UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549











FORM
10-Q





(Mark
One)


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





For the
quarterly period ended:December 31, 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 February 4,
2010.
  Transitional Small
Business Disclosure Form (Check one): Yes x No
 ̈


TABLE
OF CONTENTS


QUARTERLY
REPORT ON FORM 10-Q


FOR
NINE MONTHS ENDED DECEMBER 31, 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
            
            13Item 4.
            Controls and Procedures
            
            13PART II
            OTHER INFORMATION
            
            14Item 1.
            Legal Proceedings
            
            14Item 1A.
            Risk Factors
            
            14Item 2.
            Unregistered Sales of Equity Securities and Use
      of Proceeds
            
            37Item 3.
            Defaults Upon Senior Securities
            
            37Item 4.
            Submission of Matters to a Vote of Security
      Holders
            
            37Item 5.
            Other Information
            
            37Item 6.
            Exhibits
            
            38Signatures
            
            
            39







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.








PART I - FINANCIAL INFORMATION





Item 1. Financial Statements




CHINA JO-JO DRUGSTORES, INC AND
      SUBSIDIARIES(FORMERLY
      KNOWN AS KERRISDALE MINING CORPORATION)CONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31, 2009 AND MARCH 31, 2009A S S E T SDecember
      30,
              
              
              March
      31,2009
              
              
              2009(Unaudited)CURRENT
      ASSETSCash
              
              $
              1,226,929
              
              
              $
              996,302Restricted
      cash
              
              
              362,349
              
              
              
              -Accounts
      receivable, trade
              
              
              1,922,664
              
              
              
              1,265,110Inventories
              
              
              3,527,071
              
              
              
              2,793,101Other
      receivables
              
              
              364,574
              
              
              
              67,079Other
      receivables - related parties
              
              
              -
              
              
              
              2,432Advances
      to suppliers
              
              
              6,813,318
              
              
              
              5,485,113Advances
      to supplier - related party
              
              
              2,190,826
              
              
              
              1,797,104Other
      current assets
              
              
              1,455,707
              
              
              
              564,379Total
      current assets
              
              
              17,863,438
              
              
              
              12,970,620PROPERTY
      AND EQUIPMENT, net
              
              
              911,001
              
              
              
              979,432OTHER
      ASSETS:Long
      term deposit
              
              
              2,326,829
              
              
              
              2,015,149Total
      assets
              
              $
              21,101,268
              
              
              $
              15,965,201L I A B I L I T I E S    A N
      D    S H A R E H O L D E R S'   E Q U I
      T YCURRENT
      LIABILITIESShort
      term loans
              
              $
              1,467,000
              
              
              $
              1,465,000Notes
      payable
              
              
              720,816
              
              
              
              -Accounts
      payable, trade
              
              
              3,217,895
              
              
              
              5,939,237Other
      payables
              
              
              1,158,763
              
              
              
              404,731Other
      payables - related party
              
              
              333,029
              
              
              
              326,715Taxes
      payable
              
              
              1,125,652
              
              
              
              811,316Accrued
      liabilities
              
              
              248,481
              
              
              
              360,655Total
      liabilities
              
              
              8,271,636
              
              
              
              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 outstandingas
      of December 31, 2009 and March 31, 2009, respectively
              
              
              20,000
              
              
              
              15,800Paid-in
      capital
              
              
              867,884
              
              
              
              661,800Statutory
      reserves
              
              
              1,309,109
              
              
              
              1,309,109Retained
      earnings
              
              
              10,982,385
              
              
              
              5,033,275Accumulated
      other comprehensive loss
              
              
              (349,746
              )
              
              
              (362,437
              )Total
      shareholders' equity
              
              
              12,829,632
              
              
              
              6,657,547Total
      liabilities and shareholders' equity
              
              $
              21,101,268
              
              
              $
              15,965,201The accompanying notes are an integral part of
      these financial statements.




F-1




CHINA JO-JO DRUGSTORES, INC AND
      SUBSIDIARIES(FORMERLY
      KNOWN AS KERRISDALE MINING CORPORATION)CONSOLIDATED
      STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOMEFOR
      THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008(Unaudited)Three
      months ended
              
              
              Nine
      months endedDecember
      31,
              
              
              December
      31,2009
              
              
              2008
              
              
              2009
              
              
              2008REVENUES
              
              $
              14,923,706
              
              
              $
              11,562,762
              
              
              $
              38,863,743
              
              
              $
              33,096,321COST
      OF GOODS SOLD
              
              
              10,156,871
              
              
              
              8,238,078
              
              
              
              27,574,136
              
              
              
              24,139,585GROSS
      PROFIT
              
              
              4,766,835
              
              
              
              3,324,684
              
              
              
              11,289,607
              
              
              
              8,956,736SELLING
      EXPENSES
              
              
              912,312
              
              
              
              487,395
              
              
              
              1,986,471
              
              
              
              1,280,838GENERAL
      & ADMINISTRATIVE EXPENSES
              
              
              441,861
              
              
              
              111,386
              
              
              
              1,372,205
              
              
              
              614,987OPERATING
      EXPENSES
              
              
              1,354,173
              
              
              
              598,781
              
              
              
              3,358,676
              
              
              
              1,895,825INCOME  FROM
      OPERATIONS
              
              
              3,412,662
              
              
              
              2,725,903
              
              
              
              7,930,931
              
              
              
              7,060,911OTHER
      INCOME (EXPENSE), NET
              
              
              31,557
              
              
              
              6,448
              
              
              
              41,800
              
              
              
              (9,190
              )INCOME
      BEFORE INCOME TAXES
              
              
              3,444,219
              
              
              
              2,732,351
              
              
              
              7,972,731
              
              
              
              7,051,721PROVISION
      FOR INCOME TAXES
              
              
              797,866
              
              
              
              736,828
              
              
              
              2,023,621
              
              
              
              1,738,462NET
      INCOME
              
              
              2,646,353
              
              
              
              1,995,523
              
              
              
              5,949,110
              
              
              
              5,313,259OTHER
      COMPREHENSIVE INCOME (LOSS)Foreign
      currency translation adjustments
              
              
              1,520
              
              
              
              (5,042
              )
              
              
              12,691
              
              
              
              32,730COMPREHENSIVE
      INCOME
              
              $
              2,647,873
              
              
              $
              1,990,481
              
              
              $
              5,961,801
              
              
              $
              5,345,989BASIC
      AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
              
              
              20,000,000
              
              
              
              15,800,000
              
              
              
              17,409,489
              
              
              
              15,800,000BASIC
      AND DILUTED EARNING PER SHARE
              
              $
              0.13
              
              
              $
              0.13
              
              
              $
              0.34
              
              
              $
              0.34The
      accompanying notes are an integral part of these financial
      statements.




