 25.63% to $3,498,876 for the three months
ended September 30, 2009 from $2,785,102 for the three months ended September
30, 2008. Our gross margin remained relatively constant at 28.5% for the three
months ended September 30, 2009 compared with 26.8% for the three months ended
September 30, 2008. We anticipate that our overall gross profit will continue to
increase as our sales increase. Additionally, we anticipate that our gross
margin will increase as we will be able to obtain better pricing terms from our
suppliers and achieve further economies of scale as a result of purchasing
larger quantities of products. We presently do not privately label any of our
products and are constantly adjusting our product mix to meet customer demand
and to maximize our gross margin.


7





Sales and
Marketing Expenses.Our sales and marketing expenses increased by 37.3%
to $596,382 for the three months ended September 30, 2009 from $434,282 for the
three months ended September 30, 2008. This increase was primarily a result of
the continued expansion of our drugstore chain from 13 stores for the three
months ended September 30, 2008 to 22 stores for the three months ended
September 30, 2009. Sales and marketing expenses as a percentage of our revenue
increased slightly to 4.9% for the three months ended September 30, 2009 from
4.2% for the three months ended September 30, 2008. We expect that our sales and
marketing expenses will increase as we continue to expand our store
network.





General and
Administrative Expenses.Our general and administrative expenses
increased by 94.1% to $565,134 for the three months ended September 30, 2009
from $291,147 for the three months ended September 30, 2008. Of this $273,987
increase $126,325 relates to stock compensation of service providers. General
and administrative expenses as a percentage of our revenue, excluding the
stock compensation expense, decreased slightly to 2.5% for the three months
ended September 30, 2009 from 2.8% for the three months ended September 30,
2009. As we continue to open drugstores, further develop our infrastructure,
and incur expenses related to being a US public company, we anticipate that
our general and administrative expenses will increase.





Income from
Operations.As a result of the foregoing, our income from operations
increased to $2,337,360 for the three months ended September 30, 2009 from
$2,059,673 for the three months ended September 30, 2008, an increase of 13.5%.
Our operating margin for the three months ended September 30, 2009 and 2008 was
19.1% and 19.8%, respectively.





Results
of Operations - Six Months ended September 30, 2009 as compared to Six Months
ended September 30, 2008





Revenue.Our revenue increased by 11.2% to $23,940,037 for the six months ended
September 30, 2009 from $21,533,559 for the six months ended September 30, 2008
due to operating additional store locations. As of September 30, 2008 we
operated 13 stores, as compared to 22 stores as of September 30, 2009. We
anticipate that our overall revenue will continue to increase as we open
additional stores.





Gross Profit.Our gross profit increased by 15.8% to $6,522,772 for the six months
ended September 30, 2009 from $5,632,052 for the six months ended September 30,
2008. Our gross margin remained relatively constant at 27.2% for the six months
ended September 30, 2009 compared with 26.2% for the six months ended September
30, 2008. We anticipate that our overall gross profit will continue to increase
as our sales increase. Additionally, we anticipate that our gross margin will
increase as we will be able to obtain better pricing terms from our suppliers
and achieve further economies of scale as a result of purchasing larger
quantities of products. We presently do not privately label any of our products
and are constantly adjusting our product mix to meet customer demand and to
maximize our gross margin.





Sales and
Marketing Expenses.Our sales and marketing expenses increased by 35.4%
to $1,074,159 for the six months ended September 30, 2009 from $793,443 for the
six months ended September 30, 2008. This increase was primarily a result of the
continued expansion of our drugstore chain from 13 stores for the six months
ended September 30, 2008 to 22 stores for the six months ended September 30,
2009. Sales and marketing expenses as a percentage of our revenue increased
slightly to 4.5% for the six months ended September 30, 2009 from 3.7% for the
six months ended September 30, 2008. We expect that our sales and marketing
expenses will increase as we continue to expand our store network.





General and
Administrative Expenses.Our general and administrative expenses
increased by 84.7% to $930,344 for the six months ended September 30, 2009 from
$503,601 for the six months ended September 30, 2008. Of this $426,743 increase,
$126,325 relates to stock compensation of service providers. General and
administrative expenses as a percentage of our revenue, excluding the stock
compensation expense, increased slightly to 2.8% for the six months ended
September 30, 2009 from 2.2% for the six months ended September 30, 2009.
As we continue to open drugstores, further develop our infrastructure, and incur
expenses related to being a US public company, we anticipate that our
general and administrative expenses will increase.


8





Income from
Operations.As a result of the foregoing, our income from operations
increased to $4,518,269 for the six months ended September 30, 2009 from
$4,335,008 for the six months ended September 30, 2008, an increase of 4.2%. Our
operating margin for the six months ended September 30, 2009 and 2008 was 18.9%
and 20.1%, respectively.





Liquidity





Six
Month Period Ended September 30, 2009





For the
six months ended September 30, 2009, we generated $355,633 from operating
activities, as compared to $176,223 for the six months ended September 30, 2008.
The increase is primarily attributable to decrease of cash advances to
suppliers.





We used
$233,735 in investing activities during the six months ended September 30, 2009
as compared to $160,979 during the six months ended September 30, 2008 as a
result of increased leasehold improvements from six store-openings during the
six months ended September 30, 2009. During the six months ended September 30,
2008 we opened four stores.





Cash used
in financing activities was $307,838 for the six month period ended September
30, 2009 as compared to cash used in financing activities of $0 for the six
month period ended September 30, 2008. The increase was the result of bank
requirements to keep cash deposits with the bank as security for notes payable
outstanding with the bank.





As of
September 30, 2009, we had cash of $819,800. Our total current assets were
$16,160,783 and our total current liabilities were $9,519,290 which resulted in
a net working capital of $6,641,493.





Capital
Resources





During
the six months ended September 30, 2009, we borrowed and repaid $1,466,200. We
have funded our continued expansion from our operating cash flow. However, if we
were to expand more aggressively throughout Hangzhou and other parts of Zhejiang
Province, we will 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 four to five years. Our commitments for minimum rental
payments under our leases for the next five years and thereafter are as
follows:




Years
      ending March 31,2010
                        
                        $
                        606,6592011
                        
                        
                        1,044,6972012
                        
                        
                        763,1342013
                        
                        
                        478,1452014
                        
                        
                        344,185Thereafter
                        
                        
                        70,032




Logistics
Services Commitments




We use a
third party service provider, Zhejiang Yingte Logistics Co., Ltd., (“Yingte”) to
accept goods from our suppliers and to deliver the goods to our store locations.
On January 1, 2009 we entered into a one year agreement with Yingte and are
obligated to pay 1% of the purchase price of the goods received from our
suppliers by Yingte during the term of the agreement, January 1, 2009 to
December 31, 2009, with a contractual minimum of 2,900,000 RMB.


9





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





HJ Group
maintains its books and records in Renminbi (“RMB”), the lawful currency of the
PRC.  In general, for consolidation purposes, the Company translates
HJ Group’s assets and liabilities into U.S. Dollars 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 HJ Group’s
financial statements are recorded as accumulated other comprehensive
income.





Until
July 21, 2005, RMB had been pegged to US$ at the rate of RMB8.30:
US$1.00.  On July 21, 2005, the PRC government reformed the exchange
rate system into a managed floating exchange rate system based on market supply
and demand with reference to a basket of currencies. In addition, the exchange
rate of RMB to US$ was adjusted to RMB8.11: US$1.00 as of July 21,
2005.  The People’s Bank of China announces the closing price of a
foreign currency such as US$ traded against RMB in the inter-bank foreign
exchange market after the closing of the market on each working day, which will
become the unified exchange rate for the trading against RMB on the following
working day.  The daily trading price of US$ against RMB in the
inter-bank foreign exchange market is allowed to float within a band of ±0.3%
around the unified exchange rate published by the People’s Bank of
China.  This quotation of exchange rates does not imply free
convertibility of RMB to other foreign currencies.  All foreign
exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People’s Bank of China.  Approval of foreign currency
payments by the Bank of China or other institutions required submitting a
payment application form together with invoices, shipping documents and signed
contracts.





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




September 30,
                  2009
                
                March 31,
                  2009
                
                September 30,
                  2008Balance
      sheet items, except for the registered and paid-up capital, as of end of
      period/year
                
                USD1:RMB
      0.14670
                
                USD1:RMB0.1465
                
                USD1:RMB0.1463Amounts
      included in the statement of operations, statement of changes in
      stockholders' equity and statement of cash flows for the period/ year
      ended
                
                USD1:RMB
      0.14662
                
                USD1:RMB0.14582
                
                USD1:RMB0.14516




No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.




Inflation





We
believe that inflation has not had a material effect on our operations to
date.


