UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549   
 

 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 
 
Date of report (Date of earliest event reported): September 23, 2009 (September 17, 2009)


 
CHINA JO-JO DRUGSTORES, INC.

(Exact name of registrant as specified in Charter)
 
Nevada
 
333-147698
 
98-0557852
(State or other jurisdiction of
incorporation or organization)
 
(Commission File No.)
 
(IRS Employee Identification No.)
 
Room 507-513, 5th Floor A Building, Meidu Plaza
Gongshu District, Hangzhou, Zhejiang Province, P.R. China

(Address of Principal Executive Offices)
 
+86 (571) 88077078

(Registrant’s Telephone number)
 
Kerrisdale Mining Corporation
Floor 8, Xueyuan Tower
No. 1 Zhichun Road
Beijing, People’s Republic of China 100083

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act (17 CFR 240.14a-12(b))

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 


 
 

 
 
Forward Looking Statements

This Form 8-K and other reports filed by Registrant from time to time with the Securities and Exchange Commission (collectively the “ Filings ”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, Registrant’s management as well as estimates and assumptions made by Registrant’s management. When used in the filings the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan” or the negative of these terms and similar expressions as they relate to Registrant or Registrant’s management identify forward looking statements. Such statements reflect the current view of Registrant with respect to future events and are subject to risks, uncertainties, assumptions and other factors (including the risks contained in the section of this current report entitled “Risk Factors”) relating to Registrant’s industry, Registrant’s operations and results of operations and any businesses that may be acquired by Registrant. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or planned.

Although Registrant believes that the expectations reflected in the forward looking statements are reasonable, Registrant cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, Registrant does not intend to update any of the forward-looking statements to conform these statements to actual results. The following discussion should be read in conjunction with Registrant’s pro forma financial statements and the related notes that will be filed herein.
 
Item 1.01 Entry into a Material Definitive Agreement.

As more fully described in Item 2.01 below, on September 17, 2009, Kerrisdale Mining Corporation, which effective on September 24, 2009 shall be known as China Jo-Jo Drugstores, Inc. (“the Registrant ”), executed a Share Exchange Agreement (“ Exchange Agreement ”) by and among Renovation Investment (Hong Kong) Co., Ltd., a Hong Kong limited liability company (“ Renovation ”), and the holders of 100% of Renovation’s issued and outstanding capital stock (the “ Renovation Stockholders ”), on the one hand, and the Registrant on the other hand. A copy of the form of Exchange Agreement executed by the parties is included as Exhibit 2.1 and filed with this current report on Form 8-K.

Renovation owns 100% of Zhejiang Jiuxin Investment Management Co., Ltd. (“ Jiuxin Management ”), a limited liability company organized in the People’s Republic of China (“ PRC ” or “ China ”) and a wholly foreign-owned enterprise (“ WFOE ”) under PRC laws. Jiuxin Management has entered into a series of contractual arrangements with Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“ Jiuzhou Grand Pharmacy ”), a PRC limited liability company, Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine General Partnership (“ Jiuzhou Clinic ”), a PRC general partnership, and Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd. (“ Jiuzhou Service ”), a PRC limited liability company. The contractual arrangements are discussed below in Item 2.01 under the section titled “Description of Business – Relationships with HJ Group and Their Owners.” Throughout this Form 8-K, Jiuzhou Grand Pharmacy, Jiuzhou Clinic and Jiuzhou Service are sometimes collectively referred to “ HJ Group ,” and Renovation, Jiuxin Management and HJ Group are sometimes collectively referred to as “ Grand Pharmacy Group .”

At the closing of the transaction under the Exchange Agreement (the “ Closing ”), which occurred on September 17, 2009 (the “ Closing Date ”), the Registrant issued 15,800,000 shares of its common stock to the Renovation Stockholders in exchange for 100% of the capital stock of Renovation (the “ Exchange ”).

As a result of the transaction under the Exchange Agreement, the Registrant acquired 100% of the capital stock of Renovation and consequently acceded to the businesses and operations of Grand Pharmacy Group, which are conducted in China.

Terms and Conditions of the Share Exchange Agreement
 
The following is a brief description of the terms and conditions of the Exchange Agreement and the transactions contemplated thereunder that are material to the Registrant:

 
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Issuance of Common Stock . On the Closing Date, the Registrant issued 15,800,000 shares of its common stock to the Renovation Stockholders in exchange for 100% of the issued and outstanding capital stock of Renovation.

Change in Management . In connection with the Exchange, and as more fully described in Item 5.02 below, Huoqi Chen, the Registrant’s sole executive officer immediately prior to the Exchange, resigned, and Lei Liu, Bennet P. Tchaikovsky and Li Qi were appointed as the new chief executive officer, chief financial officer and secretary, respectively, effective at the Closing. Additionally, a designee of Renovation, namely Mr. Liu, was appointed to the Registrant’s board of directors effective at the Closing, and upon the satisfaction of the requirements of Section 14(f) of the Securities Exchange Act of 1934 , as amended (the “ Exchange Act ”), and Rule 14f-1 promulgated thereunder, Mr. Chen, who is also the Registrant’s sole director immediately prior to the Exchange, will resign from that position, and three additional designees of Renovation, namely Li Qi, Chongan Jin and Shike Zhu, will be appointed to the board of directors.

Item 2.01 Acquisition or Disposition of Assets

On September 17, 2009, we consummated the Exchange referenced in Item 1.01 of this Form 8-K. As a result, we acquired 100% of the capital stock of Renovation and consequently, control of the businesses and operations of its subsidiary, Jiuxin Management, and three affiliated PRC entities, namely, Jiuzhou Grand Pharmacy, Jiuzhou Clinic and Jiuzhou Service. The description of the material terms and conditions of the Exchange Agreement as described in Item 1.01 above is incorporated herein by reference.

The Exchange Agreement and the transactions contemplated thereunder were approved by our board of directors, as well as Renovation’s directors and the Renovation Stockholders. Except for the Exchange Agreement and the transactions contemplated thereunder, neither we nor our officers and directors serving prior to the consummation of the Exchange had any material relationship with Renovation or any of the Renovation Stockholders.

Other material terms and conditions of the Exchange Agreement are described under Item 1.01 above and such description is incorporated herein by reference.

As a result of the Exchange, our principal business is now the business of Grand Pharmacy Group, as more fully described below. The information provided hereinafter in this Item 2.01 with respect to Grand Pharmacy Group is intended to comply with the disclosure requirements of Form 10 prescribed under the Exchange Act.

DESCRIPTION OF BUSINESS

Except as otherwise indicated by the context, references to “we”, “us” or “our” hereinafter in this current report are to the consolidated business of Grand Pharmacy Group, except that references to “our common stock”, “our shares of common stock” or “our capital stock” or similar terms shall refer to the common stock of the Registrant.

Renovation Investment (Hong Kong) Co., Ltd.

Renovation is a limited liability company incorporated under the laws of Hong Kong Special Administrative Region (“ SAR ”) on September 2, 2008. Renovation was formed by the owners of HJ Group as a special purpose vehicle for purposes of raising capital, in accordance with requirements of the PRC State Administration of Foreign Exchange (“ SAFE ”). Specifically, on May 31, 2007, SAFE issued an official notice known as Hi Zhong Fa [2007] No. 106 (“ Circular 106 ”), which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China. Accordingly, the owners of HJ Group, namely Lei Liu, Li Qi and Chongan Jin, submitted their applications to SAFE on July 25, 2008. On August 16, 2008, SAFE approved the application, permitting these Chinese nationals to establish Renovation as an offshore, special purpose vehicle which may have foreign ownership and participate in foreign capital raising activities. After SAFE’s approval, Mr. Liu, Ms. Qi and Dr. Jin became holders of 100% of Renovation’s issued and outstanding capital stock on September 2, 2008.

 
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Zhejiang Jiuxin Investment Management Co., Ltd.

Jiuxin Management was organized in the PRC on October 14, 2008. Because all of its issued and outstanding capital stock is held by Renovation Investment, a Hong Kong company, Jiuxin Management is deemed a WFOE under PRC laws. The principal purpose of Jiuxin Management is to manage, hold and own rights in and to the businesses and profits of the HJ Group companies through a series of contractual arrangements.

We do not own any equity interests in Jiuzhou Grand Pharmacy, Jiuzhou Clinic or Jiuzhou Service, but control and receive the economic benefits of their respective business operations through contractual arrangements. Each of Jiuzhou Grand Pharmacy, Jiuzhou Clinic and Jiuzhou Service has the licenses and approvals necessary to operate its businesses in China. Through Jiuxin Management, we have contractual arrangements with each of them and their owners pursuant to which we provide consulting and other general business operation services. Through these contractual arrangements, we also have the ability to substantially influence their daily operations and financial affairs, since we are able to appoint their senior executives and approve all matters requiring approval of the equity owners. As a result of these contractual arrangements, which enable us to control each constituent HJ Group company and to receive, through Jiuxin Management, all of their profits, we are considered the primary beneficiary of HJ Group. Accordingly, we consolidate its results, assets and liabilities in our financial statements.

Other than activities relating to its contractual arrangements with HJ Group, Jiuxin Management has no other separate operations of its own.

Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd.

Jiuzhou Grand Pharmacy is a PRC limited liability company established in Zhejiang Province on September 9, 2003, with registered capital of 5 million Renminbi (“ RMB ”) which has been fully paid by its owners. Jiuzhou Grand Pharmacy’s principal offices are in Hangzhou at Room 507-513, 5th Floor, A Building, Meidu Plaza, Gongshu District. The three owners of Jiuzhou Grand Pharmacy are Lei Liu (55%), who is also the executive director of the company, Chongan Jin (23%) and Li Qi (22%). Jiuzhou Grand Pharmacy operates a chain of pharmacies in Hangzhou that is presently comprised of 20 stores.

Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (General Partnership)

Jiuzhou Clinic is a PRC general partnership established in Zhejiang Province on October 10, 2003. Jiuzhou Clinic’s principal offices are in Hangzhou City at No. 12, De Yuan Road, Da Guan Community, Gongshu District. The three partners of Jiuzhou Clinic are Lei Liu (39%), Li Qi (30%) and Chongan Jin (31%), who is also the managing partner of the partnership. Jiuzhou Clinic is a medical practice currently operating adjacent to Jiuzhou Grand Pharmacy’s Daguan branch, providing primary, urgent, minor surgical and traditional medical care services. Additionally, Jiuzhou Clinic’s physicians consult with, and examine, patients at other Jiuzhou Grand Pharmacy stores.

Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd.

Jiuzhou Service is a PRC limited liability company established in Zhejiang Province on November 2, 2005, with registered capital of RMB 500,000 which has been fully paid by its owners. Jiuzhou Service’s principal offices are in Hangzhou City at 3rd Floor, No. 2 South Road, Wenjiao Avenue, Xiasha Town. The three owners of Jiuzhou Service are Lei Liu (39%), Li Qi (30%) and Chongan Jin (31 %), who is also the executive director of the company. Jiuzhou Service is licensed as a healthcare management company and currently manages the medical clinic operating adjacent to Jiuzhou Grand Pharmacy’s Wenhua branch that provides services similar to those provided by Jiuzhou Clinic.

Relationships with HJ Group and Their Owners
 
Our relationships with the three HJ Group companies and their owners are governed by a series of contractual arrangements that they have entered into with our WFOE, Jiuxin Management.

 
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PRC regulations on foreign investment currently permit foreign companies to establish or invest in WFOEs or joint ventures that engage in wholesale or retail sales of pharmaceuticals in China. For retail sales, however, these regulations restrict the number and size of retail pharmacy stores that a foreign investor may establish. If a foreign investor owns more than 30 stores that sell a variety of branded pharmaceutical products sourced from different suppliers, such foreign investor’s ownership interests in the stores are limited to 49.0%. The contractual arrangements with Jiuzhou Grand Pharmacy enable us to bypass such restrictions, since neither we nor our WFOE, Jiuxin Management, own equity interests in Jiuzhou Grand Pharmacy, while at the same time, we retain control of the drugstore chain by virtue of the contractual arrangements.

Similarly, PRC regulations place certain restrictions on foreign ownership of medical practice. Foreign investors can acquire ownership interests through a Sino-foreign joint venture only and cannot do so through a WFOE. Since we do not have actual equity interest in Jiuzhou Clinic or Jiuzhou Service, but control these entities through contractual arrangements, the PRC regulations restricting foreign ownership of medical practice are not applicable to us or our structure.

Under PRC laws, Jiuxin Management (our WFOE), Jiuzhou Pharmacy, Jiuzhou Medical and Jiuzhou Clinic are each an independent business entity not exposed to the liabilities incurred by any of the other three entities. The contractual arrangements constitute valid and binding obligations of the parties of such agreements. Each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. Other than pursuant to these contractual arrangements as described below, the three HJ Group companies cannot transfer any funds generated from their respective operations. On August 1, 2009, Jiuxin Management entered into the following contractual arrangements with the three HJ Group companies and their owners (the “ Owners ”):

Consulting Services Agreement . Pursuant to the exclusive consulting services agreement, Jiuxin Management has the exclusive right to provide to them with general business operation services, including advice and strategic planning, as well as consulting services related to their current and future operations (the “ Services ”). Additionally, Jiuxin Management owns the intellectual property rights developed or discovered through research and development, in the course of providing the Services, or derived from the provision of the Services. Each HJ Group company pays a quarterly consulting service fees in RMB to Jiuxin Management that is equal to its profits for such quarter. This agreement is in effect unless and until terminated by written notice of either Jiuxin Management or HJ Group in the event that: (a) a party becomes bankrupt, insolvent, is the subject of proceedings or arrangements for liquidation or dissolution, ceases to carry on business, or becomes unable to pay its debts as they become due; (b) Jiuxin Management terminates its operations; or (c) circumstances arise which would materially and adversely affect the performance or the objectives of the agreement, provided that this agreement will automatically terminate on May 1, 2010 unless the Registrant completes a financing of at least $25 million and its common stock becomes listed for trading on the Nasdaq Capital Market by such date. Jiuxin Management may also terminate the agreement if HJ Group breach the terms of the agreement, or without cause.

Operating Agreement . Pursuant to the operating agreement, Jiuxin Management agrees to guarantee the HJ Group companies’ contractual performance of their agreements with any third party. In return, The Owners must appoint designees of Jiuxin Management to HJ Group’s boards of directors and senior management. In addition, each HJ Group company agrees to pledge its accounts receivable and all of its assets to Jiuxin Management. Moreover,  the HJ Group companies agree that without the prior consent of Jiuxin Management, they will not engage in any transactions that could materially affect their respective assets, liabilities, rights or operations, including, without limitation, incurrence or assumption of any indebtedness, sale or purchase of any assets or rights, incurrence of any encumbrance on any of their assets or intellectual property rights in favor of a third party or transfer of any agreements relating to their business operation to any third party. The HJ Group companies further agree to abide by corporate policies set by Jiuxin Management with respect to their daily operations, financial management and employment issues. The term of this agreement is from August 1, 2009 until the maximum period of time permitted by law, unless sooner terminated by Jiuxin Management upon 30-day prior written notice, provided that this agreement is subject to automatic termination on May 1, 2010 on conditions identical to those in the consulting services agreement. On the other hand, HJ Group cannot terminate this agreement.

 
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Equity Pledge Agreement . Pursuant to the equity pledge agreement, the Owners pledge all of their equity interests in HJ Group to Jiuxin Management in order to guarantee the three HJ Group companies’ performance of their respective obligations under the consulting services agreement. If HJ Group or the Owners breaches their respective contractual obligations, Jiuxin Management, as pledgee, will be entitled to certain rights, including the right to sell the pledged equity interests. The Owners have also agreed that upon occurrence of any event of default, Jiuxin Management shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the Owners to carry out the security provisions of this agreement and take any action and execute any instrument that Jiuxin Management may deem necessary or advisable to accomplish the purposes of this agreement. The Owners agree not dispose the pledged equity interests or take any actions that would prejudice Jiuxin Management’s interests. This agreement will expire two (2) years after HJ Group’s obligations under the consulting services agreements have been fulfilled.

Option Agreement .     Pursuant to the option agreement, the Owners irrevocably grant Jiuxin Management or its designee an exclusive option to purchase, to the extent permitted under PRC law, all or part of HJ Group’s equity interests for the cost of the initial contributions to the registered capital or the minimum amount of consideration permitted by applicable PRC law. Jiuxin Management or its designee has sole discretion to decide when to exercise the option, whether in part or in full. The term of this agreement is from August 1, 2009 until the maximum period of time permitted by law, provided that this agreement is subject to automatic termination on May 1, 2010 on conditions identical to those in the consulting services agreement.

Proxy Agreement . Pursuant to the proxy agreement, the Owners irrevocably grant a  Jiuxin Management designee with the right to exercise their voting and other ownership rights in HJ Group, including the rights to attend  any meeting of the Owners (or participate by written consent in lieu of such meeting) in accordance with applicable laws and the HJ Group companies’ incorporating documents, as well as the rights to sell or transfer all or any of the Owners’ equity interests in HJ Group, and to appoint and vote for the directors of HJ Group. The proxy agreement may be terminated by mutual consent of the parties or upon 30-day written notice from Jiuxin Management, provided that this agreement is subject to automatic termination on May 1, 2010 on conditions identical to those in the consulting services agreement.

Our Corporate Structure

The following chart illustrates our corporate structure from and after the closing of the Exchange:

 
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(1)
From and after the Exchange, the management of the Registrant includes: Lei Liu as chairman of the board of directors and chief executive officer, Bennet P. Tchaikovsky as chief financial officer, Li Qi as secretary and director, and Chongan Jin and Shike Zhu also as directors, except that the appointments of Ms. Qi, Dr. Jin and Mr. Zhu will become effective after the satisfaction of the requirements of Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. As of the date of this current report: Mr. Liu, Ms. Qi and Dr. Jin collectively own approximately 60.3%, Mr. Tchaikovsky approximately 1%, and Mr. Zhu approximately 2.5%, of the Registrant’s issued and outstanding common stock. The Registrant’s name change to “China Jo-Jo Drugstores, Inc.” shall be effective as of September 24, 2009.

 
(2)
The management of Renovation is comprised of Mr. Liu as its Managing Director. The Registrant is the sole shareholder of Renovation.

 
(3)
The management of Jiuxin Management is comprised of Mr. Liu as its Executive Director. Renovation is the sole shareholder of Jiuxin Management, and as such, Jiuxin Management is a wholly-foreign owned enterprise or WFOE.

 
(4)
Jiuxin Management controls each of Jiuzhou Grand Pharmacy, Jiuzhou Clinic and Jiuzhou Service through contractual arrangements designed to mimic their equity ownership by Jiuxin Management, subject to an automatic termination of these arrangements on May 1, 2010 unless the Registrant completes a financing of at least $25 million and its common stock becomes listed for trading on the Nasdaq Capital Market by such date. These contracts include a consulting services agreement, operating agreement, equity pledge agreement, option agreement, and proxy agreement. Most non-PRC entities such as us control or hold ownership of Chinese enterprises indirectly through WFOEs because it eliminates the need for a Chinese partner and does not require large amounts of invested capital.

 
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(5)
The management of Jiuzhou Grand Pharmacy includes: Mr. Liu as the Executive Director, Ms. Qi as the General Manager and Dr. Jin as the Supervising Director. As of the date of this current report: Mr. Liu owns 55%, Dr. Jin owns 23%, and Ms. Qi owns 22% of the issue and outstanding equity interests of Jiuzhou Grand Pharmacy.

 
(6)
The management of Jiuzhou Clinic includes: Dr. Jin as the Managing General Partner, and Mr. Liu and Ms. Qi as General Partners. As of the date of this current report: Mr. Liu owns 39%, Ms. Qi owns 30%, and Dr. Jin owns 31% of the partnership.  The medical clinic is located adjacent to Jiuzhou Grand Pharmacy’s Daguan branch (“Daguan Clinic”).

 
(7)
The management of Jiuzhou Service includes: Dr. Jin as the Executive Director, Ms. Qi as the General Manager and Mr. Liu as the Supervising Director. As of the date of this current report: Mr. Liu owns 39%, Ms. Qi owns 30%, and Dr. Jin owns 31% of the issue and outstanding equity interests of Jiuzhou Service.

 
(8)
Jiuzhou Grand Pharmacy is licensed to own and operate its chain of retail drugstores. As of the date of this current report, Jiuzhou Grand Pharmacy is operating a chain of 20 retail drugstores throughout Hangzhou.

 
(9)
Jiuzhou Service is a licensed healthcare management company set up to carry out integrated management of multiple medical clinics, such as the one that it currently manages adjacent to Jiuzhou Grand Pharmacy’s Wenhua branch (“ Wenhua Clinic ”). Jiuzhou Clinic is also seeking governmental approval to become a managed clinic under Jiuzhou Service, which approval has not been issued as of the date of this current report.

Principal Products or Services
 
Through Jiuzhou Grand Pharmacy, we operate a retail drugstore chain in Hangzhou, the capital of Zhejiang Province approximately 112 miles south of Shanghai. As of the date of this current report, our store network is comprised of 20 directly operated stores.  

We provide our customers with high-quality, professional and convenient pharmacy as well as a wide variety of other merchandise, including over-the-counter (OTC) drugs, nutritional supplements, traditional Chinese medicine (“TCM”) products, personal care products, family care products, medical devices, as well as convenience products including consumable, seasonal and promotional items. Each of our stores typically carries approximately 2,500 to 7,500 different products. We constantly review and refine our product selection in order to respond to changing demographics, lifestyles, habits and product preferences of our customers.

Our product selection is designed to offer choices and convenience to our customers and to achieve high gross margins for us. We offer our customers a broader range of choices in two respects. First, we offer a wide range of complementary products in each therapeutic category so that customers have more choices to suit their needs. For example, a customer looking for a cough remedy will be able to find a wide variety of choices including different OTC drugs, nutritional supplements and herbal products. Second, for products with the same therapeutic purpose, we offer choices in each of the high, medium and low price ranges to suit the needs of customers with different spending power.
  
The products available at our drugstores can be broadly classified into the following categories:

 
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Prescription Drugs. We offer approximately 2,300 prescription drugs. We accept prescriptions only from licensed health care providers, and approximately 90% of our customers’ prescriptions are issued by physicians in our employ. Our in-store pharmacists verify the validity, accuracy and completeness of all prescription drug orders. We ask all prescription drug customers to provide us with information regarding drug allergies, current medical conditions and current medications. All pharmaceutical products in the PRC are subject to price controls, with a recommended price and a price ceiling for each drug that are periodically adjusted by the relevant government authorities in an effort to make healthcare more widely available. The latest such adjustment occurred in October 2008 involving 1,357 medicines. However, this adjustment only required us to adjust 105 of our 2,300 prescription drug prices which did not have a significant effect on our revenues as we generally price our prescription drugs substantially below the price ceilings. Because we have always priced our drugs substantially below price ceilings, price controls have not affected our revenue historically, and we do not expect them to do so in the future. Sales of prescription drugs accounted for approximately 37% of our drugstore revenue for fiscal year ended March 31, 2009.
     
OTC Drugs. We offer approximately 1,500 OTC drugs, including western medicines and traditional Chinese medicines, for the treatment of common diseases. Sales of OTC drugs accounted for approximately 18% of our drugstore revenue in fiscal 2009.

Nutritional Supplements. We offer approximately 1,300 nutritional supplements, including a variety of healthcare supplements, vitamin, mineral and dietary products. According to a survey of over 8,000 households across China conducted in 2004 by China Pharmaceutical News, a newspaper sponsored by the State Food and Drug Administration (“ SFDA ”), a majority of Chinese consumers prefer to buy nutritional supplements from a reputable drugstore as opposed to supermarkets or convenience stores. Nutritional supplements normally generate higher gross margins than drugs. Sales of nutritional supplements accounted for approximately 6% of our drugstore revenue in fiscal 2009.

TCM Products. Each of our stores maintains a traditional Chinese medicine (“ TCM ”) counter, staffed by licensed herbalists who put together packages of herbs in a process similar to how our in-store pharmacists fill out prescriptions. Additionally, we offer various types of drinkable herbal remedies and pre-packaged herbal mixtures for making soup, which are used by consumers as health supplements. TCM products typically have higher margins than prescription and OTC drugs. Sales of TCM products accounted for approximately 10% of our drugstore revenue in fiscal 2009.

Sundry Products. Our sundry products include personal care products such as skin care, hair care and beauty products, convenience products such as soft drinks, packaged snacks, and other consumable, cleaning agents, stationeries, and seasonal and promotional items tailored to local consumer demand for convenience and quality. We believe offering these products increases customer visits by increasing the shopping convenience for our customers. Sales of sundry products accounted for approximately 27% of our revenue in fiscal 2009.

Medical Devices.   Our medical device offerings include family planning and birth control products, early pregnancy test products, portable electronic diagnostic apparatus, rehabilitation equipment, and surgical tools such as hemostats, needle forceps and surgical scissors. Sales of medical devices accounted for approximately 2% of our drugstore revenue in fiscal 2009.

In addition to the products available at our drugstores, we are unique because, as an additional convenience to our customers, we have licensed physicians available for consultation, examination and treatment of common ailments at scheduled hours. In addition, both our Daguan Clinic and Wenhua Clinic, which are adjacent to two of our drugstores, offer our customers urgent care (such as sprains, minor lacerations and dizziness), TCM (including acupuncture, therapeutic massage, moxibustion and cupping) and minor outpatient surgical treatments (such as suturing). Patient treatments at the two clinics follow nationally established clinical practice guidelines from the PRC Ministry of Health. Such access to licensed physicians enables our customers to walk into any one of our stores and directly consult with a doctor to determine the treatment most appropriate for his or her symptoms, then proceed to make the necessary in-store purchase of OTC or prescription medication.

To ensure quality and personal attention for patients, we employ only licensed doctors and certified nurses and technicians. We currently have on staff, at Daguan and Wenhua Clinics, 12 physicians of western medicine, 8 TCM doctors, 9 nurses, 2 TCM assistants and 2 laboratory technicians. Additionally, a doctor is onsite 5 days a week at our five busiest branches, namely, Taihe, Wushan, Banshan, Xiasha No. 2 and Lin’an, and makes a weekly visit to the remaining branches. The in-store consultations and examinations by our physicians are provided free-of-charge to ensure that our customers are being prescribed and taking the appropriate medicines for their ailments. Our medical staff also regularly offers free seminars and outreach programs covering various health issues that are topical to the communities where our drugstores are located. Such events are designed to not only raise public health awareness, but to reach potential customers for our drugstores.

 
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We view the types of medical service that we provide as more consumer-driven than other health care specialties, because consumers requiring the types of medical service that we provide often seek treatment on their own accord. We have developed our medical service to respond to the public need for convenient access medical consultation and/or care and the significant savings that we can provide as compared to a more traditional medical setting such as a hospital. Patient flow is derived from the physical presence of Jiuzhou Grand Pharmacy, not from pre-existing doctor-patient relationships or referrals from other healthcare providers. We are able to market directly to our target consumers through the advertisements of Jiuzhou Grand Pharmacy. Thus, many of our patients often need immediate access, do not have a regular physician, or may lack suitable alternatives. Additionally, because Jiuzhou Grand Pharmacy operates in various locales, our physicians are adapted in their practice to serve the local communities in which they are based.

Customers

For fiscal 2009, our stores served an average of approximately 8,100 customers per day. We periodically conduct qualitative customer surveys, helping us to build a stronger understanding of our market position and our customers’ purchasing habits.

Our customers pay by cash, debit or credit cards, or medical insurance cards under municipal and provincial medical insurance programs. During the fiscal year ended March 31, 2009, approximately 80% of our revenue came from cash sales, 15% from Hangzhou’s medical insurance cards and 5% come from debit, credit, provincial medical insurance and other charge card sources. We obtain payments from the relevant government social security bureaus, for sales made to eligible participants in the national medical insurance program on a monthly basis. See “— Regulation — Reimbursement under the National Medical Insurance Program.” It takes approximately one year from the opening date for a store to be licensed to accept Hangzhou’s medical insurance cards. Of our 20 stores, 14 are licensed to accept Hangzhou’s medical insurance cards while 6 are awaiting approval as of the date of this current report. Our stores accepting Hangzhou’s medical insurance are designated as such on our outer signage.

Our Stores

All of our stores are located in Hangzhou, the provincial capital of Zhejiang Province, which has a population of approximately 7.97 million as of December 31, 2008. Prior to opening a store, we carefully evaluate sites to maximize consumer traffic, store visibility and convenience for our customers. All of our stores are located in well-established residential communities and prime retail locations where consumer purchasing power is relatively concentrated. Depending on its size, each drugstore has between two to twelve pharmacists on staff, all of whom are properly licensed. As of the date of this report, we operate a chain of 20 drugstores. In addition, we anticipate adding two more locations by the end of September 2009.  The anticipated openings, however, are subject to governmental approval and the progress of our store opening preparation.

After opening, a location may take up to one hundred twenty days to achieve our projected revenue goals for that particular location. Various factors influence individual store revenue including, but not limited to: location, nearby competition, local population demographics, and square footage. To date, we have not closed or targeted for closure any stores due to underperformance.

Marketing and Promotion

Our marketing and promotion strategy is to build brand recognition, increase customer traffic to our stores, attract new customers, build strong customer loyalty, maximize repeat customer visits and develop incremental revenue opportunities.

 
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Our marketing department designs our chain-wide marketing efforts while each store designs local promotions based on local demographics and market conditions. We also launch single store promotional campaigns and community activities in connection with the openings of new stores. Our store managers and staff are also encouraged to propose their own advertising and promotion plans, including holiday promotions, posters and billboards. In addition, we offer special discounts and gift promotions for selected merchandise periodically in conjunction with our suppliers’ marketing programs. We also provide ancillary services such as providing free blood pressure measurements in our stores.

Many of our promotion programs are designed to encourage manufacturers to invest resources to market their brands within our stores. We charge manufacturers promotional fees in exchange for granting them the right to promote and display their products in our stores during promotional periods. We also allow manufacturers and distributors to station salespeople at our drugstore locations to promote their products, for which we receive a fee. We believe that manufacturer promotions improve our customers’ shopping experience because manufacturers provide purchasing incentives and information to help customers to make informed purchase decisions. We work to maintain strong inventory positions for merchandise featured in our promotions, as we believe this increases the effectiveness of our spending on promotion activities. As of the date of this current report, approximately 209 manufacturers’ sales personnel are working at our 20 branches.

As part of our marketing campaign, we offer our customers the Jiuzhou Drugstore Rewards Card (the “Rewards Card”). Certain discount pricing is only available to our customers who have a Rewards Card. After a customer signs up for the Rewards Card, we communicate via the customer’s preferred method: e-mail, traditional mail or text messages. Approximately 35% of total customers use the Rewards Card when making purchases. We intend to further extend this program to enhance customer acquisition and retention.

We run advertisements periodically in selected newspapers to promote our brand and the products carried in our stores. Under our agreements with certain newspapers, we run one-page weekly or monthly advertisements in these newspapers, and the newspapers publish healthcare-related feature articles relating to the products we advertise near the dates of our advertisements. We also promote our brand and products using billboards and radio and television commercials. Advertising expenses are borne either by the manufacturers of the products being advertised or us, or are shared, depending on our agreement with the particular manufacturer. Our advertisements are designed to promote our brand, our corporate image and the prices of products available for sale in our stores.