F-2




CHINA JO-JO DRUGSTORES, INC AND
      SUBSIDIARIES(FORMERLY
      KNOWN AS KERRISDALE MINING CORPORATION)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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,313,259
              
              
              
              
              
              
              
              5,313,259Adjustment
      of statutory reserves
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              531,326
              
              
              
              (531,326
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              32,730
              
              
              
              32,730BALANCE,
      December 31, 2008 (unaudited)
              
              
              15,800,000
              
              
              $
              15,800
              
              
              $
              661,800
              
              
              $
              1,137,991
              
              
              $
              3,704,136
              
              
              $
              (357,395
              )
              
              $
              5,162,332Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,500,257
              
              
              
              
              
              
              
              1,500,257Adjustment
      of statutory reserves
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              171,118
              
              
              
              (171,118
              )
              
              
              
              
              
              
              -Foreign
      currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,042
              )
              
              
              (5,042
              )BALANCE,
      March 31, 2009
              
              
              15,800,000
              
              
              $
              15,800
              
              
              $
              661,800
              
              
              $
              1,309,109
              
              
              $
              5,033,275
              
              
              $
              (362,437
              )
              
              $
              6,657,547Shares
      issued for reorganization onSeptember
      17, 2009
              
              
              4,200,000
              
              
              
              4,200
              
              
              
              (4,200
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Stock-based
      compensation
              
              
              
              
              
              
              
              
              
              
              202,120
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              202,120Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,949,110
              
              
              
              
              
              
              
              5,949,110Shareholder
      contribution
              
              
              
              
              
              
              
              
              
              
              8,164
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,164Foreign
      currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,691
              
              
              
              12,691BALANCE,
      December 31, 2009 (unaudited)
              
              
              20,000,000
              
              
              $
              20,000
              
              
              $
              867,884
              
              
              $
              1,309,109
              
              
              $
              10,982,385
              
              
              $
              (349,746
              )
              
              $
              12,829,632The
      accompanying notes are an integral part of these financial
      statements.




F-3


CHINA JO-JO DRUGSTORES, INC AND
      SUBSIDIARIES(FORMERLY
      KNOWN AS KERRISDALE MINING CORPORATION)CONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008(Unaudited)2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            5,949,110
            
            
            $
            5,313,259Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
      and amortization
            
            
            389,809
            
            
            
            331,582Loss
      on fixed assets disposal
            
            
            -
            
            
            
            321Stock
      compensation
            
            
            126,325
            
            
            
            -Change
      in operating assetsAccounts
      receivable, trade
            
            
            (655,559
            )
            
            
            (516,212
            )Inventories
            
            
            (729,858
            )
            
            
            (814,081
            )Other
      receivables
            
            
            (297,283
            )
            
            
            (386,195
            )Other
      receivables - related parties
            
            
            2,435
            
            
            
            165,592Advances
      to suppliers
            
            
            (1,320,177
            )
            
            
            (3,269,792
            )Advances
      to suppliers - related parties
            
            
            (391,108
            )
            
            
            (641,987
            )Other
      current assets
            
            
            (889,536
            )
            
            
            126,672Long
      term deposit
            
            
            (308,803
            )
            
            
            -Change
      in operating liabilitiesAccounts
      payable, trade
            
            
            (2,007,814
            )
            
            
            (322,498
            )Other
      payables and accrued liabilities
            
            
            716,512
            
            
            
            (25,221
            )Other
      payables-related parties
            
            
            5,866
            
            
            
            (7,278
            )Taxes
      payable
            
            
            313,101
            
            
            
            325,495Net
      cash provided by operating activities
            
            
            903,020
            
            
            
            279,657CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of equipment
            
            
            (57,110
            )
            
            
            (22,944
            )Additions
      to leasehold improvements
            
            
            (263,619
            )
            
            
            (246,402
            )Net
      cash used in investing activities
            
            
            (320,729
            )
            
            
            (269,346
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Restricted
      cash
            
            
            (362,349
            )
            
            
            -Payments
      on short-term loans
            
            
            (1,466,400
            )
            
            
            (508,060
            )Proceeds
      from short-term loans
            
            
            1,466,400
            
            
            
            508,060Net
      cash used in financing activities
            
            
            (362,349
            )
            
            
            -EFFECT
      OF EXCHANGE RATE ON CASH
            
            
            10,685
            
            
            
            24,082INCREASE
      IN CASH
            
            
            230,627
            
            
            
            34,393CASH,
      beginning of period
            
            
            996,302
            
            
            
            878,948CASH,
      end of period
            
            $
            1,226,929
            
            
            $
            913,341The
      accompanying notes are an integral part of these financial
      statements.




F-4


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.  As the share exchange transaction was accounted
for as a reverse acquisition and recapitalization, there was no gain or loss
recognized on the transaction. The carrying values of assets, liabilities, and
equity of Renovation HK did not change. In reporting earnings per share for
periods prior to September 17, 2009, the Company used 15,800,000 shares, or the
shares issued to Renovation HK’s stockholders in exchange for 100% of the
capital stock of Renovation HK.




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.


F-5


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”):





(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.





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.





As a
result of the Contractual Arrangements and amendments thereto, 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.