10





Item 3. Quantitative and Qualitative Disclosures about Market
Risk





Not
applicable





Item
4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





As of
September 30, 2009, we carried out an evaluation, under the supervision and with
the participation of our management, including our chief executive officer and
our chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on the foregoing, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) were not effective.





During
the three months ended September 30, 2009 we identified certain weaknesses
involving control activities, primarily, accounting and finance personnel
weaknesses. Our current accounting staff members are relatively inexperienced in
U.S. GAAP- based reporting and require 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.





The
Company’s management has identified the steps it believes are necessary to
address the weaknesses described above, and expect that we will satisfactorily
address the control deficiencies and weaknesses relating to these matters by the
end of our fiscal year ending March 31, 2010, although there can be no assurance
that compliance will be achieved in this time frame.





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. We
expanded our review of accounting for business combinations to help compensate
for our material weaknesses in order to provide assurance that the financial
statements are free of material inaccuracies or omissions of material fact. 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.





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 quarter ended
September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


11





PART
II - OTHER INFORMATION




Item 1. Legal Proceedings.





None.





Item 1A. Risk Factors.





You should carefully consider the risks described below
together with all of the other information included in this report before making
an investment decision with regard to our securities. The statements contained
in or incorporated into this offering that are not historic facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.





Risks Relating to All of Our
Business Segments




Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.




We have a
limited operating history. Jiuzhou Pharmacy opened its first drugstore in March
2004, Jiuzhou Clinic began its first clinic in October 2003, and Jiuzhou Service
commenced operation in November 2005. Accordingly, you should consider our
future prospects in light of the risks and uncertainties experienced by early
stage companies in evolving industries such as the pharmaceutical industry in
China. Some of these risks and uncertainties relate to our ability
to:





·
            maintain
      our market position;·
            attract
      additional customers and increase spending per
customer;·
            respond
      to competitive market conditions;·
            increase
      awareness of our brand and continue to develop user and customer
      loyalty;·
            respond
      to changes in our regulatory environment;·
            maintain
      effective control of our costs and expenses;·
            raise
      sufficient capital to sustain and expand our business;
  and·
            attract,
      retain and motivate qualified
personnel.





If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.





We
depend substantially on the continuing efforts of our executive officers, and
our business and prospects may be severely disrupted if we lose their
services.





Our
future success is dependent on the continued services of the key members of our
management team. In particular, we depend on the services of the three
co-founders of HJ Group, Mr. Lei Lu, who is also our chief executive officer and
the chairman of our board of directors, and Ms. Li Qi and Mr. Chong’an Jin, who
are also members of our board of directors. The implementation of our business
strategy and our future success depend in large part on our continued ability to
attract and retain highly qualified management personnel. We face competition
for personnel from other drugstore chains, retail chains, supermarkets,
convenience stores, pharmaceutical companies and other organizations.
Competition for these individuals could cause us to offer higher compensation
and other benefits in order to attract and retain them, which could materially
and adversely affect our financial condition and results of operations. We may
be unable to attract or retain the personnel required to achieve our business
objectives and failure to do so could severely disrupt our business and
prospects. The process of hiring suitably qualified personnel is also often
lengthy. If our recruitment and retention efforts are unsuccessful in the
future, it may be more difficult for us to execute our business
strategy.


12





We do not
maintain key-man insurance for members of our management team. If we lose the
services of any senior management, we may not be able to locate suitable or
qualified replacements, and may incur additional expenses to recruit and train
new personnel, which could severely disrupt our business and prospects.
Furthermore, as we expect to continue to expand our operations, we will need to
continue attracting and retaining experienced management. Each of our three
founders has entered into a confidentiality and non-competition agreement with
us regarding these agreements. However, if any disputes arise between our
founders and us, we cannot assure you, in light of uncertainties associated with
the PRC legal system, that any of these agreements could be enforced in China,
where the three founders reside and hold some of their assets. See “— Risks
Related to Doing Business in China — Uncertainties with respect to the PRC legal
system could limit the protections available to you and us.”





We
may need additional capital and may not be able to obtain it at acceptable terms
or at all, which could adversely affect our liquidity and financial
position.





As of
September 30, 2009, we had RMB 5.3 million (US $0.8 million) in cash. Based
on our current operating plans, we expect our existing resources, including our
current cash and cash flows from operations, to be sufficient to fund our
anticipated cash needs, including for working capital and capital expenditures
for at least the next 12 months. We may, however, need to raise additional
funds if our expenditures exceed our current expectations due to changed
business conditions or other future developments. Our future liquidity needs and
other business reasons could require us to sell additional equity or debt
securities or obtain a credit facility. The sale of additional equity securities
or securities convertible or exchangeable to our equity securities would result
in additional dilution to you. The incurrence of additional indebtedness would
result in increased debt service obligations and could result in operating and
financing covenants that restrict our operational flexibility.





Our
ability to raise additional funds in the future is subject to a variety of
uncertainties, including:





·
            our
      future financial condition, results of operations and cash
      flows;





·
            general
      market conditions for capital-raising activities by pharmaceutical
      companies; and





·
            economic,
      political and other conditions in China and
  elsewhere.





We may be
unable to obtain additional capital in a timely manner or on commercially
acceptable terms or at all. Furthermore, the terms and amount of any additional
capital raised through issuances of equity securities may result in significant
shareholder dilution.





Risks Relating to Our
Pharmacy





Our
operating results are difficult to predict, and we may experience significant
fluctuations in our operating results.





Our
operating results may fluctuate significantly. As a result, you may not be able
to rely on period to period comparisons of our operating results as an
indication of our future performance. Factors causing these fluctuations
include, among others:





·
            our
      ability to maintain and increase sales to existing customers, attract new
      customers and satisfy our customers’ demands;·
            the
      frequency of customer visits to our drugstores and the quantity and mix of
      products our customers purchase;·
            the
      price we charge for our products or changes in our pricing strategies
      or the pricing strategies of our
competitors;





·
            timing
      and costs of marketing and promotional programs organized by us and/or our
      suppliers, including the extent to which we or our suppliers offer
      promotional discounts to our
customers;





·
            our
      ability to acquire merchandise, manage inventory and fulfill
      orders;


13





·
            technical
      difficulties, system downtime or interruptions that may affect our product
      selection, procurement, pricing, distribution and retail management
      processes;





·
            the
      introduction by our competitors of new products or
    services;





·
            the
      effects of strategic alliances, potential acquisitions and other business
      combinations, and our ability to successfully and timely integrate them
      into our business;





·
            changes
      in government regulations with respect to pharmaceutical and retail
      industries; and





·
            current
      economic and geopolitical conditions in China and
    elsewhere.





In
addition, a significant percentage of our operating expenses are fixed in the
short term. As a result, a delay in generating revenue for any reason could
result in substantial operating losses.





Moreover,
our business is subject to seasonal variations in demand. In particular,
traditional retail seasonality affects the sales of certain pharmaceuticals and
other non-pharmaceutical products. Sales of our pharmaceutical products benefit
in the fourth quarter from the winter cold and flu season, and are lower in the
first quarter of each year because Chinese New Year falls into the first quarter
of each year and our customers generally pay fewer visits to drugstores during
this period. In addition, sales of some health and beauty products are driven,
to some extent, by seasonal purchasing patterns and seasonal product changes.
Failure to manage the increased sales effectively in the high sale season, and
increases in inventory in anticipation of sales increase could have a material
adverse effect on our financial condition, results of operations and cash
flow.





Many of
the factors discussed above are beyond our control, making our quarterly results
difficult to predict, which could cause the trading price of our securities to
decline below investor expectations. You should not rely on our operating
results for prior periods as an indication of our future results.




We
may not be able to timely identify or otherwise effectively respond to changing
customer preferences, and we may fail to optimize our product offering and
inventory position.





The
drugstore industry in China is rapidly evolving and is subject to rapidly
changing customer preferences that are difficult to predict. Our success depends
on our ability to anticipate and identify customer preferences and adapt our
product selection to these preferences. In particular, we must optimize our
product selection and inventory positions based on sales trends. We cannot
assure you that our product selection, especially our selections of nutritional
supplements and food products, will accurately reflect customer preferences at
any given time. If we fail to anticipate accurately either the market for our
products or customers’ purchasing habits or fail to respond to customers’
changing preferences promptly and effectively, we may not be able to adapt our
product selection to customer preferences or make appropriate adjustments to our
inventory positions, which could significantly reduce our revenue and have a
material adverse effect on our business, financial condition and results of
operations.





Our
success depends on our ability to establish effective advertising, marketing and
promotional programs.