Distribution Methods of Our Products or Services
 
We currently outsource all of the typical operations of a distribution center, including inventory, delivery and distribution, to Zhejiang Yingte Logistics Co., Ltd. (“ Yingte Logistics ”), one of the largest logistics companies in Zhejiang Province. Yingte Logistics is certified by Zhejiang Province to distribute prescription medication and our other products. The outsourcing of our distribution center functions to Yingte Logistics is designed to reduce our costs of operations and to provide us with the ability and flexibility for rapid expansion into other cities in Zhejiang Province.

Pursuant to our annual contract with Yingte Logistics, in addition to providing delivery and distribution services, Yingte Logistics provides us with a 5,000 square meter capacity warehouse for our exclusive use, sufficient to support up to 50 stores. Inventory and inventory management is controlled through our centralized management system that tracks inventory status retrieval, and is linked to all of our drugstores to track sales volume by product. Based on such information, we can instruct Yingte Logistics to make deliveries to each drugstore as necessary.

Suppliers

We currently source our merchandise from approximately 275 suppliers, including 46 wholesalers and 229 direct manufacturers. For the year ended March 31, 2009 two venders accounted for 32% of our total purchases. We believe that competitive sources are readily available for substantially all of the merchandise we carry in our stores. We believe that as we grow in size, our greater sourcing capability will make us a more attractive distribution channel for many drug manufacturers who can reduce their marketing expense while increasing their sales volume by selling directly to us, thereby reducing our cost of purchase.

 
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Cash Control

For the year ended March 31, 2009, approximately 80% of our sales were made in cash and therefore, we have adopted strict cash control procedures in all of our stores. Specifically, the details of each sales event are recorded in our integrated information management system, and the cash generated at our stores is collected and deposited promptly in designated bank accounts, which are controlled by our headquarters. Our accounting department also carries out a daily reconciliation of sales data collected on our information management system with cash receipts as confirmed by the banks.

Quality Control

We place strong emphasis on quality control for both merchandise sourcing and in-store services. Our quality control starts with procurement. We select products based on the manufacturers and wholesalers’ GMP and GSP compliance status and their product quality, manufacturing facilities and technology, packaging, transportation and storage capabilities as well as market acceptance and cost competitiveness of the products. Additionally, we conduct random quality inspections of each batch of products we procure. We replace our suppliers if they fail to pass our quality inspections. Since there is a significant manufacturing capability surplus within the Chinese pharmaceutical industry, it is possible for us to change suppliers without a material interruption to our business.

All of our employees participate in a mandatory 36-hour training program regarding quality control annually, and we regularly dispatch quality inspectors to our stores to monitor the service quality of our staff.

Competition

The drugstore industry in China is intensely competitive, rapidly evolving and highly fragmented. We primarily compete with other retail drugstore chains or drugstores, but also increasingly face competition from discount stores, convenience stores and supermarkets as we increase our offering of non-drug convenience products and services. We compete for customers primarily on the basis of store location, merchandise selection, prices, the unique combination of pharmacy and medical care services that we offer and brand name recognition. We believe that continued consolidation of the drugstore industry and new store openings by chain store operators will further increase competitive pressures.

We believe the primary competitive factors include: (i) the ability to negotiate favorable discounts from drug manufacturers; (ii) responsiveness to customers’ needs; (iii) the ability to identify and apply effective cost management programs utilizing clinical strategies; (iv) the commitment to provide flexible, clinically-oriented services to customers; and (v) the quality, scope and costs of products and services offered to our customers. We compete with a number of large, national drugstore chains that may have more financial resources and stronger brand strength and management expertise than us, including China Nepstar Chain Drugstore Ltd. (“Nepstar”), Lao Bai Xing Grand Pharmacy (“Lao Bai Xing”) and Tian Tian Hao Grand Pharmacy (“Tian Tian”). In Hangzhou, as of December 31, 2008, Nepstar operated approximately 188 stores, Lao Bai Xing operated 8 stores, and Tian Tian operated 30 stores.  We additionally compete with local and independent drugstores and government-operated pharmacies. On average, the square footage of Tian Tian and Nepstar stores are significantly smaller than our average store size and do not have the breadth of product offerings or categories. Moreover, none of our competitors provide the medical consultations that we offer at our drugstores.

Patents, Trademarks, Licenses, Franchises, Concessions or Royalty Agreements

We do not currently own any patents or trademarks, and we are not a beneficiary of any licenses, franchises, concessions or royalty agreements. All our employees are required to enter into written employment agreements with us, pursuant to which they are subject to confidentiality obligations.

 
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Applicable Government Regulations

Circular 106
 
On May 31, 2007, China’s State Administration of Foreign Exchange (“ SAFE ”) issued an official notice known as “Circular 106”, which requires the owners of any Chinese companies to obtain SAFE’s approval before establishing any offshore holding company structure in so-called “round-trip” investment transactions for foreign financing as well as subsequent acquisition matters in China. Likewise, the “Provisions on Acquisition of Domestic Enterprises by Foreign Investors”, issued jointly by Ministry of Commerce (“ MOFCOM ”), State-owned Assets Supervision and Administration Commission, State Taxation Bureau, State Administration for Industry and Commerce, China Securities Regulatory Commission and SAFE in September 2006, impose approval requirements from MOFCOM for “round-trip” investment transactions, including acquisitions in which equity was used as consideration.

Dividend Distribution

The principal laws, rules and regulations governing dividends paid by our PRC affiliated entities include the Company Law of the PRC (1993), as amended in 2006, Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and Wholly Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001. Under these laws and regulations, each of our consolidated PRC entities, including wholly foreign owned enterprises, or WFOEs, and domestic companies in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our consolidated PRC entities, including WFOEs and domestic companies, is required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its statutory surplus reserve fund until the accumulative amount of such reserve reaches 50% of its respective registered capital. These reserves are not distributable as cash dividends. As of March 31, 2009, the accumulated balance of our statutory reserve funds reserves amounted to RMB 9.5 million (US$1.3 million) and the accumulated profits of our consolidated PRC entities that were available for dividend distribution amounted to RMB 30.4 million (US $5.0 million).

Taxation

The recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the implementation regulations for the EIT Law issued by the PRC State Council, became effective as of January 1, 2008. The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and are generally subject to the uniform 25% enterprise income tax rate as to their worldwide income. Under the implementation regulations for the EIT Law, “de facto management body” is defined as a body that has material and overall management and control over the manufacturing and business operations, personnel and human resources, finances and treasury, and acquisition and disposition of properties and other assets of an enterprise. Although substantially all of our operational management is currently based in the PRC, it is unclear whether PRC tax authorities would treat us as a PRC resident enterprise.

Under the EIT Law and implementation regulations, PRC income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident enterprises,” which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of shares by such investors is also subject to 10% PRC income tax if such gain is regarded as income derived from sources within the PRC. If we are considered a PRC “resident enterprise,” it is unclear whether dividends we pay with respect to our common shares, or the gain you may realize from the transfer of our common shares, would be treated as income derived from sources within the PRC and be subject to PRC income tax. It is also unclear whether, if we are considered a PRC “resident enterprise,” holders of our common shares might be able to claim the benefit of income tax treaties entered into between China and other countries.

General PRC Government Approval

As a distributor and retailer of pharmaceutical products, we are subject to regulation and oversight by different levels of the food and drug administration in China, in particular, the SFDA. The Law of the PRC on the Administration of Pharmaceutical Products, as amended, provides the basic legal framework for the administration of the production and sale of pharmaceutical products in China and governs the manufacturing, distributing, packaging, pricing and advertising of pharmaceutical products in China. The corresponding implementation regulations set out detailed rules with respect to the administration of pharmaceuticals in China. We are also subject to other PRC laws and regulations that are applicable to business operators, retailers and foreign-invested companies.

 
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Distribution of Pharmaceutical Products

A distributor of pharmaceutical products must obtain a distribution permit from the relevant provincial- or designated municipal- or county-level food and drug administration. The grant of such permit is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control systems, personnel and equipment. The distribution permit is valid for five years, and the holder must apply for renewal of the permit within six months prior to its expiration. In addition, a pharmaceutical product distributor needs to obtain a business license from the relevant administration for industry and commerce prior to commencing its business. All of our consolidated entities that engage in retail pharmaceutical business have obtained necessary pharmaceutical distribution permits, and we do not expect any difficulties for us to renew these permits and/or certifications.

In addition, under the Supervision and Administration Rules on Pharmaceutical Product Distribution promulgated by the SFDA on January 31, 2007, and effective May 1, 2007, a pharmaceutical product distributor is responsible for its procurement and sales activities and is liable for the actions of its employees or agents in connection with their conduct of distribution on behalf of the distributor. A retail distributor of pharmaceutical products is not allowed to sell prescription pharmaceutical products, or Tier A OTC pharmaceutical products, listed in the national or provincial medical insurance catalogs without the presence of a certified in-store pharmacist. See “— Reimbursement under the National Medical Insurance Program.”

Restrictions on Foreign Ownership of Wholesale or Retail Pharmaceutical Business in China

PRC regulations on foreign investment currently permit foreign companies to establish or invest in wholly foreign-owned enterprises or joint ventures that engage in wholesale or retail sales of pharmaceuticals in China. For retail sales, these regulations restrict the number and size of retail pharmacy stores that a foreign investor may establish. If a foreign investor owns more than 30 stores that sell a variety of branded pharmaceutical products sourced from different suppliers, the foreign investor’s ownership interests in the stores are limited to 49.0%.

Our WFOE, Jiuxin Management, has entered into contractual arrangements with Jiuzhou Grand Pharmacy and its owners.

Good Supply Practice Standards

GSP standards regulate wholesale and retail pharmaceutical product distributors to ensure the quality of distribution of pharmaceutical products in China. The current applicable GSP standards require pharmaceutical product distributors to implement strict controls on the distribution of medicine products, including standards regarding staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management and quality control. The GSP certificate is usually valid for five years. Prior to opening, each of our stores must go through GSP certification. All 20 of our locations are GSP certified, and we anticipate that we will be able to obtain such certification for our 2 stores opening in September 2009.

Prescription Administration

Under the Rules on Administration of Prescriptions promulgated by the SFDA, effective May 1, 2007, doctors are required to include the chemical ingredients of the medicine they prescribe in their prescription and are not allowed to include brand names in their prescription. This regulation is designed to provide consumers with choices among different pharmaceutical products that contain the same chemical ingredients.

Advertisement of Pharmaceutical Products

In order to prevent misleading advertising of pharmaceutical products, the State Administration for Industry and Commerce (“ SAIC ”) and the SFDA jointly promulgated the Standards for Examination and Publication of Advertisements of Pharmaceutical Products and Rules for Examination of Advertisement of Pharmaceutical Products in March 2007. Under these regulations, there are prohibitions on the advertising of certain pharmaceutical products, and advertisement of prescription pharmaceutical products may only be made in authorized medical magazines. In addition, an approval must be obtained from the provincial level of food and drug administration before a pharmaceutical product may be advertised. Such approval, once obtained, is valid for one year.

 
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Product Liability and Consumers Protection

Product liability claims may arise if the products sold have any harmful effect on the consumers. The injured party may make a claim for damages or compensation. The General Principles of the Civil Law of the PRC, which became effective in January 1987, state that manufacturers and sellers of defective products causing property damage or injury shall incur civil liabilities for such damage or injuries.

The Product Quality Law of the PRC was enacted in 1993 and amended in 2000 to strengthen the quality control of products and protect consumers’ rights and interests. Under this law, manufacturers and distributors who produce or sell defective products may be subject to confiscation of earnings from such sales, revocation of business licenses and imposition of fines, and in severe circumstances, may be subject to criminal liability.

The Law of the PRC on the Protection of the Rights and Interests of Consumers was promulgated on October 31, 1993 and became effective on January 1, 1994 to protect consumers’ rights when they purchase or use goods or services. All business operators must comply with this law when they manufacture or sell goods and/or provide services to customers. In extreme situations, pharmaceutical product manufacturers and distributors may be subject to criminal liability if their goods or services lead to the death or injuries of customers or other third parties.

Price Controls

The retail prices of some pharmaceutical products sold in China, primarily those included in the national and provincial medical insurance catalogs and those pharmaceutical products whose production or distribution are deemed to constitute monopolies, are subject to price controls in the form of fixed prices (for non-profit medical institutions) or price ceilings. Manufacturers or distributors cannot freely set or change the retail price for any price-controlled product above the applicable price ceiling or deviate from the applicable fixed price imposed by the PRC government. The prices of medicines that are not subject to price controls are determined freely at the discretion of the respective pharmaceutical companies, subject to notification to the provincial pricing authorities.

The retail prices of medicines that are subject to price controls are administered by the Price Control Office of the National Development and Reform Commission (“ NDRC ”), and provincial and regional price control authorities. The retail price, once set, also effectively determines the wholesale price of that medicine. From time to time, the NDRC publishes and updates a list of medicines that are subject to price control. Fixed prices and price ceilings on medicine are determined based on profit margins that the relevant government authorities deem reasonable, the type and quality of the medicine, its production costs, the prices of substitute medicine and the extent of the manufacturer’s compliance with the applicable Good Manufacturing Practice (“ GMP ”) standards. The NDRC directly regulates the pricing of a portion of the medicine on the list, and delegates to provincial and regional price control authorities the authority to regulate the pricing of the rest of the medicine on the list. Provincial and regional price control authorities have discretion to authorize price adjustments based on the local conditions and the level of local economic development. Currently, approximately 2,014 pharmaceutical products are subject to price controls. The price controls of all of those pharmaceutical products are administered by the NDRC.

Only the manufacturer of a medicine may apply for an increase in the retail price of the medicine, and it must either apply to the provincial price control authorities in the province where it is incorporated, if the medicine is provincially regulated, or to the NDRC, if the medicine is NDRC regulated. For a provincially regulated medicine, in cases where provincial price control authorities approve an application, manufacturers must file the newly approved price with the NDRC for record and thereafter the newly approved price will become binding and enforceable across China.

Since May 1998, the PRC government has been ordering reductions in the retail prices of various pharmaceutical products. The latest price reduction occurred in October 2008 and it affected 1,357 different pharmaceutical products, but it impacted only 105 of our 2,300 prescription drug prices. As of December 31, 2006, 2007 and 2008, 7.5%, 12.7% and 11.8% of the pharmaceutical products we offered were subject to price controls, respectively. Price controls, however, have had no significant impact on our operations as our price points have historically been substantially below such government-imposed ceilings.

 
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The NDRC may grant premium pricing status to certain pharmaceutical products that are under price control. The NDRC may set the retail prices of pharmaceutical products that have obtained premium pricing status at a level that is significantly higher than comparable products.

Reimbursement under the National Medical Insurance Program

Eligible participants in the national medical insurance program, mainly consisting of urban residents, are entitled to purchase medicine when presenting their medical insurance cards in an authorized pharmacy, provided that the medicine they purchase have been included in the national or provincial medical insurance catalogs. Depending on relevant local regulations, authorized pharmacies either sell medicine on credit and obtain reimbursement from relevant government social security bureaus on a monthly basis, or receive payments from the participants at the time of their purchases, and the participants in turn obtain reimbursement from relevant government social security bureaus.

Medicine included in the national and provincial medical insurance catalogs is divided into two tiers. Purchases of Tier A pharmaceutical products are generally fully reimbursable, except that certain Tier A pharmaceutical products are only reimbursable to the extent the medicine are used for specifically stated purposes in the medical insurance catalogs. Purchasers of Tier B pharmaceutical products, which are generally more expensive than Tier A pharmaceutical products, are required to make a certain percentage of co-payments, with the remaining amount being reimbursable. The percentage of reimbursement for Tier B OTC pharmaceutical products varies in different regions in the PRC. Factors that affect the inclusion of medicine in the medical insurance catalogs include whether the medicine is consumed in large volumes and commonly prescribed for clinical use in China and whether it is considered to be important in meeting the basic healthcare needs of the general public.

The PRC Ministry of Labor and Social Security, together with other government authorities, has the power to determine every two years which medicine are included in the national medical insurance catalog, under which of the two tiers the included medicine falls, and whether an included medicine should be removed from the catalog. Provincial governments are required to include all Tier A medicines listed on the national Medical Insurance Catalog in their provincial medical insurance catalogs. For Tier B medicines listed in the national medical insurance catalog, provincial governments have the discretion to adjust upwards or downwards by no more than 15% from the number of Tier B medicine listed in the national medical insurance catalog that is to be included in the provincial medical insurance catalogs. The amount in a participant’s individual account under the program varies, depending on the amount of contributions from the participant and his or her employer. Generally, participants under the national medical insurance program who are from relatively wealthier parts of China and metropolitan centers have greater amounts in their individual accounts than those from other parts of the country. Different regions in China have different requirements regarding the caps of reimbursements in excess of the amounts in the individual accounts.

Sales of Nutritional Supplements and other Food Products

According to the PRC Food Hygiene Law and Rules on Food Hygiene Certification, a distributor of nutritional supplements and other food products must obtain a food hygiene certificate from relevant provincial or local health regulatory authorities. The grant of such certificate is subject to an inspection of the distributor’s facilities, warehouses, hygienic environment, quality control systems, personnel and equipment. The food hygiene certificate is valid for four years, and the holder must apply for renewal of the certificate within six months prior to its expiration.

Medical Practice

Healthcare providers in China are required to comply with many laws and regulations at the national and local government levels. The laws and regulations applicable to our medical practice include the following:

 
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·
We must register with and maintain an operating license from the local public health authority for each clinic that we operate, and is subject to annual review by the public health authority;

·
The Licensed Physician Act requires that we only hire PRC licensed physicians;

·
All waste material from our clinics must be properly collected, sterilized, deposited, transported and disposed of, and we are required to keep records of the origin, type and amount of all waste materials that we generate;

·
We must have at least 3 physicians, 5 nurses and 1 technician on staff at each clinic; and

·
We must establish and follow protocols to prevent medical malpractice, which require us to: (i) insure that patients are  adequately  informed  before they consent to medical operations or procedures; (ii) maintain  complete  medical  records which are available for review by the patient, physicians and the courts; (iii) voluntarily  report  any event of  malpractice  to a local  government agency; and (iv) support and justify  the  medical  services  we  provide  in  any   administrative investigation or litigation. If we fail to comply with applicable laws and regulations, we could suffer penalties, including the loss of our license to operate.

Interim Regulations on Administration of Sino-Foreign Joint Venture and Cooperative Medical Institutions

As per China’s WTO commitments, “Foreign service suppliers are permitted to establish joint venture hospitals or clinics with local Chinese partners with quantitative limitations in line with China’s needs. Foreign majority ownership is permitted.” In accordance with the “Interim Regulations on Administration of Sino-Foreign Joint Venture and Cooperative Medical Institutions” jointly issued by the Ministry of Health (“MOH”) and MOFCOM in 2000, the Chinese party of Sino-foreign joint ventures and cooperative medical institutions shall hold no less than 30% of shares and legal rights or interest, which also mean foreign investors are allowed to hold a maximum stake of 70%. Such regulations also specify that the establishment of Sino-foreign joint venture and cooperative medical institutions should be approved respectively by MOH and MOFCOM. In other words, foreigners are allowed to run hospitals or clinics in the form of equity or co-operative joint ventures with an equity interest of up to 70% and a duration for co-operation of up to 20 years.

Environmental Matters
 
Our drugstore operations do not involve any activities subject to specific PRC environmental regulations.  Our medical clinics are in compliance with applicable regulations regarding the administration of medical wastes, including collections, temperate storage, package and labeling of medical wastes. Pursuant to such regulations, we contract with Dadi Weikang Medical Wastes Disposal Center to dispose of all medical wastes generated by our clinics.

Employees and other In-store Salespersons
 
Jiuzhou Grand Pharmacy currently has 293 employees, including 226 fulltime and 67 part-time. Jiuzhou Clinic currently has 33 fulltime employees, and Jiuzhou Service currently has 16 fulltime employees. Overall, we have not experienced any work stoppage and do not anticipate any work stoppage in the foreseeable future. Management believes that relations with our employees are good.

In addition to our employees, there are 204 sales personnel provided to our drugstores by various manufacturers, which pay us a fee for their presence in our stores. These manufacturers also compensate us to train these salespersons in our stores’ policies and procedures.

Corporate Information
 
Our principal executive offices are located at Room 507-513, 5th Floor A Building, Meidu Plaza, Gongshu District, Hangzhou, Zhejiang Province, China. Our telephone number is (86571) 8807-7078, and our facsimile number is (86571) 8823-3598.

 
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Where You Can Find More Information

Because we are subject to the requirements of the Exchange Act, we file reports, proxy statements and other information with the SEC.  You may obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330.  In addition, we are required to file electronic versions of those materials with the SEC through the SEC’s EDGAR system. The SEC also maintains a web site at http://www.sec.gov, which contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

RISK FACTORS

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

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

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

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

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

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

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

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

As of June 30, 2009, we had RMB 8.7 million (US $1.3 million) in cash. Based on our current operating plans, we expect our existing resources, including our current cash and cash flows from operations, to be sufficient to fund our anticipated cash needs, including for working capital and capital expenditures for at least the next 12 months. We may, however, need to raise additional funds if our expenditures exceed our current expectations due to changed business conditions or other future developments. Our future liquidity needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities or securities convertible or exchangeable to our equity securities would result in additional dilution to you. The incurrence of additional indebtedness would result in increased debt service obligations and could result in operating and financing covenants that restrict our operational flexibility.

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

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

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

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

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

Risks Relating to Our Pharmacy

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

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

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

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

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

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

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

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

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

 
·
current economic and geopolitical conditions in China and elsewhere.

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

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

Many of the factors discussed above are beyond our control, making our quarterly results difficult to predict, which could cause the trading price of our securities to decline below investor expectations. You should not rely on our operating results for prior periods as an indication of our future results.
 
We may not be able to timely identify or otherwise effectively respond to changing customer preferences, and we may fail to optimize our product offering and inventory position.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
·
pay damage awards;

 
·
seek licenses from third parties;

 
·
pay ongoing royalties;

 
·
redesign our product offerings; or

 
·
be restricted by injunctions,

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

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

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

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

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

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

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

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

 
·
the integration of new operations, services and personnel;

 
·
unforeseen or hidden liabilities;

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

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

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

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

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

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

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

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

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

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

 
·
information technology system enhancement;

 
·
strengthening of financial and management controls;

 
·
increased marketing, sales and sales support activities; and

 
·
hiring and training of new personnel.

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

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

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

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

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

 
·
greater financial and other resources;

 
·
larger variety of products;

 
·
more extensive and advanced supply chain management systems;

 
·
greater pricing flexibility;

 
·
larger economies of scale and purchasing power;

 
·
more extensive advertising and marketing efforts;

 
·
greater knowledge of local market conditions;

 
·
stronger brand recognition; and

 
·
larger sales and distribution networks.

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

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

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

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

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

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

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

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

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

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

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

Risks Relating to Our Medical Services

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
·
imposing fines.

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

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

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

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

The interpretation and application of existing Chinese laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, pharmaceutical businesses in China, including our business.
 
Our contractual arrangements with Jiuzhou Grand Pharmacy, Jiuzhou Clinic, Jiuzhou Service and their respective owners may not be as effective in providing control over these entities as direct ownership.
 
We have no equity ownership interest in Jiuzhou Grand Pharmacy, Jiuzhou Clinic or Jiuzhou Service, and rely on contractual arrangements to control and operate these companies and their businesses. These contractual arrangements may not be as effective in providing control over these companies as direct ownership. For example, Jiuzhou Grand Pharmacy, Jiuzhou Clinic or Jiuzhou Service could fail to take actions required for our business despite its contractual obligation to do so. If Jiuzhou Grand Pharmacy, Jiuzhou Clinic or Jiuzhou Service fails to perform under their agreements with us, we may have to rely on legal remedies under Chinese law, which may not be effective. In addition, we cannot assure you that the respective owners of Jiuzhou Grand Pharmacy, Jiuzhou Clinic or Jiuzhou Service will act in our best interests.

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

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

Pursuant to the terms of our contractual arrangements with these companies, such agreements are subject to automatic termination on May 1, 2010 unless the Registrant completes a financing of $25 million and its common stock becomes listed on the NASDAQ Capital Market by such date, and there is no assurance that the Registrant will be able to satisfy these conditions on or prior to such date or at all. As we do not have any equity interests in any of the HJ Group companies, in the event the contractual arrangements terminate, whether pursuant to these automatic termination provisions or otherwise, we will lose our control over them and their business operations, as well as our sole source of revenues. Should this occur, we may seek to acquire control of the HJ Group companies through other means, although we cannot guarantee that we will do so, nor can we guarantee that we will be successful if we do.

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

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

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

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

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

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

Risks Related to Doing Business in China
 
The three HJ Group companies are subject to restrictions on making payments to us.
 
We are a holding company incorporated in Nevada and do not have any assets or conduct any business operations other than our indirect investments in the three HJ Group companies. As a result of our holding company structure, we rely entirely on payments from these companies under their contractual arrangements with our WFOE, Jiuxin Management. The Chinese government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. See “Government control of currency conversion may affect the value of your investment.” Furthermore, if our affiliated entity in China incurs debt on their own in the future, the instruments governing the debt may restrict their ability to make payments. If we are unable to receive all of the revenues from our operations through these contractual arrangements, we may be unable to pay dividends on our ordinary shares.
 
Uncertainties with respect to the Chinese legal system could adversely affect us.
 
We conduct our business primarily through the three HJ Group companies, all of which are PRC entities. Our operations in China are governed by Chinese laws and regulations. We are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The Chinese legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.

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

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

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

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

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

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

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

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

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

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

Risks Related to an Investment in Our Securities
 
To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
 
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay any dividends. We intend to retain all earnings for our operations.

 
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The application of the "penny stock" rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.
 
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.
 
The OTC Bulletin Board is a quotation system, not an issuer listing service, market or exchange. Therefore, buying and selling stock on the OTC Bulletin Board is not as efficient as buying and selling stock through an exchange. As a result, it may be difficult for you to sell your common stock or you may not be able to sell your common stock for an optimum trading price.

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

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

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

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

Our common shares are thinly traded and, you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
 
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. However, we do not rule out the possibility of applying for listing on the Nasdaq National Market or other exchanges.

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

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

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

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

 
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Volatility in our common share price may subject us to securities litigation.
 
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management's attention and resources.
 
Our officers and directors own a substantial portion of our outstanding common stock, which will enable them to influence many significant corporate actions and in certain circumstances may prevent a change in control that would otherwise be beneficial to our shareholders.

Immediately after the closing of the Exchange, our directors and executive officers (both current and incoming) will control approximately 63.8% of our outstanding shares of stock that are entitled to vote on all corporate actions. These stockholders, acting together, could have a substantial impact on matters requiring the vote of the shareholders, including the election of our directors and most of our corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our shareholders and us. This control could adversely affect the voting and other rights of our other shareholders and could depress the market price of our common stock.
 
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
 
Our bylaws contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, and we are prepared to give such indemnification to our directors and officers to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
 
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.
 
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
 
The market price for our stock may be volatile.
 
The market price for our stock may be volatile and subject to wide fluctuations in response to factors including the following:

 
·
actual or anticipated fluctuations in our quarterly operating results;

 
·
changes in financial estimates by securities research analysts;

 
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·
conditions in the retail pharmacy markets;

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

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

 
·
addition or departure of key personnel;

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

 
·
intellectual property litigation; and

 
·
general economic or political conditions in China.
 
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.
 
We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.
 
We believe that our current cash and cash equivalents, anticipated cash flow from operations and the net proceeds from a proposed offering will be sufficient to meet our anticipated cash needs for the near future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
 
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.
 
Since Grand Pharmacy Group operated as a private enterprise without public reporting obligations prior to the Exchange, we have committed limited personnel and resources to the development of the external reporting and compliance obligations that would be required of a public company. Recently, we have taken measures to address and improve our financial reporting and compliance capabilities and we are in the process of instituting changes to satisfy our obligations in connection with joining a public company, when and as such requirements become applicable to us. Prior to taking these measures, we did not believe we had the resources and capabilities to do so. We plan to obtain additional financial and accounting resources to support and enhance our ability to meet the requirements of being a public company. We will need to continue to improve our financial and managerial controls, reporting systems and procedures, and documentation thereof. If our financial and managerial controls, reporting systems or procedures fail, we may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of our internal controls or our ability to provide accurate financial statements could cause the trading price of our common stock to decrease substantially.

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

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

Shares eligible for future sale may adversely affect the market.

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

We do not anticipate paying any cash dividends.

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

SELECTED CONSOLIDATED FINANCIAL DATA
 
You should read the summary consolidated financial data set forth below in conjunction with “ Management’s Discussion and Analysis of Financial Condition or Plan of Operations ” and our predecessor’s financial statements and the related notes included elsewhere in this current report. The financial data for the years ended March 31, 2009 and 2008 were derived from our audited financial statements, and for the three months ended June 30, 2009 and 2008, and as of June 30, 2009 from our reviewed financial statements, included in this current report. The historical results are not necessarily indicative of the results to be expected for any future period.

 
38

 


   
Three months ended
June 30,
   
Year ended
March 31,
   
Year ended
March 31,
 
   
2009
(Unaudited)
   
2008
(Unaudited)
   
2009
(Audited)
   
2008
(Audited)
 
                         
Net sales
  $ 11,681,464     $ 11,150,389     $ 44,776,652     $ 31,311,942  
Cost of sales
    8,657,568       8,303,439       32,607,741       23,835,859  
                                 
Gross profit
    3,023,896       2,846,950       12,168,911       7,476,083  
                                 
Selling expenses
    477,777       359,161       1,712,474       1,359,087  
General and administrative expenses
    365,210       212,454       1,399,305       699,069  
Total operating expenses
    842,987       571,615       3,111,779       2,058,156  
                                 
Income (loss) from operations
    2,180,909       2,275,335       9,057,132       5,417,927  
Non-operating income (expense)
    6,635       (9,591 )     17,369       (6,854 )
                                 
Income (loss) before income taxes
    2,187,544       2,265,744       9,074,501       5,411,073  
Income taxes
    588,383       524,925       2,260,985       2,023,194  
                                 
Net income (loss)
  $ 1,599,161     $ 1,740,819     $ 6,813,516     $ 3,387,879  

     
As at March 31,
 
 
As at June 30, 2009
 
2009
 
2008
 
Consolidated Balance Sheet Data:
(Unaudited)
 
(Audited)
 
(Audited)
 
Cash and Cash Equivalents
  $ 1,272,148     $ 966,302     $ 878,948  
Working Capital (Deficit)
    4,906,427       3,662,966       (1,102,484 )
Total Assets
    17,244,127       15,965,201       8,255,647  
Total Liabilities
    8,988,839       9,307,054       8,439,304  
Total Shareholders’ Equity (Deficit)
    8,255,288       6,657,547       (183,657 )
 

The Exchange contemplated under the Exchange Agreement is deemed to be a reverse acquisition, where Kerrisdale (the legal acquirer) is considered the accounting acquiree and Renovation (the legal acquiree) is considered the accounting acquirer.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

The following discussion of the financial condition and results of operation of Grand Pharmacy Group for the fiscal years ended March 31, 2009 and 2008, and for the three months ended June 30, 2009 and 2008, should be read in conjunction with the selected consolidated financial data, the financial statements and the notes to those statements that are included elsewhere in this current report on Form 8-K (“Form 8-K”). Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this Form 8-K. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 
39

 

Overview
 
We, Grand Pharmacy Group, are in the drugstore chain business in the PRC, and are comprised of Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”), a Hong Kong company, its wholly-owned PRC subsidiary, Zhejiang Jiuxin Investment Management Co., Ltd. (“ Jiuxin Management ”), and three PRC companies that we control through Jiuxin Management, namely Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“ Jiuzhou Grand 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 ”).

