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: June 30, 2010
or
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
For the transition period from ______________ to _______________
Commission File Number: 001-34711
CHINA JO-JO DRUGSTORES, INC.
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(Exact name of registrant as specified in its charter)
Nevada 98-0557852
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(State or other jurisdiction of incorporation of (I.R.S. Employer
origination) Identification Number)
Room 507-513, 5th Floor A Building, Meidu Plaza
Gongshu District, Hangzhou, Zhejiang Province
People's Republic of China N/A
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(Address of principal executive offices) (Zip code)
+86 (571) 88077078
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (?232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes[ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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: 13,500,002 shares issued and
outstanding as of August 9, 2010.
1
TABLE OF CONTENTS
TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2010
Page
PART I FINANCIAL INFORMATION 4
Item 1. Financial Statements (unaudited) 4
Consolidated Balance Sheets 4
Consolidated Statements of Income and Other Comprehensive Income (unaudited) 5
Consolidated Statements of Shareholders' Equity 6
Consolidated Statements of Cash Flows (unaudited) 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 35
PART II OTHER INFORMATION 36
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Reserved 36
Item 5. Other Information 36
Item 6. Exhibits 36
Signatures 39
2
CAUTION REGARDING FORWARD-LOOKING INFORMATION
All statements contained in this Quarterly Report on Form 10-Q ("Form 10-Q") for
China Jo-Jo Drugstores, Inc., other than statements of historical facts, that
address future activities, events or developments are forward-looking
statements, including, but not limited to, statements containing the words
"believe," "anticipate," "expect" and words of similar import. These statements
are based on certain assumptions and analyses made by us in light of our
experience and our assessment of historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
under the circumstances. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.
Such risks include, among others, the following: national and local general
economic and market conditions: our ability to sustain, manage or forecast our
growth; raw material costs and availability; new product development and
introduction; existing government regulations and changes in, or the failure to
comply with, government regulations; adverse publicity; competition; the loss of
significant customers or suppliers; fluctuations and difficulty in forecasting
operating results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.
Consequently, all of the forward-looking statements made in this Form 10-Q are
qualified by these cautionary statements and there can be no assurance that the
actual results anticipated by management will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on our business operations.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED BALANCE SHEETS
JUNE 30, MARCH 31,
2010 2010
--------------- -------------
(Unaudited)
---------------
ASSETS
------
CURRENT ASSETS
Cash $ 15,774,697 $ 801,593
Restricted cash 807,941 746,703
Accounts receivable, trade 1,446,093 1,228,294
Inventories 3,963,780 3,770,411
Other receivables 246,484 282,073
Advances to suppliers 10,179,812 6,850,240
Other current assets 1,630,603 1,331,167
---------------- -------------
Total current assets 34,049,410 15,010,481
---------------- -------------
PROPERTY AND EQUIPMENT, net 1,326,425 1,186,292
---------------- -------------
OTHER ASSETS:
Long term deposit 2,321,115 2,311,661
Prepaid - noncurrent 5,671,660 5,508,963
---------------- -------------
Total other assets 7,992,775 7,820,624
---------------- -------------
Total assets $ 43,368,610 $ 24,017,397
================ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Short term loans $ 1,473,000 $ 880,200
Notes payable 1,587,026 1,464,241
Accounts payable, trade 3,348,229 2,330,317
Other payables 166,488 225,716
Other payables - related parties 880,107 935,000
Taxes payable 1,140,709 1,235,083
Accrued liabilities 439,804 257,091
---------------- -------------
Total current liabilities 9,035,363 7,327,648
---------------- -------------
Purchase option derivative liability 344,507 -
---------------- -------------
Total liabilities 9,379,870 7,327,648
---------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock; $0.001 par value; 500,000,000 and 250,000,000
shares authorized; 13,500,002 and 10,000,000 shares issued
and outstanding as of June 30, 2010 and March 31, 2010,
respectively 13,500 10,000
Paid-in capital 15,921,489 877,884
Statutory reserves 1,309,109 1,309,109
Retained earnings 17,007,480 14,855,016
Accumulated other comprehensive loss (262,838) (362,260)
---------------- -------------
Total shareholders' equity 33,988,740 16,689,749
---------------- -------------
Total liabilities and shareholders' equity $ 43,368,610 $ 24,017,397
================ ==============
4
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended June 30,
2010 2009
------------------- ------------------------
REVENUES 15,207,428 11,681,464
COST OF GOODS SOLD 10,593,532 8,657,568
------------------- ------------------------
GROSS PROFIT 4,613,896 3,023,896
------------------- ------------------------
SELLING EXPENSES 823,358 477,777
GENERAL & ADMINISTRATIVE EXPENSES 773,762 365,210
------------------- ------------------------
OPERATING EXPENSES 1,597,120 842,987
------------------- ------------------------
INCOME FROM OPERATIONS 3,016,776 2,180,909
OTHER INCOME (EXPENSE), NET (57,532) 6,635
CHANGE IN FAIR VALUE OF PURCHASE OPTION DERIVATIVE LIABILITY 57,944 -
------------------- ------------------------
INCOME BEFORE INCOME TAXES 3,017,188 2,187,544
PROVISION FOR INCOME TAXES 864,724 588,383
------------------- ------------------------
NET INCOME 2,152,464 1,599,161
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments 99,422 (1,420)
------------------- ------------------------
COMPREHENSIVE INCOME $ 2,251,886 $ 1,597,741
=================== ========================
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 12,653,848 7,900,000
=================== ========================
BASIC AND DILUTED EARNING PER SHARE $ 0.17 $ 0.20
=================== ========================
5
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained Earnings Accumulated
Common Stock ----------------------- other
Number of Paid-in Statutory comprehensive
shares Amount capital reserves Unrestricted income/(loss) Total
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, March 31, 2009 7,900,000 $ 7,900 $ 669,700 $1,309,109 $ 5,033,275 $ (362,437) $ 6,657,547
Net income 1,599,161 1,599,161
Foreign currency translation adjustments (1,420) (1,420)
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, June 30, 2009 (Unaudited) 7,900,000 $ 7,900 $ 669,700 $1,309,109 $ 6,632,436 $ (363,857) $ 8,255,288
========== ======= ============ ========== ============= ============== ============
Shares issued for reorganization on
September 17, 2009 2,100,000 2,100 (2,100) -
Stock-based compensation 202,120 202,120
Shareholder contribution 8,164 8,164
Net income 8,222,580 8,222,580
Foreign currency translation adjustments 1,597 1,597
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, March 31, 2010 10,000,000 $10,000 $ 877,884 $1,309,109 $ 14,855,016 $ (362,260) $16,689,749
========== ======= ============ ========== ============= ============== ============
Issurance of common stock 3,500,000 3,500 15,446,056 15,449,556
Fractional shares due to the one-for-two
reverse split 2 -
Reclassification of purchase option to
derivative liabilities (402,451) (402,451)
Net income 2,152,464 2,152,464
Foreign currency translation adjustments 99,422 99,422
---------- ------- ------------ ---------- ------------- -------------- ------------
BALANCE, June 31, 2010 (Unaudited) 13,500,002 $13,500 $15,921,489 $1,309,109 $ 17,007,480 $ (262,838) $33,988,740
========== ======= ============ ========== ============= ============== ============
6
CHINA JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
June 30,
2010 2009
------------------ --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,152,464 $ 1,599,161
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 148,584 121,033
Stock compensation 40,529 -
Change in fair value of purchase option derivative liability (57,944) -
Change in operating assets
Accounts receivable, trade (211,953) 124,975
Inventories (177,259) 97,471
Other receivables 36,600 17,455
Advances to suppliers (3,288,775) (552,270)
Advances to suppliers - related parties - (93,389)
Other current assets (256,265) (244,132)
Long term deposit - (296,553)
Prepaid rent - noncurrent (16,938) -
Change in operating liabilities
Accounts payable, trade 1,004,479 (203,057)
Other payables and accrued liabilities 81,500 9,195
Notes payable 116,344 -
Taxes payable (99,041) (125,237)
------------------ --------------------
Net cash provided by (used in) operating activities (527,675) 454,652
------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (127,334) (7,668)
Additions to leasehold improvements (315,375) (170,893)
------------------ --------------------
Net cash used in investing activities (442,709) (178,561)
------------------ --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (57,958) -
Proceeds from equity financing 15,449,516 -
Proceeds from short-term loans 586,920 -
Other payables-related parties (54,942) -
------------------ --------------------
Net cash provided by financing activities 15,923,536 -
------------------ --------------------
EFFECT OF EXCHANGE RATE ON CASH 19,952 (245)
------------------ --------------------
INCREASE IN CASH 14,973,104 275,846
CASH, beginning of period 801,593 996,302
------------------ --------------------
CASH, end of period $ 15,774,697 $ 1,272,148
================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 17,352 $ -
================== ====================
Cash paid for income taxes $ 837,658 $ 584,945
================== ====================
7
CHINA JO-JO DRUGSTORES, INC. AND SUBSIDIARIES
(FORMERLY KNOWN AS KERRISDALE MINING CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Note 1 - DESCRIPTION OF BUSINESS AND ORGANIZATION
China Jo-Jo Drugstores, Inc. ("Jo-Jo Drugstores" or the "Company"), was
incorporated in Nevada on December 19, 2006, originally under the name
"Kerrisdale Mining Corporation." On September 24, 2009, the Company changed its
name to "China Jo-Jo Drugstores, Inc." in connection with a share exchange
transaction as described below.
