Attached files
file | filename |
---|---|
EX-1.1 - CHINA JO-JO DRUGSTORES, INC. | v178109_ex1-1.htm |
EX-23.3 - CHINA JO-JO DRUGSTORES, INC. | v178109_ex23-3.htm |
EX-99.1 - CHINA JO-JO DRUGSTORES, INC. | v178109_ex99-1.htm |
EX-23.1 - CHINA JO-JO DRUGSTORES, INC. | v178109_ex23-1.htm |
As
filed with the Securities and Exchange Commission on March __,
2010
Registration
Statement No. 333- 163879
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 2 TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHINA JO-JO DRUGSTORES,
INC.
(Exact
Name of Registrant in Its Charter)
Nevada
|
5912
|
98-0557852
|
||
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
Room
507-513, 5th Floor, A Building, Meidu Plaza
Gongshu
District, Hangzhou, Zhejiang Province, P.R. China
+86-571-88077078
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
Val-U-Corp
Services, Inc.
1802
North Carson Street, Suite 108
Carson
City, NV 89701
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
Copies
to:
Kevin
K. Leung, Esq.
Francis
Y.L. Chen, Esq.
RICHARDSON
& PATEL LLP
10900
Wilshire Boulevard, Suite 500
Los
Angeles, California 90024
(310)
208-1182
|
Harvey
J. Kesner, Esq.
Thomas
Rose, Esq.
SICHENZIA
ROSS FRIEDMAN FERENCE LLP
61
Broadway, Suite 3200
New
York, New York 10006
(212)
930-9700
|
Approximate date of commencement of
proposed sale to the public: from time to time after the effective date
of this registration statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. ¨
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company, in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
|
Accelerated filer ¨
|
Non-accelerated filer ¨
|
Smaller reporting company x
|
|||
(Do not check if a smaller reporting
company) |
CALCULATION
OF REGISTRATION FEE
Title of Each Class of Securities to Be Registered
|
Amount to Be
Registered
|
Proposed Maximum
Aggregate Offering
Price (1)
|
Amount of
Registration Fee
|
|||||||
Share
of Common Stock, $.001 par value (2)
|
$ | 35,017,500 | $ | 2,496.75 | ||||||
Representative’s
Common Stock Purchase Option (3) (4)
|
1
Option
|
$ | 100 | $ | — | |||||
Shares
of Common Stock underlying Representative’s Common Stock Purchase
Option
|
$ | 1,141,875 | 81.42 | |||||||
Total
Registration Fee
|
$ | 2,578.17 | (5) |
|
(1)
|
Estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(o) under the
Securities Act.
|
|
(2)
|
Includes shares
of common stock which may be issued pursuant to the exercise of a 45-day
option granted by the registrant to the underwriters to cover
over-allotments, if any.
|
|
(3)
|
No registration fee required
pursuant to Rule 457(g) under the Securities Act of
1933.
|
|
(4)
|
Pursuant to Rule 416 under the
Securities Act of 1933, this registration statement shall be deemed to
cover the additional securities (i) to be offered or issued in connection
with any provision of any securities purported to be registered hereby to
be offered pursuant to terms which provide for a change in the amount of
securities being offered or issued to prevent dilution resulting from
stock splits, stock dividends, or similar transactions and (ii) of the
same class as the securities covered by this registration statement issued
or issuable prior to completion of the distribution of the securities
covered by this registration statement as a result of a split of, or a
stock dividend on, the registered
securities.
|
|
(5)
|
$2,049.88 has been previously
paid.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(a), MAY DETERMINE.
PRELIMINARY PROSPECTUS
|
SUBJECT TO COMPLETION, DATED MARCH , 2010
|
CHINA JO-JO
DRUGSTORES, INC.
This
is a firm commitment public offering of 4,350,000 shares of our common
stock.
Our
common stock is currently traded on the OTC Bulletin Board under the symbol
“CJJD.OB”. Prior to the effectiveness of the registration statement
which this prospectus is a part of, we will effect a reverse stock split
anticipated to be on a 1-for-2 basis. On March 19, 2010, the
last reported sale price for our common stock was $6.40 per share (after giving
effect to the anticipated 1-for-2 reverse stock split). We anticipate that
the offering price will be between $5.00 and $7.00 per share.
We
have applied for listing of our common stock on The NASDAQ Capital Market under
the symbol “CJJD”, which listing we expect to occur immediately prior to the
date of this prospectus. No assurance can be given that our application will be
approved.
Investing
in our securities involves certain risks. See “Risk Factors” beginning on
page 8 of this prospectus for a discussion of information that should be
considered in connection with an investment in our securities.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
Public
Offering Price
|
Underwriting
Discount and
Commissions (1)
|
Proceeds, to
Us, Before
Expenses (2)
|
||||||||||
Per
share
|
$
|
$
|
$
|
|||||||||
Total
|
$
|
$
|
$
|
|
(1)
|
Does not include an expense
allowance equal to 0.5% of the gross proceeds of this offering payable to
Madison Williams and Company LLC (“Madison Williams”), the representative
of the underwriters.
|
|
(2)
|
We estimate that the total
expenses of this offering, excluding the underwriters’ discount and
expense allowance, will be approximately
$ .
|
We
have granted a 45-day option to Madison Williams, as representative of the
underwriters, to purchase up to 652,500 additional shares of common stock
(15% of the shares sold) solely to cover over-allotments, if any. The shares
issuable upon exercise of the underwriter over-allotment option are identical to
those offered by this prospectus and have been registered under the registration
statement of which this prospectus forms a part.
In
connection with this offering, we have also agreed to sell to Madison Williams,
the underwriter representative, options to purchase up to 3% of the shares sold,
for $100. If the options are exercised, each share of common stock may be
purchased at
$ per share
(125% of the price of the shares sold in the offering) and the warrants
exercisable commencing on a date which is six months from the effective date of
the registration statement of which this prospectus forms a part and expiring
five years from the effective date of the registration
statement.
We are
offering the shares of common stock on a firm commitment basis. The underwriters
expect to deliver our shares to purchasers in the offering on or
about .
MADISON
WILLIAMS AND COMPANY
|
RODMAN
& RENSHAW, LLC
|
The date
of this prospectus
is ,
2010.
(1)
Adjoining pharmacy and medical clinic entrances at the Wenhua Branch, which
opened in September 2004.