F-6


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.





Consolidation of variable
interest entities





In
accordance with the 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, through Jiuxin Management, to receive a
majority of their respective expected residual returns. Accordingly, the Company
accounts for each of these three companies as a VIE.





Additionally,
as the three HJ Group 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.





Control is
defined under the accounting standard as “an individual, enterprise, or
immediate family members who hold more than 50 percent of the voting ownership
interest of each entity.” Because Lei Liu, Li Qi, and Chong’an Jin collectively
own 100% of HJ Group, the Company believes that these three individuals
collectively have control of HJ Group in accordance the accounting standard.
Accordingly, the Company believes that Jiuzhou Pharmacy, Jiuzhou Clinic and
Jiuzhou Service were constructively held under common control by Jiuxin
Management as of the time the Contractual Agreements were entered into,
establishing Jiuxin Management as their primary beneficiary. Jiuxin Management,
in turn, is owned by Renovation HK.





Although
the Company recognizes the consolidation of VIEs standard but does not provide
for retroactive accounting treatment, HJ Group in substance were controlled by
the same three individuals on September 9, 2003, October 10, 2003 and November
2, 2005, the establishment dates of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou
Service, respectively. Such common control condition resulted in the share
exchange transaction to be a capital transaction in substance, reflected as a
recapitalization, and the Company has accordingly recorded the consolidation of
Renovation HK at its historical cost.


F-7


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 assets or 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.





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.


F-8


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 December 31,
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





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.


F-9


Based on
its review, the Company believes that, as of December 31, 2009 and March 31,
2009, there was no impairment.





Income
taxes





The
Company records income taxes pursuant to the accounting standards for income
taxes. The accounting standards require the recognition of deferred income tax
liabilities and assets for the expected future tax consequences of temporary
differences between income tax basis and financial reporting basis of assets and
liabilities. Provision for income taxes consists of taxes currently due 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. The accounting standard also provides guidance on de-recognition,
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 December 31, 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-10


Advertising and promotion
costs





Advertising
and promotion costs are expensed as incurred. Advertising and promotion costs
amounted to $185,551 and $104,198 for the three months ended December 31, 2009
and 2008, respectively. Advertising and promotion costs amounted to $311,659 and
$160,188 for the nine months ended December 31, 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 December 31, 2009 and 2008, the Company recognized vendor
allowances of $81,498 and $231,685 in cost of goods sold, respectively. For the
nine months ended December 31, 2009 and 2008, the Company recognized vendor
allowances of $188,278 and $344,693 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.





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.


F-11


The
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 $349,
746 and $362,437 as of December 31, 2009 and March 31, 2009, respectively. The
balance sheet amounts with the exception of equity at December 31, 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 nine months ended December 31, 2009 and 2008 were at 1
RMB to $0.14664 USD and at 1 RMB to $0.14559 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 December 31, 2009 and March
31, 2009, the Company had deposits totaling $1,549,521 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 nine months ended December 31, 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 nine
months ended December 31, 2009 and 2008, respectively.





For the
three months ended December 31, 2009, two vendors accounted for 13% and 11% of
the Company’s total purchases and 32% of the total accounts payable and 16% of
total purchase deposit, respectively. For the nine months ended December 31,
2008, one vendor accounted for 20% of the Company’s purchase and 7% of total
accounts payable at December 31, 2008.





For the
nine months ended December 31, 2009 and 2008, one vendor accounted for 17% of
the Company’s total purchases and 15% of the total accounts payable; and 20% of
the Company’s total purchases and 7% 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-12


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. The Company adopted this
accounting standard, but it did not have a material impact on the disclosures
related to 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, but the Company does not expect this standard
to have a material effect on its consolidated financial statements.





In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.


F-13


In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.





In January
2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary.  Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary.  Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value.  In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction.  This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
 This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009.  The Company is
currently evaluating the impact of this ASU; however, the Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements.





In January
2010, FASB issued ASU No. 2010-01- Accounting for Distributions to Shareholders
with Components of Stock and Cash. The amendments in this Update clarify that
the stock portion of a distribution to shareholders that allows them to elect to
receive cash or stock with a potential limitation on the total amount of cash
that all shareholders can elect to receive in the aggregate is considered a
share issuance that is reflected in EPS prospectively and is not a stock
dividend for purposes of applying Topics 505 and 260 (Equity and Earnings Per
Share). The amendments in this update are effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.





In January
2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in
Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update
affect accounting and reporting by an entity that experiences a decrease in
ownership in a subsidiary that is a business or nonprofit activity. The
amendments also affect accounting and reporting by an entity that exchanges a
group of assets that constitutes a business or nonprofit activity for an equity
interest in another entity.  The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.


F-14


In January
2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers.  2)  Activity in Level 3 fair value
measurements.  In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number).This update provides
amendments to Subtopic 820-10 that clarify existing disclosures as follows:
1) Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs
and valuation techniques. A reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level 3.The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company is currently evaluating
the impact of this ASU, however, the Company does not expect the adoption of
this ASU to have a material impact on its consolidated financial
statements.





Note
3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION





Interest
paid for the three months ended December 31, 2009 and 2008, amounted to $24,185
and $10,648, respectively. Interest paid for the nine months ended December 31,
2009 and 2008, amounted to $53,519 and $31,985, respectively.




Income
taxes paid for the three months ended December 31, 2009 and 2008 amounted to
$652,717 and $678,892, respectively. Income taxes paid for the nine months ended
December 31, 2009 and 2008 amounted to $1,817,371 and $1,676,147,
respectively.





Non-cash
financing activities includes $720,816 of notes payable issued to pay off
accounts payable for the nine months ended December 31, 2009.





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 purchases on a timely basis.





This
amount is refundable and bears no interest. As of December 31, 2009 and March
31, 2009, advances to suppliers, including advances to related parties, amounted
to $9,004,144 and $7,282,217, respectively.