All of our business operations are carried out by Jiuzhou Grand Pharmacy, Jiuzhou Clinic and Jiuzhou Service. We control these companies and their operations through a series of contractual arrangements between Jiuxin Management, on the one hand, and each of these three companies and their owners, on the other hand. Please see “Relationships with HJ Group and Their Owners” above and Note [1] to our consolidated financial statements for the three months ended June 30, 2009, and for fiscal year 2008 included in this current report for a description of these contractual arrangements and their impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

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

We believe that any reasonable deviation from those judgments and estimates would not have a material impact on our financial condition or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of operations and corresponding balance sheet accounts would be necessary. These adjustments would be made in future financial statements.

When reading our financial statements, you should consider: (i) our critical accounting policies; (ii) the judgment and other uncertainties affecting the application of such policies; and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements. We have not made any material changes in the methodology used in these accounting policies during the past two years.
 
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 recogn ized 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 r ecognized 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 benefit s 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 re t urns have been immaterial.

Our revenue is net of value added tax (“ VAT” ) collected on behalf of tax authorities in respect of the sale of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the balance s heet until it is paid to the tax authorities.

Vendor allowances

The Company accounts for vendor allowances according to Emerging Issues Task Force (“ EITF” ) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Receive d from a Vendor and EITF Issue No. 03-10, Application of EITF Issue No. 02-16 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 so ld when the inventories are sold, unless those allowances are specifically identified as reimbursements for advertising, promotion and other services, in which case they are recognized as a reduction of the related advertising and promotion costs.

Depreciation and Amortization

Our non current assets include property and equipment, including leasehold improvements, long term deposits and long term advances to suppliers. We depreciate our equipment assets using the straight-line method over the estimated useful lives of the assets. We make estimates of the useful lives of the equipment (including the salvage values), in order to determine the amount of depreciation expense to be recorded during any reporting period. We amortize leasehold improvements of our retail drugstores and other business premises over the shorter of five years or lease term. A majority of our leases have a five-year term. We estimate the useful lives of our other property and equipment at the time we acquire the assets based on our historical experience with similar assets as well as anticipated technological and other changes. If technological changes were to occur more rapidly than anticipated or in a different form than anticipated, we may shorten the useful lives assigned to these assets as appropriate, which will result in the recognition of increased depreciation and amortization expense in future periods. There has been no change to the estimated useful lives and salvage values 2008 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 its review, we believe that, as of March 31, 2009 and 2008, there was no impairment.

 
40

 

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 fiscal years ending March 31, 2009 and 2008 have been immaterial.

Results of Operations

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

Revenue. Our revenue increased slightly by 4.8% to $11.7 million for the three months ended June 30, 2009 from $11.1 million for the three months ended June 30, 2008. During the three months ended June 30, 2008, we were running a large promotional activity which significantly increased sales of our sundries and nutritional supplements which collectively decreased from 41.8% of overall revenue for the three months ended June 30, 2008 to 26.7% for the three months ended June 30, 2009, even though we were operating fewer stores during the three months ended June 30, 2008. During the three months ended June 30, 2009, we did not run a similar marketing promotion and focused opening new locations. As we open additional stores, we anticipate that our overall revenue will continue to increase.

Gross Profit. Our gross profit increased by 6.2% to $3.0 million for the three months ended June 30, 2009 from $2.8 million for the three months ended June 30, 2008. Our gross margin remained relatively constant at 25.9% for the three months ended June 30, 2009 compared with 25.5% for the three months ended June 30, 2008. We anticipate that our overall gross profit will continue to increase as our sales increase. Additionally, we anticipate that our gross margin will increase as we will be able to obtain better pricing terms from our suppliers and achieve further economies of scale as a result of purchasing larger quantities of products. We presently do not privately label any of our products and are constantly adjusting our product mix to meet customer demand and to maximize our gross margin.

Sales and Marketing Expenses. Our sales and marketing expenses increased by 33.0% to $0.5 million for the three months ended June 30, 2009 from $0.4 million for the three months ended June 30, 2008. This increase was primarily a result of the continued expansion of our drugstore chain from 11 stores for the three months ended June 30, 2008 to 19 stores for the three months ended June 30, 2009. Sales and marketing expenses as a percentage of our revenue increased slightly to 4.1% for the three months ended June 30, 2009 from 3.2% for the three months ended June 30, 2008. We expect that our sales and marketing expenses will increase as we continue to expand our store network.

General and Administrative Expenses. Our general and administrative expenses increased by 71.9% to $0.4 million for the three months ended June 30, 2009 from $0.2 million for the three months ended June 30, 2008. This increase was primarily due to increased administrative costs to operate new stores. General and administrative expenses as a percentage of our revenue increased slightly from 1.9% for the three months ended June 30, 2008 to 3.1% for the three months ended June 30, 2009. As we continue to open drugstores, further develop our infrastructure, and begin to incur expenses related to being a United States publicly traded company, we anticipate that our general and administrative expenses will continue to increase.

Income from Operations. As a result of the foregoing, our income from operations decreased to $2.1 million for the three months ended June 30, 2009 from $2.3 million for the three months ended June 30, 2008, a decrease of 4.15%. Our operating margin for the three months ended June 30, 2009 and 2008 was 18.7% and 20.3%, respectively.

 
41

 

Income Taxes. Our income tax expense remained relatively constant at $0.6 million for the three months ended June 30, 2009 from $0. 5 million for the three months ended June 30, 2008. Our effective tax rate was 27% and 22% for the three months ended June 30, 2009 and 2008, respectively.
     
Net Income. As a result of the foregoing, our net income decreased to $1.6 million for the three months ended June 30, 2009 from $1.7 million for the three months June 30, 2008.

Results of Operations - Year Ended March 31, 2009 as compared to year ended March 31, 2008  

Revenue. Our revenue increased by 43.0% to $44.8 million for year ended March 31, 2009 from $31.3 million for the year ended March 31, 2008. This increase was primarily attributable to the additional drugstores that we operated period-over-period: from 9 stores during the year ended March 31, 2008 to 16 stores during the year ended March 31, 2009.  Our revenue increase was attributable to customer retention, running promotional activities, marketing to new customers and increased sales from existing locations. As we open additional stores, we anticipate that our overall revenue will continue to increase.

Gross Profit. Our gross profit increased by 62.8% to $12.2 million for the year ended March 31, 2009 from $7.5 million for the year ended March 31, 2008. Our gross margin increased to 27.2% for the year ended March 31, 2009 from 23.9% for the year ended March 31, 2008 primarily as a result of increased bargaining power with our suppliers as a result of operating additional stores We anticipate that our gross profit will increase as we continue to open more stores. We anticipate that our gross margin will increase as we will be able to obtain better pricing terms from our suppliers by purchasing larger quantities of products. We presently do not privately label any of our products and are constantly adjusting our product mix to meet customer demand and to maximize our gross margin.

Sales and Marketing Expenses. Our sales and marketing expenses increased by 26.0% to $1.7 million for the year ended March 31, 2009 from $1.4 million for the year ended March 31, 2008. This increase was primarily a result of the continued expansion of our drugstore chain. Sales and marketing expenses as a percentage of our revenue decreased slightly to 3.8% for the year ended March 31, 2009 from 4.3% for the year ended March 31, 2008. However, we expect that our sales and marketing expenses will increase as we continue to expand our store network.

General and Administrative Expenses. Our general and administrative expenses increased by 100% to $1.4 million for the year ended March 31, 2009 from $0.7 million for the year ended March 31, 2008. This increase was primarily due to increased administrative costs to operate new stores. General and administrative expenses as a percentage of our revenue increased slightly from 2.2% for the year ended March 31, 2008 to 3.1% for the year ended March 31, 2009. As we continue to build our infrastructure and begin operating as a United States publicly traded company, we anticipate that our general and administrative expenses will continue to increase.
     
Income from Operations. As a result of the foregoing, our income from operations increased to $9.1 million for the year ended March 31, 2009 from $5.4 million for the year ended March 31, 2008, an increase of 67.2%. Our operating margin increased from 17.3% for the year ended March 31, 2008 to 20.2% for the year ended March 31, 2009.
    
Income Taxes. Our income tax expense increased to $2.3 million for the year ended March 31, 2009 from $2.0 million for the year ended March 31, 2008 as a result of our increased operating income. Our effective tax rate decreased from 37.4% for the year ended March 31, 2008 to 25% for the year ended March 31, 2009.
     
Net Income. As a result of the foregoing, our net income increased to $6.8 million for the year ended March 31, 2009 from $3.4 million for the year ended March 31, 2008.

 
42

 

Liquidity

Three Month Period Ended June 30, 2009

For the three months ended June 30, 2009, we generated $454,651 from operating activities, as compared to cash used in operating activities of $92,559 for the three months ended June 30, 2008. The increase is primarily attributable to a decrease in advances made to suppliers of $1,460,399 from the three months ended June 30, 2008 to the three months ended June 30, 2009 offset by a decrease in inventory liquidation from the three months ended June 30, 2008 to the three months ended June 30, 2009 of $448,243 and taxes paid of $342,294 from the three months ended June 30, 2008 to the three months ended June 30, 2009.

We used $178,562 in investing activities during the three months ended June 30, 2009 as compared to $79,018 during the three months ended June 30, 2008 as a result of opening 3 stores during the three months ended June 30, 2009 as compared to opening 2 stores during the three months ended June 30, 2008.

There was no cash used in or provided by for the three months ended June 30, 2009 and 2008.

As of June 30, 2009, we had cash of $1,272,149. Our total current assets were $13,895,266 and our total current liabilities were $8,988,839 which resulted in a net working capital of $4,906,427. We believe that we have sufficient cash flow to meet our obligations on a timely basis in the foreseeable future.

Year Ended March 31, 2009

For the year ended March 31, 2009, we used cash in operating activities of $230,990, as compared to cash provided by operating activities of $1,421,926 for the year ended March 31, 2008. The decrease is primarily attributable to an increase in long term rental deposits of $2,005,795 and supplier advances of $4,307,901 offset by an increase in net income of $3,425,637 from the year ended March 31, 2008 to March 31, 2009.

We used $474,072 in investing activities during the year March 31, 2009 as compared to $348,886 during the year March 31, 2008 as a result of adding additional stores during the year ended March 31, 2009.

Cash provided by financing activities was $805,193 for the year ended March 31, 2009 as compared to cash used in financing activities of $772,398 for the year ended March 31, 2008. As described in Note 10 of the accompanying footnotes to our consolidated financial statements, we borrowed $1,465,600 and partially repaid loans totaling $512,400 during the year ended March 31, 2009 while we made payments of $772,398 towards a short term loan during the year ended March 31, 2008.

As of March 31, 2009, we had cash of $996,302. Our total current assets were $12,970,620 and our total current liabilities were $9,307,654 which resulted in a net working capital of $3,662,966.

Capital Resources

During the year ended March 31, 2009, we borrowed $1,465,600. We have funded our continued expansion from our operating cash flow. However, if we were to expand more aggressively throughout Hangzhou and other parts of Zhejiang Province, we will need additional capital.

Contractual Obligations and Off-Balance Sheet Arrangements
 
Contractual Obligations
 
When we open store locations, we typically enter into lease agreements that are generally between four to five years. Our commitments for minimum rental payments under our leases for the next five years and thereafter are as follows:
 
Years ending March 31,
     
2010
  $ 1,057,975  
2011
    897,791  
2012
    616,612  
2013
    372,540  
2014
    243,676  
Thereafter
    34,269  
 
Logistics Services Commitments
 
We use a third party service provider, Zhejiang Yingte Logistics Co., Ltd., (“Yingte”) to accept goods from our suppliers and to deliver the goods to our store locations. On January 1, 2009 we entered into a one year agreement with Yingte and are obligated to pay 1% of the purchase price of the goods received from our suppliers by Yingte during the term of the agreement, January 1, 2009 to December 31, 2009, with a contractual minimum of 2,900,000 RMB.

 
 
43

 

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.

Related Party Transactions

For a description of our related party transactions, see the section of this current report entitled “Certain Relationships and Related Transactions.”

Quantitative and Qualitative Disclosures about Market Risk  

DESCRIPTION OF PROPERTY

All of our current business operations, including our corporate headquarters, our distribution center and branch stores, are located in Hangzhou, and all of the space for our operations is leased from third parties, as summarized in the following table:
 
 
 
Principal
Activities
 
Location
 
Approx.
Area
(square
meters)
 
Opening Date
 
Lease 
Expiration Date
Main Office
 
Room 507-513, 5th Floor A Building, Meidu Plaza
Gongshu District, Hangzhou
 
729
 
N/A
 
March 3, 2012
                 
Taihe Branch
 
No. 121 Jiefang Road, Shangcheng District
 
521
 
March 11, 2004
 
September 30, 2009
                 
Daguan Branch
 
No. 8 Deyuan Road, Gongshu District
 
1,985
 
June 9, 2004
 
June 20, 2010
                 
Wenhua Branch
 
No. 233 West Wenyi Road, West Lake District
 
800
 
September 6, 2004
 
August 1, 2010
                 
Wensan Branch
 
No. 451 Wensan Road, West Lake District
 
178
 
April 28, 2005
 
July 31, 2008
                 
Banshan Branch
 
No,63-4 to No.63-8, Building 63, Hang Gang Nan Yuan, Gongshu District
 
600
 
April 28, 2005
 
November 16, 2013
                 
Qiutao Branch
 
1st Floor, No. 276 North Qiutao Road, Jianggan District
 
200
 
November 24, 2006
 
November 30, 2011
                 
Beijingyuan Branch
 
No. 1028 Dongxin Road, Xiacheng District
 
161
 
July 4, 2007
 
July 31, 2010

 
44

 

Jinfang Branch
 
Building 1 Qianjiangqiyuan, Jianggan District
 
139
 
November 30, 2007
 
November 2, 2013
                 
Xiasha No. 2 Branch
 
No. 8-1 No. 4 Avenue, Baiyang Street, Economic & Technology Development Zone
 
532
 
December 6, 2007
 
October 14, 2014
                 
Dongxin Branch
 
No. 77 East Xiangjisi Road, Xiacheng District
 
100
 
April 2, 2008
 
January 15, 2013
                 
Wushan Branch
 
No. 35 Yanan Road, Shangcheng District
 
300
 
April 23, 2008
 
December 13, 2010
                 
Binjiang Branch
 
No 500 Weiye Road, Binjiang District
 
83
 
July 8, 2008
 
June 5, 2013
                 
Gongbei Branch
 
No.1074 and No. 1076 Shangtang Road, Gongshu District
 
200
 
June 24, 2008
 
June 19, 2014
                 
Changhe Branch
 
No. 27 and No. 29 Changjiangzhong Road, Changhe Street, Binjiang District
 
80
 
November 28, 2008
 
October 30, 2013
                 
Gudun Branch
 
Jindu Garden C-7, 311, 313, 315, 317, 319 Gudun Road
 
315
 
January 16, 2009
 
October 31, 2011
                 
Lin’an Branch
 
403 Qianwang Road
Lin’an District
 
364
 
March 7, 2009
 
December 17, 2013
                 
Kuaileren Branch
 
No. 7 Jiubao Street
 
220
 
April 30, 2009
 
March 27, 2015
   
Jianggan District
 
           
Jingfang Branch
 
No. 2-52 to No. 2-53
 
182
 
May 27, 2009
 
March 7, 2014
   
Jingfangliuqu, Tanhua’an Road
Jiang Gan District
 
           
Daguan No. 2 Branch
 
No. 75 Danguanyuan Road
Gong Shu District
 
130
 
June 26, 2009
 
June 5, 2014
                 
Caihe Branch
 
No. 22 to No. 28, Caihe Road
Jianggan District
 
63
 
July 17, 2009
 
July 31, 2014

We must negotiate with the landlords for an extension of the old leases or enter into new leases upon their termination, and our landlords may request a rent increase. Under applicable PRC law, we have priority over other potential lessees with respect to the leased store space on the same terms. We also do not expect any significant difficulties in renewal of existing leases upon their expiration, where desired. Our community stores are normally relatively small in size and the facilities inside the store are easily movable. As a result, we do not expect our drugstore operations to be materially and adversely affected by any failure to renew or enter into new leases.

 
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SECURITY OWNERSHIP PRIOR TO CHANGE OF CONTROL  

The following table sets forth certain information concerning the number of the Registrant’s common shares owned beneficially immediately prior to the Closing of the Exchange by: (i) each person (including any group) known to us to own five percent (5%) or more of any class of the Registrant’s voting securities, (ii) each of the Registrant’s directors and executive officers, and (iii) all officers and directors as a group. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the common shares shown.

Common Stock Beneficially Owned
 
Executive officers and directors:
 
Number of
Shares
beneficially
owned  (1)
 
Percentage of
class beneficially
owned after the
Transaction   (1)
Huoqing Chen (2)
   
0
 
0
All directors and executive officers as a group (one person)
   
0
 
0
           
5% Shareholders:
         
John S. Morita (3)
   
1,000,000
 
23.81
John Yinglong He (4)
   
1,000,000
 
23.81
 

(1)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of common stock actually outstanding on September 16, 2009. As of September 16, 2009, there were 4,200,000 common shares issued and outstanding.

(2)
Huoqing Chen’s address is: Floor 8, Xuequan Tower, No. 1 Zhichun Road, Beijing, PRC 100083.

(3)
John S. Morita’s address is: 145 West 44 th Avenue, Vancouver, BC V5Y 2V3, Canada.

(4)
John Yinglong He’s address is: 4620 Coventry Drive, Richmond, BC V7C 4R2, Canada.

SECURITY OWNERSHIP IMMEDIATELY AFTER CHANGE OF CONTROL
 
The following table sets forth certain information regarding the number of the Registrant’s common shares beneficially owned after the Closing, for (i) each person (including any group) known to us to own five percent (5%) or more of any class of the Registrant’s voting securities, (ii) each current and incoming executive officers and directors, and (iii) all current and incoming executive officers and directors as a group.

 
46

 

Common Stock Beneficially Owned
   
Executive officers and directors: (1)
Number of
Shares
beneficially
owned  (2)
 
Percentage of
class beneficially
owned after the
Transaction   (3)
 
Lei Liu, chief executive officer and Chairman of the Board of Directors (4) (8)
     
60.3
%
Bennet P. Tchaikovsky, chief financial officer (4) (5)
     
1.0
%
Li Qi, Incoming Director (4) (8)
     
60.3
%
Chongan Jin, Incoming Director (4) (8)
     
60.3
%
Shike Zhu, Incoming Director (4) (6)
     
2.5
%
Huoqi Chen, Director (4) (7)
     
0.0
%
All directors and executive officers as a group (5 persons)
     
63.8
%
           
5% Shareholders: (1)
         
Super Marvel Limited (8)
     
60.30
%
 

(1)
Unless otherwise noted, the address for each of the named beneficial owners is: Room 507-513, 5th Floor, A Building, Meidu Plaza, Gongshu District, Hangzhou, Zhejiang Province, China.

(2)
Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person's actual ownership or voting power with respect to the number of shares of common stock actually outstanding.
 
(3)
Pursuant to the terms of the Exchange Agreement, the Registrant issued 15,800,000 common shares to the Renovation Stockholders equal to approximately 79% of the Registrant’s issued and outstanding common shares as of the Closing Date of the Exchange. Immediately after the Closing of the Exchange, the Registrant had 20,000,000 issued and outstanding shares of common stock. Percentage totals may vary slightly due to rounding.

(4)
In connection with the Exchange, Huoqi Chen resigned as President, chief executive officer, chief financial officer, treasurer and secretary, and in his place, Lei Liu was appointed as chief executive officer and Bennet P. Tchaikovsky as chief financial officer. Mr. Liu was additionally appointed to the board of directors. In addition, at the expiration of the 10-day period following the delivery and/or mailing of the Schedule 14f-1 Information Statement to our shareholders as required under Rule 14(f)-1, the resignation of Mr. Chen from, and the appointments of Li Qi, Chongan Jin and Shike Zhu to, our board of directors will also become effective.

(5)
Bennet P. Tchaikovsky’s address is: 6571 Morningside Drive, Huntington Beach, CA 92648.
 
(6)
Shike Zhu’s address is: Citigroup Tower, 24/F, 33 Hua Yuan Shi Qiao Road, Pudong New Area, Shanghai, China 200120.

(7)
Huoqing Chen’s address is: Floor 8, Xuequan Tower, No. 1 Zhichun Road, Beijing, PRC 100083.

(8)
The address of Super Marvel Limited (“Super Marvel”) address is P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands. The owners of Super Marvel are Lei Liu (39%), who is also its Executive Director, and Li Qi (30%) and Chongan Jin (31%), who are also its Directors. As such, they are deemed to have or share investment control over Super Marvel’s portfolio. The numbers of shares of Kerrisdale common stock reported herein as beneficially owned by Mr. Liu, Ms. Qi and Mr. Jin are held by Super Marvel, which they in turn own indirectly through their respective ownership of Super Marvel.

 
47

 

MANAGEMENT

Appointment of New Officers and Directors

In accordance with the Exchange Agreement, the Registrant’s board of directors appointed Lei Liu to the board of directors effective at the Closing. In addition, upon the Registrant’s compliance with the provisions of Section 14(f) of the Exchange Act and Rule 14(f)-1 thereunder, the resignation of Huoqi Chen from, and the appointments of Li Qi, Chongan Jin and Shike Zhu to, the Registrant’s board of directors will also become effective.
 
Additionally, upon Closing, Mr. Chen resigned as the Registrant’s president, chief executive officer, chief financial officer, treasurer and secretary. Immediately following the resignation of Mr. Chen, the Registrant’s new officers are as described in the table below:

Name
 
Age
 
Position
Lei Liu
 
45
 
Chief Executive Officer and Chairman of the Board of Directors
Bennet P. Tchaikovsky
 
40
 
Chief Financial Officer
Li Qi
  
37
  
Secretary

Biographical Information

The following is a brief account of the education and business experience of the incoming directors and executive officers during at least the past five years, indicating the person's principal occupation during the period, and the name and principal business of the organization by which he or she was employed.
 
Lei Liu is one of the three founders of HJ Group, and has been the executive director of Jiuzhou Grand Pharmacy since September 2003 and the supervising director of Jiuzhou Service since November 2005. From December 1997 to August 2003, Mr. Liu worked in Tai He Drugstore as a general manager. From September 1992 to November 1997, Mr. Liu was an administration offical of Hangzhou Medical Junior College, his alma mater, where he was also a researcher and an anatomy instructor from September 1983 to July 1992. Mr. Liu has been a licensed researcher in the PRC since September 1988.
 
Bennet P. Tchaikovsky is presently the chief financial officer of Skystar Bio-Pharmaceutical Company which he performs on a part-time basis. He is also currently serving on the board of directors of Ever-Glory International Group, Inc., as chairman of the audit committee and member of the compensation committee, and the board of directors of Sino Clean Energy, Inc., as chairman of the audit committee and member of the compensation and nominating committees. From July 2004 through October 2007, Mr. Tchaikovsky served as the chief financial officer of Innovative Card Technologies, Inc. Mr. Tchaikovsky acted as a consultant to Innovative Card Technologies from November 2007 until July 2008. Mr. Tchaikovsky is a licensed Certified Public Accountant and an inactive member of the California State Bar. He received a B.A. in Business Economics from the University of California at Santa Barbara, and a J.D. from Southwestern University School of Law.

Li Qi   is one of the three founders of HJ Group and is currently the general manager of both Jiuzhou Grand Pharmacy and Jiuzhou Service. From January 2000 to June 2003, Ms. Qi worked in Zhejiang Yikang Drugstore as a general manager. From October 1991 to January 2000, Ms. Qi worked in the Branch Hospital of Hangzhou No. 1 People’s Hospital as a nurse. Ms. Qi is a licensed TCM pharmacist in the PRC and is a 1991 graduate of Hangzhou Nurse School.

Chongan Jin is one of the three founders of HJ Group and is presently the executive director of Jiuzhou Service and the managing general partner of Jiuzhou Clinic. From June 1996 to September 2003, Mr.Jin worked for Hangzhou Qiantang Medical Outpatient Clinic as a general manager. From December 1991 to October 1994, he worked in Hangzhou Hospital of Traditional Chinese Medicine as a physician of western medicine. From September 1988 to December 1991, Mr. Jin worked in Zhejiang Tumor Hospital as a physician of western medicine. In July 1988, Mr. Jin received a B.S. in Medicine from Sun Yat-sen Medical University, and is a licensed pharmacist in the PRC.

 
48

 

Shike Zhu  is the chairman of Huai Nan Tian Rui Goods & Materials Co., Ltd., a post he has held since 2003. He is also the director of Tianri Rubber Products Co., Ltd. since 1994, where he was also the deputy general manager from 1994 to 1998. Since May 2008, Mr. Zhu has served as advisor to the chairman of China Wind Systems, Inc. From October 1988 to May 1994, Mr. Zhu was an official of Tiantai municipal government in Zhejiang Province, service as vice director of the Overseas Chinese Affairs Office and vice director of the Overseas Chinese Federation. Mr. Zhu is a graduate of Zhejiang TV University Engineering Management College.

Family Relationships

There are no family relationships between or among any of the current and incoming directors or executive officers.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of the incoming officers and directors have been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, nor have they been a party to any judicial or administrative proceeding during the past five years, except for matters that were dismissed without sanction or settlement, that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.

Code of Ethics

We have not adopted a code of ethics as of the date of this current report. Prior to the Closing, the Registrant only had one individual acting as its director and executive officer, and it had no employees. However, we plan to adopt a code of ethics in the near future.

Section 16(a) Beneficial Ownership Compliance

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, other than reported in our annual report on Form 10-K filed on October 27, 2008, and except that Huoqi Chen, John S. Morita and John Yinglong He have not filed Form 3 reports in connection with transactions that occurred prior to the Exchange Transaction, all executive officers, directors and greater than 10% shareholders filed the required reports in a timely manner.

Board of Directors, Board Meetings and Committees

Prior to the Closing, Huoqi Chen served as the Registrant’s sole director. Concurrent with and effective at the Closing, Lei Liu became a member of the board of directors. In addition, at the expiration of the 10-day period following the delivery and/or mailing of the Schedule 14f-1 Information Statement to our shareholders as required under Rule 14(f)-1, the resignation of Huoqi Chen from, and the appointments of Li Qi, Chongan Jin and Shike Zhu to, the Registrant’s board of directors will become effective, after which the board of directors will comprise of four (4) members, all of whom, except for Mr. Shike Zhu, are management members of HJ Group. All members of the board of directors serve in their capacity until their terms expire or until their successors are duly elected and qualified. The Registrant’s bylaws provide that the authorized number of directors is between one (1) and thirteen (13).
 

Common Stock Beneficially Owned
 
Executive officers and directors:
 
Number of
Shares
beneficially
owned  (1)
 
Percentage of
class beneficially
owned after the
Transaction   (1)
Huoqi Chen (2)
   
0
 
0
All directors and executive officers as a group (one person)
   
0
 
0
           
5% Shareholders:
         
John S. Morita (3)
   
1,000,000
 
23.81
John Yinglong He (4)
   
1,000,000
 
23.81
 
 

 
 
49

 

Lei Liu has been appointed as the Chairman of the Board of Directors. In this capacity he is responsible for meeting with the chief financial officer to review the Registrant’s financial and operating results, agendas and minutes of board and committee meetings, and presiding at the meetings of the committees of the board of directors.

The board of directors held no formal meetings during the most recently completed fiscal year. All proceedings of the board of directors were conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the corporate laws of the State of Nevada and our By-laws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.

Board Committees; Director Independence
 
As of this date the Registrant’s board of directors has not appointed a nominating committee, audit committee or compensation committee, or committees performing similar functions nor does it have a written nominating, compensation or audit committee charter. The board of directors does not believe that it is necessary to have such committees because it believes the functions of such committees can be adequately performed by the board of directors. Further, the Registrant is not a "listed company" under SEC rules and thus is not required to have a compensation committee or a nominating committee. Accordingly, the Registrant does not have an “audit committee financial expert” as such term is defined in the rules promulgated under the Securities Act of 1933, as amended (the “ Securities Act ”) and the Exchange Act. The functions ordinarily handled by these committees are currently handled by the entire board of directors. The board of directors intends, however, to review the governance structure and institute board committees as necessary and advisable in the future, to facilitate the management of the Registrant’s business.

We do not believe that any of the current or incoming directors are considered “independent” as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. We are not currently subject to any law, rule or regulation, however, requiring that all or any portion of our board of directors include "independent" directors.

We do not have any defined policy or procedure requirements for shareholders to submit recommendations or nominations for directors. We believes that, given the early stages of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. We do not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. Our board of directors assesses all candidates, whether submitted by management or shareholders, and makes recommendations for election or appointment.

A stockholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our chief executive officer at the address appearing on the face page of this current report. We do not have a policy regarding the attendance of board members at the annual meeting of shareholders.

Compensation Committee Interlocks and Insider Participation

No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

EXECUTIVE COMPENSATION

Former Executive Officers

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal year of the Registrant ended July 30, 2009 by its former chief executive officer, chief financial officer and each of the other two highest paid executives, if any, whose total compensation exceeded $100,000 during the fiscal year ended July 30, 2009.

50

 
Summary Compensation Table

Name and Principal Position
 
Fiscal
Year
Ended
 
Salary
($)
 
Bonus
($)
 
Stock
Awards
($) 
 
Option
Awards
($)
 
Non-
Equity
Incentive
Plan
Compensa-
tion
($)
 
Nonqualified
Deferred
Compensa-
tion
Earnings
($)
 
All Other
Compensa-
tion ($)
 
Total
($)
 
Huoqi Chen, former President, chief executive officer, chief financial officer, treasurer, and secretary (1)
   
2008
 
0
   
0
 
0
   
0
 
0
   
0
 
0
   
0
 
                                                 
John S. Morita, former President and chief executive officer (2)
   
2008
 
0
   
0
 
0
   
0
 
0
   
0
 
0
   
0
 
                                                 
John Yinglong He, former chief financial officer, treasurer and secretary (3)
   
2008
 
0
   
0
 
0
   
0
 
0
   
0
 
0
   
0
 

(1)
Mr. Chen was appointed as the Registrant’s president and chief executive officer on September 4, 2008, and as chief financial officer, treasurer and secretary on August 12, 2008. Mr. Chen resigned from all of these positions on September 17, 2009.

(2)
Mr. Morita was appointed as the Registrant’s president and chief executive officer on December 19, 2006, and resigned from these positions on September 4, 2008.

(3)
Mr. He was appointed as the Registrant’s chief financial officer, treasurer and secretary on December 19, 2006, and resigned from these positions on August 12, 2008.