(2)
Free physician consultation at the Daguan No. 2 branch, which opened in June
2009.
(3)
Grand opening of the Linping branch, which opened in October
2009.
TABLE
OF CONTENTS
Prospectus
Summary
|
1
|
|
Summary
Financial Information
|
7 | |
Risk
Factors
|
8
|
|
Special
Note Regarding Forward Looking Statement
|
27
|
|
Determination
of Offering Price
|
28
|
|
Use
of Proceeds
|
29
|
|
Capitalization
|
30
|
|
Dilution
|
31
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
32
|
|
Business
|
40
|
|
Description
of Property
|
56
|
|
Management
|
58
|
|
Executive
Compensation
|
60
|
|
Certain
Relationships and Related Transactions
|
62
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
63
|
|
Market
for Common Equity and Related Stockholder Matters
|
64
|
|
Dividend
Policy
|
64
|
|
Description
of Securities
|
64
|
|
Underwriting
and Plan of Distribution
|
65
|
|
Legal
Matters
|
71
|
|
Experts
|
71
|
|
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
|
71
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
72
|
|
Where
You Can Find More Information
|
72
|
|
Index
to Financial Statements
|
|
74
|
You
should rely only on the information contained or incorporated by reference to
this prospectus in deciding whether to purchase our common stock. We have not
authorized anyone to provide you with information different from that contained
or incorporated by reference to this prospectus. Under no circumstances should
the delivery to you of this prospectus or any sale made pursuant to this
prospectus create any implication that the information contained in this
prospectus is correct as of any time after the date of this prospectus. To the
extent that any facts or events arising after the date of this prospectus,
individually or in the aggregate, represent a fundamental change in the
information presented in this prospectus, this prospectus will be updated to the
extent required by law.
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. Nevertheless, we are responsible for the accuracy and completeness
of the historical information presented in this prospectus, as of the date of
the prospectus.
i
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. It does
not contain all of the information that you should consider before investing in
our securities. You should read the entire prospectus carefully, including the
section entitled “Risk Factors” and our consolidated financial statements and
the related notes. In this prospectus, we refer to China Jo-Jo Drugstores, Inc.
as “Jo-Jo Drugstores” and “our Company,” and to Jo-Jo Drugstores, its
subsidiaries and affiliated companies sometimes collectively as “we,” “us” and
“our.”
Where
indicated, information regarding share amounts and prices assume the
consummation of a 1-for-2 reverse stock split and a corresponding reduction of
authorized common shares on a 1-for-2 basis to be effected prior to the
effectiveness of the registration statement which this prospectus is a part
of.
Overview
We own
and operate a retail pharmacy chain in the People’s Republic of China (“PRC” or
“China”). We currently have 25 stores in Hangzhou, the capital of
Zhejiang Province approximately 112 miles south of Shanghai. Our stores provide
customers with a wide variety of medicinal products, including prescription and
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. In addition to these products, we have
licensed doctors of both western medicine and TCM onsite for consultation,
examination and treatment of common ailments at scheduled hours. Two
of our stores have adjacent medical clinics offering urgent care (to provide
treatment for minor ailments such as sprains, minor lacerations and dizziness
which can be treated on an outpatient basis), TCM (including acupuncture,
therapeutic massage and cupping) and minor outpatient surgical treatments (such
as suturing). Our store locations vary in size; however, our 25 stores
presently average approximately 3,000 square feet. We attempt to tailor our
product offerings, physician access and operating hours based on the community
where each individual store is located.
Industry
Background
In
2004, the Chinese government initiated regulation towards separation of drug
prescribing and drug dispensing. Since then, the number of retail pharmacies in
China has grown significantly. According to Business Monitor International, an
independent research firm, it is estimated that approximately 15% to 30% of all
prescription drugs are sold by retail drug stores with the remaining 70% to 85%
sold by state run hospitals. Over time, we believe that more and more
prescription drugs will be sold via retail drugstores versus state-run hospitals
due to the immediate accessibility that retail storefront drugstores provide.
The retail drugstore segment is highly fragmented consisting of several chains
and a large number of single-location businesses. According to Snapshot
International Ltd., China had approximately 391,500 non-hospital drugstores in
2008, up from 239,800 in 2004. According to Business Monitor
International, in 2007, the amounts spent in China on prescription drugs
(including patented drugs and generics) was $26.42 billion USD while over the
counter drugs accounted for $7.45 billion USD and TCM accounted for $21 billion
USD.
Our
Business
Our
sales are derived from prescription drugs, OTC drugs, nutritional supplements,
TCM, sundries and medical devices. Our sales as a percentage of total revenue
for the nine months ended December 31, 2009 and 2008 were:
% of Revenues
|
||||||||
for the nine months
ended December 31, 2009
|
for the nine months
ended December 31, 2008
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Prescription
Drugs
|
36
|
%
|
37
|
%
|
||||
OTC
Drugs
|
31
|
%
|
26
|
%
|
||||
Sundries
|
5
|
%
|
5
|
%
|
||||
TCM
|
14
|
%
|
11
|
%
|
||||
Nutritional
Supplements
|
12
|
%
|
17
|
%
|
||||
Medical
Devices
|
2
|
%
|
4
|
%
|
||||
TOTAL
|
100
|
%
|
100
|
%
|
The
medical consultations at our locations without adjoining clinics are provided
without charge to our customers and the revenue generated from medical services
at our clinics is nominal. However, providing access to these services is an
important part of differentiating ourselves from our competition.
All of
the products that we sell are manufactured by and purchased from third parties.
We presently do not sell any self-branded products. Prior to purchasing from a
manufacturer and selling their product at our drugstores, we review the
manufacturer’s quality control standards and Good Manufacturing Practice (“GMP”)
and other regulatory standards when applicable.
1
We
carefully select our store locations. As our growth has been self-funded to
date, we have been able to choose locations which do not compete against one
another. Prior to opening a store, we have a pre-marketing process which
includes handing out flyers, signing up new customers for our discount card
program, and providing access to our physicians. In opening a new location,
there are many factors we consider including: maximizing foot traffic,
demographics, and leasehold costs. We incur significant initial store opening
costs, including inventory stocking, annual or semi-annual lease prepayments,
and leasehold improvements. Our target location is approximately 3,000 square
feet, but varies by location and local market conditions. Historically, our
stores have been certified as compliant with the Good Supply Practice (“GSP”)
standard, which is required for all retail drugstores, within forty days from
leasehold acquisition. Our logistics are outsourced to a third party that has
the ability to distribute throughout Zhejiang Province.