On September 17, 2009, the Company completed a share exchange transaction with
Renovation Investment (Hong Kong) Co., Ltd. ("Renovation HK"), and Renovation HK
became a wholly-owned subsidiary of the Company. On the closing date, the
Company issued 7,900,000 of its common stock (taking into account the 1-for-2
reverse stock split effected on April 9, 2010) 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 2,100,000 shares of common stock issued
and outstanding (taking into account the 1-for-2 reverse stock split effected on
April 9, 2010). After the share exchange transaction, the Company had 10,000,000
shares of common stock outstanding (taking into account the 1-for-2 reverse
stock split effected on April 9, 2010) 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
whereby Renovation HK is deemed to be the accounting acquirer (legal acquiree)
and the Company the accounting acquiree (legal acquirer) 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 historical
financial statements for periods prior to September 17, 2009 are those of
Renovation HK except that the equity section and earnings per share have been
retroactively restated to reflect the reverse acquisition.
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 through certain
exclusive agreements discussed below, 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. As of June 30, 2010, Renovation HK transferred all registered
capital to Jiuxin Management, and 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), engages 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.
8
Jiuzhou Service is a PRC limited liability company established in Zhejiang
Province on November 2, 2005 with registered capital of RMB 500,000 ($60,500).
It is engaged in providing medical-related management consulting services in the
PRC.
On April 7, 2010, Jiuzhou Pharmacy was granted an Internet Pharmaceutical
Transaction Sevice Qualification Certificate ( the "Certificate") by the State
Food and Drug Administration of Zhejiang Province. The Certificate allows
Jiuzhou Pharmacy to engage in online retail pharmaceutical sales throughout the
PRC.
All three HJ Group companies have been under the common control of the same
three owners (the "Owners") since their respective establishment dates, pursuant
to agreements amongst the Owners to vote their interests in concert as
memorialized in a voting agreement. Based on such voting agreement, the Company
has determined that common control exists among the three HJ Group companies in
accordance with the guidance of definition of common control accounting
standard. Operationally, the Owners have operated the three HJ Group companies
in conjunction with one another since each company's respective establishment
date. Each HJ Group company holds the licenses and approvals necessary to
operate its business in China.
The paid-in capital of all three HJ Group companies was funded by the majority
shareholders of Renovation HK. 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 following exclusive agreements with HJ Group and the Owners
(collectively the "Contractual Arrangements").
The Company has concluded that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou
Service are each a Variable Interest Entity (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 enables the Company, through Jiuxin
Management, to receive a majority of their respective expected residual returns.
Such conclusion is based on the terms of the Contractual Arrangements as
follows:
(1) Under the Consulting Services Agreement, Jiuxin Management will
provide exclusive consulting and services to HJ Group for a quarterly fee
in the amount of each HJ Group company's quarterly net income after tax.
The Company has the right to receive the expected residual gains of each HJ
Group company, and there is no cap on such expected residual gains. The
Company is also obligated to absorb the risk of loss from the activities of
each HJ Group company. The Company is not protected from such risk of loss
and is not guaranteed a return by HJ Group or by other parties involved
with HJ Group. 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.
(2) Under the Equity Pledge Agreement, the Owners have pledged their rights,
title and equity interest in HJ Group as security for Jiuxin Management to
collect its fees from each HJ Group company under the Consulting Services
Agreement. On May 18, 2010, all the owners effectively completed the
registration of their equity pledge to Zheijiang Management Co., Ltd.
(3) Under the Operating Agreement, Jiuxin Management has exclusive authority of
all decision-making relating to HJ Group's ongoing major operations,
including establishing compensation levels and hiring and firing key
personnel. In order to ensure HJ Group's normal operation, Jiuxin
Management agrees to act as the guarantor for HJ Group in any contract,
agreement or transaction with third parties relating to HJ Group's
operations, and to guarantee HJ Group's performance of such contract,
agreement or transaction. As a counter guarantee, each HJ Group company
agrees to pledge all of its assets including receivables to Jiuxin
Management which have not been pledged to any third parties at the
execution date of this agreement. The operating agreement shall remain in
effect unless terminated by Jiuxin Management.
9
(4) Under the Proxy Agreement, the Owners have authorized any designee of
Jiuxin Management to exercise all of their respective voting rights as
owners of HJ Group. The voting rights proxy agreement shall remain in
effect for the maximum period of time permitted by law.
(5) Under the Option Agreement, the Owners have granted Jiuxin Management
the exclusive right and option to acquire all of their equity interests in
HJ Group. The option agreement shall remain in effect for the maximum
period time permitted by law.
Accordingly, the Company accounts for each of these three companies as a VIE.
As a result of the Contractual Arrangements, which obligate the Company to
absorb all of the risk of loss from HJ Group's activities and enable the Company
to receive all of HJ Group's expected residual returns, the Company accounts for
each HJ Group company as a variable interest entity ("VIE") under Financial
Accounting Standards Board (FASB)'s accounting standard. Accordingly, the
financial statements of HJ Group are consolidated into the financial statements
of the Company.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The reporting entities
------------------------
The Company's consolidated financial statements of reflect the activities of the
Company and the following subsidiary and VIEs:
Percentage of
Subsidiaries Incorporated in Ownership
----------------- ------------------------- --------------------------------
Renovation HK Hong Kong 100%
Jiuxin Management PRC 100%
Jiuzhou Pharmacy PRC VIE by Contractual Arrangements
Jiuzhou Clinic PRC VIE by Contractual Arrangements
Jiuzhou 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 subsidiaries and its VIEs. All significant
inter-company transactions and balances between the Company, its subsidiaries
and VIEs are eliminated upon consolidation.