Our
success depends on our ability to establish effective advertising, marketing and
promotional programs, including pricing strategies implemented in response to
competitive pressures and/or to drive demand for our products. Our
advertisements are designed to promote our brand, our corporate image and the
prices of products available for sale in our stores. Our pricing strategies and
value proposition must be appropriate for our target customers. If we are not
able to maintain and increase the awareness of our pharmacy brand, products and
services, we may not be able to attract and retain customers and our reputation
may also suffer. We expect to incur substantial expenses in our marketing and
promotional efforts to both attract and retain customers. However, our marketing
and promotional activities may be less successful than we anticipate, and may
not be effective at building our brand awareness and customer base. We also
cannot assure you that our current and planned spending on marketing activities
will be adequate to support our future growth. Failure to successfully execute
our advertising, marketing and promotional programs may result in material
decreases in our revenue and profitability.


14





If
we are unable to optimize management of our distribution activities, we may be
unable to meet customer demand.





We
currently outsource our distribution and inventory functions to Yingte
Logistics. Our ability to meet customer demand may be significantly limited if
we do not successfully and efficiently conduct our distribution activities, or
if Yingte Logistics’ facilities are destroyed or shut down for any reason,
including as the result of a natural disaster. Any disruption in the operation
of our distribution could result in higher costs or longer lead times associated
with distributing our products. In addition, as it is difficult to predict
accurate sales volume in our industry, we may be unable to optimize our
distribution activities, which may result in excess or insufficient inventory,
warehousing, fulfillment or distribution capacity. Furthermore, failure to
effectively control product damage during distribution process could decrease
our operating margins and reduce our profitability.





Failure
to maintain optimal inventory levels could increase our inventory holding costs
or cause us to lose sales, either of which could have a material adverse effect
on our business, financial condition and results of operations.





We need
to maintain sufficient inventory levels to operate our business successfully as
well as meet our customers’ expectations. However, we must also guard against
the risk of accumulating excess inventory. We are exposed to inventory risks as
a result of our increased offering of private label products, rapid changes in
product life cycles, changing consumer preferences, uncertainty of success of
product launches, seasonality, and manufacturer backorders and other
vendor-related problems. We cannot assure you that we can accurately predict
these trends and events and avoid over-stocking or under-stocking products. In
addition, demand for products could change significantly between the time
product inventory is ordered and the time it is available for sale. When we
begin selling a new product, it is particularly difficult to forecast product
demand accurately. The purchase of certain types of inventory may require
significant lead-time. As we carry a broad selection of products and maintain
significant inventory levels for a substantial portion of our merchandise, we
may be unable to sell such inventory in sufficient quantities or during the
relevant selling seasons. Carrying too much inventory would increase our
inventory holding costs, and failure to have inventory in stock when a customer
orders or purchases it could cause us to lose that order or lose that customer,
either of which could have a material adverse effect on our business, financial
condition and results of operations.





The
centralization of procurement may not help us achieve anticipated savings and
may place additional burdens on the management of our supply chain.





All of
the product procurement for our drugstore chain is handled through our corporate
headquarters. Such centralization of merchandise procurement and replenishment
operations is intended to reduce cost of goods sold as a result of volume
purchase benefits. However, we may be less successful than anticipated in
achieving these volume purchase benefits. In addition, the centralization of
merchandise procurement is expected to increase the complexity of tracking
inventory, create additional inventory handling and transportation costs and
place additional burdens on the management of our supply chain. Furthermore, we
may not be successful in achieving the cost savings expected from the
renegotiation of certain supplier contracts due to the nature of the products
covered by those contracts and the market position of the related suppliers. If
we cannot successfully reduce our costs through centralizing procurement, our
profitability and prospects would be materially and adversely
affected.





Our
brand name, trade secrets and other intellectual property are valuable assets.
If we are unable to protect them from infringement, our business and prospects
may be harmed.





We
consider our pharmacy brand name to be a valuable asset. We may be unable to
prevent third parties from using our brand name without authorization.
Unauthorized use of our brand name by third parties may adversely affect our
business and reputation, including the perceived quality and reliability of our
products and services.





We also
rely on trade secrets to protect our know-how and other proprietary information,
including pricing, purchasing, promotional strategies, customer lists and/or
suppliers lists. However, trade secrets are difficult to protect. While we use
reasonable efforts to protect our trade secrets, our employees, consultants,
contractors or advisors may unintentionally or willfully disclose our
information to competitors. In addition, confidentiality agreements, if any,
executed by the foregoing persons may not be enforceable or provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure. If we were to enforce a claim that a third
party had illegally obtained and was using our trade secrets, our enforcement
efforts could be expensive and time-consuming, and the outcome is unpredictable.
In addition, if our competitors independently develop information that is
equivalent to our trade secrets or other proprietary information, it will be
even more difficult for us to enforce our rights and our business and prospects
could be harmed.


15





Litigation
may be necessary in the future to enforce our intellectual property rights or to
determine the validity and scope of the intellectual property rights of others.
However, because the validity, enforceability and scope of protection of
intellectual property rights in the PRC are uncertain and still evolving, we may
not be successful in prosecuting these cases. In addition, any litigation or
proceeding or other efforts to protect our intellectual property rights could
result in substantial costs and diversion of our resources and could seriously
harm our business and operating results. Furthermore, the degree of future
protection of our proprietary rights is uncertain and may not adequately protect
our rights or permit us to gain or keep our competitive advantage. If we are
unable to protect our trade names, trade secrets and other propriety information
from infringement, our business, financial condition and results of operations
may be materially and adversely affected.





We
may be exposed to intellectual property infringement and other claims by third
parties which, if successful, could disrupt our business and have a material
adverse effect on our financial condition and results of
operations.





Our
success depends, in large part, on our ability to use our proprietary
information and know-how without infringing third party intellectual property
rights. As litigation becomes more common in China, we face a higher risk of
being the subject of claims for intellectual property infringement, invalidity
or indemnification relating to other parties’ proprietary rights. Our current or
potential competitors, many of which have substantial resources, may have or may
obtain intellectual property protection that will prevent, limit or interfere
with our ability to conduct our business in China. Moreover, the defense of
intellectual property suits, including trademark infringement suits, and related
legal and administrative proceedings can be both costly and time consuming and
may significantly divert the efforts and resources of our management personnel.
Furthermore, an adverse determination in any such litigation or proceedings to
which we may become a party could cause us to:





·
            pay
      damage awards;





·
            seek
      licenses from third parties;





·
            pay
      ongoing royalties;





·
            redesign
      our product offerings; or





·
            be
      restricted by injunctions,





each of
which could effectively prevent us from pursuing some or all of our business and
result in our customers or potential customers deferring or limiting their
purchase from our stores, which could have a material adverse effect on our
financial condition and results of operations.





We
rely on computer software and hardware systems in managing our operations, the
capacity of which may restrict our growth and the failure of which could
adversely affect our business, financial condition and results of
operations.





We are
dependent upon our integrated information management system to monitor daily
operations of our drugstores and to maintain accurate and up-to-date operating
and financial data for compilation of management information. In addition, we
rely on our computer hardware and network for the storage, delivery and
transmission of the data of our retail system. Any system failure which causes
interruptions to the input, retrieval and transmission of data or increase in
the service time could disrupt our normal operation. Although we believe that
our disaster recovery plan is adequate in handling the failure of our computer
software and hardware systems, we cannot assure you that we can effectively
carry out this disaster recovery plan and that we will be able to restore our
operation within a sufficiently short time frame to avoid our business being
disrupted. Any failure in our computer software and/or hardware systems could
have a material adverse effect on our business, financial condition and results
of operations. In addition, if the capacity of our computer software and
hardware systems fails to meet the increasing needs of our expanding operations,
our ability to grow may be constrained.


16





As
a retailer of pharmaceutical and other healthcare products, we are exposed to
inherent risks relating to product liability and personal injury
claims.





Pharmacies
are exposed to risks inherent in the packaging and distribution of
pharmaceutical and other healthcare products, such as with respect to improper
filling of prescriptions, labeling of prescriptions, adequacy of warnings,
unintentional distribution of counterfeit drugs. Furthermore, the applicable
laws, rules and regulations require our in-store pharmacists to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects and other information the in-store
pharmacists deem significant. Our in-store pharmacists may also have a duty to
warn customers regarding any potential negative effects of a prescription drug
if the warning could reduce or negate these effects and we may be liable for
claims arising from advices given by our in-store pharmacists. In addition,
product liability claims may be asserted against us with respect to any of the
products we sell and as a retailer, we are required to pay for damages for any
successful product liability claim against us, although we may have the right
under applicable PRC laws, rules and regulations to recover from the relevant
manufacturer for compensation we paid to our customers in connection with a
product liability claim. We may also be obligated to recall affected products.
Any product liability claim or product recall may result in adverse publicity
regarding us and the products we sell, which would harm our reputation. If we
are found liable for product liability claims, we could be required to pay
substantial monetary damages. Furthermore, even if we successfully defend
ourselves against this type of claim, we could be required to spend significant
management, financial and other resources, which could disrupt our business, and
our reputation as well as our brand name may also suffer. We, like many other
similar companies in China, do not carry product liability insurance. As a
result, any imposition of product liability could materially harm our business,
financial condition and results of operations. In addition, we do not have any
business interruption insurance due to the limited coverage of any business
interruption insurance in China, and as a result, any business disruption or
natural disaster could severely disrupt our business and operations and
significantly decrease our revenue and profitability.