Incoming Executive Officers

The following summary compensation table indicates the cash and non-cash compensation earned during the fiscal year of Renovation ended March 31, 2009 by the incoming chief executive officer, chief financial officer and each of the other two highest paid executives of Grand Pharmacy Group, if any, whose total compensation exceeded $100,000 during the fiscal year ended March 31, 2009.
Summary Compensation Table

Name and Principal Position
 
 
Fiscal
Year
Ended
 
Salary
($)
 
Bonus
($)
 
Stock
Awards
($) 
 
Option
Awards
($) 
 
Non-Equity
Incentive
Plan
Compensa-
tion
($)
 
Nonqualified
Deferred
Compensa-
Tion
Earnings
($)
 
All Other
Compensa-
tion ($) 
 
Total
($)
 
Lei Liu, incoming president and chief executive officer (1)
   
2009
   
10,000
   
0
   
0
   
0
   
0
   
0
   
0
   
10,000
 
                                                         
Bennet P. Tchaikovsky, incoming chief financial officer (2)
   
2009
   
0
   
0
   
0
   
0
   
0
   
0
   
0
   
0
 

(1)
Salary and other annual compensation paid to Mr. Liu are from Grand Pharmacy Group and are expressed in U.S. Dollars based on the interbank exchange rate of RMB 6.83 for each 1.00 U.S. Dollar, on March 31, 2009.

 
51

 

(2)
Mr. Tchaikovsky was appointed chief financial officer of Renovation on July 30, 2009 and accordingly did not receive any compensation from Grand Pharmacy Group for the fiscal year ended March 31, 2008.

Employment Agreements

Except as described below, we currently have no employment agreements with any of our officers.
 
CFO Services Agreement for the Services of Bennet P. Tchaikovsky
 
On July 30, 2009, we entered into a CFO Services Agreement (the “CFO Agreement”) with Worldwide Officers, Inc., a California corporation (“WOI”), pursuant to which we have retained the services of Bennet P. Tchaikovsky to serve as our chief financial officer until the completion of a financing. Under the terms of the Loanout Agreement, Mr. Tchaikovsky will perform his duties from the United States, and we agreed to pay $30,000 for his services through the close of a financing. We also agree to include Mr. Tchaikovsky as an insured under a directors and officers insurance policy during his term of engagement, and to enter into an indemnification agreement with him should we enter into such an agreement with any member of our board of directors.
 
The CFO Agreement terminates at the closing of a financing, provided that we shall enter into a new agreement at that time with WOI to continue Mr. Tchaikovsky’s engagement as our chief financial officer. Additionally, the CFO Agreement automatically terminates 9 months from the date of its execution if the Registrant’s common stock is not listed on the Nasdaq Capital Market or if a financing is not completed by such time. We may also terminate the CFO Agreement upon a 30-day written notice to Mr. Tchaikovsky. On the other hand, Mr. Tchaikovsky may terminate the CFO Agreement upon a 90-day written notice to us.

Director Compensation
 
We do not have any agreements or formal plan for compensating our directors for their service in their capacity as directors, although our board of directors may, in the future, award stock options to purchase shares of common stock to our directors.

Potential Payments Upon Termination or Change-In-Control

SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection with any termination of employment or change in control of the company. We currently have no such agreements, plans or arrangements in place. As a result, we have omitted this table.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Agreement and Plan of Share Exchange
 
On September 17, 2009, the Registrant executed the Exchange Agreement with Renovation and the Renovation Stockholders. Renovation owns 100% of Jiuxin Management, which is a WFOE under the laws of the PRC.
 
On the Closing Date of the Exchange Agreement, the Registrant issued 15,800,000 shares of its common stock to the Renovation Stockholders in exchange for 100% of the issued and outstanding common stock of Renovation. After the Closing, the Registrant has a total of 20,000,000 shares of common stock outstanding, with the Renovation Stockholders owning approximately 79% of the Registrant’s total issued and outstanding common shares.
 
As a result of the Exchange, the Renovation Stockholders became the Registrant’s controlling shareholders and Renovation became its wholly owned subsidiary. In connection therewith, the Registrant acquired the business and operations of Jiuxin Management, and its principal business activities are conducted through Jiuxin Management in China.

 
52

 

Related Party Transactions of Grand Pharmacy Group

Set forth below are the related party transactions among Grand Pharmacy Group, their equity owners and officers and/or directors:
 
   
June 30, 2009
   
March 31, 2009
 
   
(Unaudited)
       
Amounts due from directors (1):
  $ 2,432     $ 2,432  
Amount due to director (2):
  $ 326,715     $ 326,715  
Advances to supplier (3):
  $ 1,890,410     $ 1,797,104  

(1)
Represents interest free loans to two directors of the Company, Li Qi and Chongan Jing. The loans are due upon demand.
 
(2)
Represents leasehold improvement expenses paid by a director of the Company, Lei Liu, on behalf of the Company. The amount is interest from and due upon demand.
   
(3)
Represents prepayment for inventory purchase made to a supplier, which was formerly owned by the Company’s directors. The Company will collect inventory from the supplier.

The Company also leases a retail space and the corporate office space f rom a director of the Company under long-term operating lease agreements beginning August 2008 to August 2010 and from January 2008 to March 2012, respectively. The annual rent for the retail space and the corporate office are $170,123 and $134,330 for the year s ended March 31, 2009 and 2008, respectively. For the years ended March 31, 2009 and 2008, rent paid to Mr . Liu amounted to $171,360 and $134,330, respectively.

Related Party Transaction of the Registrant

DESCRIPTION OF SECURITIES

General
 
The Registrant’s authorized capital stock consists of 500,000,000 shares of common stock at a par value of $0.001 per share and 10,000,000 shares of preferred stock at a par value of $0.001 per share. After the Closing of the Exchange, the Registrant has 20,000,000 shares of common stock issued and outstanding held by approximately  21 stockholders of record.

Common Stock
 
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of common stock do not have cumulative voting rights. Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of liquidation, dissolution or winding up, subject to preferences that may be applicable to any then-outstanding preferred stock, each outstanding share entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
 
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.

Preferred Stock

Our board of directors, without further shareholder approval, may issue preferred stock in one or more classes or series as the board may determine from time to time.  Each such class or series shall be distinctly designated.  All shares of any one class or series of the preferred stock shall be alike in every particular, except that there may be different dates from which dividends thereon, if any, shall be cumulative, if made cumulative.  The voting powers, designations, preferences, limitations, restrictions and relative rights thereof, if any, may differ from those of any and all other series outstanding at any time.  Our board of directors has express authority to fix (by resolutions adopted prior to the issuance of any shares of each particular class or series of preferred stock) the number of shares, voting powers, designations, preferences, limitations, restrictions and relative rights of each such class or series.  The rights granted to the holders of any series of preferred stock could adversely affect the voting power of the holders of common stock and issuance of preferred stock may delay, defer or prevent a change in our control.

 
53

 

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Registrant’s common stock is traded on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol “KMNG.OB”. There was no active trading market for the common stock before May 1, 2008. The following table sets forth, for the periods indicated, the reported high and low closing bid quotations for our common stock as reported on the OTCBB. The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns or commissions and do not necessarily reflect actual transactions.
Common Stock
 
Quarter Ended
 
High Bid
   
Low Bid
 
June 30, 2009
    0.00       0.00  
March 31, 2009
    0.00       0.00  
December 31, 2008
    0.55       0.15  
September 30, 2008
    1.12       0.25  
June 30, 2008
    1.11       0.00  

Shareholders

After the closing of the Exchange, we have approximately 21 shareholders of record of our issued and outstanding common stock.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock is Island Stock Transfer. The transfer agent’s address is 100 Second Avenue South, Suite 705S, St. Petersburg, Florida 33701, and their telephone number is (727) 289-0010.

Dividend Policy

We do not currently intend to pay any cash dividends in the foreseeable future on our common stock and, instead, intend to retain earnings, if any, for future operation and expansion. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant.

Equity Compensation Plan Information

We currently do not have any equity compensation plans.

LEGAL PROCEEDINGS

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.

RECENT SALES OF UNREGISTERED SECURITIES

Reference is made to Item 3.02 of this current report on Form 8-K for a description of recent sales of unregistered securities, which is hereby incorporated herein by reference.

 
54

 

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Pursuant to the provisions of the State of Nevada’s Revised Business Statutes, the Registrant has adopted the following indemnification provisions in its Bylaws for its directors and officers:

.01        Indemnification.
 
The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a Director, Trustee, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Trustee, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and with respect to any criminal action proceeding, had reasonable cause to believe that such person's conduct was unlawful.
 
.02       Derivative Action

The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in the Corporation's favor by reason of the fact that such person is or was a Director, Trustee, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Trustee, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorney's fees) and amount paid in settlement actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to amounts paid in settlement, the settlement of the suit or action was in the best interests of the Corporation; provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for gross negligence or willful misconduct in the performance of such person's duty to the Corporation unless and only to the extent that, the court in which such action or suit was brought shall determine upon application that, despite circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses as such court shall deem proper. The termination of any action or suit by judgment or settlement shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation.

.03       Successful Defense.
 
To the extent that a Director, Trustee, Officer, employee or Agent of the Corporation has been successful on the merits or otherwise, in whole or in part in defense of any action, suit or proceeding referred to in Paragraphs .01 and .02 above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith.

 
55

 

.04       Authorization.
 
Any indemnification under Paragraphs .01 and .02 above (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, Trustee, Officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Paragraphs .01 and .02 above. Such determination shall be made (a) by the Board of Directors of the Corporation by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (b) is such a quorum is not obtainable, by a majority vote of the Directors who were not parties to such action, suit or proceeding, or (c) by independent legal counsel (selected by one or more of the Directors, whether or not a quorum and whether or not disinterested) in a written opinion, or (d) by the Shareholders. Anyone making such a determination under this Paragraph .04 may determine that a person has met the standards therein set forth as to some claims, issues or matters but not as to others, and may reasonably prorate amounts to be paid as indemnification.

.05       Advances.

Expenses incurred in defending civil or criminal action, suit or proceeding shall be paid by the Corporation, at any time or from time to time in advance of the final disposition of such action, suit or proceeding as authorized in the manner provided in Paragraph .04 above upon receipt of an undertaking by or on behalf of the Director, Trustee, Officer, employee or agent to repay such amount unless it shall ultimately be by the Corporation is authorized in this Section.

.06       Nonexclusivity.

The indemnification provided in this Section shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any law, bylaw, agreement, vote of shareholders or disinterested Directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, Trustee, Officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person.

.07       Insurance.

The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a Director, Trustee, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Trustee, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability assessed against such person in any such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability.
 
.08       "Corporation" Defined.
 
For purposes of this Section, references to the "Corporation" shall include, in addition to the Corporation, an constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had the power and authority to indemnify its Directors, Trustees, Officers, employees or agents, so that any person who is or was a Director, Trustee, Officer, employee or agent of such constituent corporation or of any entity a majority of the voting stock of which is owned by such constituent corporation or is or was serving at the request of such constituent corporation as a Director, Trustee, Officer, employee or agent of the corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving Corporation as such person would have with respect to such constituent corporation if its separate existence had continued.”

 
56

 

The indemnification provisions described above provide coverage for claims arising under the Securities Act and the Exchange Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to its Articles of Incorporation, Bylaws, the Nevada Revised Business Statutes, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Item 3.02 Unregistered Sales of Equity Securities

Exchange

On September 17, 2009, and as described under Item 2.01 above, pursuant to the Exchange Agreement, the Registrant issued 15,800,000 shares of its common stock to the Renovation Stockholders in exchange for 100% of the issued and outstanding capital stock of Renovation. The issuance of these shares was exempt from registration pursuant to Regulation D and Regulation S under the Securities Act. The Registrant made this determination based on the representations of the Renovation Stockholders, which included, in pertinent part, that such shareholders were an “accredited investor” as that term is defined in Regulation D under the Securities Act, or were not a "U.S. person" as that term is defined in Rule 902(k) of Regulation S under the Securities Act, and that such shareholders were acquiring our common stock, for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to the resale or distribution thereof, and that such shareholders understood that the shares of our common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.
 
July 2007 Common Stock Offering
 
On July 16, 2007, we completed an offering of 1,000,000 shares of our common stock at a price of $0.02 per share to a total of 25 purchasers. The total amount received from this offering was $20,000. These shares were issued pursuant to Regulation S of the Securities Act. The purchasers in this offering were as follows:

Name of Subscriber:
 
Number of
Shares:
 
Yuxian An
   
40,000
 
Jordan Buck
   
40,000
 
Richard Chan
   
40,000
 
Yibin Han
   
40,000
 
Yingbin He
   
40,000
 
Thomas J.  Kennedy
   
40,000
 
Deborah Kennedy
   
40,000
 
Robert Kennedy
   
40,000
 
Guoliang Liu
   
40,000
 
Michelle Z. Liu
   
40,000
 
Yuzhi Liu
   
40,000
 
Jody Morita
   
40,000
 
Hua Niu
   
40,000
 
Xiaoming Ran
   
40,000
 
Richard X. Song
   
40,000
 
Yuxia Wang
   
40,000
 
Winnie Lai Wah Wing
   
40,000
 
Shun Rong Wu
   
40,000
 
Qing Xia
   
40,000
 
Shenglin Xu
   
40,000
 
Dwayne Yaretz
   
40,000
 
Peiqin Yu
   
40,000
 
Xiao Bo Zhang
   
40,000
 
Shuang Zhen
   
40,000
 
Yenyou Zheng
   
40,000
 

 
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March 2007 Common Stock Offering

On March 8, 2007, we completed an offering of 1,200,000 shares of our common stock at a price of $0.008 per share to a total of 6 purchasers. The total amount received from this offering was $9,600. These shares were issued pursuant to Regulation S of the Securities Act. The purchasers in this offering were as follows:

Name of Subscriber:  
 
Number of
Shares:
 
Ya Qin
   
200,000
 
Sue Morita
   
200,000
 
Yingzhe He
   
200,000
 
Gary Buck
   
200,000
 
Jason Buck
   
200,000
 
Linda Buck
   
200,000
 

January 2007 Common Stock Offering

On January 16, 2007, we completed an offering of 2,000,000 shares of our common stock at a price of $0.002 per share to a total of 2 purchasers. The total amount received from this offering was $4,000. These shares were issued pursuant to Regulation S of the Securities Act. The purchasers in this offering were as follows:

Name of Subscriber:  
 
Number of
Shares:
 
John S. Morita
   
1,000,000
 
John Yinglong He
   
1,000,000
 

Each offer or sale to the subscribers in the January, March and July 2007 common stock offerings listed above was made in an offshore transaction. Neither the Registrant, nor a distributor, nor any respective affiliates nor any person on behalf of any of the foregoing made any directed selling efforts in the United States. Offering restrictions were, and are, implemented. No offer or sale was made to a U.S. person or for the account or benefit of a U.S. person. Each purchaser of the securities certifies that it was not a U.S. person and was not acquiring the securities for the account or benefit of any U.S. person. Each purchaser of the securities agreed to resell such securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration; and agreed not to engage in hedging transactions with regard to such securities unless in compliance with the Act. The securities contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration; and that hedging transactions involving those securities may not be conducted unless in compliance with the Act. We are required, either by contract or a provision in its bylaws, articles, charter or comparable document, to refuse to register any transfer of the securities not made in accordance with the provisions of Regulation S pursuant to registration under the Act, or pursuant to an available exemption from registration; provided, however, that if any law of any Canadian province prevents us from refusing to register securities transfers, other reasonable procedures, such as a legend described in paragraph (b)(3)(iii)(B)(3) of Regulation S have been implemented to prevent any transfer of the securities not made in accordance with the provisions of Regulation S.

Item 5.01 Changes in Control of Registrant.
 
As explained more fully above in Item 2.01, in connection with the Exchange, the Registrant issued 15,800,000 shares of its common stock to the Renovation Stockholders in exchange for the transfer of 100% of the outstanding shares of Renovation’s capital stock by the Renovation Stockholders to the Registrant. As a result, the Renovation Stockholders acquired control of the Registrant because the common shares issued to them equal approximately 79% of the Registrant’s outstanding shares of common stock (on a fully-diluted basis) on the Closing Date. Each share of the Registrant’s outstanding common stock entitles the holders of common stock to one vote. Thus, the Renovation Stockholders holds the majority number of the Registrant’s voting shares on a fully diluted basis.
 
58

 
In connection with the Closing of the Exchange, and as explained more fully in Item 2.01 above under the section titled “Management” and in Item 5.02 below, effective on September 17, 2009, Huoqi Chen resigned as the Registrant’s chief executive officer, president, chief financial officer, secretary and treasurer. Further, effective September 17, 2009, the board of directors appointed Lei Liu as chief executive officer and as a director, Bennet P. Tchaikovsky as chief financial officer, and Li Qi as secretary. In addition, upon the Registrant’s compliance with the provisions of Section 14(f) of the Exchange Act and Rule 14(f)-1 thereunder, the appointments of Ms. Qi, Chongan Jin and Shike Zhu as new members of the board of directors will also become effective. The Schedule 14f-1 Information Statement will be filed and mailed to the Registrant’s stockholders shortly after the filing of this Form 8-K Current Report.
 
The closing of the transaction under the Exchange Agreement, which resulted in the change of control of the Registrant, occurred on September 17, 2009.
 
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
 
Effective September 17, Huoqi Chen resigned as the Registrant’s president, chief executive officer, chief financial officer, treasurer and secretary.

Effective September 17, 2009, Lei Liu was appointed as the Registrant’s chief executive officer, Bennet P. Tchaikovsky was appointed as chief financial officer, and Li Qi as secretary.

Effective September 17, 2009, Lei Liu was appointed as a member of the Registrant’s board of directors as its chairman. In addition, upon the Registrant’s compliance with the provisions of Section 14(f) of the Exchange Act and Rule 14(f)-1 thereunder, the appointments of Li Qi, Chongan Jin and Shike Zhu as new members of the Registrant’s board of directors and Mr. Huoqi Chen’s resignation from the Registrant's board of directors will also become effective.

There are no family relationships between or among any of the current and incoming directors or executive officers. Other than the transactions in connection with the Exchange, as described above in Item 2.01, no transactions occurred in the last two years to which the Registrant was a party in which the above-mentioned officers and/or directors had or is to have a direct or indirect material interest. Related party transactions involving Grand Pharmacy Group and its officers and/or directors are described in Item 2.01 above.

Descriptions of the business backgrounds and any compensation arrangements with the newly appointed or proposed directors and officers can be found in Item 2.01 above, in the sections titled “Management” and “Executive Compensation”, and such descriptions are incorporated herein by reference.

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
 
On September 17, 2009 and pursuant to the Exchange Agreement, the Registrant changed its fiscal year end from July 30 to March 31 to conform to the fiscal year end of Renovation.

On September 24, 2009, the amendment to the Registrant's Articles of Incorporation to reflect a name change from “ Kerrisdale Mining Corporation”  to “ China Jo-Jo Dru gstores, Inc.” shall be effective.   The name change shall be effected through a parent/subsidiary merger of a wholly-owned subsidiary, China Jo-Jo Drugstores, Inc., with and into the Registrant, with the Registrant as the surviving corporation.  The Registrant filed its Articles o f Merger with the Nevada Secretary of State and the merger shall be effective on September 24, 2009.  The Registrant s board of directors approved the merger which resulted in the name change.  In accordance with Section 92A.180 of the Nevada Rev ised Statutes , shareholder approval of the merger was not required.

Item 5.06 Change in Shell Company Status

As explained more fully in Item 2.01 above, the Registrant was a "shell company" (as such term is defined in Rule 12b-2 under the Exchange Act) immediately before the Closing of the Exchange. As a result of the Exchange, Renovation became the wholly owned subsidiary and main operating business of the Registrant. Consequently, the Registrant believes that the Exchange has caused it to cease to be a shell company. For information about the Exchange, please see the information set forth above under Item 2.01 of this current report on Form 8-K above, which information is incorporated herein by reference.

 
59

 

Item 8.01.   Other Events

The Registrant’s name change to “China Jo-Jo Drugstores, Inc.” shall be effective with NASDAQ’s Over-the-Counter Bulletin Board at the open of business on September 24, 2009. The Registrant’s new trading symbol shall be “CJJD” and its new CUSIP number shall be 16949A107.

Item 9.01   Financial Statement and Exhibits
 
As more fully described in Item 2.01 above, on September 17, 2009, the Registrant executed the Exchange Agreement with Renovation and the Renovation Stockholders. The Closing of this Exchange Transaction occurred on September 17, 2009. Renovation is the registered owner of 100% of the registered capital of Jiuxin Management. As a result of its acquisition of Renovation pursuant to the Exchange Agreement, the Registrant’s principal business activities after the Exchange shall continue to be conducted through Jiuxin Management.

(a) 
Financial statements of businesses acquired .
 
The audited consolidated financial statements of Renovation as of March 31, 2009 and 2008 are filed as Exhibit 99.2 to this current report and are incorporated herein by reference.

The unaudited condensed combined financial statements of Renovation as of June 30, 2009 and for the three months ended June 30, 2009 and 2008 are filed as Exhibit 99.3 to this current report and are incorporated herein by reference.

(b)
Pro forma financial information .
 
Per Regulation S-X Article 11, a narrative description of the pro forma effects of the transaction can be presented where a limited number of pro forma adjustments are required and those adjustments are easily understood. China Jo-Jo Drugstores, Inc., (“China Jo-Jo Drugstores Nevada”) is a shell company with limited activities, therefore, there are a limited number of pro forma adjustments and we are not presenting the pro forma financial statement in this current report. Below is the narrative description of the pro forma effects of the transaction.

Because Renovation Investment Co., Ltd., a Hong Kong Company’s (“Renovation HK”) former owners have received the majority voting rights in the combined entity and Renovation HK’s officers and directors have been appointed as executive officers and directors upon the completion of the share exchange transaction, the share exchange transaction is deemed to be a reverse acquisition and recapitalization. In accordance with the Accounting and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission, China Jo-Jo Drugstores Nevada (the legal acquirer) is considered the accounting acquiree and Renovation HK (the legal acquiree) is considered the accounting acquirer. The consolidated financial statements of the combined entity will be in substance be those of Renovation HK, with the assets and liabilities, and revenues and expenses of China Jo-Jo Drugstores Nevada being included effective from the date of the consummation of the share exchange transaction. China Jo-Jo Drugstores Nevada is deemed to be a continuation of the business of Renovation HK. The outstanding stock of China Jo-Jo Drugstores Nevada prior to the share exchange transaction will be accounted for at their net book value and no goodwill will be recognized.
 
(c) 
Shell company transactions .
 
Reference is made to Items 9.01(a) and 9.01(b) above and the exhibits referred to therein, which are incorporated herein by reference.

(d)
Exhibits

Exhibit
Number
  
Description
2.1
 
Share Exchange Agreement among Kerrisdale Mining Corporation (“Kerrisdale”), certain stockholders of Kerrisdale, Renovation Investment (Hong Kong) Co., Ltd. (“Renovation”) and the shareholders of Renovation dated September 17, 2009 (1)
3.1
 
Articles of Incorporation of Kerrisdale as filed with the State of Nevada (2)
3.2
 
Certificate of Amendment to Articles of Incorporation of Kerrisdale (3)
3.3
 
Articles of Merger of Kerrisdale as filed with the State of Nevada (1)
3.4
 
Bylaws of Kerrisdale (2)
3.5
 
Text of Amendments to the Bylaws of Kerrisdale (3)
99.1
 
Letters of resignation and waiver of accrued compensation by Huoqi Chen to the Board of Directors of Kerrisdale (1)
99.2
 
Audited consolidated financial statements of Renovation for the years ended March 31, 2009 and 2008 (1)
99.3
 
Unaudited consolidated financial statements of Renovation for the three months ended June 30, 2009 and 2008 (1)
99.4
  Reserved

 
60

 

99.5
 
Consulting Services Agreement between Jiuxin Management and Jiuzhou Grand Pharmacy dated August 1, 2009 (1)
99.6
 
Operating Agreement among Jiuxin Management, Jiuzhou Grand Pharmacy and its owners dated August 1, 2009 (1)
99.7
 
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Grand Pharmacy and its owners dated August 1, 2009 (1)
99.8
 
Option Agreement among Jiuxin Management, Jiuzhou Grand Pharmacy and its owners dated August 1, 2009 (1)
99.9
 
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Grand Pharmacy and its owners dated August 1, 2009
99.10
 
Consulting Services Agreement between Jiuxin Management and Jiuzhou Clinic dated August 1, 2009 (1)
99.11
 
Operating Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (1)
99.12
 
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (1)
99.13
 
Option Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009
99.14
 
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Clinic and its owners dated August 1, 2009 (1)
99.15
 
Consulting Services Agreement between Jiuxin Management and Jiuzhou Service dated August 1, 2009 (1)
99.16
 
Operating Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (1)
99.17
 
Equity Pledge Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (1)
99.18
 
Option Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (1)
99.19
 
Voting Rights Proxy Agreement among Jiuxin Management, Jiuzhou Service and its owners dated August 1, 2009 (1)
99.20
 
Agreement between Jiuzhou Grand Pharmacy and Yingte Logistics dated January 1, 2009 (1)

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

 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. 
 
Date: September 23, 2009
China Jo-Jo Drugstores, Inc.
     
 
By:
/s/ Lei Liu
 
Lei Liu
 
Chief Executive Officer
 
62

 
SHARE EXCHANGE AGREEMENT

by and between

Renovation Investment (Hong Kong) Co., Limited  (“Renovation”)

and

the Shareholders of Renovation,

on the one hand ;

and

Kerrisdale Mining Corporation (“Kerrisdale”),
a Nevada corporation,

on the other hand

September __, 2009

 
SHARE EXCHANGE AGREEMENT
1

 

SHARE EXCHANGE AGREEMENT

This Share Exchange Agreement, dated as of September __, 2009 (this “ Agreement ”), is made and entered into by and between Renovation Investment (Hong Kong) Co., Limited, a Hong Kong company (“ Renovation ”), and the shareholders of Renovation (“ Renovation Shareholders ”) listed on the Signature Page for Renovation Shareholders that is attached hereto, on the one hand; and Kerrisdale Mining Corporation, a Nevada corporation (“ Kerrisdale ”) that is attached hereto, on the other hand.

RECITALS

WHEREAS, on September __, 2009, the Board of Directors of Kerrisdale adopted resolutions approving Kerrisdale’s acquisition of the equity interests of Renovation held by the Renovation Stockholders (the “ Acquisition ”) by means of a share exchange with the Renovation Shareholders, upon the terms and conditions hereinafter set forth in this Agreement;

WHEREAS, the Renovation Shareholders own all of the equity interest (in shares of capital stock or otherwise) of Renovation (the “ Renovation Equity Interest ”);

WHEREAS, upon consummation of the transactions contemplated by this Agreement, Renovation will become a 100% wholly-owned subsidiary of Kerrisdale; and

WHEREAS, it is intended that the terms and conditions of this Agreement comply in all respects with Section 368(a)(1)(B) and/or Section 351 of the Code and the regulations corresponding thereto, so that the Acquisition shall qualify as a tax free reorganization under the Code, and that this share exchange transaction shall qualify as a transaction in securities exempt from registration or qualification under the Securities Act of 1933, as amended and in effect on the date of this Agreement.
   
AGREEMENT

NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:
 
ARTICLE 1

THE ACQUISITION

1.1            The Acquisition . Upon the terms and subject to the conditions hereof, at the Closing (as hereinafter defined) the parties shall do the following:

  (a)           The Renovation Shareholders will each sell, convey, assign, transfer and deliver to Kerrisdale certificates representing the Renovation Equity Interest held by each Renovation Shareholder as set forth in Column II of Annex I hereto, which in the aggregate shall constitute 100% of the issued and outstanding equity interests of Renovation, accompanied by a properly executed and authenticated stock power, instrument of transfer or other instrument of like tenor.

  (b)           As consideration in exchange for the acquisition of the Renovation Equity Interests, Kerrisdale will issue to each Renovation Shareholder or their designees, in exchange for such Renovation Shareholder’s portion of the Renovation Equity Interests, a total of 15,800,000 shares of Kerrisdale’s common stock (collectively, the “ Kerrisdale Shares ”).  The Kerrisdale Shares issued shall equal approximately 79% of the outstanding shares of Kerrisdale’s common stock at the time of Closing.

 
SHARE EXCHANGE AGREEMENT
2

 

1.2            Closing Date . The closing of the Acquisition (the “ Closing ”) shall take place as soon as practicable upon signing of this Agreement, and on or prior to September __, 2009, or on such other date as may be mutually agreed upon in writing by the parties.  Such date is referred to herein as the “Closing Date.”

1.3            Taking of Necessary Action; Further Action . If, at any time after the Closing, any further action is necessary or desirable to carry out the purposes of this Agreement, the Renovation Shareholders, Renovation, and/or Kerrisdale (as applicable) will take all such lawful and necessary action.

1.4            Certain Definitions . The following capitalized terms as used in this Agreement shall have the respective definitions:

Affiliate ” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
 
Contract ” means any contract, lease, license, indenture, note, bond, agreement, permit, concession, franchise or other instrument.
 
FINRA ” means Financial Industry Regulatory Authority.
 
Knowledge ” means the actual knowledge of the officers, directors or advisors of the referenced party.

 “ Liens ” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

Material Adverse Effect ” means a adverse effect on either referenced party or the combined entity resulting from the consummation of the transaction contemplated by this Agreement, or on the financial condition, results of operations or business, before or after the consummation of the transaction contemplated in this Agreement, which as a whole is or would be considered material to an investor in the referenced party.

Non-U.S. Person ” means any person who is not a U.S. Person or is deemed not to be a U.S. Person under Rule 902(k)(2).

Person ” means any individual, corporation, partnership, joint venture, trust, business association, organization, governmental authority or other entity.

Restricted Period ” shall have the meaning set forth in Section 3.4(b)(vi).

Securities Act ” means the Securities Act of 1933, as amended.

Subsidiary ” means any entity, whether or not capitalized, in which the referenced party, owns, directly or indirectly, an equity interest of more than fifty percent (50%).

Tax Returns ” means all federal, state, local and foreign returns, estimates, information statements and reports relating to Taxes.

 
SHARE EXCHANGE AGREEMENT
3

 

Tax ” or “ Taxes ” means any and all applicable central, federal, provincial, state, local, municipal and foreign taxes, including, without limitation, gross receipts, income, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, assessments, governmental charges and duties together with all interest, penalties and additions imposed with respect to any such amounts and any obligations under any agreements or arrangements with any other person with respect to any such amounts and including any liability of a predecessor entity for any such amounts.

Trading Day ” means a day on which the principal Trading Market is open for trading.

Trading Market ” means the following markets or exchanges on which Kerrisdale’s common stock is listed or quoted for trading on the date in question: the NYSE Amex Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.

Transaction ” means the transactions contemplated by this Agreement, including the share exchange.

United States ” means and includes the United States of America, its territories and possessions, any State of the United States, and the District of Columbia.

U.S. Person   as defined in Regulation S means: (i) a natural person resident in the United States; (ii) any partnership or corporation organized or incorporated under the laws of the United States; (iii) any estate of which any executor or administrator is a U.S. Person; (iv) any trust of which any trustee is a U.S. Person; (v) any agency or branch of a foreign entity located in the United States; (vi) any nondiscretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. Person; (vii) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated and (if an individual) resident in the United States; and (viii) a corporation or partnership organized under the laws of any foreign jurisdiction and formed by a U.S. Person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, owned, by accredited investors (as defined in Rule 501(a) under the Securities Act) who are not natural persons, estates or trusts).

1.5            Tax Consequences .  It is intended that the terms and conditions of this Agreement comply in all respects with Section 368(a)(1)(B) and/or Section 351 of the Code and the regulations corresponding thereto, so that the Acquisition shall qualify as a tax-free reorganization under the Code.
 
ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF RENOVATION

Except as otherwise disclosed herein or in a disclosure schedule attached hereto, Renovation hereby represents and warrants to Kerrisdale as of the date hereof and as of the Closing Date (unless otherwise indicated) as follows:

2.1            Organization . Renovation has been duly incorporated, validly exists as a corporation, and is in good standing under the laws of its jurisdiction of incorporation, and has the requisite power to carry on its business as now conducted.  Set forth on Schedule 2.1 of the disclosure schedules hereto is a list of those jurisdictions in which Renovation presently conducts its business, owns, holds and operates its properties and assets.

 
SHARE EXCHANGE AGREEMENT
4

 

2.2            Capitalization . The authorized capital stock of Renovation consists of 10,000 ordinary shares, HK $1.00 par value per share, of which at the Closing, no more than 10,000 shares shall be issued and outstanding.  All of the issued and outstanding shares of capital stock of Renovation, as of the Closing, are duly authorized, validly issued, fully paid, non-assessable and free of preemptive rights.  There are no voting trusts or any other agreements or understandings with respect to the voting of Renovation’s capital stock.  Except as set forth in the preceding sentence, no other class of capital stock or other security of Renovation is authorized, issued, reserved for issuance or outstanding.  There are no authorized or outstanding options, warrants, equity securities, calls, rights, commitments or agreements of any character by which Renovation or any of the Renovation Shareholders is obligated to issue, deliver or sell, or cause to be issued, delivered or sold, any shares of capital stock or other securities of Renovation.  There are no outstanding contractual obligations (contingent or otherwise) of Renovation to retire, repurchase, redeem or otherwise acquire any outstanding shares of capital stock of, or other ownership interests in, Renovation.

2.3            Subsidiaries . As of the Closing, Renovation has no direct or indirect Subsidiary, except as disclosed in Schedule 2.3 of the disclosure schedules hereto (collectively the “ Renovation Subsidiaries ,” and each a “ Renovation Subsidiary ”).  Each Renovation Subsidiary is an entity duly organized, validly existing and in good standing under the laws of its respective jurisdiction of formation and has the requisite corporate power and authority to own, lease and to carry on its business as now being conducted.  Renovation owns all of the shares of each Renovation Subsidiary, and there are no outstanding options, warrants, subscriptions, conversion rights or other rights, agreements or commitments obligating any Renovation Subsidiary to issue any additional shares of common stock or ordinary stock, as the case may be, of such Subsidiary, or any other securities convertible into, exchangeable for or evidence the right to subscribe for or acquire from any Renovation Subsidiary any shares of such Subsidiary.

2.4            Certain Corporate Matters . Renovation is duly qualified to do business as a corporation and is in good standing under the laws of Hong Kong, and except as disclosed in Schedule 2.4 of the disclosure schedules hereto, in each other jurisdiction in which the ownership of its property or the conduct of its business requires it to be so qualified, except where the failure to be so qualified would not have a Material Adverse Effect on Renovation’s financial condition, results of operations or business.  Renovation has full corporate power and authority and all authorizations, licenses and permits necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it.

2.5            Authority Relative to this Agreement .  Renovation has the requisite power and authority to enter into this Agreement and to carry out its respective obligations hereunder.  The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby by Renovation have been duly authorized by Renovation’s Board of Directors and except as disclosed in Schedule 2.5 of the disclosure schedules hereto, no other actions on the part of Renovation are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Renovation and constitutes a valid and binding agreement, enforceable against Renovation in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity.

2.6            Consents and Approvals; No Violations .  Except for applicable requirements of federal securities laws and state securities or blue-sky laws, and except as disclosed in Schedule 2.6 of the disclosure schedules hereto, no filing with, and no permit, authorization, consent or approval of, any third party, public body or authority is necessary for the consummation by Renovation of the transactions contemplated by this Agreement.  Neither the execution and delivery of this Agreement by Renovation nor the consummation by Renovation of the transactions contemplated hereby, nor compliance by them with any of the provisions hereof, will (a) conflict with or result in any breach of any provisions of the charter or bylaws (or operating agreement) of Renovation or any Renovation Subsidiary, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, Contract, agreement or other instrument or obligation to which Renovation or any Renovation Subsidiary is a party or by which any of their respective properties or assets may be bound or (c) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Renovation or any Renovation Subsidiary, or any of its properties or assets, except in the case of clauses (b) and (c) for violations, breaches or defaults which are not in the aggregate material to Renovation taken as a whole.

 
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2.7            Books and Records . The books and records of Renovation delivered to Kerrisdale prior to the Closing fully and fairly reflect the transactions to which Renovation is a party or by which it or its properties are bound, and except as disclosed in Schedule 2.7 of the disclosure schedules hereto, there shall be no material difference between the unaudited combined financial statements of Renovation given to Kerrisdale and the actual reviewed US GAAP results of Renovation for the six-month period ended June 30, 2009.
 
2.8            Intellectual Property . Except as disclosed in Schedule 2.8 of the disclosure schedules hereto, Renovation has no knowledge of any claim that, or inquiry as to whether, any product, activity or operation of Renovation infringes upon or involves, or has resulted in the infringement of, any trademarks, trade-names, service marks, patents, copyrights or other proprietary rights of any other person, corporation or other entity; and no proceedings have been instituted, are pending or are threatened.

2.9            Litigation . Except as disclosed in Schedule 2.9 of the disclosure schedules hereto, there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the Knowledge of Renovation, threatened against or affecting Renovation or any of its properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “ Action ”) which (i) adversely affects or challenges the legality, validity or enforceability of this Agreement or the Renovation Shares or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect.  Neither Renovation nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty.  There has not been, and to the Knowledge of Renovation, there is not pending or contemplated, any investigation by the Commission involving Renovation or any current or former director or officer of Renovation.

2.10            Legal Compliance . To the best Knowledge of Renovation, after due investigation, except as disclosed in Schedule 2.10 of the disclosure schedules hereto, no claim has been filed against Renovation or any of the Renovation Subsidiaries alleging a violation of any applicable laws and regulations of foreign, federal, state and local governments and all agencies thereof. Except as disclosed in Schedule 2.10 , Renovation and each of the Renovation Subsidiaries holds all of the material permits, licenses, certificates or other authorizations of foreign, federal, state or local governmental agencies required for the conduct of their respective businesses as presently conducted.

2.11            Contracts . Except as disclosed in Schedule 2.11 of the disclosure schedules hereto, there are no Contracts that are material to the business, properties, assets, condition (financial or otherwise), results of operations or prospects of the Renovation.  Renovation is not in violation of or in default under (nor does there exist any condition which upon the passage of time or the giving of notice would cause such a violation of or default under) any Contract to which they are a party or by which they or any of their properties or assets are bound, except for violations or defaults that would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

 
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2.12            Material Changes . Since April 1, 2009, except as disclosed in Schedule 2.12 of the disclosure schedules hereto: (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) Renovation has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in Renovation’s financial statements pursuant to GAAP, (iii) Renovation has not altered its method of accounting, (iv) Renovation has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) Renovation has not issued any equity securities to any officer, director or Affiliate.

2.13            Labor Relations .  Except as disclosed in Schedule 2.13 of the disclosure schedules hereto, no material labor dispute exists or, to the knowledge of Renovation and the Renovation Shareholders, is imminent with respect to any of the employees of Renovation which could reasonably be expected to result in a Material Adverse Effect.  None of Renovation’s or Renovation Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with Renovation or such Renovation Subsidiary, and neither Renovation nor any of the Renovation Subsidiaries is a party to a collective bargaining agreement, and Renovation and the Renovation Subsidiaries believe that their relationships with their employees are good.  No executive officer, to the knowledge of Renovation and the Renovation Shareholders, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject Renovation or any of the Renovation Subsidiaries to any liability with respect to any of the foregoing matters.  Renovation and the Renovation Subsidiaries are in compliance with all laws and regulations which they are subject to relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

2.14            Title to Assets .  Except as disclosed in Schedule 2.14 of the disclosure schedules hereto, Renovation and the Renovation Subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title in all personal property owned by them that is material to the business of Renovation and the Renovation Subsidiaries, in each case free and clear of all Liens, except for Liens that do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by Renovation and the Renovation Subsidiaries and Liens for the payment of Taxes, the payment of which is neither delinquent nor subject to penalties.  Any real property and facilities held under lease by Renovation and the Renovation Subsidiaries are held by them under valid, subsisting and enforceable leases with which Renovation and the Renovation Subsidiaries are in compliance.

2.15            Transactions with Affiliates and Employees .  Except as disclosed in Schedule 2.15 of the disclosure schedules hereto, none of the officers or directors of Renovation and, to the knowledge of Renovation and the Renovation Shareholders, none of the employees of Renovation is presently a party to any transaction with Renovation or any Renovation Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of Renovation and the Renovation Shareholders, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $120,000, other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of Renovation and (iii) other employee benefits.

 
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2.16            Certain Fees .  Except as disclosed in Schedule 2.16 of the disclosure schedules hereto, no brokerage or finder’s fees or commissions are or will be payable by Renovation to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement.

2.17            Registration Rights .  Except as disclosed in Schedule 2.17 of the disclosure schedules hereto, no Person has any right to cause (or any successor) to effect the registration under the Securities Act of any securities of Renovation (or any successor).

2.18            Application of Takeover Protections .  Except as disclosed in Schedule 2.18 of the disclosure schedules hereto, Renovation has taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under Renovation’s certificate of incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable as a result of Renovation fulfilling its obligations or exercising its rights under this Agreement.

2.19            Tax Status .  Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, and except as disclosed in Schedule 2.19 of the disclosure schedules hereto, Renovation and each Renovation Subsidiary has filed all necessary Tax Returns and has paid or accrued all Taxes shown as due thereon, and Renovation has no knowledge of a tax deficiency which has been asserted or threatened against Renovation or any Renovation Subsidiary.

2.20            No General Solicitation .  Except as disclosed in Schedule 2.20 of the disclosure schedules hereto, neither Renovation nor any person acting on behalf of Renovation has offered or sold securities in connection herewith by any form of general solicitation or general advertising.

2.21            Foreign Corrupt Practices.   Except as disclosed in Schedule 2.21 of the disclosure schedules hereto, neither Renovation, nor to the knowledge of Renovation and the Renovation Shareholders, any agent or other person acting on behalf of Renovation , has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by Renovation (or made by any person acting on its behalf of which Renovation is aware) which is in violation of law or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

2.22            Obligations of Management . Except as disclosed in Schedule 2.22 of the disclosure schedules hereto, each officer and key employee of Renovation and its Subsidiaries is currently devoting substantially all of his or her business time to the conduct of business of Renovation and its Subsidiaries.  Neither Renovation nor any of its Subsidiaries is aware that any officer or key employee of Renovation or any Renovation Subsidiary is planning to work less than full time at Renovation or any Renovation Subsidiary, as applicable, in the future.  No officer or key employee is currently working or, to Renovation’s or any Renovation Shareholder’s knowledge, plans to work for a competitive enterprise, whether or not such officer or key employee is or will be compensated by such enterprise.

2.23            Minute Books . Except as disclosed in Schedule 2.23 of the disclosure schedules hereto,   the minute books of Renovation and the Renovation Subsidiaries made available to Kerrisdale contain a complete summary of all meetings and written consents in lieu of meetings of directors and stockholders since the time of incorporation.

 
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2.24            Employee Benefits .  Except as set forth on Schedule 2.24 of the disclosure schedules hereto, neither Renovation nor any Renovation Subsidiary has (nor for the two years preceding the date hereof has had) any plans which are subject to ERISA.  “ ERISA ” means the Employee Retirement Income Security Act of 1974 or any successor law and the regulations and rules issued pursuant to that act or any successor law.

2.25            Money Laundering Laws .  Except as disclosed in Schedule 2.25 of the disclosure schedules hereto, the operations of Renovation are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the money laundering statutes of all U.S. and non-U.S. jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental body (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving Renovation with respect to the Money Laundering Laws is pending or, to the knowledge of Renovation, threatened.

2.26            Disclosure . The representations and warranties and statements of fact made by Renovation and its Subsidiaries in this Agreement are, as applicable, accurate, correct and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained herein not false or misleading.
  
ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF THE RENOVATION SHAREHOLDERS

Except as otherwise disclosed herein or in a disclosure schedule attached hereto, the Renovation Shareholders each hereby represent and warrant to Kerrisdale as follows:

3.1            Ownership of the Renovation Equity Interest .  Renovation Shareholders own, beneficially and of record, good and marketable title to the amount of the Renovation Equity Interest, free and clear of all security interests, liens, adverse claims, encumbrances, equities, proxies, options or voting agreements.  Renovation Shareholders represent that they each have no right or claims whatsoever to any equity interests of Renovation, other than the Renovation Equity Interest and does not have any options, warrants or any other instruments entitling him to exercise or purchase or convert into additional equity interests of Renovation. At the Closing, the Renovation Shareholders will convey to Kerrisdale good and marketable title to the Renovation Equity Interest, free and clear of any security interests, liens, adverse claims, encumbrances, equities, proxies, options, shareholders’ agreements or restrictions.

3.2            Authority Relative to this Agreement . This Agreement has been duly and validly executed and delivered by the Renovation Shareholders and constitutes a valid and binding agreement of such person, enforceable against such person in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity.

3.3            Purchase of Restricted Securities for Investment . The Renovation Shareholders each acknowledge that the Kerrisdale Shares will not be registered pursuant to the Securities Act or any applicable state securities laws, that the Kerrisdale Shares will be characterized as “restricted securities” under federal securities laws, and that under such laws and applicable regulations the Kerrisdale Shares cannot be sold or otherwise disposed of without registration under the Securities Act or an exemption therefrom.  In this regard, the Renovation Shareholder is familiar with Rule 144 promulgated under the Securities Act, as currently in effect, and understands the resale limitations imposed thereby and by the Securities Act.  Further, each Renovation Shareholder acknowledges and agrees that:

 
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  (a)           Each Renovation Shareholder is acquiring the Kerrisdale Shares for investment for such Renovation Shareholder’s own account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and each Renovation Shareholder has no present intention of selling, granting any participation in, or otherwise distributing the same.  Each Renovation Shareholder further represents that he, she or it does not have any Contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Kerrisdale Shares.
 
  (b)           Each Renovation Shareholder understands that the Kerrisdale Shares are not registered under the Securities Act on the ground that the sale and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that Kerrisdale’s reliance on such exemption is predicated on the each Shareholder’s representations set forth herein.

3.4            Status of Stockholder . Each of the Renovation Shareholders hereby makes the representations and warranties in either paragraph (a) or (b) of this Section 3.4, as indicated on the Signature Page of Renovation Shareholders which is attached and part of this Agreement:

  (a)            Accredited Investor Under Regulation D . The Renovation Shareholder is an “Accredited Investor” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act, an excerpt of which is included in the attached Annex II , and such Renovation Shareholder is not acquiring its portion of the Kerrisdale Shares as a result of any advertisement, article, notice or other communication regarding the Kerrisdale Shares published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

  (b)            Non-U.S. Person Under Regulation S .  The Renovation Shareholder:

   (i)          is not a “U.S. person” as defined by Rule 902 of Regulation S promulgated under the Securities Act, was not organized under the laws of any U.S. jurisdiction, and was not formed for the purpose of investing in securities not registered under the Securities Act;
 
   (ii)         at the time of Closing, the Renovation Shareholder was located outside the United States;

   (iii)        no offer of the Kerrisdale Shares was made to the Renovation Shareholder within the United States;

   (iv)       the Renovation Shareholder is either (a) acquiring the Kerrisdale Shares for its own account for investment purposes and not with a view towards distribution, or (b) acting as agent for a principal that has signed this Agreement or has delivered representations and warranties substantially similar to this Section 3.4(b);

   (v)        all subsequent offers and sales of the Kerrisdale Shares by the Renovation Shareholder will be made outside the United States in compliance with Rule 903 of Rule 904 of Regulation S, pursuant to registration of the Shares under the Securities Act, or pursuant to an exemption from such registration; the Renovation Shareholder understands the conditions of the exemption from registration afforded by section 4(l) of the Securities Act and acknowledges that there can be no assurance that it will be able to rely on such exemption.

 
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   (vi)       the Renovation Shareholder will not resell the Kerrisdale Shares to U.S. Persons or within the United States until after the end of the one (1) year period commencing on the date of Closing (the “ Restricted Period ”);

   (vii)      the Renovation Shareholder shall not and hereby agrees not to enter into any short sales with respect to the common stock of Kerrisdale at any time after the execution of this Agreement by the Renovation Shareholder  and prior to the expiration of the Restricted Period;

   (viii)     the Renovation Shareholder understands that the Kerrisdale Shares are being offered and sold to it in reliance on specific provisions of federal and state securities laws and that the parties to this Agreement are relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understanding of the Renovation Shareholder set forth herein in order to determine the applicability of such provisions.  Accordingly, the Renovation Shareholder agrees to notify Kerrisdale of any events which would cause the representations and warranties of the Renovation Shareholder to be untrue or breached at any time after the execution of this Agreement by such Renovation Shareholder and prior to the expiration of the Restricted Period;

   (ix)        in the event of resale of the Kerrisdale Shares to non-U.S. Persons outside of the U.S. during the Restricted Period, the Renovation Shareholder shall provide a written confirmation or other written notice to any distributor, dealer, or person receiving a selling concession, fee, or other remuneration in respect of the Shares stating that such purchaser is subject to the same restrictions on offers and sales that apply to the undersigned, and shall require that any such purchase shall provide such written confirmation or other notice upon resale during the Restricted Period;
  
   (x)         the Renovation Shareholder has not engaged, nor is it aware that any party has engaged, and it will not engage or cause any third party to engage in any “directed selling” efforts (as such term is defined in Regulation S) in the United States with respect to the Kerrisdale Shares;

   (xi)        the Renovation Shareholder is not a “distributor” as such term is defined in Regulation S, and it is not a “dealer” as such term is defined in the Securities Act; and

   (xii)       the Renovation Shareholder has not taken any action that would cause any of the parties to this Agreement to be subject to any claim for commission or other or remuneration by any broker, finder, or other person.

3.6            Compliance In Connection With Shares Acquisition .  Each Renovation Shareholder hereby represents that it has satisfied fully observed of the laws of the jurisdiction in which it is located or domiciled, in connection with the acquisition of the Kerrisdale Shares or this Agreement, including (i) the legal requirements of the Renovation Shareholder’s jurisdiction for the purchase and acquisition of the Kerrisdale Shares, (ii) any foreign exchange restrictions applicable to such purchase and acquisition, (iii) any governmental or other consents that may need to be obtained, and (iv) the income tax and other tax consequences, if any, which may be relevant to the purchase, holding, redemption, sale, or transfer of the Kerrisdale Shares; and further, each Renovation Shareholder agrees to continue to comply with such laws as long as such shareholder shall hold the Kerrisdale Shares.

3.7            Investment Risk . The Renovation Shareholder is able to bear the economic risk of acquiring the Kerrisdale Shares pursuant to the terms of this Agreement, including a complete loss of such the Renovation Shareholder’s investment in the Kerrisdale Shares.

 
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3.8            Restrictive Legends . The Renovation Shareholder acknowledges that the certificate(s) representing the Renovation Shareholder’s pro rata portion of the Kerrisdale Shares shall each conspicuously set forth on the face or back thereof a legend in substantially the following form, corresponding to the stockholder’s status as set forth in Section 3.4 and the signature pages hereto:

REGULATION D LEGEND :

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”
 
REGULATION S LEGEND :

“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“SECURITIES ACT”), AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT, PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT, OR PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM REGISTRATION; HEDGING TRANSACTIONS INVOLVING THE SHARES REPRESENTED HEREBY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.”

3.9            Disclosure .  The representations and warranties and statements of fact made by Renovation Shareholders in this Agreement are, as applicable, accurate, correct and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained herein not false or misleading.
 
ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF KERRISDALE

Except as otherwise disclosed herein or in a disclosure schedule attached hereto, Kerrisdale hereby represents and warrants, to Renovation and the Renovation Shareholders as of the date hereof and as of the Closing Date (unless otherwise indicated), as follows:

4.1            Organization and Qualification .  Kerrisdale is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Kerrisdale is not in violation nor default of any of the provisions of its certificate or articles of incorporation, bylaws or other organizational or charter documents (collectively the “ Charter Documents ”).  Kerrisdale is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in a Material Adverse Effect, and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.  Kerrisdale has no direct or indirect Subsidiary.

 
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4.2            Authorization; Enforcement .  Kerrisdale has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder.  The execution and delivery of this Agreement by Kerrisdale and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action on the part of Kerrisdale and no further action is required by Kerrisdale, the Board of Directors or Kerrisdale’s stockholders in connection therewith other than in connection with the Required Approvals, as defined in Section 4.4.  This Agreement has been (or upon delivery will have been) duly executed by Kerrisdale and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of Kerrisdale enforceable against Kerrisdale in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

4.3            No Conflicts .  The execution, delivery and performance by Kerrisdale of this Agreement and the consummation by Kerrisdale of the other transactions to which it is a party and as contemplated hereby do not and will not: (i) conflict with or violate any provision of Kerrisdale’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of Kerrisdale, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Kerrisdale debt or otherwise) or other understanding to which Kerrisdale is a party or by which any property or asset of Kerrisdale is bound or affected, or (iii) subject to the Required Approvals, as defined by Section 4.4, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which Kerrisdale is subject (including federal and state securities laws and regulations), or by which any property or asset of Kerrisdale is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

4.4            Filings, Consents and Approvals .  Kerrisdale is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by Kerrisdale of this Agreement, other than the filing of a Current Report on Form 8-K and a Form D (if applicable) with the Commission and such filings as are required to be made under applicable state securities laws (collectively, the “ Required Approvals ”).

4.5            Issuance of the Kerrisdale Shares .  The Kerrisdale Shares are duly authorized and, when issued and paid for in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed on or by Kerrisdale other than restrictions on transfer provided for in this Agreement.

 
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4.6            Capitalization .  The capitalization of Kerrisdale is as set forth on Schedule 4.6 of the disclosure schedules hereto, which Schedule 4.6 shall also include the number of shares of Kerrisdale’s common stock owned beneficially, and of record, by Affiliates of Kerrisdale as of the date hereof, if any.  Other than as set forth in Schedule 4.6 , Kerrisdale has not issued any capital stock since its most recently filed periodic report under the Exchange Act.  No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement.  There are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Kerrisdale’s common stock, or Contracts, commitments, understandings or arrangements by which Kerrisdale is or may become bound to issue additional shares of Kerrisdale’s common stock or Common Stock Equivalents.  The issuance of the Kerrisdale Shares will not obligate Kerrisdale to issue shares of Kerrisdale’s common stock or other securities to any Person (other than the Renovation Shareholders) and will not result in a right of any holder of Kerrisdale securities to adjust the exercise, conversion, exchange or reset price under any of such securities.  All of the outstanding shares of capital stock of Kerrisdale are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any stockholder or Kerrisdale’s board of directors is required for the issuance of the Kerrisdale Shares.  There are no stockholders agreements, voting agreements or other similar agreements with respect to Kerrisdale’s capital stock to which Kerrisdale is a party or, to the Knowledge of Kerrisdale, between or among any of Kerrisdale’s stockholders.  “ Common Stock Equivalents ” means any securities of Kerrisdale which would entitle the holder thereof to acquire at any time Kerrisdale’s common stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive Kerrisdale’s common stock.

4.7            SEC Reports; Financial Statements .  Kerrisdale has filed all reports, schedules, forms, statements and other documents required to be filed by Kerrisdale under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as Kerrisdale was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “ SEC Reports ”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The financial statements of Kerrisdale included in the SEC Reports (the “ Financial Statements ”) comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared in accordance with GAAP, except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of Kerrisdale as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

4.8            Material Changes . Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof or in connection herewith: (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) Kerrisdale has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in Kerrisdale’s financial statements pursuant to GAAP or disclosed in filings made with the Commission, (iii) Kerrisdale has not altered its method of accounting, (iv) Kerrisdale has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) Kerrisdale has not issued any equity securities to any officer, director or Affiliate.  Kerrisdale does not have pending before the Commission any request for confidential treatment of information.  Except for the issuance of the Kerrisdale Shares contemplated by this Agreement or as set forth on Schedule 4.8 of the disclosure schedules hereto, no event, liability or development has occurred or exists with respect to Kerrisdale or its business, properties, operations or financial condition, that would be required to be disclosed by Kerrisdale under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one (1) Trading Day prior to the date that this representation is made.

 
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4.9            Litigation .  There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the Knowledge of Kerrisdale, threatened against or affecting Kerrisdale or any of its properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “ Action ”) which (i) adversely affects or challenges the legality, validity or enforceability of this Agreement or the Kerrisdale Shares or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect.  Neither Kerrisdale nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty.  There has not been, and to the Knowledge of Kerrisdale, there is not pending or contemplated, any investigation by the Commission involving Kerrisdale or any current or former director or officer of Kerrisdale.  The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by Kerrisdale under the Securities Act.

4.10            Labor Relations .  No labor dispute exists or, to the knowledge of Kerrisdale, is imminent with respect to any of the employees of Kerrisdale which could reasonably be expected to result in a Material Adverse Effect.  None of Kerrisdale’s employees is a member of a union that relates to such employee’s relationship with Kerrisdale, and Kerrisdale is not a party to a collective bargaining agreement, and Kerrisdale believes that its relationships with their employees are good.  No executive officer, to the Knowledge of Kerrisdale, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other Contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject Kerrisdale to any liability with respect to any of the foregoing matters.  Kerrisdale is in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

4.11            Compliance .  Kerrisdale: (i) is not in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by Kerrisdale under), nor has Kerrisdale received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is not n violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business and all such laws that affect the environment, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.

4.12            Regulatory Permits .  Kerrisdale possesses all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct its business, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“ Material Permits ”), and Kerrisdale has not received any notice of proceedings relating to the revocation or modification of any Material Permit.

 
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4.13            Title to Assets .  Kerrisdale has good and marketable title in all personal property owned by it that is material to the business of, in each case free and clear of all Liens, except for Liens that do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by Kerrisdale and Liens for the payment of Taxes, the payment of which is neither delinquent nor subject to penalties.  Kerrisdale does not own any real property.  Any real property and facilities held under lease by Kerrisdale, if any is held by Kerrisdale under valid, subsisting and enforceable leases with which Kerrisdale is in compliance.

4.14            Patents and Trademarks .  Kerrisdale has, or has rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights as described in the SEC Reports as necessary or material for use in connection with their business and which the failure to so have could have a Material Adverse Effect (collectively, the “ Intellectual Property Rights ”).  Kerrisdale has not received a notice (written or otherwise) that any of the Intellectual Property Rights used by Kerrisdale violates or infringes upon the rights of any Person.  To the Knowledge of Kerrisdale, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.  Kerrisdale has taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

4.15            Transactions with Affiliates and Employees .  Except as set forth in the SEC Reports, none of the officers or directors of Kerrisdale and, to the Knowledge of Kerrisdale, none of the employees of Kerrisdale is presently a party to any transaction with Kerrisdale (other than for services as employees, officers and directors), including any Contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the Knowledge of Kerrisdale, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $120,000, other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of Kerrisdale and (iii) other employee benefits.

4.16            Sarbanes-Oxley; Internal Accounting Controls .  Kerrisdale is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.  Kerrisdale maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.  Kerrisdale has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Kerrisdale and designed such disclosure controls and procedures to ensure that information required to be disclosed by Kerrisdale in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  Kerrisdale’s certifying officers have evaluated the effectiveness of Kerrisdale’s disclosure controls and procedures as of the end of the period covered by Kerrisdale’s most recently filed periodic report under the Exchange Act (such date, the “ Evaluation Date ”).  Kerrisdale presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no changes in Kerrisdale’s internal control over financial reporting (as such term is defined in the Exchange Act) that has materially affected, or is reasonably likely to materially affect, Kerrisdale’s internal control over financial reporting.

 
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4.17            Certain Fees .  Except as disclosed in Schedule 4.17 of the disclosure schedules hereto, no brokerage or finder’s fees or commissions are or will be payable by Kerrisdale to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement.

4.18            Issuance of Kerrisdale Shares . Assuming the accuracy of the Renovation Shareholders’ representations and warranties set forth in Section 3, no registration under the Securities Act is required for the offer and issuance of the Kerrisdale Shares by Kerrisdale to the Renovation Shareholders as contemplated hereby.  The issuance of the Kerrisdale Shares hereunder does not contravene the rules and regulations of the applicable Trading Market.

4.19            Investment Company. Kerrisdale is not, and is not an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

4.20            Listing and Maintenance Requirements .  Kerrisdale’s common stock is currently quoted on FINRA’s Over-the-Counter Bulletin Board Quotation Service (“ OTC Bulletin Board ”) and Kerrisdale has not, in the twenty four (24) months preceding the date hereof, received any notice from the OTC Bulletin Board or FINRA or any trading market on which Kerrisdale’s common stock is or has been listed or quoted to the effect that Kerrisdale is not in compliance with the quoting, listing or maintenance requirements of the OTCBB or such other trading market. Kerrisdale is, and has no reason to believe that it will not, in the foreseeable future continue to be, in compliance with all such quoting, listing and maintenance requirements.

4.21            Application of Takeover Protections .  Kerrisdale has taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under Kerrisdale’s certificate of incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Renovation Shareholders as a result of the Renovation Shareholders and Kerrisdale fulfilling their obligations or exercising their rights under this Agreement, including without limitation as a result of Kerrisdale’s issuance of the Kerrisdale Shares and the Renovation Shareholders’ ownership of the Kerrisdale Shares.

4.22            No Integrated Offering . Assuming the accuracy of the Renovation Shareholders’ representations and warranties set forth in Section 3, neither Kerrisdale, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Kerrisdale Shares to be integrated with prior offerings by Kerrisdale for purposes of (i) the Securities Act which would require the registration of any such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading Market on which any of the securities of Kerrisdale are listed or designated.

4.23            Tax Status .  Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, Kerrisdale has timely filed all necessary Tax Returns and has paid or accrued all Taxes shown as due thereon, and Kerrisdale has no Knowledge of a tax deficiency which has been asserted or threatened against Kerrisdale.

 
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4.24            No General Solicitation .  Neither Kerrisdale nor any person acting on behalf of Kerrisdale has offered or sold any of the Kerrisdale Shares by any form of general solicitation or general advertising.

4.25            Foreign Corrupt Practices.   Neither Kerrisdale, nor to the Knowledge of Kerrisdale, any agent or other person acting on behalf of Kerrisdale, has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by Kerrisdale (or made by any person acting on its behalf of which Kerrisdale is aware) which is in violation of law or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

4.26            Accountants .  Kerrisdale’s accounting firm is set forth on Schedule 4.29 of the disclosure schedules hereto.  To the Knowledge of Kerrisdale, such accounting firm: (i) is a registered public accounting firm as required by the Exchange Act and (ii) expressed its opinion with respect to the financial statements included in Kerrisdale’s Annual Report for the year ended July 31, 2008.

4.27            No Disagreements with Accountants and Lawyers.   There are no disagreements of any kind, including but not limited to any disagreements regarding fees owed for services rendered, presently existing, or reasonably anticipated by Kerrisdale to arise, between Kerrisdale and the accountants and lawyers formerly or presently employed by Kerrisdale which could affect Kerrisdale’s ability to perform any of its obligations under this Agreement, and Kerrisdale is current with respect to any fees owed to its accountants and lawyers.