Consolidation of variable interest entities
-----------------------------------------------
In accordance with the consolidation of Variable Interest Entities standards,
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. Such conclusion is based
on the terms of the Contractual Arrangements as described in Note 1.
10
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 defining common control 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 and have agreed to vote
their interests in concert since the establishment of each HJ Group company as
memorialized in a voting agreement, the Company believes that these three
individuals collectively have control of HJ Group in accordance with EITF 02-05.
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.
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, notes 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.
In connection with the public offering of the Company's common stock that closed
on April 28, 2010, the Company agreed to issue its underwriters, Madison
Williams and Company and Rodman & Renshaw, LLC, an option for $100 to purchase
up to a total of 105,000 shares of common stock (3% of the shares sold) at $6.25
per share (125% of the price of the shares sold in the offering). The option is
exercisable commencing on October 23, 2010 and expires on April 22, 2015.
11
The Company is treating the common shares underlying the option as a derivative
liability as the strike price of the option is denominated in U.S. dollars, a
currency other than the Company's functional currency, the Chinese RMB. As a
result, the option is not considered indexed to the Company's own stock, and as
such, all future changes in the fair value of the option are recognized
currently in earnings until such time as the option is exercised or expired.
On April 22, 2010, the issue date of the option, the Company classified the fair
value of this option as a liability resulting in a decrease of additional
paid-in capital of $402,451 and the establishment of a $402,451 option liability
to recognize the option's fair value. The Company recognized a gain of $57,944
from the change in fair value of option liability for the three months ended
June 30, 2010. There was no option outstanding as of March 31, 2010.
This option does not trade in an active securities market, and as such, the
Company estimates the fair value of this option using the Black-Scholes Option
Pricing Model ("Black-Scholes Model") on the date that the option was originally
issued and as of June 30, 2010 using the following assumptions:
Underwriter Purchase Option (1)
June 30, April 22,
2010 2010
(Unaudited) (Unaudited)
------------- -------------------
Stock price $ 4.20 $ 4.78
Exercise price $ 6.25 $ 6.25
Annual dividend yield 0% 0%
Expected term (years) 4.81 5.00
Risk-free interest rate 1.79% 2.57%
Expected volatility 120% 120%
(1) As of June 30, 2010, the option to purchase 105,000 had not been exercised.
The option cannot be exercised until October 23, 2010.
Expected volatility is based on historical volatility. Historical volatility was
computed using daily pricing observations for recent periods that correspond to
the term of the option. The Company believes this method produces an estimate
that is representative of future volatility over the expected term of this
option. The Company has no reason to believe future volatility over the expected
remaining life of this option is likely to differ materially from historical
volatility. The expected life is based on the remaining term of the option. The
risk-free interest rate is based on U.S. Treasury securities according to the
remaining term of the option.
As required by the FASB's accounting standards, financial assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Depending on the product and the
terms of the transaction, the fair values option liability were modeled using a
series of techniques, including closed-form analytic formula, such as the
Black-Scholes Model, which does not entail material subjectivity because the
methodology employed does not necessitate significant judgment, and the pricing
inputs are observed from actively quoted markets.
The fair value of the 105,000 shares underlying the option outstanding as of
June 30, 2010 was determined using the Black-Scholes Model, defined in the
FASB's accounting standard of fair value measurement as level 2 inputs, and the
Company recorded the change in earnings. As a result, the option liability is
carried on the consolidated balance sheets at fair value.
12
The following table sets forth, by level within the fair value hierarchy, the
Company's financial assets and liabilities that were accounted for at fair value
as of June 30, 2010:
Carrying Value at Fair Value Measurement at
June 30, June 30,
2010 2010
----------------- ------------------------------
Level 1 Level 2 Level 3
--------- -------- ---------
Purchase option derivative liability (unaudited) $ 344,507 $ -- $344,507 $ --
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
PRC tax authorities in respect of the sale of merchandise. VAT collected from
customers, net of VAT paid for purchases, is recorded as a liability in the
balance sheet until it is paid to the relevant PRC tax authorities.
Cash
----
Cash consists of cash on hand, cash in the drugstores and cash at banks.
Restricted cash
----------------
The Company's restricted cash consists of cash in a bank as security for its
notes payable. The Company has notes payable outstanding with the bank and is
required to keep certain amounts on deposit that are subject to withdrawal
restrictions. The notes payable are generally short term in nature due to their
short maturity period of six to nine months; thus, restricted cash is classified
as a current asset. As of June 30, 2010, restricted cash and notes payable
amounted to $807,941 and $1,587,026, respectively. As of March 31, 2010,
restricted cash and notes payable amounted to $746,703 and $1,464,241,
respectively.
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. At June 30, 2010 and March 31, 2010, management concluded all amounts
are collectible and allowance for doubtful accounts was not deemed necessary.
13
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 lease term or remaining lease period of the underlying assets.
Following are the estimated useful lives of the Company's other property and
equipment:
Estimated Useful Life
---------------------
Leasehold improvements 3-10 years
Motor vehicles 5 years
Office 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. Based on its review, the Company believes that, as of June 30,
2010 and March 31, 2010, there was no impairment.
Income taxes
-------------
The Company records income taxes pursuant to the accounting standards for income
taxes. The accounting standards for income taxes 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 were no deferred tax amounts at June 30, 2010 and
March 31, 2010.
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.
14
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 are sold in the PRC are subject to a
Chinese value-added tax on the gross sales price. The value-added tax rate vary
from 0% 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 or acquiring its 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 FASB's
accounting standards regarding accounting for stock-based compensation and
accounting for equity instruments that are issued to other than employees for
acquiring or in conjunction with selling goods or services. Costs are measured
at the estimated fair market value of the consideration received or the
estimated fair value of the equity instruments issued, whichever is more
reliably determinable. The value of equity instruments issued for consideration
other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services as
defined by these accounting standards. In the case of equity instruments issued
to consultants, the fair value of the equity instrument is recognized over the
term of the consulting agreement.
Advertising and promotion costs
----------------------------------
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs amounted to $39,419 and $97,432 for the three months ended June
30, 2010 and 2009, 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 by reducing the carrying value of
inventories and are subsequently transferring the amounts to cost of goods sold
when the inventories are sold, unless those allowances are specifically
identified as reimbursements for advertising, promotion and other services, in
which case they are recognized as a reduction of the related advertising and
promotion or other service costs.
For the three months ended June 30, 2010 and 2009, the Company recognized vendor
allowances of $269,979 and $46,802 in cost of goods sold, respectively.
Distribution costs
-------------------
Distribution costs represent the costs of transporting merchandise from
warehouse to stores. These costs are expensed as incurred and are included in
sales, marketing and other operating expenses.
15
Operating leases
-----------------
The Company leases premises for retail drugstores, warehouse, offices, and land
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 10-year term with a renewal option upon the
expiration of the lease. The Company has historically been able to renew a
majority of its drugstores leases. Under the terms of the lease agreements, the
Company has no legal or contractual asset retirement obligations at the end of
the lease. Land leased from government is amortized on a straight-line basis
over a 30-year term.
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 subsidiaries 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 subsidiaries'
and VIEs' assets and liabilities 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.