During the
fiscal year ended March 31, 2009, we had revenues of $44.8 million, operating
income of $9.1 million and net income of $6.8 million as compared to revenues of
$31.3 million, operating income of $5.4 million and net income of $3.4 million
for the fiscal year ended March 31, 2008. For fiscal year ended March 31, 2009,
approximately 80% of our sales were made in cash and approximately 15% under
government insurance program which are reimbursed to us 30 days after submittal.
During the nine months ended December 31, 2009, we had revenues of $38.9
million, operating income of $7.9 million and net income of $5.9 million as
compared to revenues of $33.1 million, operating income of $7.1 million and net
income of $5.3 million for the same period of 2008, with approximately 83% of
sales made in cash and approximately 17% from government insurance
programs.
Growth
Strategy
Management
believes that its model of providing quality products at affordable prices
combined with customer access to physicians will enable us to continue to grow
within Hangzhou. To date, we have not completed any public financing and all
growth has been internally funded with store openings being financed by
operating cash flow.
In order
to expand beyond Hangzhou to other cities within Zhejiang Province, we will need
to complete a financing. We would more than likely enter a new market by
initially acquiring existing drugstores, rebranding them, and then operating
them as our own. After establishing ourselves in a city, we would either open
new locations or acquire additional existing drugstores. Within each city that
we expand into, we will strive to have at least one full-service clinic
adjoining one of the larger drugstore locations, staffed with eastern and or
western medicine physicians similar to our clinics in Hangzhou. Our logistics
provider is certified to operate and distribute the products we presently sell
in Hangzhou throughout Zhejiang Province. Although we will need to establish an
administrative office in each new city that we expand into, we believe that our
current headquarters in Hangzhou will adequately serve as the base for
procurement, general marketing and accounting.
Competitive
Strengths
Onsite
Physicians Provide Invaluable Consulting Service to Customers
Among
our competitors, we are one of the very few retail drug stores that have
licensed physicians onsite and available at scheduled hours. Furthermore, our
Dagun and Wenhua stores have adjoining medical clinics that offer our customers
health consulting and minor outpatient surgical treatments. We believe the
customers appreciate the onsite physician services thereby increasing our
customer appeal. Customer feedbacks to this medical consulting service that we
provide have been overwhelmingly positive and therefore we will continue to
integrate this service into our business model going forward. This is a key
distinction between our stores and competitors and is a service that customers
associate with Jo-Jo Drugstores.
Directly
Operated Business to Provide a High Quality Customer Experience
We
operate all of our stores directly, which we believe is critical in building a
strong brand name and offering a consistent customer experience across our store
network. Moreover, we believe direct operation of our drugstores is critically
important to our success in the retail drugstore chain business in Zhejiang
Province, given the highly fragmented market. We have developed uniform
standards among various aspects of drugstore operations and are able to provide
a consistently high quality of services in all of our stores. Direct operation
also enables us to select store locations that meet the consumer traffic
requirements, target new neighborhoods and allows us to leverage our existing
distribution centers. In addition, our direct operation business model allows us
to operate a relatively centralized and streamlined organizational structure,
which enables us to expedite decision making and thus deploy our financial,
operational and management resources more effectively. Furthermore, our business
model also allows us to address local demand for specific products and services
more accurately, to control our corporate overhead expenses and to provide
uniform and high quality training for our employees.
2
Optimized,
Diverse and High Quality Product Offerings
We have
developed an optimized and diverse merchandise portfolio. In particular, we have
rigorously analyzed a large quantity of prescription and OTC drugs available for
sale in China, as well as sales data accumulated through our direct operation of
drugstores. Moreover, we monitor product quality and continuously review and
refine our product selection in order to respond to changing demographics,
lifestyles, habits and product preferences of our customers.
Proven
Ability to Expand Rapidly While Increasing Profitability
We
have expanded our store network at a rapid pace in recent years, while
maintaining and increasing our gross margin. In particular, the number of our
directly operated drugstores increased from 9 as of March 31, 2008 to 16 as of
March 31, 2009. As of December 31, 2009, we operated 23 drugstores. Our gross
profit increased from $7.5 million for fiscal year ended March 31, 2008 to $12.2
million for fiscal year ended March 31, 2009. Our gross profit increased from
$8.9 million for the nine months ended December 31, 2008 to $11.3 million for
the nine months ended December 31, 2009. Our gross margin percentage increased
from 27.1% for the nine months ended December 31, 2008 to 29.0% for the nine
months ended December 31, 2009. Our rapid expansion is supported by our central
third-party distribution center near our headquarters in Hangzhou. We believe
our distribution network enables us to provide effective support to our store
outlets, cope with distinctive regional factors such as local regulatory
requirements and demographics, and reduce the incremental cost of opening
additional outlets in cities close to our existing distribution centers. These
attributes have allowed us to effectively shorten the amount of time required
for us to open new stores and for new stores to become
profitable.
Experienced
Management Team with Proven Track Record
Over the
past few years, Lei Liu, our chief executive officer and chairman, and other
members of our senior management team have successfully led our operations and
increased our revenue and profit. Many members of our senior management team
have worked with us since our inception or otherwise have broad experience in
the retail industry. Mr. Liu has extensive experience in chain store retailing,
gained from his six years of service with Tai He Drugstore as a general
manager.
Material
Risks Affecting Our Business
We are
subject to a number of risks, which the reader should be aware of before
deciding to purchase the securities in this offering. These risks, the most
material of which are summarized below, are discussed in the section titled
“Risk Factors” beginning on page 8 of this prospectus. While our management
fully intends to make concerted efforts to manage these risks, we cannot provide
assurances that we will be able to do so successfully.
Highly
Competitive and Rapidly Evolving Marketplace
Because
we operate in a highly competitive and rapidly evolving marketplace, our ability
to be successful is dependent upon many factors, including our abilities to
timely identify and/or respond to changing customer preferences, conduct
effective advertising, marketing and promotional programs, optimize our
inventory and distribution, attract and retain skilled personnel both for our
current operations and to expand our store chain, and manage our growth. A
failure to execute any of the foregoing may negatively affect our ability to
compete against our competitors, many of whom have greater financial resources
and stronger brand recognition, which in turn may materially and adversely
affect our business operations.