4.28            Regulation M Compliance .  Kerrisdale has not, and to the Knowledge of Kerrisdale no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of Kerrisdale to facilitate the sale or resale of any of the Kerrisdale Shares, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the securities of Kerrisdale, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of Kerrisdale.

4.29            Money Laundering Laws .  The operations of Kerrisdale are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the money laundering statutes of all U.S. and non-U.S. jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental body (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving Kerrisdale with respect to the Money Laundering Laws is pending or, to the Knowledge of Kerrisdale, threatened.

4.30            Minute Books . The minute books of Kerrisdale made available to Renovation and the Renovation Shareholders contain a complete summary of all meetings and written consents in lieu of meetings of directors and stockholders since the time of incorporation.

4.31            Employee Benefits .  Kerrisdale has not (nor for the two years preceding the date hereof has) had any plans which are subject to ERISA.  “ ERISA ” means the Employee Retirement Income Security Act of 1974 or any successor law and the regulations and rules issued pursuant to that act or any successor law.

 
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4.32            Business Records and Due Diligence .  Prior to the Closing, Kerrisdale delivered to Renovation all records and documents relating to Kerrisdale, which Kerrisdale and possesses, including, without limitation, books, records, government filings, Tax Returns, Charter Documents, corporate records, stock records, consent decrees, orders, and correspondence, director and stockholder minutes, resolutions and written consents, stock ownership records, financial information and records, and other documents used in or associated with Kerrisdale (“ Business Records ”).

4.33            Contracts .  Except as set forth in the SEC Reports or in Schedule 4.32 of the disclosure schedules hereto, there are no Contracts that are material to the business, properties, assets, condition (financial or otherwise), results of operations or prospects of Kerrisdale taken as a whole.  Kerrisdale is not in violation of or in default under (nor does there exist any condition which upon the passage of time or the giving of notice would cause such a violation of or default under) any Contract to which it is a party or by which it or any of its properties or assets is bound, except for violations or defaults that would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

4.34            No Undisclosed Liabilities .  Except as otherwise disclosed (a) in Schedule 4.34 of the disclosure schedules hereto or (b) in Kerrisdale’s Financial Statements (the financial statements of which were filed with the SEC along with Kerrisdale’s quarterly report on Form 10-Q on June 11, 2009), and except for those liabilities incurred by Kerrisdale in the ordinary course of business after the nine-month period ended April 30, 2009, none of which have had or will have a Material Adverse Effect on the financial condition of Kerrisdale, Kerrisdale has no other undisclosed liabilities whatsoever, either direct or indirect, matured or unmatured, accrued, absolute, contingent or otherwise.  Kerrisdale represents that at the date of Closing, Kerrisdale shall have no liabilities or obligations whatsoever, either direct or indirect, matured or unmatured, accrued, absolute, contingent or otherwise.

4.35            No SEC or FINRA Inquiries . Neither Kerrisdale nor any of its past or present officers or directors is, or has ever been, the subject of any formal or informal inquiry or investigation by the SEC or FINRA.

4.36            Disclosure .  The representations and warranties and statements of fact made by Kerrisdale in this Agreement are, as applicable, accurate, correct and complete and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained herein not false or misleading.
 
ARTICLE 5

Reserved.

ARTICLE 6

COVENANTS OF THE PARTIES

6.1            Corporate Examinations and Investigations . Prior to the Closing, each party shall be entitled, through its employees and representatives, to make such investigations and examinations of the books, records and financial condition of Renovation and Kerrisdale as each party may request. In order that each party may have the full opportunity to do so, Renovation, Kerrisdale and the Renovation Shareholders shall furnish each party and its representatives during such period with all such information concerning the affairs of Renovation or Kerrisdale as each party or its representatives may reasonably request and cause Renovation or Kerrisdale and their respective officers, employees, consultants, agents, accountants and attorneys to cooperate fully with each party’s representatives in connection with such review and examination and to make full disclosure of all information and documents requested by each party and/or its representatives. Any such investigations and examinations shall be conducted at reasonable times and under reasonable circumstances, it being agreed that any examination of original documents will be at each party’s premises, with copies thereof to be provided to each party and/or its representatives upon request.

 
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6.2            Cooperation; Consents . Prior to the Closing, each party shall cooperate with the other parties to the end that the parties shall (i) in a timely manner make all necessary filings with, and conduct negotiations with, all authorities and other persons the consent or approval of which, or the license or permit from which is required for the consummation of the Acquisition and (ii) provide to each other party such information as the other party may reasonably request in order to enable it to prepare such filings and to conduct such negotiations.

6.3            Conduct of Business . Subject to the provisions hereof, from the date hereof through the Closing, each party hereto shall (i) conduct its business in the ordinary course and in such a manner so that the representations and warranties contained herein shall continue to be true and correct in all material respects as of the Closing as if made at and as of the Closing and (ii) not enter into any material transactions or incur any material liability not required or specifically contemplated hereby, without first obtaining the written consent of Renovation and the Renovation Shareholders on the one hand and Kerrisdale and the holders of a majority of voting stock of Kerrisdale common stock on the other hand. Without the prior written consent of Renovation, the Renovation Shareholders, or Kerrisdale, except as required or specifically contemplated hereby, each party shall not undertake or fail to undertake any action if such action or failure would render any of said warranties and representations untrue in any material respect as of the Closing.
 
6.4            Litigation . From the date hereof through the Closing, each party hereto shall promptly notify the representative of the other parties of any lawsuits, claims, proceedings or investigations which after the date hereof are threatened or commenced against such party or any of its affiliates or any officer, director, employee, consultant, agent or shareholder thereof, in their capacities as such, which, if decided adversely, could reasonably be expected to have a Material Adverse Effect on Kerrisdale.

6.5            Notice of Default . From the date hereof through the Closing, each party hereto shall give to the representative of the other parties prompt written notice of the occurrence or existence of any event, condition or circumstance occurring which would constitute a violation or breach of this Agreement by such party or which would render inaccurate in any material respect any of such party’s representations or warranties herein.

6.6            Bylaws . If necessary, Kerrisdale shall amend its bylaws to permit the election and/or appointment of additional new directors to Kerrisdale’s Board of Directors as set forth in Section 7.1(a) below.

6.7            Confidentiality; Access to Information .
 
  (a)            Confidentiality . Any confidentiality agreement or letter of intent previously executed by the parties shall be superseded in its entirety by the provisions of this Agreement. Each party agrees to maintain in confidence any non-public information received from the other party, and to use such non-public information only for purposes of consummating the transactions contemplated by this Agreement. Such confidentiality obligations will not apply to (i) information which was known to the one party or their respective agents prior to receipt from the other party; (ii) information which is or becomes generally known; (iii) information acquired by a party or their respective agents from a third party who was not bound to an obligation of confidentiality; and (iv) disclosure required by law.  In the event this Agreement is terminated as provided in Article 8 hereof, each party will return or cause to be returned to the other all documents and other material obtained from the other in connection with the Transaction contemplated hereby.

 
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  (b)            Access to Information .

    (i)           Renovation will afford Kerrisdale and its financial advisors, accountants, counsel and other representatives reasonable access during normal business hours, upon reasonable notice, to the properties, books, records and personnel of Renovation during the period prior to the Closing to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel of Renovation, as Kerrisdale may reasonably request.  No information or knowledge obtained by Kerrisdale in any investigation pursuant to this Section 6.7 will affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Transaction.
 
   (ii)           Kerrisdale will afford Renovation and its financial advisors, underwriters, accountants, counsel and other representatives reasonable access during normal business hours, upon reasonable notice, to the properties, books, records and personnel of Kerrisdale during the period prior to the Closing to obtain all information concerning the business, including the status of product development efforts, properties, results of operations and personnel of Kerrisdale, as Renovation may reasonably request.  No information or Knowledge obtained by Renovation in any investigation pursuant to this Section 6.7 will affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Transaction.

6.8            Public Disclosure . Except to the extent previously disclosed or to the extent the parties believe that they are required by applicable law or regulation to make disclosure, prior to Closing, no party shall issue any statement or communication to the public regarding the transaction contemplated herein without the consent of the other party, which consent shall not be unreasonably withheld. To the extent a party hereto believes it is required by law or regulation to make disclosure regarding the Transaction, it shall, if possible, immediately notify the other party prior to such disclosure. Notwithstanding the foregoing, the parties hereto agree that Renovation will prepare and file a Current Report on Form 8-K pursuant to the Exchange Act to report the execution of this Agreement.

6.9            Information Statement for Change in Majority of Directors.   As directed by Renovation, Kerrisdale will use its best efforts to ensure that Kerrisdale’s current sole director Huoqi Chen will remain a director of Kerrisdale until the expiration of the 10-day period beginning on the date of delivery of the information statement relating to a change in majority of directors of Kerrisdale with the SEC pursuant to Rule 14f-1 promulgated under the Exchange Act (“ Information Statement ”), which Information Statement shall be prepared by Renovation, filed with the SEC, and delivered by the Renovation Officers to the stockholders of Kerrisdale on behalf of Kerrisdale after the Closing.

6.10            Assistance with Post-Closing SEC Reports and Inquiries . Upon the reasonable request of Renovation, after the Closing Date, Kerrisdale and Huoqi Chen shall use their reasonable best efforts to provide such information available to it, including information, filings, reports, financial statements or other circumstances of Kerrisdale occurring, reported or filed prior to the Closing, as may be necessary or required by Kerrisdale for the preparation of the post-Closing Date reports that Kerrisdale is required to file with the SEC to remain in compliance and current with its reporting requirements under the Securities Act, or filings required to address and resolve matters as may relate to the period prior to the Closing and any SEC comments relating thereto or any SEC inquiry thereof.
 

 
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ARTICLE 7

CONDITIONS TO CLOSING

7.1            Conditions to Obligations of Renovation and the Renovation Shareholders . The obligations of Renovation and the Renovation Shareholders under this Agreement shall be subject to each of the following conditions:

  (a)            Closing Deliveries . At the Closing, Kerrisdale shall have delivered or caused to be delivered to Renovation and the Renovation Shareholders the following:

   (i)          this Agreement duly executed by Kerrisdale’s duly authorized signatory;

   (ii)          letter of resignation from Kerrisdale’s current sole executive officer, with his resignation as to all of the offices he currently holds with Kerrisdale to be effective on the Closing Date, and confirming that he has no claim against Kerrisdale in respect of any outstanding remuneration or fees of whatever nature as of the Closing Date;

   (iii)        letter of resignation of Kerrisdale’s current sole director, with the resignation of such director to take effect on the expiration of the ten (10) calendar day period (“Ten Day Period”) following the date of the delivery of the Information Statement to the Kerrisdale stockholders and confirming that he has no claim against Kerrisdale in respect of any outstanding remuneration or fees of whatever nature as of the Closing Date and as of expiration of the Ten Day Period;
 
   (iv)        resolutions duly adopted by the Board of Directors of Kerrisdale approving the following events or actions, as applicable:

 
a.
the execution, delivery and performance of this Agreement;

 
b.
the Acquisition and the terms thereof;

 
c.
the change of Kerrisdale’s fiscal year end from July 31 to March 31.

 
d.
fixing the number of authorized directors on Kerrisdale’s board of directors at four (4);

 
e.
the appointment of Lei Lu as Chairman of the board of directors to serve on the Kerrisdale board of directors, effective on the Closing Date, and the appointment of Li Qi, Chongan Jin and Shike Zhu as additional directors to serve on Kerrisdale’s board of directors on the date the resignation of Kerrisdale’s current sole director becomes effective; and

 
f.
the appointment of the following persons as officers of Kerrisdale, with the titles set forth opposite his name (the “ Renovation Officers ”), effective on the Closing Date:
  
Lei Liu
Chief Executive Officer, President
   
Bennet P. Tchaikovsky
Chief Financial Officer and Treasurer
   
Li Qi
Secretary
 
  
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  (iv)         a certificate of good standing for Kerrisdale from its jurisdiction of incorporation, dated not earlier than five (5) days prior to the Closing Date;

  (v)         an instruction letter signed by the President of Kerrisdale addressed to Kerrisdale’s transfer agent of record, in a form reasonably acceptable to Renovation and consistent with the terms of this Agreement, instructing the transfer agent to issue stock certificates representing the Kerrisdale Shares to be delivered pursuant to this Agreement registered in the names of the Persons designated by the Renovation Shareholders;

  (vi)        a certificate of the Secretary of the Kerrisdale, dated as of the Closing Date, certifying as to (i) the incumbency of officers of the Kerrisdale executing this Agreement and all exhibits and schedules hereto and all other documents, instruments and writings required pursuant to this Agreement (the “ Transaction Documents ”), (ii) a copy of the Articles of Incorporation and Bylaws of the Kerrisdale, as in effect on and as of the Closing Date, and (iii) a copy of the resolutions of the Board of Directors of Kerrisdale authorizing and approving the Kerrisdale’s execution, delivery and performance of the Transaction Documents, all matters in connection with the Transaction Documents, and the transactions contemplated thereby;

  (viii)       all corporate records, agreements, seals and any other information reasonably requested by Renovation’s representatives with respect to Kerrisdale; and

  (ix)         such other documents as Renovation and/or the Renovation Shareholders may reasonably request in connection with the transactions contemplated hereby.
 
(b)            Representations and Warranties to be True . The representations and warranties of Kerrisdale herein contained shall be true in all material respects at the Closing with the same effect as though made at such time.  Kerrisdale shall have performed in all material respects all obligations and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by them at or prior to the Closing.

(c)            No Assets and Liabilities . At the Closing, Kerrisdale shall have no liabilities, debts or payables (contingent or otherwise), no tax obligations, no material assets, and except as contemplated in this Agreement, no material changes to its business or financial condition shall have occurred since the date of this Agreement.

(d)            SEC Filings . At the Closing, Kerrisdale will be current in all SEC filings that Kerrisdale is required to file.

(e)            Outstanding Capital Stock . Kerrisdale shall have at 500,000,000 shares of its common stock authorized and shall have no more than 4,200,000 shares of its common stock issued and outstanding immediately prior to the Closing, and Kerrisdale shall have 10,000,000 shares of its preferred stock authorized and shall have no shares of its preferred stock issued and outstanding immediately prior to the Closing.

(f)            No Adverse Effect .  The business and operations of Kerrisdale will not have suffered any Material Adverse Effect.

 
SHARE EXCHANGE AGREEMENT
23

 
 
7.2            Conditions to Obligations of Kerrisdale . The obligations of Kerrisdale under this Agreement shall be subject to each of the following conditions:

  (a)            Closing Deliveries . On the Closing Date, Renovation and/or the Renovation Shareholders shall have delivered to Kerrisdale the following:

   (i)          this Agreement duly executed by Renovation and the Renovation Shareholders;

   (ii)         resolutions duly adopted by the Board of Directors of Renovation authorizing and approving the execution, delivery and performance of this Agreement;

   (iii)        share certificates representing the Renovation Equity Interests to be delivered pursuant to this Agreement duly endorsed or accompanied by duly executed stock powers, instruments of transfer or other executed instruments of like tenor; and

   (iv)        such other documents as Kerrisdale may reasonably request in connection with the transactions contemplated hereby.
 
  (b)            Representations and Warranties True and Correct . The representations and warranties of Renovation and the Renovation Shareholders herein contained shall be true in all material respects at the Closing with the same effect as though made at such time. Renovation and the Renovation Shareholders shall have performed in all material respects all obligations and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by them at or prior to the Closing.

  (c)            No Adverse Effect .  The business and operations of Renovation will not have suffered any Material Adverse Effect.
 
ARTICLE 8

SEC FILING; TERMINATION

8.1           This Agreement may be terminated at any time prior to the Closing:

  (a)           by mutual written agreement of Kerrisdale, Renovation and the Renovation Shareholders;

  (b)           by either Kerrisdale, Renovation or the Renovation Shareholders if the Transaction shall not have been consummated for any reason by September 30, 2009; provided, however, that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the Transaction to occur on or before such date and such action or failure to act constitutes a breach of this Agreement;

  (c)           by either Kerrisdale, Renovation or the Renovation Shareholders if a governmental entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the Transaction, which order, decree, ruling or other action is final and non-appealable;

 
SHARE EXCHANGE AGREEMENT
24

 

  (d)           by Renovation or the Renovation Shareholders, upon a material breach of any representation, warranty, covenant or agreement on the part of Kerrisdale set forth in this Agreement, or if any representation or warranty of Kerrisdale shall have become materially untrue, in either case such that the conditions set forth in Section 7.1 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such inaccuracy in Kerrisdale’s representations and warranties or breach by Kerrisdale is curable by Kerrisdale prior to the Closing Date, then Renovation or the Renovation Shareholders may not terminate this Agreement under this Section 8.1(d) for thirty (30) days after delivery of written notice from Renovation or the Renovation Shareholders to Kerrisdale of such breach, provided Kerrisdale continues to exercise commercially reasonable efforts to cure such breach (it being understood that Renovation or the Renovation Shareholders may not terminate this Agreement pursuant to this Section 8.1(d) if they shall have materially breached this Agreement or if such breach by Kerrisdale is cured during such thirty (30) day period); or
 
  (e)           by Kerrisdale, upon a material breach of any representation, warranty, covenant or agreement on the part of Renovation or the Renovation Shareholders set forth in this Agreement, or if any representation or warranty of Renovation or the Renovation Shareholders shall have become materially untrue, in either case such that the conditions set forth in Section 7.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become untrue, provided, that if such inaccuracy in Renovation’s or the Renovation Shareholders’ representations and warranties or breach by Renovation or the Renovation Shareholders is curable by Renovation or the Renovation Shareholders prior to the Closing Date, then Kerrisdale may not terminate this Agreement under this Section 8.1(e) for thirty (30) days after delivery of written notice from Kerrisdale to Renovation and the Renovation Shareholders of such breach, provided Renovation and the Renovation Shareholders continue to exercise commercially reasonable efforts to cure such breach (it being understood that Kerrisdale may not terminate this Agreement pursuant to this Section 8.1(e) if it shall have materially breached this Agreement or if such breach by Renovation or the Renovation Shareholders is cured during such thirty (30) day period).

8.2            Notice of Termination; Effect of Termination . Any termination of this Agreement under Section 8.1 above will be effective immediately upon (or, if the termination is pursuant to Section 8.1(d) or Section 8.1(e) and the proviso therein is applicable, thirty (30) days after) the delivery of written notice of the terminating party to the other parties hereto. In the event of the termination of this Agreement as provided in Section 8.1, this Agreement shall be of no further force or effect and the Transaction shall be abandoned, except as set forth in Section 8.1, Section 8.2 and Article 9 (General Provisions), each of which shall survive the termination of this Agreement.
 
ARTICLE 9

GENERAL PROVISIONS

9.1            Notices .  Any and all notices and other communications hereunder shall be in writing and shall be deemed duly given to the party to whom the same is so delivered, sent or mailed at addresses and contact information set forth on the signature pages hereof (or at such other address for a party as shall be specified by like notice).  Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) on the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (Pacific Standard Time) on a business day, (b) on the next business day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a business day or later than 5:30 p.m. (Pacific Standard Time) on any business day, (c) on the second business day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given.

 
SHARE EXCHANGE AGREEMENT
25

 

9.2            Interpretation . The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.  References to Sections and Articles refer to sections and articles of this Agreement unless otherwise stated.

9.3            Severability . If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated and the parties shall negotiate in good faith to modify this Agreement to preserve each party’s anticipated benefits under this Agreement.
 
9.4            Miscellaneous . This Agreement (together with all other documents and instruments referred to herein): (a) constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof; (b) except as expressly set forth herein, is not intended to confer upon any other person any rights or remedies hereunder and (c) shall not be assigned by operation of law or otherwise, except as may be mutually agreed upon by the parties hereto.

9.5            Separate Counsel . Each party hereby expressly acknowledges that it has been advised to seek its own separate legal counsel for advice with respect to this Agreement.

9.6            Governing Law .  This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of conflicts of law thereof.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of Los Angeles.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of Los Angeles, County of Los Angeles for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an  inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.  If either party shall commence an action or proceeding to enforce any provisions of the Agreement, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

9.7            Counterparts and Facsimile Signatures . This Agreement may be executed in two or more counterparts, which together shall constitute a single agreement. This Agreement and any documents relating to it may be executed and transmitted to any other party by facsimile, which facsimile shall be deemed to be, and utilized in all respects as, an original, wet-inked manually executed document.

 
SHARE EXCHANGE AGREEMENT
26

 

9.8            Amendment . This Agreement may be amended, modified or supplemented only by an instrument in writing executed by Renovation, Kerrisdale and the majority of the Renovation Shareholders; provided that, the consent of any Renovation Shareholder that is a party to this Agreement shall be required if the amendment or modification would disproportionately affect such shareholder (other than by virtue of their ownership of Renovation shares, as applicable).

9.9            Parties In Interest . Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, legal representatives, successors and assigns of the parties hereto.

9.10            Waiver . No waiver by any party of any default or breach by another party of any representation, warranty, covenant or condition contained in this Agreement shall be deemed to be a waiver of any subsequent default or breach by such party of the same or any other representation, warranty, covenant or condition. No act, delay, omission or course of dealing on the part of any party in exercising any right, power or remedy under this Agreement or at law or in equity shall operate as a waiver thereof or otherwise prejudice any of such party’s rights, powers and remedies. All remedies, whether at law or in equity, shall be cumulative and the election of any one or more shall not constitute a waiver of the right to pursue other available remedies.
 
9.11            Expenses . At or prior to the Closing, the parties hereto shall pay all of their own expenses relating to the transactions contemplated by this Agreement, including, without limitation, the fees and expenses of their respective counsel and financial advisers.
 
[ Remainder of Page Left Blank Intentionally ]

 
SHARE EXCHANGE AGREEMENT
27

 






















 

 
 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and shareholders
  of Renovation Investment (Hong Kong) Co., Ltd and Subsidiaries
 
We have audited the accompanying consolidated balance sheets of Renovation Investment (Hong Kong) Co., Ltd and subsidiaries as of March 31, 2009 and 2008, and the related consolidated statements of income and other comprehensive income, shareholders’ equity, and cash flows for each of the year in the two-year period ended March 31, 2009. Renovation Investment (Hong Kong) Co., Ltd’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Renovation Investment (Hong Kong) Co., Ltd and subsidiaries as of March 31, 2009 and 2008, and the results of its operations and its cash flows for each of the year in the two-year period ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
 
Brea, California
 
September 22, 2009
 
 

 
RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND 2008

ASSETS
 
   
2009
   
2008
 
             
CURRENT ASSETS
           
Cash
  $ 996,302     $ 878,948  
Accounts receivable, trade
    1,265,110       834,457  
Inventories
    2,793,101       2,847,385  
Other receivables
    67,079       425,558  
Other receivables - related parties
    2,432       166,141  
Advances to suppliers
    5,485,113       652,339  
Advances to suppliers - related parties
    1,797,104       1,016,024  
Other current assets
    564,379       515,968  
Total current assets
    12,970,620       7,336,820  
                 
EQUIPMENT, net
    979,432       918,827  
                 
OTHER ASSETS:
               
Long term deposit
    2,015,149       -  
Total other assets
    2,015,149       -  
                 
Total assets
  $ 15,965,201     $ 8,255,647  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
                 
CURRENT LIABILITIES
               
Short term loans
  $ 1,465,000     $ 499,800  
Accounts payable, trade
    5,939,237       6,012,352  
Other payables
    404,731       801,877  
Other payables - related parties
    326,715       339,961  
Taxes payable
    811,316       516,655  
Accrued liabilities
    360,655       38,037  
Customer deposit
    -       85,680  
Distribution payable
    -       144,942  
Total liabilities
    9,307,654       8,439,304  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
SHAREHOLDERS' EQUITY
               
Paid-in capital
    677,600       677,600  
Statutory reserves
    1,309,109       606,665  
Retained earnings (deficit)
    5,033,275       (1,077,797 )
Accumulated other comprehensive loss
    (362,437 )     (390,125 )
Total shareholders' equity
    6,657,547       (183,657 )
                 
Total liabilities and shareholders' equity
  $ 15,965,201     $ 8,255,647  

See report of independent registered public accounting firm.
The accompanying notes are an integral part of this consolidated financial statement.

 
- 1 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME (LOSS)
FOR YEARS ENDED MARCH 31, 2009 AND 2008

   
2009
   
2008
 
REVENUES
  $ 44,776,652     $ 31,311,942  
                 
COST OF GOODS SOLD
    32,607,741       23,835,859  
                 
GROSS PROFIT
    12,168,911       7,476,083  
                 
SELLING EXPENSES
    1,712,474       1,359,087  
GENERAL & ADMINISTRATIVE EXPENSES
    1,399,305       699,069  
TOTAL OPERATING EXPENSES
    3,111,779       2,058,156  
                 
INCOME  FROM OPERATIONS
    9,057,132       5,417,927  
                 
OTHER INCOME (EXPENSE), NET
    17,369       (6,854 )
                 
INCOME BEFORE INCOME TAXES
    9,074,501       5,411,073  
                 
PROVISION FOR INCOME TAXES
    2,260,985       2,023,194  
                 
NET INCOME
    6,813,516       3,387,879  
                 
OTHER COMPREHENSIVE INCOME/(LOSS)
               
Foreign currency translation adjustments
    27,688       (50,242 )
                 
COMPREHENSIVE INCOME
  $ 6,841,204     $ 3,337,637  

See report of independent registered public accounting firm.
The accompanying notes are an integral part of this consolidated financial statement.

 
- 2 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR YEARS ENDED MARCH 31, 2009 AND 2008

                     
Accumulated
       
         
Retained Earnings
   
other
       
   
Paid-in
   
Statutory
         
comprehensive
       
   
capital
   
reserves
   
Unrestricted
   
income/(loss)
   
Totals
 
                               
BALANCE, March 31, 2007
  $ 677,600     $ 279,276     $ (3,918,165 )   $ (339,883 )   $ (3,301,172 )
                                         
Net income
                    3,387,879               3,387,879  
Adjustment of statutory reserves
            327,389       (327,389 )             -  
Shareholder distribution
                    (220,122 )             (220,122 )
Foreign currency translation adjustments
                            (50,242 )     (50,242 )
                                         
BALANCE, March 31, 2008
  $ 677,600     $ 606,665     $ (1,077,797 )   $ (390,125 )   $ (183,657 )
                                         
Net income
                    6,813,516               6,813,516  
Adjustment of statutory reserves
            702,444       (702,444 )             -  
Foreign currency translation adjustments
                            27,688       27,688  
                                         
BALANCE, March 31, 2009
  $ 677,600     $ 1,309,109     $ 5,033,275     $ (362,437 )   $ 6,657,547  

See report of independent registered public accounting firm.
The accompanying notes are an integral part of this consolidated financial statement.

 
- 3 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008

   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 6,813,516     $ 3,387,879  
Adjustments to reconcile net income to cash
               
provided by (used in) operating activities:
               
Depreciation and amortization
    439,464       334,637  
Change in operating assets
               
Accounts receivable, trade
    (407,133 )     132,312  
Inventories
    127,466       650,356  
Other receivable
    367,791       (253,155 )
Other receivable - related party
    167,234       161,196  
Advances to suppliers
    (4,793,517 )     (314,148 )
Advances to suppliers - related party
    (751,251 )     (922,719 )
Other current assets
    (36,279 )     (251,676 )
Long term deposit
    (2,005,795 )     -  
Change in operating liabilities
               
Accounts payable, trade
    (227,834 )     (2,287,871 )
Other payables and accrued liabilities
    (95,177 )     637,114  
Other payables-related parties
    (21,952 )     248,638  
Customer deposits
    (87,492 )     80,598  
Taxes payable
    279,969       (181,234 )
  Net cash  (used in) provided by operating activities
    (230,990 )     1,421,927  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of equipments
    (35,906 )     -  
Additions to leasehold improvements
    (438,166 )     (348,886 )
Net cash used in investing activities
    (474,072 )     (348,886 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from short term loan
    1,465,600       -  
Payments on short term loan
    (512,400 )     (772,398 )
Distribution to shareholders
    (148,007 )     -  
Net cash provided by (used in) financing activities
    805,193       (772,398 )
                 
EFFECT OF EXCHANGE RATE ON CASH
    17,223       72,607  
                 
INCREASE IN CASH
    117,354       373,250  
                 
CASH, beginning of year
    878,948       505,698  
                 
CASH, end of year
  $ 996,302     $ 878,948  

See report of independent registered public accounting firm.
The accompanying notes are an integral part of this consolidated financial statement.

 
- 4 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD.
AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009

Note 1- DESCRIPTION OF BUSINESS AND ORGANIZATION

Renovation Investment (Hong Kong) Co., Ltd. (“Renovation HK” or the “Company”), was incorporated on September 2, 2008, under the laws of Hong Kong Special Administrative Region (“Hong Kong”). The Company has no substantive operations of its own except for its holding of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”), its wholly owned subsidiary. Through Jiuxin Management, the Company controls three companies that operate a chain of pharmacies in the People’s Republic of China (“PRC” or “China”), namely, Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service”, and collectively with Jiuzhou Pharmacy and Jiuzhou Clinic as “HJ Group”).

Jiuxin Management was established in the People’s Republic of China (“PRC” or “China”) by Renovation HK on October 14, 2008, as a wholly foreign owned enterprise (“WFOE”), with registered capital of $4,500,000. Renovation HK is required by the PRC company law to pay 15% of the registered capital by December 31, 2009, and the balance within two years. Jiuxin Management has no substantive operations of its own except for entering into certain exclusive agreements with HJ Group and performing its obligations thereunder.

Jiuzhou Pharmacy is a PRC limited liability company established in Zhejiang Province on September 9, 2003 with registered capital of $605,000 (RMB 5,000,000), 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.

Jiuzhou Service is a PRC limited liability company established in Zhejiang Province on November 2, 2005 with registered capital of $60,500 (RMB 500,000). It is engaged in providing medical-related management consulting services in the PRC.

All three HJ Group companies are under the common control of the same three owners (the “Owners”). Each HJ Group company holds the licenses and approvals necessary to operate its business in China.

The paid-in capital of all three HJ Group companies was funded by 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”):

See report of independent registered public accounting firm.

 
- 5 -

 

(1) Consulting Services Agreement , through which Jiuxin Management has the right to advise, consult, manage and operate all three HJ Group companies, and collect and own all of their net profits;

(2) Operating Agreement , through which Jiuxin Management has the right to recommend director candidates and appoint the senior executives of HJ Group, approve any transactions that may materially affect the assets, liabilities, rights or operations of HJ Group, and guarantee the contractual performance by HJ Group of any agreements with third parties, in exchange for a pledge by each HJ Group company of its accounts receivable and assets;

(3) Proxy Agreement , under which the Owners have vested their collective voting control over the three HJ Group companies to Jiuxin Management and will only transfer their respective equity interests in HJ Group to Jiuxin Management or its designee(s);

(4) Option Agreement , under which the Owners have granted Jiuxin Management the irrevocable right and option to acquire all of their equity interests in HJ Group; and

(5) Equity Pledge Agreement , under which the Owners have pledged all of their rights, titles and interests in the HJ Group companies to Jiuxin Management to guarantee the performance of their obligations under the Consulting Services Agreement.