Future
acquisitions are expected to be a part of our growth strategy, and could expose
us to significant business risks.





One of
our strategies is to grow our business through acquisition. However, we cannot
assure you that we will be able to identify and secure suitable acquisition
opportunities. Our ability to consummate and integrate effectively any future
acquisitions on terms that are favorable to us may be limited by the number of
attractive acquisition targets, internal demands on our resources and, to the
extent necessary, our ability to obtain financing on satisfactory terms for
larger acquisitions, if at all.





Moreover,
if an acquisition target is identified, the third parties with whom we seek to
cooperate may not select us as a potential partner or we may not be able to
enter into arrangements on commercially reasonable terms or at all. The
negotiation and completion of potential acquisitions, whether or not ultimately
consummated, could also require significant diversion of management’s time and
resources and potential disruption of our existing business. Furthermore, we
cannot assure you that the expected synergies from future acquisitions will
actually materialize. In addition, future acquisitions could result in the
incurrence of additional indebtedness, costs, and contingent liabilities. Future
acquisitions may also expose us to potential risks, including risks associated
with:





·
            the
      integration of new operations, services and
  personnel;





·
            unforeseen
      or hidden liabilities;





·
            the
      diversion of financial or other resources from our existing
      businesses;





·
            our
      inability to generate sufficient revenue to recover costs and expenses of
      the acquisitions; and





·
            potential
      loss of, or harm to, relationships with employees or
      customers.


17





Any of
the above could significantly disrupt our ability to manage our business and
materially and adversely affect our business, financial condition and results of
operations.





We
may not be able to manage our expansion of operations effectively and failure to
do so could strain our management, operational and other resources, which could
materially and adversely affect our business and growth potential.





We
anticipate continued expansion of our business to address growth in demand for
our products and services, as well as to capture new market opportunities. The
continued growth of our business has resulted in, and will continue to result
in, substantial demands on our management, operational and other resources. In
particular, the management of our growth will require, among other
things:





·
            our
      ability to continue to identify and lease new store locations at
      acceptable prices;





·
            our
      ability to optimize product offerings and increase sales of private label
      products;





·
            our
      ability to control procurement cost and optimize product
      pricing;





·
            our
      ability to control operating expenses and achieve a high level of
      efficiency, including, in particular, our ability to manage the amount of
      time required to open new stores and for stores to become profitable, to
      maintain sufficient inventory levels and to manage warehousing, buying and
      distribution costs;





·
            information
      technology system enhancement;




·
            strengthening
      of financial and management
controls;





·
            increased
      marketing, sales and sales support activities;
  and





·
            hiring
      and training of new personnel.





If we are
not able to manage our growth successfully, our business and prospects would be
materially and adversely affected.





We
depend on the continued service of, and on the ability to attract, motivate and
retain a sufficient number of qualified and skilled staff, especially in-store
pharmacists, for our stores.





Our
ability to continue expanding our retail drugstore chain and deliver high
quality products and customer service depends on our ability to attract and
retain qualified and skilled staff, especially in-store pharmacists. In
particular, the applicable PRC regulations require at least one qualified
pharmacist to be stationed in every drugstore to instruct or advise customers on
prescription drugs. Over the years, a significant shortage of pharmacists has
developed due to increasing demand within the drugstore industry as well as
demand from other businesses in the healthcare industry. We cannot assure you
that we will be able to attract, hire and retain sufficient numbers of skilled
personnel and in-store pharmacists necessary to continue to develop and grow our
business. The inability to attract and retain a sufficient number of skilled
personnel and in-store pharmacists could limit our ability to open additional
stores, increase revenue or deliver high quality customer service. In addition,
competition for these individuals could cause us to offer higher compensation
and other benefits in order to attract and retain them, which could materially
and adversely affect our financial condition and results of
operations.





We
face significant competition, and if we do not compete successfully against
existing and new competitors, our revenue and profitability would be materially
and adversely affected.





The
drugstore industry in China is highly competitive, and we expect competition to
intensify in the future. Our primary competitors include other drugstore chains
and independent drugstores. We also increasingly face competition from discount
stores, convenience stores and supermarkets as we increase our offering of
non-drug convenience products and services. We compete for customers and revenue
primarily on the basis of store location, merchandise selection, price, services
that we offer and our brand name. We believe that the continued consolidation of
the drugstore industry and continued new store openings by chain store operators
will further increase competitive pressures in the industry. In addition, we may
be subject to additional competition from new entrants to the drugstore industry
in China. If the PRC government removes the barriers for the foreign companies
to operate majority-owned retail drugstore business in China, we could face
increased competition from foreign companies. Some of our larger competitors may
enjoy competitive advantages, such as:


18





·
            greater
      financial and other resources;





·
            larger
      variety of products;





·
            more
      extensive and advanced supply chain management
  systems;





·
            greater
      pricing flexibility;





·
            larger
      economies of scale and purchasing
power;





·
            more
      extensive advertising and marketing
efforts;





·
            greater
      knowledge of local market
conditions;





·
            stronger
      brand recognition; and





·
            larger
      sales and distribution networks.





As a
result, we may be unable to offer products similar to, or more desirable than,
those offered by our competitors, market our products as effectively as our
competitors or otherwise respond successfully to competitive pressures. In
addition, our competitors may be able to offer larger discounts on competing
products, and we may not be able to profitably match those discounts.
Furthermore, our competitors may offer products that are more attractive to our
customers or that render our products uncompetitive. In addition, the timing of
the introduction of competing products into the market could affect the market
acceptance and market share of our products. Our failure to compete successfully
could materially and adversely affect our business, financial condition, results
of operation and prospects.





Changes
in economic conditions and consumer confidence in China may influence the retail
industry, consumer preferences and spending patterns.





Our
business and revenue growth primarily depend on the size of the retail market of
pharmaceutical products in China. As a result, our revenue and profitability may
be negatively affected by changes in national, regional or local economic
conditions and consumer confidence in China. In particular, as we focus our
expansion of retail stores in metropolitan markets, where living standards and
consumer purchasing power are relatively high, we are especially susceptible to
changes in economic conditions, consumer confidence and customer preferences of
the urban Chinese population. External factors beyond our control that affect
consumer confidence include unemployment rates, levels of personal disposable
income, national, regional or local economic conditions and acts of war or
terrorism. Changes in economic conditions and consumer confidence could
adversely affect consumer preferences, purchasing power and spending patterns.
In addition, acts of war or terrorism may cause damage to our facilities,
disrupt the supply of the products and services we offer in our stores or
adversely impact consumer demand. Any of these factors could have a material
adverse effect on our business, financial condition and results of
operations.


19





The
retail prices of some of our products are subject to control, including periodic
downward adjustment, by PRC governmental authorities.





An
increasing percentage of our pharmaceutical products, primarily those included
in the national and provincial medical insurance catalogs, are subject to price
controls in the form of fixed retail prices or retail price ceilings. See
“Government Approval and Regulation of Our Principal Products or Services— Price Controls” above.
In addition, the retail prices of these products are also subject to periodic
downward adjustments as the PRC governmental authorities seek to make
pharmaceutical products more affordable to the general public. Since
May 1998, the relevant PRC governmental authorities have ordered price
reductions of thousands of pharmaceutical products. The latest price reduction
occurred in December 2007 and affected 47 different pharmaceutical
products, none of which is sold in our stores. Any future price controls or
government mandated price reductions may have a material adverse affect on our
financial condition and results of operations, including significantly reducing
our revenue and profitability.





Our
retail operations require a number of permits and licenses in order to carry on
their business.