Inherent
Exposure to Certain Legal Claims
As an
operator of both pharmacies and medical clinics, we are exposed to risks
inherent to such businesses, which risks may be heightened in certain instances
by the prevalence of counterfeit pharmaceutical products in China. Our inability
to manage such risks could result in product liability, personal injury and/or
medical malpractice claims against us. If we are found liable for any such
claims, we could be required to pay substantial monetary damages. Even if we are
successful in defending ourselves, significant management, financial and other
resources may be drained as a result, in addition to damages to our reputation
and brand name. We currently do not maintain insurance against such claims and,
as a result, could face significant disruption to our business operations and
decrease in our revenue and profitability should such claims
materialize.
Substantial
Uncertainties in Chinese Laws that are Applicable to Us
All of
our business operations are in China and are subject to Chinese laws and
regulations. Because many of these laws and regulations are relatively new and
evolving, there are substantial uncertainties regarding their interpretation and
application, especially in light of the broad discretion enjoyed by the PRC
government. In addition to the PRC government regulations applicable to our
business operating drugstores and clinics and the medical professionals we
employ, the foreign ownership of Chinese businesses is also heavily regulated.
For example, in order to comply with Chinese regulations limiting foreign
ownership, we conduct our business operations through companies that we do not
own any equity interest in, but control through contractual arrangements. While
we have been advised by our PRC counsel that such structure complies with all
applicable Chinese laws and regulations, PRC regulatory authorities may
nevertheless determine otherwise, and impose punitive measures that may severely
disrupt our ability to conduct business and have a material adverse effect on
our financial condition, results of operations and prospects.
3
Additional
Capital is Required for Our Expansion and Unanticipated
Expenditures
Our
growth strategy includes expanding beyond Hangzhou into other cities in Zhejiang
Province. We expect our existing resources and internally generated funds to be
sufficient for our current operations. However, if circumstances arise that
require additional expenditures than anticipated, or if we wish to expand beyond
Hangzhou into other parts of Zhejiang Province, we will need to raise additional
funds. While we can raise funds by selling equity or debt securities or
obtaining credit facility, our ability to do so may depend on factors that are
beyond our control, such as the economic and political conditions in China and
the general market conditions for capital-raising, and we cannot assure you that
the terms of any fund raising, if any, will be acceptable to us. If we are
unable to raise additional capital, we may be unable to meet unanticipated cash
needs or to expand, which will have a negative impact on our financial condition
and results of operations which could affect our stock price. Even if we are
able to raise funds, doing so by issuing equity securities could result in
dilution to our existing stockholders, while doing so by debt could result in
restrictions on our business operations as may be imposed by the debt
holders.
Our
History and Corporate Structure
We were
incorporated in Nevada on December 19, 2006, originally under the name
“Kerrisdale Mining Corporation.”
On
September 17, 2009, we entered into a share exchange agreement (the “Exchange
Agreement”) with 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”), pursuant to which we agreed to issue an aggregate of 7,900,000
shares of our common stock (giving
effect to the anticipated 1-for-2 reverse stock split) to the Renovation
Stockholders in exchange for all of the issued and outstanding capital stock of
Renovation (the “Share Exchange”). On September 17, 2009, the Share
Exchange closed and Renovation became our wholly-owned subsidiary. On
September 24, 2009, in connection with the Share Exchange, we changed our name
from “Kerrisdale Mining Corporation” to “China Jo-Jo Drugstores, Inc.” to better
reflect our business operations.
All of
our business operations are carried out by three PRC companies: (1) Hangzhou
Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), (2) Hangzhou
Jiuzhou Clinic of Integrated Traditional and Western Medicine (General
Partnership) (“Jiuzhou Clinic”), and (3) Hangzhou Jiuzhou Medical & Public
Health Service Co., Ltd. (“Jiuzhou Service”). Throughout this prospectus, we
will sometimes refer to Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service
collectively as “HJ Group.”
We do not
own any equity interests in any of the three HJ Group companies, but control and
receive the economic benefits of their business operations through contractual
arrangements. The contractual arrangements are between these companies and their
owners, on the one hand, and Zhejiang Jiuxin Investment Management Co., Ltd.
(“Jiuxin Management”), Renovation’s wholly-owned subsidiary in the PRC. Through
these contractual arrangements, we have the ability to substantially influence
the daily operations and financial affairs of each HJ Group company, since we
are able to appoint its senior executives and approve all matters requiring
stockholder approval. As a result of these contractual arrangements, which
enable us to control each HJ Group company and to receive, through our
subsidiaries, all of its profits, we are considered the primary beneficiary of
HJ Group and each HJ Group company is deemed our variable interest entity
(“VIE”). Accordingly, we consolidate HJ Group’s results, assets and liabilities
in our financial statements.
However,
Chinese laws and regulations concerning the validity of the contractual
arrangements are uncertain, as many of these laws and regulations are relatively
new and may be subject to change, and their official interpretation and
enforcement by the Chinese government involves substantial uncertainty.
Additionally, the contractual arrangements may not be as effective in providing
control over HJ Group as direct ownership, which we are restricted from under
current Chinese law. Due to such uncertainty, we may take such additional steps
in the future as may be permitted by the then applicable law and regulations in
China to further strengthen our control over or toward actual ownership of each
HJ Group company or its assets or business operations, which could include
direct ownership of selected assets without jeopardizing any favorable
government policies toward domestic owned enterprises. Because we rely on HJ
Group for our revenue, any termination of or disruption to these contractual
arrangements would detrimentally affect our business and financial
condition.
4
The
contractual arrangements, comprising of a series of five agreements, were
entered into on August 1, 2009. Four of the agreements were subsequently amended
on October 27, 2009, to remove an automatic termination provision. The following
diagram illustrates our corporate structure as of the date of this prospectus
(1):
(1)
|
For
risks relating to our current corporate structure, see “Risk Factors –
Risks Related to Our Corporate
Structure.”
|
Corporate
Information
Our
principal executive offices are located at Room 507-513, 5th Floor, A Building,
Meidu Plaza, Gonshu District, Hangzhou, Zhejiang Province, People’s Republic of
China. Our telephone number is +86-571-88077078.