The Contractual Arrangements shall remain in full force and effect for the maximum period of time permitted by PRC law, provided that these agreements (other than the Equity Pledge Agreement) shall automatically terminate on May 1, 2010 (the “Automatic Termination Date”) if the company that acquired the Company in a reverse merger transaction (see Note 15 – Subsequent Events) has not completed a financing of at least $25 million, and the common stock of such company has not listed on the Nasdaq Capital Market, by the Automatic Termination Date.

As a result of the Contractual Arrangements, which obligates the Company to absorb all of the risk of loss from HJ Group’s activities and enables the Company to receive all of HJ Group’s expected residual returns, the Company accounts for each HJ Group company as a variable interest entity (“VIE”) under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. 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:

See report of independent registered public accounting firm.

 
- 6 -

 


Subsidiaries
 
Incorporated in
 
Percentage of
Ownership
 
           
Jiuxin Management
 
PRC
 
100.00
Jiuzhou Pharmacy
 
PRC
 
VIE by Contractual Arrangements
 
Jiuzhou Clinic
 
PRC
 
VIE by Contractual Arrangments
 
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 subsidiary and its VIEs. All significant inter-company transactions and balances between the Company, its subsidiary and VIEs are eliminated upon consolidation.

Consolidation of variable interest entities

In accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has concluded that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are each a VIE and that the Company’s wholly owned subsidiary, Jiuxin Management, absorb a majority of the risk of loss from the activities of these three companies, and enable the Company to receive a majority of their respective expected residual returns. Accordingly, the Company accounts for each of these three companies as a VIE. As the companies are under common control, the consolidated financial statements have been prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial statements.

Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. For example, the Company estimates its allowance for doubtful accounts and useful lives of plant and equipment. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

See report of independent registered public accounting firm.

 
- 7 -

 

Fair values of financial instruments

On January 1, 2008, the Company adopted SFAS No. 157 which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables, payables and short term loans qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow:

 
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets

 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments

 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value

The Company did not identify any other assets and liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS No. 157.

Revenue recognition

Revenue from sales of prescription medicine at the drugstores is recognized when the prescription is filled and the customer picks up and pays for the prescription.

Revenue from sales of other merchandise at the drugstores is recognized at the point of sale, which is when the customer pays for and receives the merchandise.

Revenue from medical services is recognized after the service has been rendered to the customer.

Revenue from sales of merchandise to non-retail customers is recognized when the following conditions are met: 1) persuasive evidence of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement); 2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received by the customer at its designated location in accordance with the sales terms; 3) the sales price is fixed or determinable; and 4) collectability is probable. Historically, sales returns have been immaterial.

The Company’s revenue is net of value added tax (“VAT”) collected on behalf of tax authorities in respect of the sale of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the balance sheet until it is paid to the tax authorities.
 
See report of independent registered public accounting firm.

 
- 8 -

 

Cash

Cash consists of cash on hand, cash in the drugstores and cash at banks. None of the Company’s cash balance is restricted as to withdrawal.

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 March 31, 2009 and 2008, management concluded all amounts are collectible and allowance for doubtful accounts deemed not necessary.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Market is the lower of replacement cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location to ensure that the amounts reflected in the consolidated financial statements at each reporting period are properly stated and valued. The Company records write-downs to inventories for shrinkage losses and damaged merchandise that are identified during the inventory counts.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method over the following estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold improvements are amortized over the shorter of 5 years or the lease term of the underlying assets. Following are the estimated useful lives of the Company’s other property and equipment:

   
Estimated Useful Life
Leasehold improvements
 
5   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.

See report of independent registered public accounting firm.

 
- 9 -

 

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 March 31, 2009 and 2008, there was no impairment.

Income taxes

The Company records income tax pursuant to SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no affect on the Company’s financial statements. There are no deferred tax amounts at March 31, 2009.
 
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when related items are credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Value Added Tax (VAT)

Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax on the gross sales price. The value-added tax rate varies from 9% to 17%, depending on the type of products sold. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing 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.

See report of independent registered public accounting firm.

 
- 10 -

 

Advertising and promotion costs

Advertising and promotion costs are expensed as incurred. Advertising and promotion costs amounted to $232,902 and $247,743 for the years ended March 31, 2009 and 2008, respectively. Advertising costs consist primarily of print and television advertisements.

Pre-opening costs

Expenditures related to the opening of new drugstores, other than expenditures for property and equipment, are expensed as incurred.

Vendor allowances

The Company accounts for vendor allowances according to Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Rec eived from a Vendor and EITF Issue No. 03-10, Application of EITF Issue No. 02-16 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.

For the years ended March 31, 2009 and 2008, the Company recognized vendor allowances of $264,845 and $581,187 in cost of goods sold, respectively.

Distribution costs

Distribution costs represent the costs of transporting the merchandise from warehouses to stores. These costs are expensed as incurred and are included in sales, marketing and other operating expenses.

Operating leases

The Company leases premises for retail drugstores, warehouses and offices under non-cancelable operating leases. Operating lease payments are expensed on a straight-line basis over the term of lease. A majority of the Company’s retail drugstore leases have a 3 to 5-year term with a renewal option upon the expiry of the lease. The Company has historically been able to renew a majority of its drugstores leases. Under the terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the lease.

See report of independent registered public accounting firm.

 
- 11 -

 

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”) for financial reporting purposes. The Company’s subsidiary and VIEs maintain their books and records in their functional currency, being the primary currency of the economic environment in which their operations are conducted.
 
In general, for consolidation purposes, the Company translates the subsidiary’s 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 subsidiary’s and VIEs’ financial statements are recorded as accumulated other comprehensive income.

SFAS No. 130, “Reporting Comprehensive Income”, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s accumulated other comprehensive income only consist of changes in foreign currency exchange rates. Accumulated other comprehensive loss in the statement of shareholders’ equity amounted to $362,437 and $390,125 as of March 31, 2009 and 2008, respectively. The balance sheet amounts with the exception of equity at March 31, 2009 and 2008 were translated at 1 RMB to $ 0.1465 USD and at 1 RMB to $ 0.1428 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the years ended March 31, 2009 and 2008 were at 1 RMB to $ 0.14582 USD and at 1 RMB to $ 0.13433 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.
 
See report of independent registered public accounting firm.

 
- 12 -

 

Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. Balances at financial institutions or state owned banks within the PRC are not covered by insurance. As of March 31, 2009 and 2008, the Company had deposits totaling $995,448 and $876,026 that are not covered by insurance, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

For the fiscal years ended March 31, 2009 and 2008, all of the Company’s sales and purchases arose in the PRC. No major customers accounted for more than 10% of the Company’s total revenues for the years ended March 31, 2009 and 2008, respectively.

For the fiscal year ended March 31, 2009, two vendors accounted for 32% of the Company’s total purchases and 1% of the total accounts payable. For the fiscal year ended March 31, 2008, no major vendor accounted for more than 10% of the Company’s total purchases.

Recently issued accounting pronouncements
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements.

In December 2007, Statement of Financial Accounting Standards No. 141(R), Business Combinations , was issued. SFAS No. 141R replaces SFAS No. 141, Business Combinations. SFAS 141R retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method ) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This replaces SFAS 141’s cost-allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS 141R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141R). SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating the impact that adopting SFAS No. 141R will have on its financial statements.

See report of independent registered public accounting firm.

 
- 13 -

 

In February 2008, the FASB issued FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” FSP FAS 157-1 indicates that it does not apply under SFAS 13, “Accounting for Leases,” and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS 13. This scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under SFAS 141 or SFAS 141R, regardless of whether those assets and liabilities are related to leases.

Also in February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” With the issuance of FSP FAS 157-2, the FASB agreed to: (a) defer the effective date in SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), and (b) remove certain leasing transactions from the scope of SFAS 157. The deferral is intended to provide the FASB time to consider the effect of certain implementation issues that have arisen from the application of SFAS 157 to these assets and liabilities.

In March 2008, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained non-controlling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for fiscal years beginning after March15, 2008. The Company has not determined the effect that the application of SFAS 160 will have on its consolidated financial statements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - An Amendment of SFAS No. 133” (“SFAS 161”). Effective on January 1, 2009, SFAS 161 seeks to improve financial reporting for derivative instruments and hedging activities by requiring enhanced disclosures regarding the impact on financial position, financial performance, and cash flows. To achieve this increased transparency, SFAS 161 requires (1) the disclosure of the fair value of derivative instruments and gains and losses in a tabular format; (2) the disclosure of derivative features that are credit risk-related; and (3) cross-referencing within the footnotes. The Company is in the process of evaluating the new disclosure requirements under SFAS 161.

In April 2008, the FASB issued 142-3 “Determination of the useful life of Intangible Assets”, which amends the factors a company should consider when developing renewal assumptions used to determine the useful life of an intangible asset under SFAS142. This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. SFAS 142 requires companies to consider whether renewal can be completed without substantial cost or material modification of the existing terms and conditions associated with the asset. FSP 142-3 replaces the previous useful life criteria with a new requirement—that an entity consider its own historical experience in renewing similar arrangements. If historical experience does not exist, then the Company would consider market participant assumptions regarding renewal including 1) highest and best use of the asset by a market participant, and 2) adjustments for other entity-specific factors included in SFAS 142. The Company is currently evaluating the impact that adopting SFAS No.142-3 will have on its financial statements.

See report of independent registered public accounting firm.

 
- 14 -

 

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). FAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." The Company is in the process of evaluating the impact of adoption of this statement on the results of operations, financial position or cash flows. 

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60.” The scope of this Statement is limited to financial guarantee insurance (and reinsurance) contracts, as described in this Statement, issued by enterprises included within the scope of Statement 60. Accordingly, this Statement does not apply to financial guarantee contracts issued by enterprises excluded from the scope of Statement 60 or to some insurance contracts that seem similar to financial guarantee insurance contracts issued by insurance enterprises (such as mortgage guaranty insurance or credit insurance on trade receivables). This Statement also does not apply to financial guarantee insurance contracts that are derivative instruments included within the scope of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement will not have any impact on the Company’s financial statements.

In June 2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF No. 07-5”). This Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No 133 “Accounting for Derivatives and Hedging Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. EITF No.07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. This standard triggers liability accounting on all options and warrants exercisable at strike prices denominated in any currency other than the functional currency of the operating entity in China (Renminbi). The Company is currently evaluating the impact of adoption of EITF No. 07-5 on the Company’s consolidated financial statements.

See report of independent registered public accounting firm.

 
- 15 -

 

In June 2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4 is to provide transition guidance for conforming changes made to EITF No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27 “Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This Issue is effective for financial statements issued for fiscal years ending after December 15, 2008. Early application is permitted.  Management is currently evaluating the impact of adoption of EITF No. 08-4 on the accounting for the consolidated financial statements.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. FSP EITF 03-6-1 indicates that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the requirements of FSP EITF 03-6-1 and the impact that its adoption will have on the consolidated results of operations or consolidated financial position.

In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is Not Active,” which clarifies the application of SFAS 157 when the market for a financial asset is inactive. Specifically, FSP FAS 157-3 clarifies how (1) management’s internal assumptions should be considered in measuring fair value when observable data are not present, (2) observable market information from an inactive market should be taken into account, and (3) the use of broker quotes or pricing services should be considered in assessing the relevance of observable and unobservable data to measure fair value. The Company is currently evaluating the impact of adoption of FSP FAS 157-3 on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. FSP FAS 157-4 shall be applied prospectively with retrospective application not permitted. FSP FAS 157-4 shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. Additionally, if an entity elects to early adopt either FSP FAS 107-1 and 28-1, “Interim Disclosures about Fair Value of Financial Instruments” or FSP FAS 115-2 and 124-2, it must also elect to early adopt this FSP. The Company is currently evaluating the impact of this new FSP on the Company's consolidated financial statements.

See report of independent registered public accounting firm.

 
- 16 -

 

In April 2009, the FASB issued FSP FAS 107-1 and 28-1. This FSP amends SFAS 107, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP shall be effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4 and 115-2 and 124-2. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The Company is currently evaluating the disclosure requirements of this new FSP.

In May 2009, the FASB issued SFAS 165, “Subsequent Events,” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. SFAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued. The Company is currently evaluating the impact of adopting SFAS 165.

In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets – an amendment of FASB No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 166 amends the criteria for a transfer of a financial asset to be accounted for as a sale, redefines a participating interest for transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. SFAS 166 is effective for the Company beginning in 2010.

In June 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R),” which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009, and the Company is currently assessing the impact of adopting SFAS 167.

See report of independent registered public accounting firm.

 
- 17 -

 

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS 168”). This Standard establishes the FASB Accounting Standards Codification TM (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.

Note 3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid for the years ended March 31, 2009 and 2008, amounted to $32,035 and $28,370, respectively.

Income taxes paid for the years ended March 31, 2009 and 2008 amounted to $2,148,692 and $2,036,282, respectively.

Note 4 - PROPERTY AND EQUIPMENT

Property and equipment for years ended March 31, 2009 and 2008 consists of the following:

   
2009
   
2008
 
Leasehold improvements
  $ 2,057,892     $ 1,576,826  
Furniture and equipment
    304,709       261,244  
Motor vehicles
    162,443       158,340  
Total
    2,525,044       1,996,410  
Less: Accumulated depreciation and amortization
    1,545,612       1,077,583  
Property and equipment, net
  $ 979,432     $ 918,827  

Total depreciation expense for property and equipment for the years ended March 31, 2009 and 2008 was $439,464 and $334,637, respectively. No depreciation expense was included in cost of goods sold for the years presented because the Company’s business does not involve manufacturing of merchandise and the amount of depreciation of property and equipment utilized in acquiring, warehousing and transporting the merchandise to locations ready for sale is not material.

Note 5 – ADVANCES TO SUPPLIERS

Advances to suppliers and advances to suppliers-related parties are monies 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 their purchase on a timely basis. As of March 31, 2009 and 2008, the advances to suppliers amounted to $7,282,217 and $1,668,363, respectively.

See report of independent registered public accounting firm.

 
- 18 -

 

Note 6 – LONG TERM RENTAL DEPOSITS

Long term rental deposits are monies 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 March 31, 2009 and 2008, the long term rental deposit amounted to $2,015,149 and $0, respectively.

Note 7 - RETAINED EARNINGS

Statutory Reserves

Statutory reserves represent restricted retained earnings. Based on the legal formation of the entities, 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 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 years ended March 31, 2009 and 2008, the Company made total appropriations to these statutory reserves of $702,444 and $327,389, respectively.
  
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.

Shareholder Distribution

One of the Company’s VIEs, Jiuzhou Clinic, distributed $220,122 and $108,306 to the Owners in February 2008 and October 2006, respectively.

Note 8 - TAXES
 
Income Tax

The Company is registered in Hong Kong and conducts all of its business through its subsidiary, Jiuxin Management, and its PRC VIEs, Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service.  The Company’s VIEs are subject to PRC tax laws.

Jiuzhou Pharmacy was tax exempt from 2005 to 2006 calendar years due to tax incentives in hiring laid-off state employees. From January 2007 to December 2007, Jiuzhou Pharmacy was subject to the effective 2007’s income tax rate of 33% (30% state income taxes plus 3% local income taxes) on taxable income which are reported in the statutory financial statements after appropriate tax adjustments. Beginning January 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the former income tax laws. The new standard EIT rate of 25% replaced the 33% rate previously applicable to enterprises. Therefore, from January 2008 to March 2008, Jiuzhou Pharmacy was subject to an effective tax rate of 25%.

See report of independent registered public accounting firm.

 
- 19 -

 

Jiuzhou Clinic was subject to the regular income tax rate of 33% in calendar year 2007, and 25% in calendar year 2008 and 2009.

The following table reconciles the US statutory rates to the Company's effective tax rate for the years ended March 31, 2009 and 2008: 
 
   
2009
   
2008
 
U.S. Statutory rates
    34 %     34 %
Foreign income not recognized in USA
    (34 )     (34 )
China income taxes
    25       31  
Other (a)
    0       6  
Effective tax rate
    25 %     37 %

(a)
The 6% represents the expenses incurred by the Company that are not subjected to PRC income tax.

Value Added Tax

Sales of birth control related products are not subject to VAT, while Chinese herbs are subject to 13% VAT and all other sales are subject to 17% VAT. VAT on sales and on purchases amounted to $7,300,265 and $5,172,307 for the year ended March 31, 2009, respectively, and $5,052,608 and $3,692,462 for the year ended March 31, 2008, respectively.

Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.

Taxes payable at March 31, 2009 and 2008 consisted of the following:

   
2009
   
2008
 
VAT
  $ 196,784     $ 32,217  
Income tax
    588,681       462,350  
Others
    25,851       22,088  
Total taxes payable
  $ 811,316     $ 516,655  

Note 9 –OTHER PAYABLES

Other payables consist of the following:

   
March 31, 2009
   
March 31, 2008
   
Cash advance from third party (a)
  $ 314,975     $ 735,420  
Other
    89,756       66,457  
Total
  $ 404,731     $ 801,877  

See report of independent registered public accounting firm.

 
- 20 -

 

Notes:

(a)
Represents short term cash advance from a non-related third party, Hangzhou Today Real Estate. The advance is non-interest bearing and due upon request.

Note 10 – SHORT TERM LOANS

Short term loans represent amounts due to various banks and are due on demand or normally within one year. These loans generally can be renewed with the banks. Short term bank loans at March 31, 2009 and 2008, consisted of the following:

   
2009
   
2008
 
Hangzhou Bank, due February 4, 2009
           
annual interest at 8.22%, secured by the
           
personal properties of the Company’s
  $ -     $ 499,800  
shareholders
               
                 
Hangzhou Bank, due August 13, 2009
               
annual interest at 4.86%, secured by the
               
personal properties of the Company’s
  $ 586,000     $ -  
shareholders
               
                 
Hangzhou Bank, due September 16, 2009
               
annual interest at 486%, secured by the
               
personal properties of the Company’s
  $ 879,000     $ -  
shareholders
               
                 
Total
  $ 1,465,000     $ 499,800  

Interest expense for the years ended March 31, 2009 and 2008 amounted to $32,035 and $31,309, 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 required by the local government and the employees' current compensation. The Company contributed $57,776 and $42,683 in employment benefits and pension in the years ended March 31, 2009 and 2008, respectively.

Note 12 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
Amounts receivable from and payable to related parties are summarized as follows:

   
March 31, 2009
   
March 31, 2008
 
Amounts due from directors (1):
  $ 2,432     $ 166,141  
Amount due to director (2):
  $ 326,715     $ 339,961  
Advances to supplier (3):
  $ 1,797,104     $ 1,016,024  

See report of independent registered public accounting firm.

 
- 21 -

 

(1) 
Represents interest free loans to two of the Company’s directors, Li Qi and Chongan Jin. The loans are due upon demand.
 
(2) 
Represents leasehold improvement expenses paid by a director of the Company, Lei Liu, on behalf of the Company. The amount is due upon demand.

(3) 
Represents prepayment for inventory purchase made to a supplier, which was formerly owned by the Company’s directors. The Company will collect inventory from the supplier.

The Company also leases its facilities from a director. See Note 14 below for details.

Note 13 - 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, etc. The class of customer, selling practice and distribution process are the same for all products. The Company’s chief operating decision-makers (i.e. 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 SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company considers itself to be operating within one reportable segment.
 
The Company does not have long-lived assets located in foreign countries. In accordance with the enterprise-wide disclosure requirements of SFAS 131, the Company's net revenue from external customers by main product is as follows:
 
   
Twelve months Ended March 31,
 
   
2009
 
2008
 
             
Prescription Drugs
 
$
16,518,218
   
$
7,634,160
 
Over The Counter (OTC) Drugs
   
8,118,632
     
3,952,093
 
Nutritional Supplements
   
2,800,290
     
3,343,442
 
Traditional Chinese Medicine Products
   
4,312,097
     
4,036,885
 
Sundry Products
   
11,985,508
     
11,698,344
 
Medical Devices
   
1,041,907
     
647,018
 
Total
 
$
44,776,652
   
$
31,311,942
 

Note 14 - COMMITMENTS AND CONTINGENCIES

Operating lease commitments

The Company recognizes lease expense on a straight line basis over the term of the lease in accordance to SFAS. 13, “Accounting for leases.” The Company has entered into various tenancy agreements for the lease of store premises. The Company’s leases do not contain any escalating lease payments or contingent rental payments terms.

See report of independent registered public accounting firm.

 
- 22 -

 

Jiuzhou Pharmacy leases a retail space and the corporate office space from Lei Liu, a director of the Company under long-term operating lease agreements beginning August 2008 to August 2010 and from January 2008 to March 2012, respectively. The annual rent for the retail space and the corporate office are $170,123 and $134,330 for the years ended March 31, 2009 and 2008, respectively. For the years ended March 31, 2009 and 2008, rent paid to Mr. Liu amounted to $171,360 and $134,330, respectively.

The Company’s commitments for minimum rental payments under its lease for the next five years and thereafter are as follows:

Years ending March 31,
 
Amount
 
2010
  $ 1,057,975  
2011
    897,791  
2012
    616,612  
2013
    372,540  
2014
    243,676  
Thereafter
    34,269  

Rental expense for the years ended March 31, 2009 and 2008 amounted to $963,879 and $474,724, respectively.
 
Logistics Services Commitments

On January 1, 2009 the Company entered into a one year agreement for logistics services (“Logistics Agreement”) with Zhejiang Yingte Logistics Co., Ltd. (“Yingte”) to provide logistics and other related services. Pursuant to the Logistics Agreement, Yingte accepts goods from the Company’s suppliers, stores 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 2,900,000 RMB annually (1% of 290 million RMB: the total minimum amount of goods to be delivered under the Logistics Agreement).
 
As of March 31, 2009 and 2008, the Company did not have any contingent liabilities.

Legal Proceedings
  
The Company is not aware of any legal proceedings in which any director, officer, or any owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any affiliate of any such director, officer, or security holder, is a party adverse to Company or has a material interest adverse to the Company.

Note 15 – SUBSEQUENT EVENT

On June 8, 2009, the three Owners of Jiuzhou Pharmacy acquired 100% equity interests of Kuaileren [Pharmacy Co., Ltd.] (“Kuaileren”) from its owner.  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).

On July 30, 2009, the Company entered into an agreement with eight parties, including the Company’s Chief Financial Officer (“CFO”) and its legal counsel, to transfer the Owners’ equity interests. Subsequent to these agreements, the eight parties hold 23.68% of the total outstanding stock of the Company. The CFO and the legal counsel acquired shares of the Company that collectively represent 2.22%. The Company is presently evaluating the issuances to the CFO and the legal counsel for treatment as non-cash stock compensation charges. The Company anticipates that these charges will be recognized in its financial statements for the three months ending September 30, 2009.

See report of independent registered public accounting firm.

 
- 23 -

 

On September 17, 2009, the Company and its shareholders entered into a Share Exchange Agreement with Kerrisdale Mining Corporation (“Kerrisdale”). Pursuant to the terms of the Share Exchange Agreement, Kerrisdale agreed to acquire all of the issued and outstanding capital stock of in exchange for 15,800,000 shares of Kerrisdale’s common stock. The transactions contemplated under the Share Exchange Agreement closed on September 17, 2009.

See report of independent registered public accounting firm.
 
- 24 -


RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2009 AND MARCH 31, 2009

   
June 30,
   
March 31,
 
   
2009
   
2009
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS
           
Cash
  $ 1,272,148     $ 996,302  
Accounts receivable, trade
    1,140,245       1,265,110  
Inventories
    2,695,717       2,793,101  
Other receivables
    49,639       67,079  
Other receivables - related parties
    2,432       2,432  
Advances to suppliers
    6,036,893       5,485,113  
Advances to suppliers - related parties
    1,890,410       1,797,104  
Other current assets
    807,782       564,379  
Total current assets
    13,895,266       12,970,620  
                 
EQUIPMENT, net
    1,037,422       979,432  
                 
OTHER ASSETS:
               
Long term deposit
    2,311,439       2,015,149  
Total other assets
    2,311,439       2,015,149  
                 
Total assets
  $ 17,244,127     $ 15,965,201  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
                 
CURRENT LIABILITIES
               
Short term loans
  $ 1,465,000     $ 1,465,000  
Accounts payable, trade
    5,736,361       5,939,237  
Other payables
    384,618       404,731  
Other payables - related parties
    326,715       326,715  
Taxes payable
    686,190       811,316  
Accrued liabilities
    389,955       360,655  
Total liabilities
    8,988,839       9,307,654  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
SHAREHOLDERS' EQUITY
               
Paid-in capital
    677,600       677,600  
Statutory reserves
    1,467,842       1,309,109  
Retained earnings (deficit)
    6,473,703       5,033,275  
Accumulated other comprehensive loss
    (363,857 )     (362,437 )
Total shareholders' equity
    8,255,288       6,657,547  
                 
Total liabilities and shareholders' equity
  $ 17,244,127     $ 15,965,201  

The accompanying notes are an integral part of this consolidated statement.

 
- 1 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THREE MONTHS ENDED JUNE 30, 2009 AND 2008
(Unaudited)

   
2009
   
2008
 
REVENUES
  $ 11,681,464     $ 11,150,389  
                 
COST OF GOODS SOLD
    8,657,568       8,303,439  
                 
GROSS PROFIT
    3,023,896       2,846,950  
                 
SELLING EXPENSES
    477,777       359,161  
GENERAL & ADMINISTRATIVE EXPENSES
    365,210       212,454  
TOTAL OPERATING EXPENSES
    842,987       571,615  
                 
INCOME  FROM OPERATIONS
    2,180,909       2,275,335  
                 
OTHER INCOME (EXPENSE), NET
    6,635       (9,591 )
                 
INCOME BEFORE INCOME TAXES
    2,187,544       2,265,744  
                 
PROVISION FOR INCOME TAXES
    588,383       524,925  
                 
NET INCOME
    1,599,161       1,740,819  
                 
OTHER COMPREHENSIVE INCOME/(LOSS)
               
Foreign currency translation adjustments
    (1,420 )     20,186  
                 
COMPREHENSIVE INCOME
  $ 1,597,741     $ 1,761,005  

The accompanying notes are an integral part of this consolidated statement.

 
- 2 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                     
Accumulated
       
         
Retained Earnings
   
other
       
   
Paid-in
   
Statutory
         
comprehensive
       
   
capital
   
reserves
   
Unrestricted
   
income/(loss)
   
Totals
 
BALANCE, March 31, 2008
  $ 677,600     $ 606,665     $ (1,077,797 )   $ (390,125 )   $ (183,657 )
                                         
Net income
                    1,740,819               1,740,819  
Adjustment of statutory reserve
            174,208       (174,208 )             -  
Foreign currency translation adjustments
                            20,186       20,186  
                                         
BALANCE, June 30, 2008 (unaudited)
  $ 677,600     $ 780,873     $ 488,814     $ (369,939 )   $ 1,577,348  
                                         
Net income
                    5,072,697               5,072,697  
Adjustment of statutory reserve
            528,236       (528,236 )             -  
Foreign currency translation adjustments
                            7,502       7,502  
                                         
BALANCE, March 31, 2009
  $ 677,600     $ 1,309,109     $ 5,033,275     $ (362,437 )   $ 6,657,547  
                                         
Net income
                    1,599,161               1,599,161  
Adjustment of statutory reserve
            158,733       (158,733 )             -  
Foreign currency translation adjustments
                            (1,420 )     (1,420 )
                                         
BALANCE, June 30, 2009 (unaudited)
  $ 677,600     $ 1,467,842     $ 6,473,703     $ (363,857 )   $ 8,255,288  
 
The accompanying notes are an integral part of this consolidated statement.

 
- 3 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008
(Unaudited)

   
2009
   
2008
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,599,161     $ 1,740,819  
Adjustments to reconcile net income to cash  provided by (used in) operating activities:
               
Depreciation and amortization
    121,033       74,501  
Change in operating assets
               
Accounts receivable, trade
    124,975       (37,148 )
Inventories
    97,471       545,714  
Other receivable
    17,455       (72,352 )
Other receivable - related party
    -       163,682  
Advances to suppliers
    (552,270 )     (1,073,596 )
Advances to suppliers - related party
    (93,389 )     (1,032,462 )
Other current assets
    (244,132 )     168,817  
Long term deposit
    (296,553 )     -  
Change in operating liabilities
               
Accounts payable, trade
    (203,057 )     (733,954 )
Other payables and accrued liabilities
    9,195       39,903  
Other payables-related parties
    -       (7,194 )
Customer deposits
    -       (86,346 )
Taxes payable
    (125,237 )     217,057  
Net cash provided by (used in) operating activities
    454,652       (92,559 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of equipment
    (7,668 )     (13,911 )
Additions to leasehold improvements
    (170,893 )     (65,107 )
Net cash used in investing activities
    (178,561 )     (79,018 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net cash provided by (used in) financing activities
    -       -  
                 
EFFECT OF EXCHANGE RATE ON CASH
    (245 )     16,616  
                 
INCREASE IN CASH
    275,846       (154,961 )
                 
CASH, beginning of period
    996,302       878,948  
                 
CASH, end of period
  $ 1,272,148     $ 723,987  

The accompanying notes are an integral part of this consolidated statement.

 
- 4 -

 

RENOVATION INVESTMENT (HONG KONG) CO., LTD.
AND SUBSIDARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
(Unaudited)

Note 1- DESCRIPTION OF BUSINESS AND ORGANIZATION

Renovation Investment (Hong Kong) Co., Ltd. (“Renovation HK” or the “Company”), was incorporated on September 2, 2008, under the laws of Hong Kong Special Administrative Region (“Hong Kong”). The Company has no substantive operations of its own except for its holding of Zhejiang Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”), its wholly owned subsidiary. Through Jiuxin Management, the Company controls three companies that operate a chain of pharmacies in the People’s Republic of China (“PRC” or “China”), namely, Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service”, and collectively with Jiuzhou Pharmacy and Jiuzhou Clinic as “HJ Group”).

Jiuxin Management was established in the People’s Republic of China (“PRC” or “China”) by Renovation HK on October 14, 2008, as a wholly foreign owned enterprise (“WFOE”), with registered capital of $4,500,000. Renovation HK is required by the PRC company law to pay 15% of the registered capital by December 31, 2009, and the balance within two years. Jiuxin Management has no substantive operations of its own except for entering into certain exclusive agreements with HJ Group and performing its obligations thereunder.

Jiuzhou Pharmacy is a PRC limited liability company established in Zhejiang Province on September 9, 2003 with registered capital of $605,000 (RMB 5,000,000). It is engaged in the retail sales of prescription and non prescription drugs, traditional Chinese medicine and general merchandise in the PRC.

Jiuzhou Clinic is a PRC general partnership established in Zhejiang Province on October 10, 2003. It is engaged in providing both traditional and western medical services in the PRC.

Jiuzhou Service is a PRC limited liability company established in Zhejiang Province on November 2, 2005 with registered capital of $60,500 (RMB 500,000). It is engaged in providing medical-related management consulting services in the PRC.

All three HJ Group companies are under the common control of the same three owners (the “Owners”). Each HJ Group company holds the licenses and approvals necessary to operate its business in China.