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 and loss only consist of changes in foreign currency
exchange rates. Accumulated other comprehensive loss in the statement of
shareholders' equity amounted to $262,838 and $362,260 as of June 30, 2010 and
March 31, 2010, respectively. The balance sheet amounts with the exception of
equity at June 30, 2010 and March 31, 2010 were translated at 1 RMB to $0.14730
USD and at 1 RMB to $0.14670 USD, respectively. The average translation rates
applied to income and cash flow statement amounts for the three months ended
June 30, 2010 and 2009 were at 1 RMB to $0.14673 USD and at 1 RMB to $0.14663
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 and restricted cash. The Company balances at
financial institutions located in Hong Kong and China. The Company maintains
balances at financial institutions which, from time to time, may exceed Hong
Kong Deposit Protection Board insured limits for the banks located in Hong Kong.
Balances at financial institutions or state-owned banks within the PRC are not
covered by insurance. As of June 30, 2010 and March 31, 2010, the Company had
deposits totaling $4,884,053 and $1,533,175 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.
16
For the three months ended June 30, 2010 and 2009, 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 ended June 30, 2010 and
2009, respectively.
For the three months ended June 30, 2010, two vendors collectively accounted for
32% of the Company's total purchases and 26% of total inventory prepayment. For
the three months ended June 30, 2009, two vendors collectively accounted for 30%
of the Company's total purchases and 1% of total accounts payable.
Recently issued accounting pronouncements
--------------------------------------------
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 adopted this standard and the standard did not have
material effect on the Company's consolidated financial statements.
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 adoption of this ASU did not 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 adoption of this ASU did not have a material impact on
its consolidated 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 adoption of this ASU did not have a material impact on
its consolidated statements.
17
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 adopted the disclosures standards, except for the disclosures
to be adopted for fiscal year beginning after December 15, 2010, and the
adoption of this ASU did not have a material impact on its consolidated
financial instruments.
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements," or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
In April 2010, the FASB issued Accounting Standards Update 2010-13,
"Compensation-Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades," or ASU 2010-13. ASU 2010-13
provides amendments to Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in currency of a market in which a
substantial porting of the entity's equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company does not expect the adoption of ASU 2010-17
to have a material impact on its consolidated financial statements.
18
Reclassification
----------------
Certain prior period amounts have been reclassified to conform to the current
period presentation. These classifications have no effect on net income.
Note 3 - OTHER CURRENT ASSETS
Other current assets consist of the following:
June 30,
2010 March 31,
(unaudited) 2010
--------------------- -------------------
Prepaid rental expense $ 1,352,933 $ 1,205,881
Lease rights transfer fees (1) 100,330 92,021
Prepaids and other assets 177,340 33,265
--------------------- -------------------
Total $ 1,630,603 $ 1,331,167
===================== ===================
(1) Lease rights transfer fees are money paid by the Company to secure store
rentals in coveted areas. These additional costs of acquiring the right to
lease new store locations are capitalized and amortized over the period of
the initial lease term.
19
Note 4 - PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2010 and March 31, 2010 consisted of the
following:
June 30,
2010 March 31,
(unaudited) 2010
------------ ------------
Leasehold improvements $ 2,755,828 $ 2,588,627
Office equipment and furniture 509,717 379,668
Motor vehicles 162,665 162,665
------------ ------------
Total 3,428,210 3,130,960
Less: Accumulated depreciation and amortization 2,101,785 1,944,668
------------ ------------
Property and equipment, net $ 1,326,425 $ 1,186,292
============ ============
Total depreciation expense for property and equipment for the three months ended
June 30, 2010 and 2009 was $148,584 and $121,033, respectively. No depreciation
expense was included in cost of goods sold for the 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 merchandise to locations ready for sale is not material.
Note 5 - ADVANCES TO SUPPLIERS
Advances to suppliers is money deposited or advanced to outside vendors for
future inventory purchases. Most of the Company's vendors require a certain
amount of money to be deposited with them as a guarantee that the Company will
receive its purchase on a timely basis. This amount is refundable and bears no
interest. As of June 30, 2010 and March 31, 2010, advances to suppliers amounted
to $10,179,812 and $6,850,240, respectively.
Note 6 - LONG TERM DEPOSITS
Long term deposits includes 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 June 30, 2010 and March 31, 2010, long term deposit for retail
leases amounted to $2,321,115 and $2,311,661, respectively.
20
Note 7 - PREPAID - NONCURRENT
Prepaid - noncurrent consist of the following:
June 30,
2010 March 31,
(unaudited) 2010
------------- -----------
Prepayment for lease of land use right - noncurrent (1) $ 4,234,875 $ 4,254,300
Prepayment for new entity (2) 1,031,100 1,026,900
Prepayment for construction 159,986 -
Lease rights transfer fees-noncurrent 205,728 227,763
Prepaids and other assets 39,971 -
------------- ----------
Total $ 5,671,660 $ 5,508,963
============= ===========
(1) Prepayment for lease of land use right is a payment made to a local
government in connection with entering into a 30-year operating land lease
agreement. As of June 30, 2010 and March 31, 2010, the balance amounted to
$4,234,875 and $4,254,300, respectively.
(2) In connection with the same lease agreement, the Company prepaid
$1,031,100 (RMB 7,000,000) to establish a new entity, Hangzhou Jiuxin
QianHong Agriculture Development Ltd. On August 10, 2010, the entity
was established with registered capital of $1,480,000 (RMB 10,000,000).
Note 8 - STATUORY RESERVE
Statutory reserves represent restricted retained earnings. Based on 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.
Appropriations to the above statutory reserves are accounted for as a transfer
from unrestricted earnings to statutory reserves. During the three months ended
June 30, 2010 and 2009, the Company made total appropriations to these statutory
reserves of $0 and $0, respectively. The Company fulfilled the 50% registered
capital requirement as of March 31, 2009. Therefore, during the three months
ended June 30, 2010 and 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 the Company does not do so.
These statutory reserves are not distributable as cash dividends.
Note 9 - TAXES
Income Tax
-----------
The Company is registered in Nevada whereas its subsidiary, Renovation HK, is
registered in Hong Kong, and conducts all of its business 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.
21
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 PRC 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 2009 and 2010.
Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the year incurred. No significant penalties
or interest relating to income tax were incurred during the three months ended
June 30, 2010 and 2009. GAAP also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transition.
The following table reconciles the U.S. statutory tax rates to the Company's
effective tax rate for the three months ended June 30, 2010 and 2009
(unaudited):
2010 2009
---------- ----------
U.S. Statutory rates 34% 34%
Foreign income not recognized in USA (34) (34)
China income taxes 25 25
Other (a) 4 2
---------- ----------
Effective tax rate 29% 27%
---------- ----------
(a) The 4% and 2% for the three months ended June 30, 2010 and 2009,
respectively, represents the expenses incurred by the Company that
were not subject to PRC income tax.
Jo-Jo Drugstores is incorporated in the U.S. and has incurred a net operating
loss for income tax purposes for 2010. As of June 30, 2010, the estimated net
operating loss carryforwards for U.S. income tax purposes amounted to $379,000
which may be available to reduce future years' taxable income. These
carryforwards will expire, if not utilized by 2030. Management believes that the
realization of the benefits arising from this loss appears to be uncertain due
to the Company's limited operating history and continuing losses for U.S. income
tax purposes. Accordingly, the Company has provided a 100% valuation allowance
at June 30, 2010. The valuation allowance at June 30, 2010 was $129,000. The
Company's management reviews this valuation allowance periodically and makes
adjustments as necessary. The Company had no net operating loss as of March 31,
2010.
The Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $15,513,643 as of June 30, 2010, which are included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for U.S.
deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the future.
Value Added Tax
-----------------
Sales of products are subject to VAT ranging from 0% to 17%. VAT on sales and on
purchases amounted to $2,454,477 and $1,987,825 for the three months ended June
30, 2010, respectively, and $1,894,552 and $1,461,063 for the three months ended
June 30, 2009, 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 June 30, 2010 and March 31, 2010 consisted of the following:
June 30,
2010 March 31,
(unaudited) 2010
------------ -----------
VAT $ 252,238 $ 341,989
Income tax 856,435 875,868
Others 32,036 17,226
------------ -----------
Total taxes payable $ 1,140,709 $ 1,235,083
============ ===========
22
Note 10 - SHORT TERM LOANS
Short term loans represent amounts due to various banks and are normally due on
demand or within one year. These loans generally can be renewed with the banks.
Short term bank loans at June 30, 2010 and March 31, 2010, consisted of the
following:
June 30, 2010 March 31,
(unaudited) 2010
------------------ -----------
Two loans with Hangzhou Bank, due September 2010 with annual
interest at 4.86%, secured by the personal properties of
certain of the Company's shareholders $ 1,178,400 $ 586,800
Hangzhou Bank, due July 2010 with annual interest at 4.86%,
secured by the personal properties of certain of the
Company's shareholders 294,600 293,400
------------------ -----------
Total $ 1,473,000 $ 880,200
================== ===========
All short term loans were repaid subsequently to June 30, 2010. Interest expense
for the three months ended June 30, 2010 and 2009 amounted to $17,352 and
$18,211, respectively.
Note 11 - 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 of an employee's current compensation as required by the
local government. The Company contributed $13,076 and $15,429 in employment
benefits and pension during the three months ended June 30, 2010 and 2009,
respectively.
Note 12 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
Amounts receivable from and payable to related parties are summarized as
follows:
June 30,
2010 March 31,
(unaudited) 2010
------------- -----------
Amount due to directors (1): $ 880,107 $ 935,000
============= ===========
(1) As of June 30, 2010 and March 31, 2010, amount due to directors
represents contributions from Li Qi ,Chong'an Jin, and Lei Liu to Jiuxin
Management to enable Jiuxin Management to meet its approved PRC registered
capital requirements. Such contributions are to be returned to these
directors upon demand.
Note 13 - EARNINGS PER SHARE and CAPITAL TRANSACTIONS
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 shares,
after the share exchange transaction between the Company and Renovation HK on
September 17, 2009, collectively represented 2.50% of the Company's issued and
outstanding common stock.
Using the fair value of services provided as of March 31, 2010, the Company
estimated that the total stock compensation expense to be recognized from these
transactions was $202,120. The Company recognized $126,325 as stock compensation
expense for the year ended March 31, 2010. The remaining $75,795 was applied to
accrued legal fees, which were expensed during the year ended March 31, 2009.
On March 15, 2010, the Company agreed to issue 6,897 shares (taking into account
the 1-for-2 reverse stock split effected on April 9, 2010) of restricted common
stock to a director. The shares are to be issued in quarterly installments
beginning on March 31, 2010, and $9,976 was recorded as director compensation
expense for the three months ended June 30, 2010.
On April 9, 2010, the Company effected a 1-for-2 reverse split of its issued and
outstanding common shares and a proportional reduction of its authorized common
shares. Therefore, all share and per share amounts used in the Company's
consolidated financial statements and notes thereto have been retroactively
restated to reflect the 1-for-2 reverse stock split.
23
On May 1, 2010, the Company agreed to issue 2,340 shares of common stock to its
legal counsel, and $3,744 was recorded as service compensation expense for the
three months ended June 30, 2010.
On May 14, 2010, the Company entered into an agreement pursuant to which the
Company agreed to issue 10,000 shares of restricted common stock to its chief
financial officer upon the adoption of a stock incentive plan (the "Plan"). The
shares are to vest in five installments and distributed to the chief financial
officer at the end of the agreement's term, and $8,169 was recorded as officer
compensation expense for the three months ended June 30, 2010.
The Company also agreed under the agreement to issue 4,000 shares of restricted
common stock from the Plan as a bonus to its chief financial officer and $18,640
was recorded as compensation expense for the three months ended June 30, 2010.
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.
Earnings per share
--------------------
The Company reports earnings per share in accordance with the provisions of
FASB's related accounting standard. This standard requires presentation of basic
and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock.
The following is a reconciliation of the basic and diluted earnings per share
computation:
Three Months Ended
June 30,
2010 2009
(unaudited) (unaudited)
------------ --------------
Net income for earnings per share $ 2,152,464 $ 1,599,161
Weighted average shares used in basic computation
Basic and diluted 12,653,848 7,900,000
Earnings per share
------------ --------------
Basic and diluted $ 0.17 $ 0.20
For the three months ended June 30, 2010, 105,000 shares underlying the
outstanding purchase option were excluded from the diluted earnings per share
calculation as they are anti-dilutive. For the three months ended June 30, 2009,
there was no purchase option outstanding.
All share and per share amounts used in the Company's consolidated financial
statements and notes thereto have been retroactively restated to reflect the
1-for-2 reverse stock split effected on April 9, 2010.
Note 15 - SEGMENTS
The Company sells prescription and over-the-counter medicines, traditional
Chinese medicines, which are medicines derived from Chinese herbs, Chinese
herbs, dietary supplement, medical instruments and sundry items. The class of
customers, selling practice and distribution process are the same for all
products. The Company's chief operating decision-makers (i.e. 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.
24
The Company does not have long-lived assets located outside the PRC. In
accordance with the enterprise-wide disclosure requirements of FASB's accounting
standard, the Company's net revenue from external customers by main segment is
as follows:
Three Months Ended
June 30,
2010 2009
(unaudited) (unaudited)
------------ ------------
Prescription Drugs $ 6,162,598 $ 4,498,498
Over-The-Counter (OTC) Drugs 5,441,859 2,560,209
Nutritional Supplements 1,731,081 525,937
Traditional Chinese Medicine Products 1,290,891 1,230,105
Sundry Products 371,263 2,592,740
Medical Devices 209,736 273,975
------------ ------------
Total $15,207,428 $ 11,681,464
============ ============
Note 16 - 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 its store premises and for the land that it has
leased from a local government to be used potentially for the cultivation of
Chinese medicinal herbs.
One of the Company's retail spaces and its corporate office are leased from Lei
Liu, a director of the Company, under long-term operating lease agreements from
August 2008 to August 2010 and from January 2008 to March 2012, respectively.
The rent expense for the retail space and the corporate office are $406,814 and
$42,531 for the three months ended June 30, 2010 and 2009, respectively. For the
three months ended June 30, 2010 and 2009, rent paid to Mr. Liu amounted to
$44,190 and $0, respectively.
The Company's commitments for minimum rental payments under its leases for the
next five years and thereafter are as follows:
Years ending March 31, Amount
--------------------------------------------------------------------- ----------
2011 $1,411,140
2012 1,698,291
2013 1,477,275
2014 1,235,845
2015 844,088
Thereafter 853,504
Rental expense for the three months ended June 30, 2010 and 2009 amounted to
$432,428 and $257,454, respectively.