Drugstores
in China are required to obtain certain permits and licenses from various PRC
governmental authorities, including GSP certification. We are also required to
obtain food hygiene certificates for the distribution of nutritional supplements
and food products. We cannot assure you that we can maintain all required
licenses, permits and certifications to carry on our business at all times, and
from time to time we may have not been in compliance with all such required
licenses, permits and certifications. Moreover, these licenses, permits and
certifications are subject to periodic renewal and/or reassessment by the
relevant PRC governmental authorities and the standards of such renewal or
reassessment may change from time to time. We intend to apply for the renewal of
these licenses, permits and certifications when required by applicable laws and
regulations. Any failure by us to obtain and maintain all licenses, permits and
certifications necessary to carry on our business at any time could have a
material adverse effect on our business, financial condition and results of
operations. In addition, any inability to renew these licenses, permits and
certifications could severely disrupt our business, and prevent us from
continuing to carry on our business. Any changes in the standards used by
governmental authorities in considering whether to renew or reassess our
business licenses, permits and certifications, as well as any enactment of new
regulations that may restrict the conduct of our business, may also decrease our
revenue and/or increase our costs and materially reduce our profitability and
prospects. Furthermore, if the interpretation or implementation of existing laws
and regulations changes or if new regulations come into effect requiring us to
obtain any additional licenses, permits or certifications that were previously
not required to operate our existing businesses, we cannot assure you that we
may successfully obtain such licenses, permits or certifications.





The
continued penetration of counterfeit products into the retail market in China
may damage our brand and reputation and have a material adverse effect on our
business, financial condition, results of operations and prospects.





There has
been continued penetration of counterfeit products into the pharmaceutical
retail market in China. Counterfeit products are generally sold at lower prices
than the authentic products due to their low production costs, and in some cases
are very similar in appearance to the authentic products. Counterfeit
pharmaceuticals may or may not have the same chemical content as their authentic
counterparts, and are typically manufactured without proper licenses or
approvals as well as fraudulently mislabeled with respect to their content
and/or manufacturer. Although the PRC government has been increasingly active in
combating counterfeit pharmaceutical and other products, there is not yet an
effective counterfeit pharmaceutical product regulation control and enforcement
system in China. Although we have implemented a series of quality control
procedures in our procurement process, we cannot assure you that we would not be
selling counterfeit pharmaceutical products inadvertently. Any unintentional
sale of counterfeit products may subject us to negative publicity, fines and
other administrative penalties or even result in litigation against us.
Moreover, the continued proliferation of counterfeit products and other products
in recent years may reinforce the negative image of retailers among consumers in
China, and may severely harm the reputation and brand name of companies like us.
The continued proliferation of counterfeit products in China could have a
material adverse effect on our business, financial condition, results of
operations and prospects.




20





We
may be subject to fines and penalties if we fail to comply with the applicable
PRC laws and regulations governing sales of medicines under the PRC National
Medical Insurance Program.





Eligible
participants in the PRC national medical insurance program, mainly consisting of
urban residents in China, are entitled to buy medicines using their medical
insurance cards in an authorized pharmacy, provided that the medicines they
purchase have been included in the national or provincial medical insurance
catalogs. The pharmacy, in turn, obtains reimbursement from the relevant
government social security bureaus. Moreover, the applicable PRC laws, rules and
regulations prohibit pharmacies from selling goods other than pre-approved
medicines when purchases are made with medical insurance cards. We have
established procedures to prohibit our drugstores from selling unauthorized
goods to customers who make purchases with medical insurance cards. However, we
cannot assure you that those procedures will be strictly followed by all of our
employees in all of our stores. In the past, there have been incidents involving
our store staff selling products other than pre-approved medicines to customers
who make payment with medical insurance cards, and we have been subject to
negative publicity, fines and other administrative penalties. These penalties
included the revocation of two of our stores’ status as authorized pharmacies,
and such status has not been reinstated as of the date of this annual report. If
any of our drugstores or sales personnel is found to have sold products other
than pre-approved medicines to customers who make payment with medical insurance
cards, we would be subject to fines or other penalties, and, to the extent we
have outstanding claims from government social security bureaus, those claims
could be rejected. Either of these cases could damage our reputation as well as
have a material adverse effect on our business, financial condition, results of
operations.





Risks Relating to Our
Medical Services





If
we do not attract and retain qualified physicians and other medical personnel,
our ability to provide medical services would be adversely
affected.





The success
of our medical services will be, in part, dependent upon the number and quality
of doctors, nurses and other medical support personnel that we employ and our
ability to maintain good relations with them. Our medical staff may terminate
their employment with us at any time. If we are unable to successfully maintain
good relationships with them, our ability to provide medical services may be
adversely affected.





The
provision of medical services is heavily regulated in the PRC and failure to
comply with those regulations could result in penalties, loss of licensure,
additional compliance costs or other adverse consequences.





Healthcare
providers in China, as in most other populous countries, are required to comply
with many laws and regulations at the national and local government levels.
These laws and regulations relate to: licensing; the conduct of operations; the
ownership of facilities; the addition of facilities and services;
confidentiality, maintenance and security issues associated with medical
records; billing for services; and prices for services. If we fail to comply
with applicable laws and regulations, we could suffer penalties, including the
loss of our licenses to operate. In addition, further healthcare legislative
reform is likely, and could materially adversely affect our business and results
of operations in the event we do not comply or if the cost of compliance is
expensive. The above list of certain regulated areas is not exhaustive and it is
not possible to anticipate the exact nature of future healthcare legislative
reform in China. Depending on the priorities determined by the Chinese Ministry
of Health, the political climate at any given time, the continued development of
the Chinese healthcare system and many other factors, future legislative reforms
may be highly diverse, including stringent infection control policies, improved
rural healthcare facilities, increased regulation of the distribution of
pharmaceuticals and numerous other policy matters. Consequently, the
implications of these future reforms could result in penalties, loss of
licensure, additional compliance costs or other adverse
consequences.





As
a provider of medical services, we are exposed to inherent risks relating to
malpractice claims.





As a
provider of medical services, any misdiagnosis or improper treatment may result
in adverse publicity regarding us, which would harm our reputation. If we are
found liable for malpractice claims, we could be required to pay substantial
monetary damages. Furthermore, even if we successfully defend ourselves against
this type of claim, we could be required to spend significant management,
financial and other resources, which could disrupt our business, and our
reputation as well as our brand name may also suffer. Because malpractice claims
are not common in China, we do not carry malpractice insurance. As a result, any
imposition of malpractice liability could materially harm our business,
financial condition and results of operations.





We
face competition that could adversely affect our results of
operations.





Our
clinics compete with a large number and variety of healthcare facilities in
their respective markets. There are numerous government-run and private
hospitals and clinics available to the general populace. There can be no
assurance that these or other clinics, hospitals or other facilities will not
commence or expand such operations, which would increase their competitive
position. Further, there can be no assurance that a healthcare organization,
having greater resources in the provision or management of healthcare services,
will not decide to engage in operations similar to those being conducted by us
in Hangzhou.


21





Risks Related to Our
Corporate Structure




In order to
comply with Chinese regulations limiting foreign ownership of Chinese pharmacy
chain operating 30 or more stores and limiting foreign ownership of Chinese
medical clinics to Sino-foreign joint venture, we conduct our drugstore business
through Jiuzhou Pharmacy and our clinics through Jiuzhou Clinic and Jiuzhou
Service by means of contractual arrangements. If the Chinese government
determines that these contractual arrangements do not comply with applicable
regulations, our business could be adversely affected. If the PRC
regulatory bodies determine that the agreements that establish the structure for
operating our business in China do not comply with PRC regulatory restrictions
on foreign investment in drugstore and medical practice, we could be subject to
severe penalties. In addition,
changes in such Chinese laws and regulations may materially and adversely affect
our business.





Current
PRC regulations limit any foreign investor’s ownership of drugstores to 49.0% if
the investor owns interests in more than 30 drugstores in China that sell a
variety of branded pharmaceutical products sourced from different suppliers.
Since we do not own any equity interests in Jiuzhou Pharmacy, but controls the
drugstore chain through contractual arrangements with our WFOE, Jiuxin
Management, we have been advised by our PRC counsel that the regulations on
foreign ownership of drugstores do not apply to Jiuzhou Pharmacy even if the
chain expands beyond 30 stores. Similarly, foreign ownership of medical practice
in China is limited to means of Sino-foreign joint venture. Since we do not have
actual equity interest in Jiuzhou Clinic or Jiuzhou Service, but control these
entities through contractual arrangements, the PRC regulations restricting
foreign ownership of medical practice are not applicable to us or our
structure.