Note
5 - PROPERTY AND EQUIPMENT





Property
and equipment consists of the following:





December
      31,
              2009
            
            
            March
      31,
              2009(Unaudited)Leasehold
      improvements
            
            $
            2,324,428
            
            
            $
            2,057,892Furniture
      and equipment
            
            
            360,329
            
            
            
            304,709Motor
      Vehicles
            
            
            164,591
            
            
            
            162,443Total
            
            
            2,849,348
            
            
            
            2,525,044Less:
      Accumulated depreciation and amortization
            
            
            1,938,347
            
            
            
            1,545,612Property
      and equipment, net
            
            $
            911,001
            
            
            $
            979,432


Total
depreciation expense for property and equipment for the three months ended
December 31, 2009 and 2008 was $141,062 and $152,281, respectively. Total
depreciation expense for property and equipment for the nine months ended
December 31, 2009 and 2008 was $389,809 and $331,582, respectively. No
depreciation expense was included in cost of goods sold for the financial
statement periods 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.


F-15


Note
6 – OTHER ASSETS





Other
assets consist of the following:





December
      31,
              2009
            
            
            March
      31,
              2009(unaudited)Prepaid
      rental expenses
            
            $
            867,220
            
            
            $
            475,864Lease
      rights transfer fees (1)
            
            
            342,934
            
            
            
            -Prepaid
      advertisement expenses
            
            
            123,461
            
            
            
            14,721Prepaids
      and other assets
            
            
            122,092
            
            
            
            73,794Total
            
            $
            1,455,707
            
            
            $
            564,379





(1)
            Lease
      rights transfer fee is money paid to original store leases for the Company
      to secure store rentals in coveted areas. The activities involved in
      originating or acquiring leases are not substantively different from the
      activities involved in lending arrangements and, therefore, the cost for
      acquiring the right to lease the new stores are capitalized and amortized
      over the period of the lease term.





Note
7 – 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 December 31, 2009 and March 31, 2009, the long term rental deposit amounted
to $2,326,829 and $2,015,149, respectively.





Note
8 – 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 December 31, 2009 and March 31, 2009, consisted of the
following:





December
      31, 2009
            
            
            March
      31, 2009(Unaudited)Hangzhou
      Bank, due  February 2, 2010 annual
      interest at 4.86%, secured by thepersonal
      properties of some of the Company’s directors
            
            $
            880,200
            
            
            $
            879,000Hangzhou
      Bank, due March 13, 2010 annual
      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-16


Interest
expense for the three months ended December 31, 2009 and 2008 amounted to
$18,009 and $10,647, respectively. Interest expense for the nine months ended
December 31, 2009 and 2008 amounted to $53,519 and $31,985,
respectively.





Note
9 - 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 nine months ended December 31, 2009 and 2008,
unaudited:





2009
            
            
            2008U.S.
      Statutory rates
            
            
            34
            %
            
            
            34
            %Foreign
      income not recognized in USA
            
            
            (34
            )
            
            
            (34
            )China
      income taxes
            
            
            25
            
            
            
            25Other(a)
            
            
            -
            
            
            
            (2
            )Effective
      tax rate
            
            
            25
            %
            
            
            23
            %





(a)
            The
      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 $2,379,548 and $1,672,385 for the three months ended
December 31, 2009, respectively, and $1,855,268 and $1,392,682 for the three
months ended December 31, 2008, respectively. VAT on sales and on purchases
amounted to $6,213,137 and $4,524,153 for the nine months ended December 31,
2009, respectively, and $5,394,740 and $3,788,586 for the nine months ended
December 31, 2008December 31, 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 December 31, 2009 and March 31, 2009 consisted of the
following:





December
      31,
              2009
            
            
            March
      31,
              2009(Unaudited)VAT
            
            $
            283,357
            
            
            $
            196,784Income
      tax
            
            
            804,831
            
            
            
            588,681Others
            
            
            37,464
            
            
            
            25,851Total
      taxes payable
            
            $
            1,125,652
            
            
            $
            811,316




F-17


Note
10 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS





Amounts
receivable from and payable to related parties are summarized as
follows:





December
      31, 2009
            
            
            March
      31, 2009(Unaudited)Amounts
      due from directors (1):
            
            $
            -
            
            
            $
            2,432Amount
      due to director (2):
            
            $
            333,029
            
            
            $
            326,715Advances
      to supplier (3):
            
            $
            2,190,826
            
            
            $
            1,797,104





(1)
            Represents
      interest free loans to two directors of the Company, Li Qi and Chong'an
      Jin. The loans are due upon demand.





(2)
            Represents
      leasehold improvement expenses and other 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 which will reduce the
  advance.





The
Company’s purchases from the related party supplier amounted to $1,254,749 and
$108,045 for the three months ended December 31, 2009 and 2008, respectively,
and $2,255,817 and $909,314 for the nine months ended December 31, 2009 and
2008, respectively.





The
Company also leases retail and office space from a director (see Note 15
below).





Note
11 – EARNINGS PER SHARE





The
Company reports earnings per share in accordance with the 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 December 31,Net
      income for earnings per share
            
            $
            2,646,353
            
            
            $
            1,995,523Weighted
      average shares used in basic computationBasic
      and Diluted
            
            
            20,000,000
            
            
            
            15,800,000Earnings
      per shareBasic
      and Diluted
            
            $
            0.13
            
            
            $
            0.13





2009
              (Unaudited)
            
            
            2008
              (Unaudited)For
      the nine months ended December 31,Net
      income for earnings per share
            
            $
            5,949,110
            
            
            $
            5,313,259Weighted
      average shares used in basic computationBasic
      and Diluted
            
            
            17,409,489
            
            
            
            15,800,000Earnings
      per shareBasic
      and Diluted
            
            $
            0.34
            
            
            $
            0.34


F-18


Note
12 – 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 December 31, 2009, the Company estimated
that the total stock compensation expense to be recognized from these
transactions was $202,120. The Company recognized $0 and $126,325 as stock
compensation expense during the three and nine months ended December 31, 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 nine months ended December 31, 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
13 - 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 $33,717 and $27,053 in employment benefits
and pension during the three months ended December 31, 2009 and 2008,
respectively. The Company contributed $67,858 and $58,559 in employment benefits
and pension during the nine months ended December 31, 2009 and 2008,
respectively.