As of June 30, 2010 and March 31, 2010, prepayment on retail spaces and
corporate office rental expense amounted to $1,352,934 and $1,205,881,
respectively.
25
Logistics Services Commitments
--------------------------------
The Company renewed its agreement for logistics services ("Logistics Agreement")
with Zhejiang Yingte Logistics Co., Ltd. ("Yingte") to provide logistics and
other related services from January 1, 2010 to December 31, 2010. Pursuant to
the Logistics Agreement, Yingte accepts goods from the Company's suppliers,
stores the goods and then delivers the goods to the Company's store locations as
directed by the Company, and 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 June 30, 2010 and March 31, 2009, the Company did not have any contingent
liabilities.
Legal Proceedings
------------------
In December 2009, Jiuzhou Pharmacy filed suit against The Ventana Group, LLC and
Michael Hom in the California Superior Court for the County of San Mateo,
alleging breach of contract of an agreement entered into with the defendants in
2008 and seeking damages of $25,000. The suit was subsequently amended to remove
Michael Hom as a defendant. In May 2010, Jiuzhou Pharmacy sought for default
judgment against the defendants, which was granted on July 14, 2010. Jiuzhou
Pharmacy is in the process of executing the judgment against The Ventana Group,
LLC.
Note 17 - SUBSEQUENT EVENT
In connection with the land use right lease agreement with a local government,
Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd. ("Qianhong") was
established with registered capital of $1,480,000 (RMB 10,000,000) on August 10,
2010. As of June 30, 2010, the Company prepaid $1,031,100 (RMB 7,000,000) of
registered capital (Note 7), and the remaining $444,000 (RMB 3,000,000) of
registered capital was contributed on August 9, 2010.
The Company has performed an evaluation of subsequent events through the date
these consolidated financial statements were issued.
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following management's discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto and the other
financial information appearing elsewhere in this item. In addition to
historical information, the following discussion contains certain
forward-looking statements within the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. These statements relate to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "may", "will", "could", "expect",
"anticipate", "intend", "believe", "estimate", "plan", "predict", and similar
terms or terminology, or the negative of such terms or other comparable
terminology. Although we believe the expectations expressed in these
forward-looking statements are based on reasonable assumptions within the bound
of our knowledge of our business, our actual results could differ materially
from those discussed in these statements. Factors that could contribute to such
differences include, but are not limited to, those discussed in the "Risk
Factors" section of the Company's current report on Form 8-K filed with the SEC
on September 24, 2009. We undertake no obligation to update publicly any
forward-looking statements for any reason even if new information becomes
available or other events occur in the future.
Our financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See "Exchange
Rates" below for information concerning the exchanges rates at which Renminbi
("RMB") 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"), a Hong Kong
company, and Renovation became a wholly-owned subsidiary of the Company. On the
closing date, the Company issued 7,900,000 of its common stock to the
stockholders of Renovation in exchange for 100% of the capital stock of
Renovation. Prior to the share exchange transaction, the Company had 2,100,000
shares of common stock issued and outstanding. After the share exchange
transaction, the Company had 10,000,000 shares of common stock issued and
outstanding, of which 79% were owned by the stockholders of Renovation. The
management members of Renovation 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 (the accounting acquirer), with the assets and liabilities, and
revenues and expenses, of the Company being included effective from the date of
the share exchange transaction.
Renovation is a holding company that, through its wholly-owned PRC
subsidiary, Zhejiang Jiuxin Investment Management Co., Ltd. ("Jiuxin
Management"), controls the three HJ Group companies in the PRC, 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.
Developments during the Quarter
On April 7, 2010, Jiuzhou Pharmacy became the first company in Zhejiang
Province to be granted an Internet Pharmaceutical Transaction Service
Qualification Certificate (the "Certificate") by the State Food and Drug
Administration of Zhejiang Province. The Certificate allows Jiuzhou Pharmacy to
engage in online retail pharmaceutical sales throughout the People's Republic of
China.
On April 9, 2010, the Company effected a 1-for-2 reverse split of its
issued and outstanding common shares and a proportional reduction of its
authorized common shares.
27
On April 28, 2010, the Company completed a registered public offering of
3.5 million shares of common stock at a price of $5.00 per share, with gross
proceeds to the Company of approximately $17.5 million, prior to deducting
underwriting discounts, commissions and offering expenses.
On May 18, 2010, the three owners of Jiuzhou Pharmacy completed the
registration of their pledge obligations under the Equity Pledge Agreement,
which is a part of the contractual arrangements, with the local State
Administration of Industry and Commerce.
In connection with the 30-year lease that we entered into in February 2010
with The People's Government of Qianhong Village in Lin'an, Zhejiang Province,
we have established Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd.
("Qianhong") as a wholly-owned subsidiary of Jiuxin Management with registered
capital of RMB 10 million (approximately $1.48 million) on August 10, 2010. RMB
7 million (approximately $1,031,100) of the registered capital was prepaid as of
June 30, 2010, and the balance of RMB 3 million (approximately $444,000) was
paid on August 9, 2010.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements in accordance with
accounting principles generally accepted in the United States, we are required
to make judgments, estimates and assumptions that affect: (i) the reported
amounts of our assets and liabilities; (ii) the disclosure of our contingent
assets and liabilities at the end of each reporting period; and (iii) the
reported amounts of revenue and expenses during each reporting period. We
continually evaluate these estimates based on our own historical experience,
knowledge and assessment of current business and other conditions, our
expectations regarding the future based on available information and reasonable
assumptions, which together form our basis for making judgments about matters
that are not readily apparent from other sources. Since the use of estimates is
an integral component of the financial reporting process, our actual results
could differ 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 (which is nominal) 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.
28
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 by Reseller 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.
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, leasehold
improvements, long term deposits, and long term prepayment. 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 lease term
or remaining lease periods. Our leases have a three to ten 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 three months ended June 30,
2010 and 2009.
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 our review, we believe that, as of June 30, 2010,
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 three months ended June 30, 2010 and 2009 have
been immaterial.
29
Recent Accounting Pronouncements
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 adopted this standard and the standard did not have
material effect on the Company's consolidated financial statements.
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 adoption of this ASU did not 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 adoption of this ASU did not have a material impact on
its consolidated 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 adoption of this ASU did not have a material impact on
its consolidated statements.
30
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 adopted the disclosures standards, except for the disclosures
to be adopted for fiscal year beginning after December 15, 2010, and the
adoption of this ASU did not have a material impact on its consolidated
financial statements.
In February 2010, the FASB issued ASU 2010-09, "Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements," or ASU 2010-09.
ASU 2010-09 primarily rescinds the requirement that, for listed companies,
financial statements clearly disclose the date through which subsequent events
have been evaluated. Subsequent events must still be evaluated through the date
of financial statement issuance; however, the disclosure requirement has been
removed to avoid conflicts with other SEC guidelines. ASU 2010-09 was effective
immediately upon issuance and was adopted in February 2010.
In April 2010, the FASB issued Accounting Standards Update 2010-13,
"Compensation-Stock Compensation (Topic 718): Effect of Denominating the
Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades," or ASU 2010-13. ASU 2010-13
provides amendments to Topic 718 to clarify that an employee share-based payment
award with an exercise price denominated in currency of a market in which a
substantial porting of the entity's equity securities trades should not be
considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award as a liability
if it otherwise qualifies as equity. The amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2010. The Company does not expect the adoption of ASU 2010-17
to have a material impact on its consolidated financial statements.