We
file reports under Section 13 of the Securities Exchange Act of 1934, as
amended. Our shares of common stock are currently quoted on the OTC
Bulletin Board under the symbol “CJJD.OB”. We have applied for the listing of
our common stock on The NASDAQ Capital Market under the symbol
“CJJD”.
Proposed
Reverse Stock Split
Prior
to the effectiveness of the registration statement which this prospectus is a
part of, we anticipate effecting a 1-for-2 reverse stock split and concurrently
reducing the number of authorized shares of common stock from 500,000,000 to
250,000,000. Under Section 78.207 of the Nevada Revised Statutes (“NRS”), a
corporation may change the number of shares of a class of its authorized stock
by increasing or decreasing the number of authorized shares of the class and
correspondingly increasing or decreasing the number of issued and outstanding
shares of the same class held by each stockholder of record by a resolution
adopted by the board of directors without obtaining the approval of the
stockholders. Accordingly, we intend to effect the 1-for-2 reverse stock split
without the approval of our stockholders by concurrently effecting a
corresponding reduction in the number of shares of our authorized common stock
pursuant to NRS Section 78.207.
5
THE
OFFERING
Common
stock offered
|
4,350,000
shares at a price within the range of $5.00 to $7.00 per
share
|
|
Number
of shares outstanding before this offering
|
10,000,000
shares (1)
|
|
Number
of shares outstanding after this offering
|
14,350,000
shares (1)
|
|
Use
of proceeds
|
We
intend to use the net proceeds of this offering to build additional
drugstores throughout Zhejiang province organically as well as by
acquisition, for marketing and as working capital for general corporate
purposes. See “Use of Proceeds” on page 29 for more information on
the use of proceeds.
|
|
OTC
Bulletin Board symbol
|
CJJD.OB
|
|
Proposed
NASDAQ Capital Market symbol
|
CJJD
|
|
Lock-up
Agreements
|
All
of our officers, directors and ___% shareholders have agreed that, for a
period of 180 days from the date of this prospectus, they will be subject
to a lock-up agreement prohibiting any sales, transfers or hedging
transactions of our securities owned by them. See “Lock-Ups” on page
66.
|
|
Risk
factors
|
The
securities offered by this prospectus are speculative and involve a high
degree of risk and investors purchasing securities should not purchase the
securities unless they can afford the loss of their entire investment. See
“Risk Factors” beginning on page 8.
|
|
Underwriter
representative’s common stock purchase option
|
In
connection with this offering, we have also agreed to sell to Madison
Williams (or designee) an option for $100 to purchase up to 3%
( shares)
of the shares of common stock sold in the Offering. If this option is
exercised, each share may be purchased at
$ per
share (125% of the price of the shares sold in the
offering.)
|
(1)
|
The
number of shares of our common stock to be outstanding after this offering
is based on the number of shares outstanding as of March 15,
2010, giving effect to a 1-for-2 reverse stock split to be effected
prior to the effectiveness of the registration statement which this
prospectus is a part of. See page 64 for an explanation of the
proposed reverse stock split. We have assumed, for purposes of disclosure
in this prospectus, that the offering price will be in the mid range of
$6.00 per share and, where indicated, the consummation of the reverse
stock split.
|
6
SUMMARY
FINANCIAL INFORMATION
In the
tables below we provide you with historical selected consolidated financial data
for and as of the nine-month periods ended December 31, 2009 and 2008, derived
from our unaudited consolidated financial statements included elsewhere in this
prospectus, and for and as of the years ended March 31, 2009 and 2008, derived
from our audited consolidated financial statements included elsewhere in this
prospectus. Historical results are not necessarily indicative of the results
that may be expected for any future period. When you read this historical
selected financial data, it is important that you read along with it the
appropriate historical consolidated financial statements and related notes and
“Management's Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
Nine Months Ended
December 31,
|
Fiscal Year Ended
March 31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
|
(Unaudited)
|
|||||||||||||||
Statements
of Operations Data
|
|
|
|
|
||||||||||||
Revenue
|
$
|
38,863,743
|
$
|
33,096,321
|
$
|
44,776,652
|
$
|
31,311,942
|
||||||||
Cost
of Goods Sold
|
27,574,136
|
24,139,585
|
32,607,741
|
23,835,859
|
||||||||||||
Gross
Profit
|
11,289,607
|
8,956,736
|
12,168,911
|
7,476,083
|
||||||||||||
Operating
Expenses
|
|
|
|
|
||||||||||||
Selling
Expenses
|
1,986,471
|
1,280,838
|
1,712,474
|
1,359,087
|
||||||||||||
General
and Administrative Expenses
|
1,372,205
|
614,987
|
1,399,305
|
699,069
|
||||||||||||
Income
from Operations
|
7,930,931
|
7,060,911
|
9,057,132
|
5,417,927
|
||||||||||||
Other
Income (Expense), Net
|
41,800
|
(9,190
|
)
|
17,369
|
(6,854
|
)
|
||||||||||
Income
before Taxes
|
7,972,731
|
7,051,721
|
9,074,501
|
5,411,073
|
||||||||||||
Provision
for Income Taxes
|
2,023,621
|
1,738,462
|
2,260,985
|
2,023,194
|
||||||||||||
Net
Income
|
5,949,110
|
5,313,259
|
6,813,516
|
3,387,879
|
||||||||||||
Other
Comprehensive Income
|
||||||||||||||||
Foreign
currency translation adjustment
|
12,691
|
32,730
|
27,688
|
(50,242
|
)
|
|||||||||||
Comprehensive
Income
|
$
|
5,961,801
|
$
|
5,345,989
|
$
|
6,841,204
|
$
|
3,337,637
|
||||||||
Basic
and Diluted Earnings Per Share
|
$
|
0.34
|
$
|
0.34
|
$
|
0.43
|
$
|
0.21
|
||||||||
Pro forma | ||||||||||||||||
Basic
and Diluted Earnings Per Common Share (after giving effect to the
anticipated 1-for-2 reverse stock split)
|
$
|
0.68
|
$ |
0.68
|
$
|
0.86
|
|
$
|
0.42
|
December 31,
2009
|
March 31,
2009
|
|||||||
|
(Unaudited)
|
|||||||
Balance
Sheet Data:
|
|
|
||||||
Cash
and Restricted Cash
|
$
|
1,589,278
|
$
|
996,302
|
||||
Total
Assets
|
$
|
21,101,268
|
$
|
15,965,201
|
||||
Total
Liabilities
|
$
|
8,271,636
|
$
|
9,307,654
|
||||
Total
Stockholders’ Equity
|
$
|
12,829,632
|
$
|
6,657,547
|
Selected store data (as of):
|
Stores operated
|
|||
March
31, 2007
|
6
|
|||
March
31, 2008
|
9
|
|||
March
31, 2009
|
16
|
|||
December
31, 2009
|
23
|
7
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this prospectus 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 Our Business
Our
relatively limited operating history makes it difficult to evaluate our future
prospects and results of operations.