The paid-in capital of all three HJ Group companies was funded by 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 the following exclusive agreements with HJ Group and the Owners (collectively the “Contractual Arrangements”):

 
- 5 -

 


(1) Consulting Services Agreement , through which Jiuxin Management has the right to advise, consult, manage and operate all three HJ Group companies, and collect and own all of their net profits;

(2) Operating Agreement , through which Jiuxin Management has the right to recommend director candidates and appoint the senior executives of HJ Group, approve any transactions that may materially affect the assets, liabilities, rights or operations of HJ Group, and guarantee the contractual performance by HJ Group of any agreements with third parties, in exchange for a pledge by each HJ Group company of its accounts receivable and assets;

(3) Proxy Agreement , under which the Owners have vested their collective voting control over the three HJ Group companies to Jiuxin Management and will only transfer their respective equity interests in HJ Group to Jiuxin Management or its designee(s);

(4) Option Agreement , under which the Owners have granted Jiuxin Management the irrevocable right and option to acquire all of their equity interests in HJ Group; and

(5) Equity Pledge Agreement , under which the Owners have pledged all of their rights, titles and interests in HJ Group to Jiuxin Management to guarantee the performance of their obligations under the Consulting Services Agreement.

The Contractual Arrangements shall remain in full force and effect for the maximum period of time permitted by PRC law, provided that these agreements (other than the Equity Pledge Agreement) shall automatically terminate on May 1, 2010 (the “Automatic Termination Date”) if the Company that acquired the Company in a reverse merger transaction (see Note 15 – Subsequent Events) has not completed a financing of at least $25 million, and the common stock of such company has not listed on the Nasdaq Capital Market by the Automatic Termination Date.

As a result of the Contractual Arrangements, which obligates the Company to absorb all of the risk of loss from HJ Group’s activities and enables the Company to receive all of HJ Group’s expected residual returns, the Company accounts for each HJ Group company as a variable interest entity (“VIE”) under FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. Accordingly, the financial statements of HJ Group are consolidated into the financial statements of the Company.

 
- 6 -

 

  Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The reporting entities

The Company’s consolidated financial statements of reflect the activities of the Company and the following subsidiary and VIEs:

Subsidiaries
 
Incorporated in
 
Percentage of
Ownership
 
           
Jiuxin Management
 
PRC
    100.00 %
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 subsidiary and its VIEs. All significant inter-company transactions and balances between the Company, its subsidiary and VIEs are eliminated upon consolidation.

Consolidation of variable interest entities

In accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities ("FIN 46R"), variable interest entities (VIEs) are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

The Company has concluded that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are each a VIE and that the Company’s wholly owned subsidiary, Jiuxin Management, absorb a majority of the risk of loss from the activities of these three companies, and enable the Company to receive a majority of their respective expected residual returns. Accordingly, the Company accounts for each of these three companies as a VIE. As the companies are under common control, the consolidated financial statements have been prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial statements.

Use of estimates

The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. For example, the Company estimates its allowance for doubtful accounts and useful lives of plant and equipment. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

 
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Fair values of financial instruments

On January 1, 2008, the Company adopted SFAS No. 157 which defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosures requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables, payables and short term loans qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels are defined as follow:

 
·
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets

 
·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments

 
·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value

The Company did not identify any other assets and liabilities that are required to be presented on the balance sheet at fair value in accordance with SFAS No. 157.

Revenue recognition

Revenue from sales of prescription medicine at the drugstores is recognized when the prescription is filled and the customer picks up and pays for the prescription.

Revenue from sales of other merchandise at the drugstores is recognized at the point of sale, which is when the customer pays for and receives the merchandise.

Revenue from medical services is recognized after the service has been rendered to the customer.

Revenue from sales of merchandise to non-retail customers is recognized when the following conditions are met: 1) persuasive evidence of an arrangement exists (sales agreements and customer purchase orders are used to determine the existence of an arrangement); 2) delivery of goods has occurred and risks and benefits of ownership have been transferred, which is when the goods are received by the customer at its designated location in accordance with the sales terms; 3) the sales price is fixed or determinable; and 4) collectability is probable. Historically, sales returns have been immaterial.

The Company’s revenue is net of value added tax (“VAT”) collected on behalf of tax authorities in respect of the sale of merchandise. VAT collected from customers, net of VAT paid for purchases, is recorded as a liability in the balance sheet until it is paid to the tax authorities.
 
Cash

Cash consists of cash on hand, cash in the drugstores and cash at banks. None of the Company’s cash balance is restricted as to withdrawal.

 
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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, 2009 and March 31, 2009, management concluded all amounts are collectible and allowance for doubtful accounts deemed not necessary.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method. Market is the lower of replacement cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location to ensure that the amounts reflected in the consolidated financial statements at each reporting period are properly stated and valued. The Company records write-downs to inventories for shrinkage losses and damaged merchandise that are identified during the inventory counts.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation or amortization. Depreciation is calculated on the straight-line method over the following estimated useful lives of the assets, taking into consideration the assets’ estimated residual value. Leasehold improvements are amortized over the shorter of 5 years or the lease term of the underlying assets. Following are the estimated useful lives of the Company’s other property and equipment:

 
Estimated Useful Life
Leasehold improvements
5   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, 2009 and March 31, 2009, there was no impairment.

 
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Income taxes

The Company records income tax pursuant to SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due plus deferred taxes.

The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), as of January 1, 2007. 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no affect on the Company’s financial statements. There are no deferred tax amounts at June 30, 2009.
 
The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when related items are credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Value Added Tax (VAT)

Sales revenue represents the invoiced value of goods, net of a value-added tax (VAT). All of the Company’s products that are sold in the PRC are subject to a Chinese value-added tax on the gross sales price. The value-added tax rate varies from 9% to 17%, depending on the type of products sold. This VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing 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.

 
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Advertising and promotion costs

Advertising and promotion costs are expensed as incurred. Advertising and promotion costs amounted to $97,432 and $21,208 for the three months ended June 30, 2009 and 2008, respectively. Advertising costs consist primarily of print and television advertisements.

Pre-opening costs

Expenditures related to the opening of new drugstores, other than expenditures for property and equipment, are expensed as incurred.

Vendor allowances

The Company accounts for vendor allowances according to Emerging Issues Task Force (“EITF”) Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received f rom a Vendor and EITF Issue No. 03-10, Application of EITF Issue No. 02-16 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.

For the three months ended June 30, 2009 and 2008, the Company recognized vendor allowances of $46,802 and $56,100 in cost of goods sold, respectively.

Distribution costs

Distribution costs represent the costs of transporting the merchandise from warehouses to stores. These costs are expensed as incurred and are included in sales, marketing and other operating expenses.

Operating leases

The Company leases premises for retail drugstores, warehouses and offices under non-cancelable operating leases. Operating lease payments are expensed on a straight-line basis over the term of lease. A majority of the Company’s retail drugstore leases have a 3 to 5-year term with a renewal option upon the expiry of the lease. The Company has historically been able to renew a majority of its drugstores leases. Under the terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the lease.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Historically, the Company has experienced no product liability or malpractice claims.

 
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Foreign currency translation

The Company uses the United States dollar (“U.S. dollars”) for financial reporting purposes. The Company’s subsidiary and VIEs maintain their books and records in their functional currency, being the primary currency of the economic environment in which their operations are conducted.
 
In general, for consolidation purposes, the Company translates the subsidiary’s 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 subsidiary’s and VIEs’ financial statements are recorded as accumulated other comprehensive income.

SFAS No. 130, “Reporting Comprehensive Income”, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s accumulated other comprehensive income only consist of changes in foreign currency exchange rates. Accumulated other comprehensive loss in the statement of shareholders’ equity amounted to $363,857 and $362,437 as of June 30, 2009 and March 31, 2009, respectively. The balance sheet amounts with the exception of equity at June 30, 2009 and March 31, 2009 were translated at 1 RMB to $ 0.1465 USD and at 1 RMB to $ 0.1465 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the three months ended June 30, 2009 and 2008 were at 1 RMB to $ 0.14663 USD and at 1 RMB to $ 0.14391 USD, respectively.

Concentrations and credit risk

The Company’s operations are all carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash. Balances at financial institutions or state owned banks within the PRC are not covered by insurance. As of June 30, 2009 and March 31, 2009, the Company had deposits totaling $1,248,992 and $995,448 that are not covered by insurance, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts.

For the three months ended June 30, 2009 and 2008, all of the Company’s sales and purchases arose in the PRC. No major customers accounted for more than 10% of the Company’s total revenues for the three months ended June 30, 2009 and 2008, respectively.

 
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For the three months ended June 30, 2009, two vendors accounted for 30% of the Company’s total purchases and 1% of the total accounts payable. For the three months ended June 30, 2008, no major vendor accounted for more than 10% of the Company’s total purchases.

Recently issued accounting pronouncements

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. FSP FAS 157-4 shall be applied prospectively with retrospective application not permitted. FSP FAS 157-4 shall be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 157-4 must also early adopt FSP FAS 115-2 and 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”. Additionally, if an entity elects to early adopt either FSP FAS 107-1 and 28-1, “Interim Disclosures about Fair Value of Financial Instruments” or FSP FAS 115-2 and 124-2, it must also elect to early adopt this FSP. The Company has determined that this new FSP did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and 28-1. This FSP amends SFAS 107, to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments. This FSP shall be effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4 and 115-2 and 124-2. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. The Company is currently evaluating the disclosure requirements of this new FSP.

In May 2009, the FASB issued SFAS 165, “Subsequent Events,” which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 also requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. SFAS 165 is effective for interim and annual periods ending after June 15, 2009, and accordingly, the Company adopted this Standard during the first quarter of 2009. SFAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are issued. We have evaluated subsequent events through the time of filing these financial statements with the SEC.

 
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In June 2009, the FASB issued SFAS 166, “Accounting for Transfers of Financial Assets – an amendment of FASB No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 166 amends the criteria for a transfer of a financial asset to be accounted for as a sale, redefines a participating interest for transfers of portions of financial assets, eliminates the qualifying special-purpose entity concept and provides for new disclosures. SFAS 166 is effective for the Company beginning in 2010.

In June 2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation No. 46(R),” which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009, and the Company is currently assessing the impact of adopting SFAS 167.

In June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles a Replacement of FASB Statement No. 162” (“SFAS 168”). This Standard establishes the FASB Accounting Standards Codification TM (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature.

Note 3 – SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid for the three months ended June 30, 2009 and 2008, amounted to $18,211 and $10,577, respectively.

Income taxes paid for the three months ended June 30, 2009 and 2008 amounted to $472,507 and $574,564, respectively.

 
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Note 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

   
June 30,
2009
   
March 31,
2009
 
   
 (Unaudited)
       
Leasehold improvements
  $ 2,228,634     $ 2,057,892  
Furniture and equipment
    312,370       304,709  
Motor Vehicles
    162,443       162,443  
Total
    2,703,447       2,525,044  
Less: Accumulated depreciation and amortization
    1,666,025       1,545,612  
Property and equipment, net
  $ 1,037,422     $ 979,432  

Total depreciation expense for property and equipment for the three months ended June 30, 2009 and 2008 was $121,033 and $74,501, respectively. No depreciation expense was included in cost of goods sold for the years presented because the Company’s business does not involve manufacturing of merchandise and the amount of depreciation of property and equipment utilized in acquiring, warehousing and transporting the merchandise to locations ready for sale is not material.

Note 5 – ADVANCES TO SUPPLIERS

Advances to suppliers and advances to suppliers- related parties are monies 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 their purchase on a timely basis. As of June 30, 2009 and March 31, 2009, the advances to suppliers amounted to $7,927,303 and $7,282,217, respectively.

Note 6 – LONG TERM RENTAL DEPOSITS

Long term rental deposits are monies 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, 2009 and March 31, 2009, the long term rental deposit amounted to $2,311,439 and $2,015,149, respectively.

Note 7 - RETAINED EARNINGS

Statutory Reserves

Statutory reserves represent restricted retained earnings. Based on the legal formation of the entities, 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 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, 2009 and 2008, the Company made total appropriations to these statutory reserves of $158,733 and $174,208, respectively.

 
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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.

Shareholder Distribution

One of the Company’s VIEs, Jiuzhou Clinic, distributed $220,122 and $108,306 to the Owners in February 2008 and October 2006, respectively.

Note 8 - TAXES
 
Income Tax

The Company is registered in Hong Kong and conducts all of its business through its subsidiary, Jiuxin Management, and its PRC VIEs, Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service.  The subsidiary and VIEs are subject to PRC tax laws.

Jiuzhou Pharmacy was tax exempt from 2005 to 2006 calendar years due to tax incentives in hiring laid-off state employees. From January to December 2007,  Jiuzhou Pharmacy was subject to the effective 2007’s income tax rate of 33% (30% state income taxes plus 3% local income taxes) on taxable income which are reported in the statutory financial statements after appropriate tax adjustments. Beginning January 2008, the new Chinese Enterprise Income Tax (“EIT”) law replaced the former income tax laws. The new standard EIT rate of 25% replaced the 33% rate previously applicable to enterprises. Therefore, from January 2008 to March 2008, Jiuzhou Pharmacy was subject to an effective tax rate of 25%.

Jiuzhou Clinic was subject to the regular income tax rate of 33% in calendar year 2007, and 25% in calendar year 2008 and 2009.

The following table reconciles the US statutory rates to the Company's effective tax rate for the three months ended June 30, 2009 and 2008: 
 
   
2009
   
2008
 
U.S. Statutory rates
    34 %     34 %
Foreign income not recognized in USA
    (34 )     (34 )
China income taxes
    25       25  
Other (a)
    2       (3 )
    Effective tax rate
    27 %     22 %

(a)
The 2% and 3% represents the expenses (income) incurred by the Company that are not subjected to PRC income tax.

 
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Value Added Tax

Sales of birth control related products are not subject to VAT, while Chinese herbs are subject to 13% VAT and all other sales are subject to 17% VAT. VAT on sales and on purchases amounted to $1,894,552 and $1,461,063 for the three months ended June 30, 2009, respectively, and $1,845,951 and $1,386,212 for the three months ended June 30, 2008, respectively.

Sales and purchases are recorded net of VAT collected and paid as the Company acts as an agent for the government. VAT taxes are not impacted by the income tax holiday.

Taxes payable at June 30, 2009 and March 31, 2009 consisted of the following:

   
June 30,
2009
   
March 31,
2009
 
   
 (Unaudited)
       
VAT
  $ 91,027     $ 196,784  
Income tax
    582,797       588,681  
Others
    12,366       25,851  
Total taxes payable
  $ 686,190     $ 811,316  

Note 9 –OTHER PAYABLES

Other payables consist of the following:

   
June 30, 2009
   
March 31, 2009
 
   
(Unaudited)
       
Cash advance from third party (a)
  $ 314,975     $ 314,975  
Other
    69,643       89,756  
Total
  $ 384,618     $ 404,731  
                 
Notes:

(a)
Represents short term cash advance from a non related third party Hangzhou Today Real Estate. The advance is non-interest bearing and due upon request.

Note 10 – SHORT TERM LOANS

Short term loans represent amounts due to various banks and are due on demand or normally within one year. These loans generally can be renewed with the banks. Short term bank loans at June 30, 2009 and March 31, 2009, consisted of the following:

   
June 30, 2009
   
March 31, 2009
 
   
(Unaudited)
 
     
Hangzhou Bank, due August 13, 2009 annual interest at 4.86%, secured by the  personal properties of the Company’s shareholders
  $ 586,000     $ 586,000  
                 
Hangzhou Bank, due September 16, 2009 annual interest at 486%, secured by the  personal properties of the Company’s shareholders
  $ 879,000     $ 879,000  
                 
Total
  $ 1,465,000     $ 1,465,000  
 
 
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Interest expense for the three months ended June 30, 2009 and 2008 amounted to $18,211 and $10,577, 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 required by the local government and the employees' current compensation. The Company contributed $15,429 and $15,460 in employment benefits and pension in the three months ended June 30, 2009 and 2008, respectively.

Note 12 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
 
Amounts receivable from and payable to related parties are summarized as follows:

   
June 30, 2009
   
March 31, 2009
 
   
(Unaudited)
   
 
 
Amounts due from directors (1):
  $ 2,432     $ 2,432  
Amount due to director (2):
  $ 326,715     $ 326,715  
Advances to supplier (3):
  $ 1,890,410     $ 1,797,104  

(1)
Represents interest free loans to two directors of the Company, Li Qi and Chongan Jin. The loans are due upon demand.
 
(2)
Represents leasehold improvement expenses paid by a director of the Company, Lei Liu, on behalf of the Company. The amount is interest free and due upon demand.
   
(3)
Represents prepayment for inventory purchase made to a supplier, which was formerly owned by the Company’s directors. The Company will collect inventory from the supplier.

The Company also leases premises from a director. See Note 14 below for details.

Note 13 - 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, etc. The class of customer, selling practice and distribution process are the same for all products. The Company’s chief operating decision-makers (i.e. managing director 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 SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, the Company considers itself to be operating within one reportable segment.

 
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The Company does not have long-lived assets located in foreign countries. In accordance with the enterprise-wide disclosure requirements of SFAS 131, the Company's net revenue from external customers by main product is as follows:
 
   
Three Months Ended June 30,
 
   
2009
 
2008
 
   
(Unaudited)
 
(Unaudited)
 
           
Prescription Drugs
 
$
4,498,498
 
$
4,210,360
 
Over The Counter (OTC) Drugs
   
2,560,209
   
1,479,861
 
Nutritional Supplements
   
525,937
   
1,105,486
 
Traditional Chinese Medicine Products
   
1,230,105
   
560,750
 
Sundry Products
   
2,592,740
   
3,460,764
 
Medical Devices
   
273,975
   
333,168
 
Total
 
$
11,681,464
 
$
11,150,389
 

Note 14 - COMMITMENTS AND CONTINGENCIES

Operating lease commitments

The Company recognizes lease expense on a straight line basis over the term of the lease in accordance to SFAS. 13, “Accounting for leases.” The Company has entered into various tenancy agreements for the lease of store premises. The Company’s leases do not contain any escalating lease payments or contingent rental payments terms.

Jiuzhou Pharmacy leases a retail space and the corporate office space from Lei Liu, a director of the Company under long-term operating lease agreements beginning August 2008 to August 2010 and from January 2008 to March 2012, respectively. The rent for the retail space and the corporate office are $42,531 and $33,583 for three months ended June 30, 2009 and 2008, respectively. For the three months ended June 30, 2009 and 2008, no rent was paid to Mr. Liu.

 The Company’s commitments for minimum rental payments under its lease for the next five years and thereafter are as follows:

Period ending June 30,
 
Amount
 
2010
  $ 793,481  
2011
    897,791  
2012
    616,612  
2013
    372,540  
2014
    243,676  
Thereafter
    34,269  

Rental expense for the three months ended June 30, 2009 and 2008 amounted to $257,454 and $226,202, respectively.
 
Logistics Services Commitments

On January 1, 2009 the Company entered into a one year agreement for logistics services (“Logistics Agreement”) with Zhejiang Yingte Logistics Co., Ltd. (“Yingte”) to provide logistics and other related services. Pursuant to the Logistics Agreement, Yingte accepts goods from the Company’s suppliers, stores 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 2,900,000 RMB annually (1% of 290 million RMB: the total minimum amount of goods to be delivered under the Logistics Agreement).
 
As of June 30, 2009, the Company did not have any contingent liabilities.

 
- 19 -

 

Legal Proceedings
  
The Company is not aware of any legal proceedings in which any director, officer, owner of record or beneficial owner of more than five percent of any class of voting securities of the Company, or any affiliate of such director, officer, or security holder, is a party adverse to the Company or has a material interest adverse to the Company.

Note 15 – SUBSEQUENT EVENT

The Company has performed an evaluation of subsequent events through September 22, 2009, which is the date of the issuance of the financial statements.
 
On June 8, 2009, the three Owners of Jiuzhou Pharmacy acquired 100% equity interests of Kuaileren [Pharmacy Co., Ltd.] (“Kuaileren”) from its owner.  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).

On July 30, 2009, the Company entered into an agreement with eight parties, including the Company’s Chief Financial Officer (“CFO”) and its legal counsel, to transfer the Owners’ equity interests. Subsequent to these agreements, the eight parties hold 23.68% of the total outstanding stock of the Company. The CFO and the legal counsel acquired shares of the Company that collectively represent 2.22%. The Company is presently evaluating the issuances to the CFO and the legal counsel for treatment as non-cash stock compensation charges. The Company anticipates that these charges will be recognized in its financial statements for the three months ending September 30, 2009.

On September 17, 2009, the Company and its shareholders entered into a Share Exchange Agreement with Kerrisdale Mining Corporation (“Kerrisdale”). Pursuant to the terms of the Share Exchange Agreement, Kerrisdale agreed to acquire all of the issued and outstanding capital stock of in exchange for 15,800,000 shares of Kerrisdale’s common stock. The transactions contemplated under the Share Exchange Agreement closed on September 17, 2009.

 
- 20 -

 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

 
 

AGREEMENT FOR LOGISTICS SERVICES

This Agreement for Logistics Services (this “ Agreement ”) is dated January 1, 2009, and is entered into by and between Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“ Party A ”), and Zhejiang Yingte Logistics Co., Ltd. (“ Party B ”). Party A and Party B are referred to collectively in this Agreement as the “ Parties .”

RECITALS

WHEREAS , the Parties desire that Party B provide logistics services and other relevant services to Party A;
 
WHEREAS , the Parties are entering into this Agreement to set forth the terms and conditions under which Party B will provide logistics and other related services to Party A.
 
NOW THEREFORE, the Parties agree as follows:
 
 
1.
RETENTION AND SCOPE OF SERVICES

Party A hereby agrees to retain the services of Party B, and Party B accepts such appointment, to provide to Party A logistics and other related services (the “Services”) pursuant to the terms and conditions of this Agreement.

 
2.
TERM OF AGREEMENT

The terms and conditions of this Agreement shall take effect for a period of one year from January 1, 2009 to December 31, 2009.

 
3.
DUTIES OF THE PARTIES

3.1
Duties of Party A

 
3.1.1
Party A guarantees that the pharmaceutical goods and the sources of supply related to the Services provide by Party B are legal.

 
 

 

 
3.1.2
Party A guarantees that the drug stores related to the Services provided by Party B meet the requirements of laws and regulations of pharmaceutical administration.

 
3.1.3
Party A shall provide necessary incorporation materials and operation certificates to Party B before the execution of this Agreement. The Parties shall later enter into an Agreement of Performance Metrics (“Performance Metrics”).

 
3.1.4
Party A shall provide detailed information of delivered goods to Party B before delivery, including name of the supplier, delivery address and contact information. Party A shall provide a letter of permit for Party B’s consignee to take delivery from the supplier and keep a copy for its own record. The letter of permit must indicate the name and ID number of the consignee. Party A shall provide Party B via Internet a copy of the order that contains the name, specification, quantity, location of production and price of the delivered goods.

 
3.1.5
Party A shall notify in advance or make notes of on invoice or delivery order any special requirements of inspection, storage and transportation for freezing or fragile goods.

 
3.1.6
Pursuant to the Performance Metrics, Party A shall timely dispose of unqualified goods and goods that will expire shortly.

3.2
Duties of Party B

 
3.2.1
Party B shall perform the Services in accordance with the Good Supply Practice (“GSP”). Party B shall start inspection and delivery upon receipt of Party A’s notice. Party B shall guarantee the goods be delivered safely and maintained in good condition.

 
3.2.2
Party B shall make “door to door” deliveries to drug stores designated by Party A, subject to the following limits:

 
 

 

 
(a)
Two deliveries must be made to any drug store located within the city of Hangzhou each day, except Sunday.
     
 
(b)
One delivery must be made to any drug store located in counties of Fu Yang, Chun An, Tong Lu, Jian De, Lin An and other regions each day, except Sunday.
     
 
(c)
Party B shall be responsible for no more than two expedite deliveries each week to any drug store located within the city of Hangzhou and can charge 50 RMB per delivery for extra need.
     
 
(d)
Party B shall perform the Services to any drug store located within the city of Hangzhou on holidays other than the Chinese New Year. Deliveries to any drug store located in counties and other regions on holidays shall be advised upon further negotiation of the Parties.
     
 
(e)
Party B shall be ready to take delivery at any time.

 
3.2.3
Party B shall conduct research and inquiry for pharmaceutical goods within the scope of the Services and inform Party A of the result of such research and inquiry. Party B shall collect the original signed documents of each delivery and return to the Financial Department of Party A on a monthly basis.

 
3.2.4
Party B shall accept rejected goods only upon being represented a Return Note.  Party B shall store the returned goods in conformity with the requirements of GSP.

 
3.2.5
If a delivery contains more than one type of goods, Party A shall inspect and accept each type of goods separately. Party B shall be responsible for any damaged goods. Each drug store shall appoint an inspector to inspect and accept the goods delivered by Party B and submit to Party B the names and signatures of the inspectors.

 
3.2.6
Drug stores shall report to the head office of Party A any request of expedite delivery. The head office shall notify Party B and make arrangement to take delivery at the location of Party B.

 
3.2.7
Party B shall inspect, store and maintain the goods returned by the drug stores pursuant to the Performance Metrics and the requirements of GSP.

 
 

 

 
3.2.8
Party B shall only be responsible for damages happened during the process of taking delivery, inspection and transportation.

3.3
Charges to be Determined
 
After the fuel tax becomes effective, the fuel surcharge shall be determined upon further negotiation of the Parties.

 
4.
RATES AND PAYMENTS

4.1
Rates
 
In consideration of the Services to be performed by Party B, Party A shall pay Party B the fees that equal to 1% of the purchase price of the delivered goods (this amount includes fees for storage, equipment, facilities, operation and transportation). Party A shall pay a minimum annual fee of 2.9 million RMB.  (1% of 290 million RMB).

4.2
Payments
 
Party A shall pay one fourth of the minimum annual payment (1/4 of 2.9 million RMB) for the first quarter starting on January 1, 2009. Starting from April, payment shall be made on a monthly basis according to actual services performed by Party B.

 
5.
LIABILITIES FOR BREACH OF AGREEMENT

5.1
Liabilities of Party A

 
5.1.1
Party B may stop performance if the goods to be delivered fail to meet the requirements of the laws and regulations.

 
5.1.2
Party A shall answer and give instructions to any notice made by Party B. Where Party A delays in answering or giving instruction, it shall be liable for any damage so caused.

 
 

 

5.2
Liabilities of Party B

 
5.2.1
Party B shall store the goods in conformity with the GSP. Party B shall be liable for damages if the goods are damaged or lost, or fail to pass the GSP inspection due to improper care of Party B. Where Party B accepts packaged goods, it shall not be liable for any loss or damaged cause to inner packaging. Party B shall be liable for any loss or damage found after inspection and storing. Where Party B has evidence that the original packaging is missing for a whole box, Party B shall not be liable for the loss of packaging.

 
5.2.2
The Parties shall enter into a Confidentiality Agreement to protect the confidentiality of product information provided by Party A or to which Party B obtains access by virtue of its performance under this Agreement. Party B shall not disclose any confidential information without Party A’s consent.

 
5.2.3
Party B shall apologize for any of its conduct in violation of the Code of Service of the company. If Party B has a dispute with Party A’s customer, it shall submit the dispute to the customer service. Party B shall be liable to any damage caused to Party A’s customer.

5.3
Other Liabilities

 
5.3.1
Database
 
Party B can use the Zhong Bao System in the prior period, but shall complete the system integration in the time period as required in the report of the Department of Drug Control.

 
5.3.2
Penalties
 
(1)
Party B is subject to a fine that equals double amount of error if the error is more than 0.5/1000 of the value of delivered goods in a month.
 
(2)
Party A shall raise any amount of error within half a day; otherwise the error shall be excused.
 
(3)
If Part A misstates the amount of error and Party B is able to prove Party A’s misstatement, Party A is subject to a fine that equals ten times of the misstated amount.

 
 

 

 
5.3.3
Circulating Boxes
 
Party B shall provide circulating boxes for delivery. Party A shall be liable for any damage caused to the circulating boxes and shall return these boxes in clean and good condition within two work days; otherwise Party B may reject and report to Party A’s head office. Any report of improper use or of circulating boxes is entitled to an award of 50 RMB and the manager of reported store is subject to a fine of 100 RMB. Party A is entitled to the cartons of the delivered goods. In case of any damage caused to the goods, the Parties shall resolve with the supplier. If the no resolution can be reached, Party B shall pay the damage based on the purchase price of the goods.

 
5.3.4
Personnel
 
Party B can use the personnel of Party A’s Distribution Center. Party A may send personnel to work at Party B’s location at the expense of Party A.

 
5.3.5
Confidentiality
 
The Parties shall enter into a Confidential Agreement to protect the confidentiality of product information such as price, quantity of purchased goods, suppliers, amount of distribution and quality.

 
5.3.6
Quality Control
 
Party B shall conduct quality control pursuant to the requirements of GSP. Party A may send personnel to assist Party B with quality control.
 
(1)
Party B shall comply with laws and regulations and perform in accordance with this Agreement and the Performance Metrics.
 
(2)
Party B shall, without condition, cooperate with Party A in dealing with all kinds of quality problems.
 
(3)
Party B shall follow the Performance Metrics and shall be liable for any damage caused by improper performance in all aspects of the Services, including accepting, maintaining, storing, administrating, distributing, rejecting goods and dealing with unqualified goods.
 
(4)
Party B shall report to Party A on a monthly basis any rejection of goods for the reason of quality problems. Party A shall provide timely instructions in dealing with unqualified goods within seven work days and shall be liable for any damage caused by delay of instruction.

 
 

 

 
(5)
Party B shall collect and keep all the original documents of quality control in accordance with requirements of GSP, including the records of delivery, storage, rejection, acceptance, maintenance, and distribution, factory inspection reports, certificates, registration of imported drugs and inspection reports, and records of returned and unqualified goods.

 
5.3.7
Management of Goods
 
(1)
Party B shall be liable for damages caused by its failure to report expiring and unsalable goods.
 
(2)
The Parties shall enter into agreement on liabilities with respect of on-time delivery, undistributed goods and inventory control.
 
(3)
Party B shall be liable for loss and damage of goods in storage unless Party B can provide conclusive evidence that the original package has never been removed and such loss and damage occurred before storage.
 
(4)
Party B shall assist Party A with distribution of goods among stores.

 
5.3.8
Miscellaneous
 
(1)
Party B shall be response for storing, maintaining and distributing Party A’s packaging materials, large size office supplies and product samples.
 
(2)
Party B shall distribute samples based on Party A’s confirmation note.
 
(3)
Party A shall confirm Party B’s entry and billing sheets with suppliers when making the payment to suppliers.
 
(4)
Party B may use Party A’s warehouse facilities with the consent of Party A.
 
(5)
Party A may call back its personnel at the termination of this Agreement.

6.
      Upon the effect of this Agreement, Party B shall become the logistic service provider of Party A and the Parties shall establish long term cooperation.

7.
   Any dispute or unsettled matter between the Parties shall be resolved through negotiation in good faith. If no resolution can be reached, the Parties shall submit the dispute to binding arbitration.

 
 

 

8.
    This Agreement is executed into four (4) duplicate originals. Each Party has received two (2) duplicate originals, and all originals shall be equally valid.

[SIGNATURE PAGE FOLLOWS]

 
 

 

IN WITNESS WHEREOF this Agreement is duly executed by each Party or its legal representatives.

PARTY A:
 
Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd.
     
   
Legal/Authorized Representative: /s/
     
   
Date: January 1, 2009
     
PARTY B:
 
Zhejiang Yingte Logistics Co., Ltd.
     
   
Legal/Authorized Representative: /s/
     
 
  
Date: January 1, 2009