31
Results of Operations
The following table summarizes our results of operations for the three months
ended June 30, 2010 and 2009.
Three Months Ended
June 30,
2010 2009
--------------------------- ---------------------------
Percentage Percentage
of of
Amount total revenue Amount total revenue
------------ ------------- ----------- -------------
Revenues $15,207,428 100.0% $11,681,464 100.0%
Gross Profit $ 4,613,896 30.3% $ 3,023,896 25.9%
Selling Expenses $ 823,358 5.4% $ 477,777 4.1%
General and Administrative Expenses $ 773,762 5.1% $ 365,210 3.1%
Income from Operations $ 3,016,776 19.8% $ 2,180,909 18.7%
Other Income (Expense), Net $ (57,532) (0.4)% $ 6,635 0.1%
Change in Fair Value of Purchase Option
Derivative Liability $ 57,944 0.4% $ - -%
Income Tax Expenses $ 864,724 5.7% $ 588,383 5.0%
Net Income $ 2,152,464 14.2% $ 1,599,161 13.7%
Revenue. Our revenue increased by $3,525,964 or 30.2% to $15,207,428 for the
three months ended June 30, 2010 from $11,681,464 for the three months ended
June 30, 2009 due to the opening of new store locations and increased same store
sales. Of this increase, $1,135,750 or 7% of the increase was attributable to
new stores, with the remainder primarily attributable to our maturing stores
that we opened during the three months ended June 30, 2010. We operated 31
stores as of June 30, 2010, as compared to 19 stores as of June 30, 2009. We
anticipate that our overall revenue will continue to increase as we open
additional stores.
Gross Profit. Our gross profit increased by $1,590,000 or 52.6% to $4,613,896
for the three months ended June 30, 2010 from $3,023,896 for the three months
ended June 30, 2009. Our gross margin increased from 25.9% for the three months
ended June 30, 2009 to 30.3% for the three months ended June 30, 2010 as a
result of selling more over-the-counter drugs. 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. However, in order to
increase sales volume we may lower our prices which may have an adverse effect
on our margins. 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.
Selling Expenses. Our selling expenses increased by $345,581 or 72.3% to
$823,358 for the three months ended June 30, 2010 from $477,777 for the three
months ended June 30, 2009. The increase in selling expenses was primarily a
result of operating additional store locations. Selling expenses as a percentage
of our revenue increased slightly to 5.4% for the three months ended June 30,
2010 from 4.1% for the three months ended June 30, 2009. We expect that our
selling expenses will increase as we continue to expand our store network within
the city of Hangzhou as well as into other cities within Zhejiang Province.
General and Administrative Expenses. Our general and administrative expenses
increased by $408,552 or 111.9% to $773,762 for the three months ended June 30,
2010 from $365,210 for the three months ended June 30, 2009. General and
administrative expenses as a percentage of our revenue increased to 5.1% for the
three months ended June 30, 2010 as compared to 3.1% for the three months ended
June 30, 2009. The increase in general administrative expenses relate to our
operating as a US publicly traded company during the three months ended June 30,
2010. As we continue to open drugstores in Hangzhou and to expand into other
cities within Zhejiang Province, 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 in absolute dollars as well as a
percentage of total revenues.
Income from Operations. As a result of the increased gross margin, our income
from operations increased by $835,867 or 38.3% to $3,016,776 for the three
months ended June 30, 2010 from $2,180,909 for the three months ended June 30,
2009. Our operating margin for the three months ended June 30, 2010 and 2009 was
19.8% and 18.7%, respectively.
32
Income Taxes. Our income tax expense increased to $864,724 for the three months
ended June 30, 2010 from $588,383 for the three months ended June 30, 2009 as a
result of increased operating income. Our effective tax rate increased from
26.9% for the three months ended June 30, 2009 to 28.6% for the three months
ended June 30, 2010.
Net Income. As a result of the foregoing, our net income increased to $2,152,464
for the three months ended June 30, 2010 from $1,599,161 for the three months
ended June 30, 2009.
Liquidity
Three months ended June 30, 2010
For the three months ended June 30, 2010, we used cash in operating
activities of $527,675, as compared to cash generated by operating activities of
$454,652 for the three months ended June 30, 2009. The decrease is primarily
attributable an increase in advances paid to suppliers of $2,736,505 offset by
an increase in net income of $553,303 and an increase in accounts payable of
$1,207,536 from the three months ended June 30, 2009 to June 30, 2010.
We used $442,709 in investing activities during the three months ended June
30, 2010, as compared to cash used in investing activities of $178,561 during
the three months ended June 30, 2009 as a result of our store expansion during
the three months ended June 30, 2010.
Cash provided by financing activities was $15,923,536 for the three months
ended June 30, 2010, as compared to cash provided by financing activities of $0
for the three months ended June 30, 2009. The increase is due to the equity
offering which raised $15.4 million in net proceeds, after deducting underwriter
discount, commission, and offering expenses.
As of August 13, 2010, we had cash of $13,915,167. Our total current assets
as of June 30, 2010 were $34,049,410 and our total current liabilities,
excluding the $344,507 derivative liability, were $9,035,363 which resulted in a
net working capital of $25,014,047 as of June 30, 2010.
Capital Resources
In April 2010, we sold 3.5 million shares of common stock in a public
offering at a price of $5.00 per share for gross proceeds of approximately $17.5
million. We anticipate that our existing capital resources will enable us to
continue to add new drugstores in Zhejiang Province. However, if make a
significant acquisition that cannot be financed with our working capital, we may
need additional capital.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
When we open store locations, we typically enter into lease agreements that
are generally between three to ten years. Our commitments for minimum rental
payments under our leases for the next five years and thereafter are as follows:
Three months ending June 30,
----------------------------
2011 $ 1,411,140
2012 1,698,291
2013 1,477,275
2014 1,235,845
2015 884,088
Thereafter 853,504
33
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, 2010 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, from January 1,
2010 to December 31, 2010, 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.
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 U.S. Dollars at the rate of
RMB8.30: USD$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 USD was adjusted to RMB8.11: USD$1.00 as of July 21, 2005. The
People's Bank of China announces the closing price of a foreign currency such as
USD$ 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 USD 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 U.S. Dollars for
the purposes of preparing the consolidated financial statements or otherwise
stated in this report were as follows:
June 30, March 31, June 30,
2010 2010 2009
---------- ---------- ------------
Balance sheet items, except for the USD1:RMB USD1:RMB USD1:RMB
registered and paid-up capital, as of end 0.14730 0.14670 0.1465
of period/year
Amounts included in the statement of USD1:RMB USD1:RMB USD1:RMB
operations, statement of changes in 0.14673 0.14664 0.14663
stockholders' equity and statement of cash
flows for the period/ year ended
No representation is made that RMB amounts have been, or would be, converted
into U.S. Dollars at the above rates.
Inflation
We believe that inflation has not had a material effect on our operations
to date.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2010, we carried out an evaluation, under the supervision
and with the participation of our management, including our chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.
Based upon that evaluation, our chief executive officer and chief financial
officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were ineffective at the reasonable assurance
level.
In our annual report on Form 10-K for the year ended March 31, 2010, we
reported certain weaknesses involving control activities, primarily accounting
and finance personnel weaknesses. Our current accounting staff members remain
relatively inexperienced in U.S. GAAP- based reporting and require additional
training so as to meet with the higher demands necessary to fulfill the
requirements of U.S. GAAP-based reporting and SEC rules and regulations.