There
are, however, uncertainties regarding the interpretation and application of PRC
laws, rules and regulations, including but not limited to the laws, rules and
regulations governing the validity and enforcement of our contractual
arrangements. Although we have been advised by our PRC counsel, that based on
their understanding of the current PRC laws, rules and regulations, the
structure for operating our business in China (including our corporate structure
and contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou
Service and their respective owners) comply with all applicable PRC laws, rules
and regulations, and do not violate, breach, contravene or otherwise conflict
with any applicable PRC laws, rules or regulations, we cannot assure you that
the PRC regulatory authorities will not determine that our corporate structure
and contractual arrangements violate PRC laws, rules or regulations. If the PRC
regulatory authorities determine that our contractual arrangements are in
violation of applicable PRC laws, rules or regulations, our contractual
arrangements will become invalid or unenforceable. In addition, new PRC laws,
rules and regulations may be introduced from time to time to impose additional
requirements that may be applicable to our contractual arrangements. For
example, the PRC Property Rights Law that became effective on October 1,
2007 may require us to register with the relevant government authority the
security interests on the equity interests in Jiuzhou Pharmacy, Jiuzhou Clinic
and Jiuzhou Service granted to us under the equity pledge agreements that are
part of the contractual arrangements. If we are required to register such
security interests, failure to complete such registration in a timely manner may
result in such equity pledge agreements to be unenforceable against third party
claims.





The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.


22





If we,
Jiuxin Management, Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service are
determined to be in violation of any existing or future PRC laws, rules or
regulations or fail to obtain or maintain any of the required governmental
permits or approvals, the relevant PRC regulatory authorities would have broad
discretion in dealing with such violations, including:





·
            revoking
      the business and operating licenses of our PRC consolidated
      entities;





·
            discontinuing
      or restricting the operations of our PRC consolidated
      entities;





·
            imposing
      conditions or requirements with which we or our PRC consolidated entities
      may not be able to comply;





·
            requiring
      us or our PRC consolidated entities to restructure the relevant ownership
      structure or operations;





·
            restricting
      or prohibiting our use of the proceeds from our initial public offering to
      finance our business and operations in China;
or





·
            imposing
      fines.





The
imposition of any of these penalties would severely disrupt our ability to
conduct business and have a material adverse effect on our financial condition,
results of operations and prospects.





We
may be adversely affected by complexity, uncertainties and changes in Chinese
regulation of drugstores and the practice of medicine.




The
Chinese government regulates drugstores and the practice of medicine including
foreign ownership, and the licensing and permit requirements. These laws and
regulations are relatively new and evolving, and their interpretation and
enforcement involve significant uncertainty. As a result, in certain
circumstances it may be difficult to determine what actions or omissions may be
deemed to be a violation of applicable laws and regulations. Issues, risks and
uncertainties relating to Chinese government regulation of the industry include
the following:





·
            we
      only have contractual control over Jiuzhou Pharmacy, Jiuzhou Clinic and
      Jiuzhou Service. We do not own them due to the restriction of foreign
      investment in pharmacy chains with 30 or more drugstores and foreign
      ownership of medical practice; and





·
            uncertainties
      relating to the regulation of drugstores and medical practice in China,
      including evolving licensing practices, means that permits, licenses or
      operations at our company may be subject to challenge. This may disrupt
      our business, or subject us to sanctions, requirements to increase capital
      or other conditions or enforcement, or compromise enforceability of
      related contractual arrangements, or have other harmful effects on
      us.





The
interpretation and application of existing Chinese laws, regulations and
policies and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, pharmaceutical businesses in China,
including our business.




Our
contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service
and their respective owners may not be as effective in providing control over
these entities as direct ownership.




We have
no equity ownership interest in Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou
Service, and rely on contractual arrangements to control and operate these
companies and their businesses. These contractual arrangements may not be as
effective in providing control over these companies as direct ownership. For
example, Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service could fail to take
actions required for our business despite its contractual obligation to do so.
If Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service fails to perform under
their agreements with us, we may have to rely on legal remedies under Chinese
law, which may not be effective. In addition, we cannot assure you that the
respective owners of Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service will
act in our best interests.


23





Because
we rely on contractual arrangements to control HJ Group and for our revenue, the
termination of such agreements will severely and detrimentally affect our
continuing business viability under our current corporate
structure.





We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between our WFOE Jiuxin Management, and
each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service. All of our
business operations are conducted by, and we derive all of our revenues from,
the three HJ Group companies. Because neither we nor our subsidiaries own equity
interests of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, the
termination of the contractual arrangements would sever our ability to continue
receiving payments from these companies under our current holding company
structure.





As we do
not have any equity interests in any of the HJ Group companies, in the event the
contractual arrangements terminate, we will lose our control over them and their
business operations, as well as our sole source of revenues. Should this occur,
we may seek to acquire control of the HJ Group companies through other means,
although we cannot guarantee that we will do so, nor can we guarantee that we
will be successful if we do.





We cannot
assure you that there will not be any event or reason that may cause the
contractual arrangements to terminate. In the event that the contractual
arrangements are terminated for any reason, this may have a severe and
detrimental effect on our continuing business viability under our current
corporate structure, which in turn may affect the value of your
investment.





We
rely principally on dividends paid by our consolidated operating entities to
fund any cash and financing requirements we may have, and any limitation on the
ability of our consolidated PRC entities to pay dividends to us could have a
material adverse effect on our ability to conduct our business.





We are a
holding company, and rely principally on dividends paid by our consolidated PRC
operating entities for cash requirements, including the funds necessary to
service any debt we may incur. In particular, we rely on earnings generated by
each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, which are passed
on to us through Jiuxin Management. If any of the consolidated operating
entities incurs debt in its own name in the future, the instruments governing
the debt may restrict dividends or other distributions on its equity interest to
us. In addition, the PRC tax authorities may require us to adjust our taxable
income under the contractual arrangements in a manner that would materially and
adversely affect our ability to pay dividends and other distributions on our
equity interest.





Furthermore,
applicable PRC laws, rules and regulations permit payment of dividends by our
consolidated PRC entities only out of their retained earnings, if any,
determined in accordance with PRC accounting standards. Under PRC laws, rules
and regulations, our consolidated PRC entities are required to set aside at
least 10.0% of their after-tax profit based on PRC accounting standards each
year to their statutory surplus reserve fund until the accumulative amount of
such reserves reach 50.0% of their respective registered capital. As a result,
our consolidated PRC entities are restricted in their ability to transfer a
portion of their net income to us whether in the form of dividends, loans or
advances. As of March 31, 2009, our restricted reserves totaled RMB 9.5 million
(US $1.3 million) and we had unrestricted retained earnings of RMB
30.4 million (US $5.0 million). Our restricted reserves are not
distributable as cash dividends. Any limitation on the ability of our
consolidated operating entities to pay dividends to us could materially and
adversely limit our ability to grow, make investments or acquisitions that could
be beneficial to our businesses, pay dividends or otherwise fund and conduct our
business.


24





Management
members of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service have potential
conflicts of interest with us, which may adversely affect our business and your
ability for recourse.




Lei Liu,
our chief executive officer and chairman of the board of directors, is also the
executive director of Jiuzhou Pharmacy, a general partner of Jiuzhou Clinic, and
the supervising director of Jiuzhou Service. Chongan Jin, who is one of our
directors, is the supervising director of Jiuzhou Pharmacy, the managing general
partner of Jiuzhou Clinic, and the executive director of Jiuzhou Service. Li Qi,
who is the general manager of each of Jiuzhou Pharmacy, Jiuzhou Clinic and
Jiuzhou Service and a general partner of Jiuzhou Clinic, is also a member
of our board of directors. Conflicts of interests between their respective
duties to our company and HJ Group may arise. As our directors and executive
officer (in the case of Mr. Liu), they have a duty of loyalty and care to us
under U.S. and Hong Kong law when there are any potential conflicts of interests
between our company and HJ Group. We cannot assure you, however, that when
conflicts of interest arise, every one of them will act completely in our
interests or that conflicts of interests will be resolved in our favor. For
example, they may determine that it is in HJ Group’s interests to sever the
contractual arrangements with Jiuxin Management, irrespective of the effect such
action may have on us. In addition, any one of them could violate his or her
legal duties by diverting business opportunities from us to others, thereby
affecting the amount of payment that HJ Group is obligated to remit to us under
the consulting services agreement.





In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against HJ Group or
our officers or directors who are members of HJ Group’s management, all of whom
reside within China. Even if you are successful in bringing an action, the laws
of China may render you unable to enforce a judgment against the assets of
Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service and their respective
management, all of which are located in China.





Risks Related to Doing
Business in China




The
three HJ Group companies are subject to restrictions on making payments to
us.




We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than our indirect investments in the three HJ Group
companies. As a result of our holding company structure, we rely entirely on
payments from these companies under their contractual arrangements with our
WFOE, Jiuxin Management. The Chinese government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. See “Government
control of currency conversion may affect the value of your investment.”
Furthermore, if our affiliated entity in China incurs debt on their own in the
future, the instruments governing the debt may restrict their ability to make
payments. If we are unable to receive all of the revenues from our operations
through these contractual arrangements, we may be unable to pay dividends on our
ordinary shares.