F-19


Note
14 - 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 the 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 December 31,2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Prescription
      Drugs
            
            $
            5,389,120
            
            
            $
            4,248,830Over
      The Counter (OTC) Drugs
            
            
            4,516,533
            
            
            
            3,418,696Nutritional
      Supplements
            
            
            1,234,362
            
            
            
            1,334,225Traditional
      Chinese Medicine Products
            
            
            2,776,579
            
            
            
            1,749,295Medical
      Devices
            
            
            321,155
            
            
            
            350,727Sundry
      Products and Others
            
            
            685,957
            
            
            
            460,989Total
            
            $
            14,923,706
            
            
            $
            11,562,762





Nine
      months Ended December 31,2009
            
            
            2008(Unaudited)
            
            
            (Unaudited)Prescription
      Drugs
            
            $
            14,181,479
            
            
            $
            12,178,657Over
      The Counter (OTC) Drugs
            
            
            11,895,897
            
            
            
            8,769,355Nutritional
      Supplements
            
            
            4,568,279
            
            
            
            5,545,568Traditional
      Chinese Medicine Products
            
            
            5,416,461
            
            
            
            3,538,906Medical
      Devices
            
            
            983,974
            
            
            
            1,201,348Sundry
      Products and Others
            
            
            1,817,653
            
            
            
            1,862,487Total
            
            $
            38,863,743
            
            
            $
            33,096,321





Note
15 - 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 the 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 and the corporate office space are $44,004 and $29,032
for three months ended December 31, 2009 and 2008, respectively. The rent for
the retail and the corporate office space are $131,976 and $130,644 for nine
months ended December 31, 2009 and 2008, respectively. For the three months and
nine months ended December 31, 2009, $175,968 was paid to Mr. Liu for retail and
corporate office space rental. For the three months and nine months ended
December 31, 2008, no rent was paid to Mr. Liu.


F-20


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
            
            $
            357,7952011
            
            $
            1,262,5252012
            
            $
            991,9902013
            
            $
            718,5762014
            
            $
            468,814Thereafter
            
            
            70,003





Rental
expense for the three months ended December 31, 2009 and 2008 amounted to
$416,702 and $235,527, respectively. Rental expense for the nine months ended
December 31, 2009 and 2008 amounted to $926,795 and $691,548,
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 December 31, 2009, the Company
has not yet renewed its contract with Yingte for 2010.





As of
December 31, 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
16 – SUBSEQUENT EVENT





The
Company has performed an evaluation of subsequent events through February 8,
2010, the date these consolidated financial statements were issued.


F-21


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 this report.  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 the share exchange transaction
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.


4


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”, and with Jiuzhou
Pharmacy and Jiuzhou Clinic collectively as “HJ Group”), by a series of
contractual arrangements. All of our business operations are carried out by HJ
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
December 31, 2009, for the impact of the contractual arrangements on our
consolidated financial statements.





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.




5


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.





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 the accounting standards, Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor,and
byReseller to Sales
Incentives Offered to Consumers by Manufacturers. 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.





Slotting
allowances are a major portion of total allowances. With slotting allowances,
the vendors reimburse the Company for the cost of placing new product on the
shelf. The Company has no obligation or commitment to keep the product on the
shelf for a minimum period.


6


A small
portion of vendor allowance also includes advertising and promotion allowances
for the promotion of vendors' products in stores. The promotion may be any
combination of a temporary price reduction or a feature in print
ads.





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 nine months
ended December 31, 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 December 31, 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 nine months ended December 31, 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.


7


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.





In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.


8


In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.




In January
2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary.  Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary.  Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value.  In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction.  This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
 This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009.  The Company is
currently evaluating the impact of this ASU; however, the Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements.




In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.




In January
2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for Decreases in
Ownership of a Subsidiary – a Scope Clarification. The amendments in this Update
affect accounting and reporting by an entity that experiences a decrease in
ownership in a subsidiary that is a business or nonprofit activity. The
amendments also affect accounting and reporting by an entity that exchanges a
group of assets that constitutes a business or nonprofit activity for an equity
interest in another entity.  The amendments in this update are effective
beginning in the period that an entity adopts SFAS No. 160, “Non-controlling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51.” If
an entity has previously adopted SFAS No. 160 as of the date the amendments in
this update are included in the Accounting Standards Codification, the
amendments in this update are effective beginning in the first interim or annual
reporting period ending on or after December 15, 2009. The amendments in this
update should be applied retrospectively to the first period that an entity
adopted SFAS No. 160. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.


9


In January
2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value
Measurements. This update provides amendments to Subtopic 820-10 that requires
new disclosure as follows: 1) Transfers in and out of Levels 1 and 2. A
reporting entity should disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and describe the
reasons for the transfers.  2)  Activity in Level 3 fair value
measurements.  In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number).This update provides
amendments to Subtopic 820-10 that clarify existing disclosures as follows:
1) Level of disaggregation. A reporting entity should provide fair value
measurement disclosures for each class of assets and liabilities. A class is
often a subset of assets or liabilities within a line item in the statement of
financial position. A reporting entity needs to use judgment in determining the
appropriate classes of assets and liabilities. 2) Disclosures about inputs
and valuation techniques. A reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level 3.The
new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company is currently evaluating
the impact of this ASU, however, the Company does not expect the adoption of
this ASU to have a material impact on its consolidated financial
statements.




Results
of Operations





Results
of Operations - Three Months ended December 31, 2009 as compared to Three Months
ended December 31, 2008





Revenue.Our revenue increased by $3,360,944 or 29.1% to $14,923,706 for the three
months ended December 31, 2009 from $11,562,762 for the three months ended
December 31, 2008 due to operating additional store locations. Of this increase,
38.7% or $1,302,166 was from new stores that were opened subsequent to December
31, 2008. We operated 22 stores as of December 31, 2009, as compared to 15
stores as of December 31, 2008. We anticipate that our overall revenue will
continue to increase as we open additional stores.