We have a
limited operating history. Jiuzhou Pharmacy opened its first drugstore in March
2004, Jiuzhou Clinic began its first clinic in October 2003, and Jiuzhou Service
commenced operation in November 2005. Accordingly, you should consider our
future prospects in light of the risks and uncertainties experienced by early
stage companies in evolving industries such as the pharmaceutical industry in
China. Some of these risks and uncertainties relate to our ability
to:
|
•
|
maintain our market
position;
|
|
•
|
attract additional customers and
increase spending per
customer;
|
|
•
|
respond to competitive market
conditions;
|
|
•
|
increase awareness of our brand
and continue to develop customer
loyalty;
|
|
•
|
respond to changes in our
regulatory environment;
|
|
•
|
maintain effective control of our
costs and expenses;
|
|
•
|
raise sufficient capital to
sustain and expand our
business;
|
|
•
|
attract, retain and motivate
qualified personnel; and
|
|
•
|
ability to find and open new
locations.
|
If we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
We
depend substantially on the continuing efforts of our executive officers, and
our business and prospects may be severely disrupted if we lose their
services.
Our
future success is dependent on the continued services of the key members of our
management team. In particular, we depend on the services of the three
co-founders of HJ Group, Mr. Lei Lu, who is also our chief executive officer and
the chairman of our board of directors, and Ms. Li Qi and Mr. Chong’an Jin, who
are also members of our board of directors. The implementation of our business
strategy and our future success depend in large part on our continued ability to
attract and retain highly qualified management personnel. We face competition
for personnel from other drugstore chains, retail chains, supermarkets,
convenience stores, pharmaceutical companies and other organizations.
Competition for these individuals could cause us to offer higher compensation
and other benefits in order to attract and retain them, which could materially
and adversely affect our financial condition and results of operations. We may
be unable to attract or retain the personnel required to achieve our business
objectives and failure to do so could severely disrupt our business and
prospects. The process of hiring suitably qualified personnel is also often
lengthy. In the past, we have had two major challenges to our recruiting
efforts: (1) unqualified candidates who represent themselves as being qualified,
and (2) talented and competent candidates who do not match our job requirements.
If our recruitment and retention efforts are unsuccessful in the future, it may
be more difficult for us to execute our business strategy.
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.”
8
We may need additional capital to
expand outside of Hangzhou, and our inability to obtain capital, use internally
generated cash, or use shares of our common stock or debt to
finance future expansion efforts could impair the growth and expansion of
our business.
As of
December 31, 2009, we had RMB 8.1 million ($1.2 million) in
unrestricted cash. Based on our current operating plans, we expect our existing
resources, including our current cash and cash flows from operations, to be
sufficient to fund our anticipated cash needs, including for working capital and
capital expenditures for at least the next 12 months. We may, however, need
to raise additional funds if our expenditures exceed our current expectations
due to changed business conditions or other future
developments.
Reliance
on internally generated cash or debt to finance our operations or to complete
business expansion efforts could substantially limit our operational and
financial flexibility. The extent to which we will be able or willing to use
shares of common stock to consummate acquisitions will depend on our market
value from time to time and the willingness of potential sellers to accept our
common stock as full or partial payment. Using shares of common stock for this
purpose also may result in significant dilution to our then existing
stockholders. To the extent that we are unable to use common stock to make
future acquisitions, our ability to grow through acquisitions may be limited by
the extent to which we are able to raise capital for this purpose through debt
or equity financings. No assurance can be given that we will be able to obtain
the necessary capital to finance a successful expansion program or our other
cash needs. If we are unable to obtain additional capital on acceptable terms,
or at all, we may be required to reduce the scope of any expansion. In addition
to requiring funding for expansions, we may need additional funds to implement
our internal growth and operating strategies or to finance other aspects of our
operations. Our failure to (i) obtain additional capital on acceptable terms,
(ii) use internally generated cash or debt to complete expansions because it
significantly limits our operational or financial flexibility, or (iii) use
shares of common stock to make future expansions may hinder our ability to
actively pursue any expansion program we may decide to implement and negatively
impact our stock price.
Our
ability to raise additional funds in the future is subject to a variety of
uncertainties, including:
|
•
|
our future financial condition,
results of operations and cash
flows;
|
|
•
|
general market conditions for
capital-raising activities by pharmaceutical companies;
and
|
|
•
|
economic, political and other
conditions in China and
elsewhere.
|
We may be
unable to obtain additional capital in a timely manner or on commercially
acceptable terms or at all.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in dilution to our stockholders.
We
believe that our current cash and cash equivalents and anticipated cash flow
from operations will be sufficient to meet our anticipated cash needs for the
near future. We may, however, require additional cash resources due to changed
business conditions or other future developments, including any investments or
acquisitions we may decide to pursue. If our resources are insufficient to
satisfy our cash requirements, we may seek to sell additional equity or debt
securities or obtain credit facility. The sale of additional equity securities
could result in dilution to our stockholders. The incurrence of additional
indebtedness would result in increased debt service obligations and could result
in further operating and financing covenants that would further restrict our
freedom to operate our business, such as conditions that:
|
•
|
limit our ability to pay
dividends or require us to seek consent for the payment of
dividends;
|
|
•
|
increase our vulnerability to
general adverse economic and industry
conditions;
|
|
•
|
require us to dedicate a portion
of our cash flow from operations to payments on our debt, thereby reducing
the availability of our cash flow to fund capital expenditures, working
capital and other general corporate purposes;
and
|
|
•
|
limit our flexibility in planning
for, or reacting to, changes in our business and our
industry.
|
We cannot
guarantee that we will be able to obtain any additional financing on terms that
are acceptable to us, or at all.
Risks
Relating to Our Pharmacy Operations
Our
operating results are difficult to predict, and we may experience significant
fluctuations in our operating results.