Uncertainties
with respect to the Chinese legal system could adversely affect us.




We
conduct our business primarily through the three HJ Group companies, all of
which are PRC entities. Our operations in China are governed by Chinese laws and
regulations. We are generally subject to laws and regulations applicable to
foreign investments in China and, in particular, laws applicable to wholly
foreign-owned enterprises. The Chinese legal system is based on written
statutes. Prior court decisions may be cited for reference but have limited
precedential value.





Since
1979, Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is
based in part on government policies and internal rules (some of which are not
published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.


25





You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.




We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Jiuxin Management and the three
HJ Group companies. In addition, all of HJ Group’s assets are located in, and
all of our other senior executive officers (excepting our chief financial
officer) reside within, China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon our
senior executive officers and directors not residing in the United States,
including with respect to matters arising under U.S. federal securities laws or
applicable state securities laws. Moreover, our Chinese counsel has advised us
that China does not have treaties with the United States or many other countries
providing for the reciprocal recognition and enforcement of judgment of courts.
As a result, our public shareholders may have substantial difficulty in
protecting their interests through actions against our management or directors
than would shareholders of a corporation with assets and management members
located in the United States.




We
may need to obtain additional governmental approvals to open new drugstores. Our
inability to obtain such approvals will have a material adverse effect on our
business and growth.





According
to the Measures on the Administration of Foreign Investment in the Commercial
Sector promulgated by the PRC Ministry of Commerce (the “Measures”), which
became effective on June 1, 2004, a company that is directly owned by a
foreign invested enterprise needs to obtain relevant governmental approvals
before it opens new retail stores. However, there are no specific laws, rules or
regulations with respect to whether it is necessary for a company contractually
controlled by a foreign invested enterprise to obtain approvals to open new
retail stores. In addition, the Measures state that PRC Ministry of Commerce
will promulgate a detailed implementation regulation to govern foreign invested
enterprises engaging in drug sale. However, such implementation regulation has
not yet been promulgated. Therefore we cannot assure you that the PRC Ministry
of Commerce will not require that such approvals to be obtained. If additional
governmental approval is deemed to be necessary and we are not able to obtain
such approvals on a timely basis or at all, our business, financial condition,
results of operations and prospects, as well as the trading price of our common
stock, will be materially and adversely affected.





Governmental
control of currency conversion may affect the value of your
investment.




The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our income is primarily derived from payments from the three HJ Group companies.
Shortages in the availability of foreign currency may restrict the ability of
our subsidiaries and our PRC affiliated entities to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency denominated obligations. Under existing Chinese foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from
China State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The Chinese government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may
not be able to pay dividends in foreign currencies to our
stockholders.





Fluctuation
in the value of RMB may have a material adverse effect on your
investment.




The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues, costs, and financial assets are mostly denominated in RMB while
our reporting currency is the U.S. dollar. Accordingly, this may result in gains
or losses from currency translation on our financial statements.  We
rely entirely on fees paid to us by our affiliated entities in China. Therefore,
any significant fluctuation in the value of RMB may materially and adversely
affect our cash flows, revenues, earnings and financial position, and the value
of, and any dividends payable on, our stock in U.S. dollars. For example, an
appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes. An appreciation of RMB against
the U.S. dollar would also result in foreign currency translation losses for
financial reporting purposes when we translate our U.S. dollar denominated
financial assets into RMB, as RMB is our reporting currency.


26





Dividends
we receive from our subsidiary located in the PRC may be subject to PRC
withholding tax.





The
recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the
implementation regulations for the EIT Law issued by the PRC State Council,
became effective as of January 1, 2008. The EIT Law provides that a maximum
income tax rate of 20% is applicable to dividends payable to non-PRC investors
that are “non-resident enterprises,” to the extent such dividends are derived
from sources within the PRC, and the State Council has reduced such rate to 10%
through the implementation regulations. We are a Nevada holding company and
substantially all of our income is derived from the operations of the three HJ
Group companies located in the PRC, who are contractually obligated to pay their
quarterly profits to our WFOE. Therefore, dividends paid to us by our
WFOE  in China may be subject to the 10% income tax if we are
considered as a “non-resident enterprise” under the EIT Law. If we are required
under the EIT Law and its implementation regulations to pay income tax for any
dividends we receive from our WFOE, it may have a material and adverse effect on
our net income and materially reduce the amount of dividends, if any, we may pay
to our shareholders.





Governmental
control of currency conversion may affect the value of your
investment.





The PRC
government imposes controls on the convertibility of the RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive all our revenues in RMB. Under our current corporate structure, our
income is primarily derived from dividend payments from our WFOE. Shortages in
the availability of foreign currency may restrict the ability of our WFOE to
remit sufficient foreign currency to pay dividends or other payments to us, or
otherwise satisfy their foreign currency-denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade related
transactions, can be made in foreign currencies without prior approval from the
SAFE by complying with certain procedural requirements. However, approval from
the SAFE or its local branch is required where RMB is to be converted into
foreign currency and remitted out of China to pay capital expenses such as the
repayment of loans denominated in foreign currencies. The PRC government may
also at its discretion restrict access in the future to foreign currencies for
current account transactions. If the foreign exchange control system prevents us
from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay dividends in foreign currencies to our
shareholders.





We
face risks related to health epidemics and other outbreaks.




Our
business could be adversely affected by the effects of an epidemic outbreak,
such as the SARS epidemic in April 2004. Any prolonged recurrence of such
adverse public health developments in China may have a material adverse effect
on our business operations. For instance, health or other government regulations
adopted in response may require temporary closure of our stores or offices. Such
closures would severely disrupt our business operations and adversely affect our
results of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.





Risks Related to an
Investment in Our Securities




To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.




We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for our
operations.





The
application of the "penny stock" rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.




As long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the "penny stock" rules. The
"penny stock" rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received the
purchaser's written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.


27




The
OTC Bulletin Board is a quotation system, not an issuer listing service, market
or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is
not as efficient as buying and selling stock through an exchange. As a result,
it may be difficult for you to sell your common stock or you may not be able to
sell your common stock for an optimum trading price.





The OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter securities. Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.





When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace the ability to
deliver accurate quote information. Lower trading volumes in a security may
result in a lower likelihood of an individual’s orders being executed, and
current prices may differ significantly from the price one was quoted by the OTC
Bulletin Board at the time of the order entry.





Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices.





The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid
price for securities bought and sold through the OTC Bulletin Board. Due to the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.





Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.




We cannot
predict the extent to which an active public market for our common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq National Market or other exchanges.





Our
common shares have historically been sporadically or "thinly-traded" on the OTC
Bulletin Board, meaning that the number of persons interested in purchasing our
common shares at or near bid prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.


28





The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.





The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes,
additions or departures of our key personnel, as well as other items discussed
under this "Risk Factors" section, as well as elsewhere in this current report.
Many of these factors are beyond our control and may decrease the market price
of our common shares, regardless of our operating performance. We cannot make
any predictions or projections as to what the prevailing market price for our
common shares will be at any time, including as to whether our common shares
will sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price. However, we do not rule out the possibility of
applying for listing on the Nasdaq National Market or other
exchanges.





Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse. Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.





Volatility
in our common share price may subject us to securities litigation.




The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
In the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its
securities. We may, in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.


29





Our
officers and directors own a substantial portion of our outstanding common
stock, which will enable them to influence many significant corporate actions
and in certain circumstances may prevent a change in control that would
otherwise be beneficial to our shareholders.





As of the
date of this report, our directors and executive officers collectively control
approximately 63.8% of our outstanding shares of capital stock that are entitled
to vote on all corporate actions. These stockholders, acting together, could
have a substantial impact on matters requiring the vote of the shareholders,
including the election of our directors and most of our corporate actions. This
control could delay, defer or prevent others from initiating a potential merger,
takeover or other change in our control, even if these actions would benefit our
shareholders and us. This control could adversely affect the voting and other
rights of our other shareholders and could depress the market price of our
common stock.




The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.




Our
bylaws contain specific provisions that eliminate the liability of our directors
for monetary damages to our company and shareholders, and we are prepared to
give such indemnification to our directors and officers to the extent provided
by Nevada law. We may also have contractual indemnification obligations under
our employment agreements with our officers. The foregoing indemnification
obligations could result in our company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant costs may also
discourage our company from bringing a lawsuit against directors and officers
for breaches of their fiduciary duties, and may similarly discourage the filing
of derivative litigation by our shareholders against our directors and officers
even though such actions, if successful, might otherwise benefit our company and
shareholders.




Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.




There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.




The
market price for our stock may be volatile.