Gross Profit.Our gross profit increased by 43.4% to $4,766,835 for the three months
ended December 31, 2009 from $3,324,684 for the three months ended December 31,
2008. Our gross margin slightly increased from 28.8% for the three months ended
December 31, 2008 to 31.9% for the three months ended December 31, 2009. 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 87.1%
to $912,312 for the three months ended December 31, 2009 from $487,395 for the
three months ended December 31, 2008 and was a primary driver of our increased
revenues during the quarter. The increase in sales and marketing expense was
primarily a result of the continued expansion of our drugstore chain from 15
stores for the three months ended December 31, 2008 to 22 stores for the three
months ended December 31, 2009. Sales and marketing expenses as a percentage of
our revenue increased to 6.1% for the three months ended December 31, 2009 from
4.2% for the three months ended December 31, 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 296.7% to $441,861 for the three months ended December 31, 2009
from $111,386 for the three months ended December 31, 2008 as a result of adding
additional infrastructure. General and administrative expenses as a
percentage of our revenue increased to 3.0% for the three months ended
December 31, 2009 from 1.0% for the three months ended December 31, 2008.
As we continue to open drugstores, further develop our infrastructure,
and incur expenses related to being a U.S. 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 $3,412,662 for the three months ended December 31, 2009 from
$2,725,903 for the three months ended December 31, 2008, an increase of 25.2%.
Our operating margin for the three months ended December 31, 2009 and 2008 was
22.9% and 23.6%, respectively.


10


Results
of Operations - Nine Months ended December 31, 2009 as compared to Nine Months
ended December 31, 2008





Revenue.Our revenue increased by $5,767,422 or 17.4% to $38,863,743 for the nine
months ended December 31, 2009 from $33,096,321 for the nine months ended
December 31, 2008 due to operating additional store locations. Of this increase,
$2,852,304 is attributable to new stores or 49.5% of the total increase. As of
December 31, 2008 we operated 15 stores, as compared to 22 stores as of December
31, 2009. We anticipate that our overall revenue will continue to increase as we
open additional stores.




Gross Profit.Our gross profit increased by 26.0% to $11,289,607 for the nine months
ended December 31, 2009 from $8,956,736 for the nine months ended December 31,
2008. Our gross margin slightly increased from 27.1% for the nine months ended
December 31, 2008 to 29.0% for the nine months ended December 31, 2009. 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 55.1%
to $1,986,471 for the nine months ended December 31, 2009 from $1,280,838 for
the nine months ended December 31, 2008. This increase was primarily a result of
the continued expansion of our drugstore chain from 15 stores for the nine
months ended December 31, 2008 to 22 stores for the nine months ended December
31, 2009. Sales and marketing expenses as a percentage of our revenue increased
slightly to 5.1% for the nine months ended December 31, 2009 from 3.9% for the
nine months ended December 31, 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 123.1% to $1,372,205 for the nine months ended December 31, 2009
from $614,987 for the nine months ended December 31, 2008. General and
administrative expenses as a percentage of our revenue increased
to 3.5% for the nine months ended December 31, 2009 from 1.9% for the
nine months ended December 31, 2009. As we continue to open drugstores, further
develop our infrastructure, and incur expenses related to being a U.S.
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 $7,930,931 for the nine months ended December 31, 2009 from
$7,060,911 for the nine months ended December 31, 2008, an increase of 12.3%.
Our operating margin for the nine months ended December 31, 2009 and 2008 was
20.4% and 21.3%, respectively.





Liquidity





Nine
Month Period Ended December 31, 2009





For the
nine months ended December 31, 2009, we generated $903,020 from operating
activities, as compared to $279,657 for the nine months ended December 31, 2008.
The decrease is a result of a greater reduction to accounts payable offset by a
decrease of cash advances to suppliers.





We used
$320,729 in investing activities during the nine months ended December 31, 2009
as compared to $269,346 during the nine months ended December 31, 2008. This
slight increase in investing activities was primarily a result of purchasing
additional equipment.


11


Cash used
in financing activities was $362,349 for the nine month period ended
December 31, 2009 as compared to cash used in financing activities of $0 for the
nine month period ended December 31, 2008. The increase was the result of
borrowing money that was offset by bank requirements to keep cash deposits with
the bank as security for notes payable outstanding with the bank.





As of
December 31, 2009, we had unrestricted cash of $1,226,929. Our total current
assets were $17,863,438 and our total current liabilities were $8,271,636 which
resulted in a net working capital of $9,591,802.





Capital
Resources





During the
nine months ended December 31, 2009, we borrowed and repaid $1,466,400. 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
the 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 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
            
            $
            357,7952011
            
            
            1,262,5252012
            
            
            991,9902013
            
            
            718,5762014
            
            
            468,814Thereafter
            
            
            70,003





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.





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.


12


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:





December
      31,
              2009
            
            March
      31,
              2009
            
            December
      31,
              2008Balance
      sheet items, except for the registered and paid-up capital, as of end of
      period/year
            USD1:RMB
      0.1467
            
            USD1:RMB0.1465
            
            USD1:RMB
      0.1467Amounts
      included in the statement of operations, statement of changes in
      stockholders'
              equity
      and statement of cash flows for the period/ year ended
            USD1:RMB
      0.14664
            
            USD1:RMB0.14582
            
            USD1:RMB
      0.14559





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.








Item 3. Quantitative and Qualitative Disclosures about Market
Risk





Not
applicable





Item 4. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





As of
December 31, 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 December 31, 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.


13


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
December 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.








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.


14


Risks
Relating to Our Business





Our
relatively 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 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;





•
            attract,
      retain and motivate qualified personnel;
and





•
            ability
      to find and open new locations.