Our
operating results may fluctuate significantly. As a result, you may not be able
to rely on period to period comparisons of our operating results as an
indication of our future performance. Factors causing these fluctuations
include, among others:
|
•
|
our ability to maintain and
increase sales to existing customers, attract new customers and satisfy
our customers’ demands;
|
9
|
•
|
the frequency of customer visits
to our drugstores and the quantity and mix of products our customers
purchase;
|
|
•
|
the price we charge for our
products or changes in our pricing strategies or the pricing
strategies of our
competitors;
|
|
•
|
timing and costs of marketing and
promotional programs organized by us and/or our suppliers, including the
extent to which we or our suppliers offer promotional discounts to our
customers;
|
|
•
|
our ability to acquire
merchandise, manage inventory and fulfill
orders;
|
|
•
|
technical difficulties, system
downtime or interruptions that may affect our product selection,
procurement, pricing, distribution and retail management
processes;
|
|
•
|
the introduction by our
competitors of new products or
services;
|
|
•
|
the effects of strategic
alliances, potential acquisitions and other business combinations, and our
ability to successfully and timely integrate them into our
business;
|
|
•
|
changes in government regulations
with respect to pharmaceutical and retail industries;
and
|
|
•
|
current economic and geopolitical
conditions in China and
elsewhere.
|
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.
10
Moreover,
our business is subject to seasonal variations in demand. In particular,
traditional retail seasonality affects the sales of certain pharmaceuticals and
other non-pharmaceutical products. Sales of our pharmaceutical products benefit
in our fiscal third quarter (October 1st through December 31st) from the winter
cold and flu season, and are lower in our fiscal fourth quarter (January 1st
through March 31st ) because Chinese New Year falls into that quarter each year
and our customers generally pay fewer visits to drugstores during this period.
In addition, sales of some health and beauty products are driven, to some
extent, by seasonal purchasing patterns and seasonal product changes. Failure to
manage the increased sales effectively in the high sale season, and increases in
inventory in anticipation of sales increase could have a material adverse effect
on our financial condition, results of operations and cash flow.
Many of
the factors discussed above are beyond our control, making our quarterly results
difficult to predict, which could cause the trading price of our securities to
decline below investor expectations. You should not rely on our operating
results for prior periods as an indication of our future results.
We
may not be able to timely identify or otherwise effectively respond to changing
customer preferences, and we may fail to optimize our product offering and
inventory position.
The
drugstore industry in China is rapidly evolving and is subject to rapidly
changing customer preferences that are difficult to predict. Our success depends
on our ability to anticipate and identify customer preferences and adapt our
product selection to these preferences. In particular, we must optimize our
product selection and inventory positions based on sales trends. We cannot
assure you that our product selection, especially our selections of nutritional
supplements and food products, will accurately reflect customer preferences at
any given time. If we fail to anticipate accurately either the market for our
products or customers’ purchasing habits or fail to respond to customers’
changing preferences promptly and effectively, we may not be able to adapt our
product selection to customer preferences or make appropriate adjustments to our
inventory positions, which could significantly reduce our revenue and have a
material adverse effect on our business, financial condition and results of
operations.
Our
success depends on our ability to establish effective advertising, marketing and
promotional programs.
Our
success depends on our ability to establish effective advertising, marketing and
promotional programs, including pricing strategies implemented in response to
competitive pressures and/or to drive demand for our products. Our
advertisements are designed to promote our brand, our corporate image and the
prices of products available for sale in our stores. Our pricing strategies and
value proposition must be appropriate for our target customers. If we are not
able to maintain and increase the awareness of our pharmacy brand, products and
services, we may not be able to attract and retain customers and our reputation
may also suffer. We expect to incur substantial expenses in our marketing and
promotional efforts to both attract and retain customers. However, our marketing
and promotional activities may be less successful than we anticipate, and may
not be effective at building our brand awareness and customer base. We also
cannot assure you that our current and planned spending on marketing activities
will be adequate to support our future growth. Failure to successfully execute
our advertising, marketing and promotional programs may result in material
decreases in our revenue and profitability.
If
we are unable to optimize management of our distribution activities, we may be
unable to meet customer demand.
We
currently outsource our distribution and inventory functions to Yingte
Logistics. Our ability to meet customer demand may be significantly limited if
we do not successfully and efficiently conduct our distribution activities, or
if Yingte Logistics’ facilities are destroyed or shut down for any reason,
including as the result of a natural disaster. Any disruption in the operation
of our distribution could result in higher costs or longer lead times associated
with distributing our products. In addition, as it is difficult to predict
accurate sales volume in our industry, we may be unable to optimize our
distribution activities, which may result in excess or insufficient inventory,
warehousing, fulfillment or distribution capacity. Furthermore, failure to
effectively control product damage during distribution process could decrease
our operating margins and reduce our profitability.
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.
11
When we
begin selling a new product, it is particularly difficult to forecast product
demand accurately. The purchase of certain types of inventory may require
significant lead-time. As we carry a broad selection of products and maintain
significant inventory levels for a substantial portion of our merchandise, we
may be unable to sell such inventory in sufficient quantities or during the
relevant selling seasons. Carrying too much inventory would increase our
inventory holding costs, and failure to have inventory in stock when a customer
orders or purchases it could cause us to lose that order or lose that customer,
either of which could have a material adverse effect on our business, financial
condition and results of operations.
The
centralization of procurement may not help us achieve anticipated savings and
may place additional burdens on the management of our supply chain.
All of
the product procurement for our drugstore chain is handled through our corporate
headquarters. Such centralization of merchandise procurement and replenishment
operations is intended to reduce cost of goods sold as a result of volume
purchase benefits. However, we may be less successful than anticipated in
achieving these volume purchase benefits. In addition, the centralization of
merchandise procurement is expected to increase the complexity of tracking
inventory, create additional inventory handling and transportation costs and
place additional burdens on the management of our supply chain. Furthermore, we
may not be successful in achieving the cost savings expected from the
renegotiation of certain supplier contracts due to the nature of the products
covered by those contracts and the market position of the related suppliers. If
we cannot successfully reduce our costs through centralizing procurement, our
profitability and prospects would be materially and adversely
affected.
Our
brand name, trade secrets and other intellectual property are valuable assets.
If we are unable to protect them from infringement, our business and prospects
may be harmed.
We
consider our pharmacy brand name to be a valuable asset. We may be unable to
prevent third parties from using our brand name without authorization.