The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:





·
            actual
      or anticipated fluctuations in our quarterly operating
      results;





·
            changes
      in financial estimates by securities research
  analysts;





·
            conditions
      in the retail pharmacy markets;





·
            changes
      in the economic performance or market valuations of other retail pharmacy
      operators;





·
            announcements
      by us or our competitors of new products, acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;





·
            addition
      or departure of key personnel;


30





·
            fluctuations
      of exchange rates between RMB and the U.S.
  dollar;





·
            intellectual
      property litigation; and





·
            general
      economic or political conditions in
China.




In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.




We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.




We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from a proposed offering will be sufficient to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.




If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.




We are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to and report on management’s assessment of the effectiveness
of our internal controls over financial reporting. Our management may conclude
that our internal controls over our financial reporting are not effective.
Moreover, even if our management concludes that our internal controls over
financial reporting are effective, our independent registered public accounting
firm may still decline to attest to our management’s assessment or may issue a
report that is qualified if it is not satisfied with our controls or the level
at which our controls are documented, designed, operated or reviewed, or if it
interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our stock. Furthermore, we anticipate that we will incur considerable costs and
use significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley Act.


We
will incur increased costs as a result of being a public company.




As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company prior to the Exchange. We will
incur costs associated with our public company reporting requirements. We also
anticipate that we will incur costs associated with recently adopted corporate
governance requirements, including certain requirements under the Sarbanes-Oxley
Act of 2002, as well as new rules implemented by the SEC and the Financial
Industry Regulatory Authority (“FINRA”). We expect these rules and regulations,
in particular Section 404 of the Sarbanes-Oxley Act of 2002, to significantly
increase our legal and financial compliance costs and to make some activities
more time-consuming and costly. Like many smaller public companies, we face a
significant impact from required compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies
to evaluate the effectiveness of internal control over financial reporting and
the independent auditors to attest to the effectiveness of such internal
controls and the evaluation performed by management. The SEC has adopted rules
implementing Section 404 for public companies as well as disclosure
requirements. The Public Company Accounting Oversight Board, or PCAOB, has
adopted documentation and attestation standards that the independent auditors
must follow in conducting its attestation under Section 404. We are currently
preparing for compliance with Section 404; however, there can be no assurance
that we will be able to effectively meet all of the requirements of Section 404
as currently known to us in the currently mandated timeframe. Any failure to
implement effectively new or improved internal controls, or to resolve
difficulties encountered in their implementation, could harm our operating
results, cause us to fail to meet reporting obligations or result in management
being required to give a qualified assessment of our internal controls over
financial reporting or our independent auditors providing an adverse opinion
regarding management’s assessment. Any such result could cause investors to lose
confidence in our reported financial information, which could have a material
adverse effect on our stock price.


31





We also
expect these new rules and regulations may make it more difficult and more
expensive for us to obtain director and officer liability insurance and we may
be required to accept reduced policy limits and coverage or incur substantially
higher costs to obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified individuals to serve on our
board of directors or as executive officers. We are currently evaluating and
monitoring developments with respect to these new rules, and we cannot predict
or estimate the amount of additional costs we may incur or the timing of such
costs.





Shares
eligible for future sale may adversely affect the market.





From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may sell
after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Of the
approximately 20 million shares of our common stock outstanding as of September
17, 2009, approximately 1.55 million shares are, or will be, freely
tradable without restriction, unless held by our "affiliates", as
of September 17, 2009. Any substantial sale of our common stock pursuant to
Rule 144 or pursuant to any resale prospectus (including sales by investors of
securities acquired in connection with this Offering) may have a material
adverse effect on the market price of our common stock.





We
do not anticipate paying any cash dividends.





We
presently do not anticipate that we will pay any dividends on any of our capital
stock in the foreseeable future. The payment of dividends, if any, would be
contingent upon our revenues and earnings, if any, capital requirements, and
general financial condition. The payment of any dividends is within the
discretion of our board of directors. We presently intend to retain all
earnings, if any, to implement our business plan; accordingly, we do not
anticipate the declaration of any dividends in the foreseeable
future.





Past company activities prior to the reverse merger may lead to
future liability for the company.





Prior to
our acquisition of Renovation HK in September 2009, we were engaged in
businesses unrelated to our current operations. Although the prior business
owners provided certain indemnifications against any loss, liability, claim,
damage or expense arising out of or based on any breach of or inaccuracy in any
of their representations and warranties made regarding such acquisition, any
liabilities relating to such prior business against which we are not completely
indemnified may have a material adverse effect on us.





Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.





As
reported in our current report on Form 8-K filed on September 24, 2009, we
issued 15,800,000 shares of common stock to the shareholders of Renovation in
exchange for 100% of the issued and outstanding capital stock of Renovation
pursuant to Regulation D and Regulation S promulgated under the Securities Act
of 1933, as amended.


32





Item 3. Defaults upon Senior Securities.




None





Item 4. Submission of Matters to a Vote of Securities
Holders.





None





Item 5. Other Information.





None




Item 6. Exhibits.





EXHIBIT
INDEX





Exhibit
                    Number
                  
                  Description2.1
                  
                  Share
      Exchange Agreement among Kerrisdale Mining
      Corporation (“Kerrisdale”), certain stockholders of Kerrisdale,
      Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”) and the
      shareholders of Renovation dated September 17, 2009 (4)3.1
                  
                  Articles
      of Incorporation of Kerrisdale as filed with the State of Nevada
      (2)3.2
                  
                  Certificate
      of Amendment to Articles of Incorporation of Kerrisdale
  (3)3.3
                  
                  Articles
      of Merger of Kerrisdale as filed with the State of Nevada
    (4)3.4
                  
                  Bylaws
      of Kerrisdale (2)3.5
                  
                  Text
      of Amendments to the Bylaws of Kerrisdale (3)31.1
                  
                  Section
      302 Certification by the Corporation’s Chief Executive Officer
      (1)31.2
                  
                  Section
      302 Certification by the Corporation’s Chief Financial Officer
      (1)32.1
                  
                  Section
      906 Certification by the Corporation’s Chief Executive Officer
      (1)32.2
                  
                  Section
      906 Certification by the Corporation’s Chief Financial Officer
      (1)99.1
                  
                  Letters
      of resignation and waiver of accrued compensation by Huoqi Chen to the
      Board of Directors of Kerrisdale (4)99.2
                  
                  Audited
      consolidated financial statements of Renovation for the years ended March
      31, 2009 and 2008 (4)99.3
                  
                  Unaudited
      consolidated financial statements of Renovation for the three months ended
      June 30, 2009 and 2008 (4)99.4
                  
                  Reserved99.5
                  
                  Consulting
      Services Agreement between Jiuxin Management and Jiuzhou Pharmacy dated
      August 1, 2009 (4)99.6
                  
                  Operating
      Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
      August 1, 2009 (4)99.7
                  
                  Equity
      Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners
      dated August 1, 2009 (4)99.8
                  
                  Option
      Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
      August 1, 2009 (4)99.9
                  
                  Voting
      Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its
      owners dated August 1, 200999.10
                  
                  Consulting
      Services Agreement between Jiuxin Management and Jiuzhou Clinic dated
      August 1, 2009 (4)99.11
                  
                  Operating
      Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
      August 1, 2009 (4)99.12
                  
                  Equity
      Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners
      dated August 1, 2009 (4)99.13
                  
                  Option
      Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
      August 1, 200999.14
                  
                  Voting
      Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its
      owners dated August 1, 2009
(4)




33




99.15
            
            Consulting
      Services Agreement between Jiuxin Management and Jiuzhou Service dated
      August 1, 2009 (4)99.16
            
            Operating
      Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
      August 1, 2009 (4)99.17
            
            Equity
      Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners
      dated August 1, 2009 (4)99.18
            
            Option
      Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
      August 1, 2009 (4)99.19
            
            Voting
      Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its
      owners dated August 1, 2009 (4)99.20
            
            Agreement
      between Jiuzhou Pharmacy and Yingte Logistics dated January 1, 2009
      (4)







(1)
            Filed
      herewith.(2)
            Filed
      as an Exhibit to Form SB-2 filed with the SEC on June 30,
      2006.(3)
            Filed
      as an Exhibit to current report on Form 8-K filed with the SEC on July 15,
      2008.(4)
            Filed
      as an Exhibit to current report on Form 8-K filed with the SEC on
      September 24, 2009.





34


SIGNATURES





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





November
      16, 2009
                China
      Jo-Jo Drugstores, Inc.By:
                /s/
      Lei LiuLei
      Liu
                  Chief
      Executive Officer
                  (Principal
      Executive Officer)By:
                /s/
      Bennet P. TchaikovskyBennet
      P. Tchaikovsky
                  Chief
      Financial Officer
                  (Principal
      Financial and Accounting
Officer)




35