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. In the past, we have had two major challenges to our recruiting
efforts: (1) unqualified candidates who represent themselves as being qualified,
and (2) talented and competent candidates who do not match our job requirements.
If our recruitment and retention efforts are unsuccessful in the future, it may
be more difficult for us to execute our business strategy.


15


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 to
expand outside of Hangzhou, and our inability to obtain capital, use internally
generated cash, or use shares of our common stock or debt to
finance future expansion efforts could impair the growth and expansion of
our business.





As of
December 31, 2009, we had RMB 8.4 million ($1.2 million) in
unrestricted 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.





Reliance
on internally generated cash or debt to finance our operations or to complete
business expansion efforts could substantially limit our operational and
financial flexibility. The extent to which we will be able or willing to use
shares of common stock to consummate acquisitions will depend on our market
value from time to time and the willingness of potential sellers to accept our
common stock as full or partial payment. Using shares of common stock for this
purpose also may result in significant dilution to our then existing
stockholders. To the extent that we are unable to use common stock to make
future acquisitions, our ability to grow through acquisitions may be limited by
the extent to which we are able to raise capital for this purpose through debt
or equity financings. No assurance can be given that we will be able to obtain
the necessary capital to finance a successful expansion program or our other
cash needs. If we are unable to obtain additional capital on acceptable terms,
we may be required to reduce the scope of any expansion. In addition to
requiring funding for expansions, we may need additional funds to implement our
internal growth and operating strategies or to finance other aspects of our
operations. Our failure to (i) obtain additional capital on acceptable terms,
(ii) use internally generated cash or debt to complete expansions because it
significantly limits our operational or financial flexibility, or (iii) use
shares of common stock to make future expansions may hinder our ability to
actively pursue any expansion program we may decide to implement and negatively
impact our stock price.





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.


16


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





We believe
that our current cash and cash equivalents and anticipated cash flow from
operations 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 credit facility. The sale of additional equity securities
could result in dilution to our stockholders. The incurrence of additional
indebtedness would result in increased debt service obligations and could result
in further operating and financing covenants that would further restrict our
freedom to operate our business, such as conditions that:





•
            limit
      our ability to pay dividends or require us to seek consent for the payment
      of dividends;





•
            increase
      our vulnerability to general adverse economic and industry
      conditions;





•
            require
      us to dedicate a portion of our cash flow from operations to payments on
      our debt, thereby reducing the availability of our cash flow to fund
      capital expenditures, working capital and other general corporate
      purposes; and





•
            limit
      our flexibility in planning for, or reacting to, changes in our business
      and our industry.





We cannot
guarantee that we will be able to obtain any additional financing on terms that
are acceptable to us, or at all.





Risks
Relating to Our Pharmacy Operations





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;





•
            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.




17


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 our fiscal third quarter (October 1st through December 31st) from the winter
cold and flu season, and are lower in our fiscal fourth quarter (January 1st
through March 31st ) because Chinese New Year falls into that quarter 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.





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.


18


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 plan to apply for trademark protection of our logo in
China, although we have not done so nor have we registered our brand name as of
the date of this prospectus.





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. Our employees are required to sign an
employment agreement as a condition of employment, which contains a
confidentiality provision.


19


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.





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.


20


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.
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.




21


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. In the past, our major recruiting challenges included unqualified
candidates who represent themselves as being qualified, and talented and
competent candidates who do not match our job requirements. 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.


22


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:





•
            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.


23


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 October 2008 and affected 1,357 different pharmaceutical products.
However, for our fiscal year ended March 31, 2009, the adjustment only required
us to adjust 105 of our 2,300 prescription drug prices which did not have any
significant effect on our revenues as most of our products are priced
substantially below the price ceilings. 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. The continued proliferation of counterfeit products in China could have a
material adverse effect on our business, financial condition, and results of
operation.


24


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.





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.


25


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.





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 wholly foreign owned
enterprise (“WFOE”), Jiuxin Management, we have been advised by our PRC counsel,
Allbright Law Offices, that the regulations on foreign ownership of drugstores
do not apply to us even if our drugstore 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, our PRC counsel has advised us that 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.


26


If we 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.


27


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.





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 Jiuxin Management, our WFOE, 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 WFOE 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 December 31, 2009, our restricted reserves totaled RMB 9.5
million ($1.3 million) and we had unrestricted retained earnings of RMB
70.1 million ($10.9 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.


28


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.





Mr. Lei
Liu, chairman of the board of directors and our chief executive officer, is also
the executive director of Jiuzhou Pharmacy, a general partner of Jiuzhou Clinic,
and the supervising director of Jiuzhou Service. Mr. Chong’an Jin, 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. Ms. Li
Qi, corporate secretary and also a member of the board of directors, is the
general manager of each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service
and a general partner of Jiuzhou Clinic. 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.


29


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.





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.





The
advent of recent healthcare reform directives from the PRC government may
increase both competition and our cost of doing business.





Under the
auspices of the Healthy China 2020 program (the “Program”), published by China’s
National Development and Reform Commission in October 2008, the PRC government
has set in motion a series of policies in fairly rapid successions aimed to
improve China’s healthcare system. Such policies include (1) discouraging
hospitals from both prescribing and dispensing medication, (2) the unveiling of
formal healthcare reform guidelines in April 2009, aimed to improve the
availability of and subsidies for “essential” drugs, and (3) the announcement of
China’s National Essential Drugs List (“NEDL”) in August 2009, listing
approximately 300 medicines that are expected to be sold at
government-controlled prices. While an underlying goal of these policies is to
make drugs more accessible to China’s poorer populations, such policy as
discouraging hospitals from both prescribing and dispensing medication also
serve to create opportunities that in turn will intensify business competition
in the Chinese retail drugstore industry, as well as competition for skilled
labor and retail spaces. Additionally, we expect the NEDL to lead to a rise in
the number of government-subsidized community healthcare service centers, which
will erode the convenience and price advantage that our drugstores traditionally
enjoy against hospitals.