The Company's management has identified the steps it believes are necessary
to address the weaknesses described above, and expect that we will
satisfactorily address the control deficiencies and weaknesses relating to these
matters by the end of our fiscal year ending March 31, 2011, 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
period covered by this Quarterly Report on Form 10-Q that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Except as described below, we know of no material, existing or pending
legal proceedings against us, nor are we involved as a plaintiff in any material
proceeding or pending litigation. There are no proceedings in which any of our
directors, officers or affiliates, or any registered or beneficial stockholder,
is an adverse party or has a material interest adverse to our company.
On December 8, 2009, Jiuzhou Pharmacy filed suit against The Ventana Group,
LLC and Michael Hom in the California Superior Court for the County of San Mateo
(Case Number CV490272), alleging breach of contract of an agreement entered into
with the defendants in 2008 and seeking damages of $25,000. The suit was
subsequently amended to remove Mr. Hom as a defendant. In May 2010, Jiuzhou
Pharmacy sought for default judgment against the remaining defendant, which was
granted on July 14, 2010. Jiuzhou Pharmacy is in the process of executing the
judgment against the defendant.
Item 1A. Risk Factors.
As of and for the three months ended June 30, 2010, there were no material
changes in our risk factors from those disclosed in Part I, Item 1A, of our
annual report on Form 10-K as of and for the year ended March 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Reserved.
Item 5. Other Information.
None
Item 6. Exhibits.
EXHIBIT INDEX
Exhibit
Number Description
------- ----------------------------------------------------------------------------------
2 Share Exchange Agreement among Kerrisdale Mining Corporation ("Kerrisdale"),
certain of its stockholders, Renovation Investment (Hong Kong) Co., Ltd.
("Renovation") and its shareholders dated September 17, 2009 (1)
3.1 Articles of Incorporation of Kerrisdale (2)
3.2 Certificate of Amendment to Articles of Incorporation of Kerrisdale filed with the
Nevada Secretary of State on July 14, 2008 (3)
3.3 Articles of Merger between Kerrisdale Mining and China Jo-Jo Drugstores, Inc.
filed with the Nevada Secretary of State on September 22, 2009 (1)
3.4 Bylaws (2)
3.5 Text of Amendments to the Bylaws (3)
3.6 Certificate of Change Pursuant to NRS 78.209 with an effective date of April 9,
2010 (8)
4 Specimen of Common Stock Certificate (2)
10.1 Consulting Services Agreement between Zhejiang Jiuxin Investment Management Co.,
Ltd. ("Jiuxin Management") and Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd.
("Jiuzhou Pharmacy") dated August 1, 2009 (1)
36
10.2 Operating Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
August 1, 2009 (1)
10.3 Equity Pledge Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners
dated August 1, 2009 (1)
10.4 Option Agreement among Jiuxin Management, Jiuzhou Pharmacy and its owners dated
August 1, 2009 (1)
10.5 Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Pharmacy and its
owners dated August 1, 2009 (1)
10.6 Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou
Clinic of Integrated Traditional and Western Medicine (General Partnership)
("Jiuzhou Clinic") dated August 1, 2009 (1)
10.7 Operating Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
August 1, 2009 (1)
10.8 Equity Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners
dated August 1, 2009 (1)
10.9 Option Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated
August 1, 2009 (1)
10.10 Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its
owners dated August 1, 2009 (1)
10.11 Consulting Services Agreement between Jiuxin Management and Hangzhou Jiuzhou
Medical & Public Health Service Co., Ltd. ("Jiuzhou Service") dated August 1,
2009 (1)
10.12 Operating Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
August 1, 2009 (1)
10.13 Equity Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners
dated August 1, 2009 (1)
10.14 Option Agreement among Jiuxin Management, Jiuzhou Service and its owners dated
August 1, 2009 (1)
10.15 Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its
owners dated August 1, 2009 (1)
10.16 Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou
Pharmacy dated October 27, 2009 (4)
10.17 Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Pharmacy
dated October 27, 2009 (4)
10.18 Amendment to Option Agreement between Jiuxin Management and Jiuzhou Pharmacy dated
October 27, 2009 (4)
10.19 Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
Pharmacy dated October 27, 2009 (4)
10.20 Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou
Clinic dated October 27, 2009 (4)
10.21 Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Clinic
dated October 27, 2009 (4)
10.22 Amendment to Option Agreement between Jiuxin Management and Jiuzhou Clinic dated
October 27, 2009 (4)
10.23 Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
Clinic dated October 27, 2009 (4)
10.24 Amendment to Consulting Services Agreement between Jiuxin Management and Jiuzhou
Service dated October 27, 2009 (4)
10.25 Amendment to Operating Agreement between Jiuxin Management and Jiuzhou Service
dated October 27, 2009 (4)
10.26 Amendment to Option Agreement between Jiuxin Management and Jiuzhou Service dated
October 27, 2009 (4)
10.27 Amendment to Voting Rights Proxy Agreement between Jiuxin Management and Jiuzhou
Service dated October 27, 2009 (4)
10.28 Director Offer Letter with Marc Thomas Serrio dated March 15, 2010 (6)
10.29 Indemnification Agreement with Marc Thomas Serrio dated March 15, 2010 (6)
10.30 Loanout Agreement with Worldwide Officers, Inc. dated May 14, 2010 (9)
10.31 Indemnification Agreement with Mr. Bennet Tchaikovsky dated May 14, 2010 (9)
37
31.1 Section 302 Certification by the Corporation's Chief Executive Officer *
31.2 Section 302 Certification by the Corporation's Chief Financial Officer *
32.1 Section 906 Certification by the Corporation's Chief Executive Officer *
32.2 Section 906 Certification by the Corporation's Chief Financial Officer *
99.1 Agreement between Jiuzhou Pharmacy and Yingte Logistics Co., Ltd. ("Yingte
Logistics") dated January 1, 2009 (1)
99.2 Form of CFO Services Agreement entered into between Jiuzhou Pharmacy and Worldwide
Officers, Inc. on July 30, 2009 (5)
99.3 Agreement between Jiuzhou Pharmacy and Yingte Logistics dated January 1, 2010 (7)
99.4 Project Agreement between The People's Government of Qianhong Village, Lin'an,
Zhejiang Province (the "Qianhong Local Government") and Jiuzhou Pharmacy dated
February 27, 2010 (10)
99.5 Security Deposit Agreement between the Qianhong Local Government and Jiuzhou
Pharmacy dated February 27, 2010 (10)
* Filed herewith
(1) Incorporated by reference from the Registrant's Registration Statement on Form SB-
2 filed on November 28, 2007.
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on July 15, 2008.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on September 24, 2009.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on October 30, 2009.
(5) Incorporated by reference from the Registrant's Registration Statement on Form S-
1/A filed on January 27, 2010.
(6) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on March 16, 2010.
(7) Incorporated by reference from the Registrant's Registration Statement on Form S-
1/A filed on March 23, 2010
(8) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on April 14, 2010.
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K filed
on May 17, 2010.
(10) Incorporated by reference from the Registrant's Annual Report on Form 10-K filed
on June 29, 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.
China Jo-Jo Drugstores, Inc.
(Registrant)
Date: August 16, 2010 By: /s/ Lei Liu
===============================
Lei Liu
Chief Executive Officer
Date: August 16, 2010 By: /s/ Bennet P. Tchaikovsky
===============================
Bennet P. Tchaikovsky
Chief Financial Officer
39