30


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.





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.


31


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





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.


32


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. We intend to apply for listing on The NASDAQ
Capital Market, but cannot assure you that this listing or listing on any other
exchange will ever occur.





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.





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 prospectus. 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.


33


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.





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.





Our
directors and executive officers collectively control approximately 63.8% of our
outstanding shares of 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.


34


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;





•
            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.





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.


35


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.





Since HJ
Group operated as a private enterprise without public reporting obligations
prior to the Share Exchange, we have committed limited personnel and resources
to the development of the external reporting and compliance obligations that
would be required of a public company. Recently, we have taken measures to
address and improve our financial reporting and compliance capabilities and we
are in the process of instituting changes to satisfy our obligations in
connection with joining a public company, when and as such requirements become
applicable to us. Prior to taking these measures, we did not believe we had the
resources and capabilities to do so. We plan to obtain additional financial and
accounting resources to support and enhance our ability to meet the requirements
of being a public company. We will need to continue to improve our financial
reporting systems and procedures, and documentation thereof. If our financial
reporting systems or procedures fail, we may not be able to provide accurate
financial statements on a timely basis or comply with the Sarbanes-Oxley Act of
2002 as it applies to us. Any failure of our ability to provide accurate
financial statements could cause the trading price of our common stock to
decrease substantially.





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 Share 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.





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 20
million shares of our common stock outstanding as of December 17, 2009,
approximately 4.2 million shares are, or will be, freely tradable without
restriction, unless held by our "affiliates", as of December 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. Under Rule 144, we estimate that our founders and
service consultants who received shares in September 2009 as a result of the
Share Exchange will be unable to sell these shares until September 2010. If our
founders and service consultants who received shares were to sell their shares,
they would be subject to volume and/or other restrictions imposed by Rule
144.


36


If
we fail to remain current in our reporting requirements, our securities could be
removed from the OTC Bulletin Board, which would limit the ability of
broker-dealers to sell our securities and the ability of stockholders to sell
their securities in the secondary market.





Companies
trading on the OTC Bulletin Board must be reporting issuers under Section 12 of
the Exchange Act, and must be current in their reports under Section 13, in
order to maintain price quotation privileges on the OTC Bulletin Board. If we
fail to remain current on our reporting requirements, we could be removed from
the OTC Bulletin Board. As a result, the market liquidity for our securities
could be severely adversely affected by limiting the ability of broker-dealers
to sell our securities and the ability of stockholders to sell their securities
in the secondary market.





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.








Item 3. Defaults upon Senior
Securities.





None





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





None





Item 5. Other Information.





None


37


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)10.1
            
            Consulting
      Services Agreement between Jiuxin Management and Jiuzhou Pharmacy dated
      August 1, 2009 (4)10.2
            
            Operating
      Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
      August 1, 2009 (4)10.3
            
            Equity
      Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners
      dated August 1, 2009 (4)10.4
            
            Option
      Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
      August 1, 2009 (4)10.5
            
            Voting
      Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its
      owners dated August 1, 2009 (4)10.6
            
            Consulting
      Services Agreement between Jiuxin Management and Jiuzhou Clinic dated
      August 1, 2009 (4)10.7
            
            Operating
      Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
      August 1, 2009 (4)10.8
            
            Equity
      Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners
      dated August 1, 2009 (4)10.9
            
            Option
      Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
      August 1, 2009 (4)10.10
            
            Voting
      Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its
      owners dated August 1, 2009 (4)10.11
            
            Consulting
      Services Agreement between Jiuxin Management and Jiuzhou Service dated
      August 1, 2009 (4)10.12
            
            Operating
      Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
      August 1, 2009 (4)10.13
            
            Equity
      Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners
      dated August 1, 2009 (4)10.14
            
            Option
      Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
      August 1, 2009 (4)10.15
            
            Voting
      Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its
      owners dated August 1, 2009 (4)10.16
            
            Agreement
      between Jiuzhou Pharmacy and Yingte Logistics dated January 1, 2009
      (4)10.17
            
            Amendment
      to Consulting Services Agreement between Jiuxin Management and Jiuzhou
      Pharmacy dated October 27, 2009 (5)10.18
            
            Amendment
      to Operating Agreement between Jiuxin Management and Jiuzhou Pharmacy
      dated October 27, 2009 (5)10.19
            
            Amendment
      to Option Agreement between Jiuxin Management and Jiuzhou Pharmacy dated
      October 27, 2009 (5)10.20
            
            Amendment
      to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
      Pharmacy dated October 27, 2009 (5)10.21
            
            Amendment
      to Consulting Services Agreement between Jiuxin Management and Jiuzhou
      Clinic dated October 27, 2009 (5)10.22
            
            Amendment
      to Operating Agreement between Jiuxin Management and Jiuzhou Clinic dated
      October 27, 2009 (5)10.23
            
            Amendment
      to Option Agreement between Jiuxin Management and Jiuzhou Clinic dated
      October 27, 2009 (5)10.24
            
            Amendment
      to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
      Clinic dated October 27, 2009 (5)10.25
            
            Amendment
      to Consulting Services Agreement between Jiuxin Management and Jiuzhou
      Service dated October 27, 2009 (5)10.26
            
            Amendment
      to Operating Agreement between Jiuxin Management and Jiuzhou Service dated
      October 27, 2009 (5)10.27
            
            Amendment
      to Option Agreement between Jiuxin Management and Jiuzhou Service dated
      October 27, 2009 (5)10.28
            
            Amendment
      to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
      Service dated October 27, 2009 (5)10.29
            
            Form
      of CFO Services Agreement entered into between Jiuzhou Pharmacy and
      Worldwide Officers, Inc. on July 30, 2009 (6)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)





(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.(5)
            Filed
      as an Exhibit to current report on Form 8-K filed with the SEC on October
      30, 2009.(6)
            Filed
      as an Exhibit to amendment to registration statement on Form S-1/A with
      the SEC on January 27, 2010.


38





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.





February
      8, 2010
            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)








39