Unauthorized use of our brand name by third parties may adversely affect our
business and reputation, including the perceived quality and reliability of our
products and services. We plan to apply for trademark protection of our logo in
China, although we have not done so nor have we registered our brand name as of
the date of this prospectus.
We also
rely on trade secrets to protect our know-how and other proprietary information,
including pricing, purchasing, promotional strategies, customer lists and/or
suppliers lists. However, trade secrets are difficult to protect. While we use
reasonable efforts to protect our trade secrets, our employees, consultants,
contractors or advisors may unintentionally or willfully disclose our
information to competitors. In addition, confidentiality agreements, if any,
executed by the foregoing persons may not be enforceable or provide meaningful
protection for our trade secrets or other proprietary information in the event
of unauthorized use or disclosure. Our employees are required to sign an
employment agreement as a condition of employment, which contains a
confidentiality provision.
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;
|
12
|
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.
As
a retailer of pharmaceutical and other healthcare products, we are exposed to
inherent risks relating to product liability and personal injury
claims.
Pharmacies
are exposed to risks inherent in the packaging and distribution of
pharmaceutical and other healthcare products, such as with respect to improper
filling of prescriptions, labeling of prescriptions, adequacy of warnings,
unintentional distribution of counterfeit drugs. Furthermore, the applicable
laws, rules and regulations require our in-store pharmacists to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects and other information the in-store
pharmacists deem significant. Our in-store pharmacists may also have a duty to
warn customers regarding any potential negative effects of a prescription drug
if the warning could reduce or negate these effects and we may be liable for
claims arising from advices given by our in-store pharmacists. In addition,
product liability claims may be asserted against us with respect to any of the
products we sell and as a retailer, we are required to pay for damages for any
successful product liability claim against us, although we may have the right
under applicable PRC laws, rules and regulations to recover from the relevant
manufacturer for compensation we paid to our customers in connection with a
product liability claim. We may also be obligated to recall affected products.
If we are found liable for product liability claims, we could be required to pay
substantial monetary damages. Furthermore, even if we successfully defend
ourselves against this type of claim, we could be required to spend significant
management, financial and other resources, which could disrupt our business, and
our reputation as well as our brand name may also suffer. We, like many other
similar companies in China, do not carry product liability insurance. As a
result, any imposition of product liability could materially harm our business,
financial condition and results of operations. In addition, we do not have any
business interruption insurance due to the limited coverage of any business
interruption insurance in China, and as a result, any business disruption or
natural disaster could severely disrupt our business and operations and
significantly decrease our revenue and profitability.
Future
acquisitions are expected to be a part of our growth strategy, and could expose
us to significant business risks.
One of
our strategies is to grow our business through acquisition. However, we cannot
assure you that we will be able to identify and secure suitable acquisition
opportunities. Our ability to consummate and integrate effectively any future
acquisitions on terms that are favorable to us may be limited by the number of
attractive acquisition targets, internal demands on our resources and, to the
extent necessary, our ability to obtain financing on satisfactory terms for
larger acquisitions, if at all. Moreover, if an acquisition target is
identified, the third parties with whom we seek to cooperate may not select us
as a potential partner or we may not be able to enter into arrangements on
commercially reasonable terms or at all. The negotiation and completion of
potential acquisitions, whether or not ultimately consummated, could also
require significant diversion of management’s time and resources and potential
disruption of our existing business. Furthermore, we cannot assure you that the
expected synergies from future acquisitions will actually materialize. In
addition, future acquisitions could result in the incurrence of additional
indebtedness, costs, and contingent liabilities. Future acquisitions may also
expose us to potential risks, including risks associated with:
13
|
•
|
the integration of new
operations, services and
personnel;
|
|
•
|
unforeseen or hidden
liabilities;
|
|
•
|
the diversion of financial or
other resources from our existing
businesses;
|
|
•
|
our inability to generate
sufficient revenue to recover costs and expenses of the acquisitions;
and
|
|
•
|
potential loss of, or harm to,
relationships with employees or
customers.
|
Any of
the above could significantly disrupt our ability to manage our business and
materially and adversely affect our business, financial condition and results of
operations.
We
may not be able to manage our expansion of operations effectively and failure to
do so could strain our management, operational and other resources, which could
materially and adversely affect our business and growth potential.
We
anticipate continued expansion of our business to address growth in demand for
our products and services, as well as to capture new market opportunities. The
continued growth of our business has resulted in, and will continue to result
in, substantial demands on our management, operational and other resources. In
particular, the management of our growth will require, among other
things:
|
•
|
our ability to continue to
identify and lease new store locations at acceptable
prices;
|
|
•
|
our ability to optimize product
offerings and increase sales of private label
products;
|
|
•
|
our ability to control
procurement cost and optimize product
pricing;
|
|
•
|
our ability to control operating
expenses and achieve a high level of efficiency, including, in particular,
our ability to manage the amount of time required to open new stores and
for stores to become profitable, to maintain sufficient inventory levels
and to manage warehousing, buying and distribution
costs;
|
|
•
|
information technology system
enhancement;
|
|
•
|
strengthening of financial and
management controls;
|
|
•
|
increased marketing, sales and
sales support activities;
and
|
|
•
|
hiring and training of new
personnel.
|
If we are
not able to manage our growth successfully, our business and prospects would be
materially and adversely affected.
We
depend on the continued service of, and on the ability to attract, motivate and
retain a sufficient number of qualified and skilled staff, especially in-store
pharmacists, for our stores.
Our
ability to continue expanding our retail drugstore chain and deliver high
quality products and customer service depends on our ability to attract and
retain qualified and skilled staff, especially in-store pharmacists. In
particular, the applicable PRC regulations require at least one qualified
pharmacist to be stationed in every drugstore to instruct or advise customers on
prescription drugs. Over the years, a significant shortage of pharmacists has
developed due to increasing demand within the drugstore industry as well as
demand from other businesses in the healthcare industry. We cannot assure you
that we will be able to attract, hire and retain sufficient numbers of skilled
personnel and in-store pharmacists necessary to continue to develop and grow our
business. In the past, our major recruiting challenges included unqualified
candidates who represent themselves as being qualified, and talented and
competent candidates who do not match our job requirements. The inability to
attract and retain a sufficient number of skilled personnel and in-store
pharmacists could limit our ability to open additional stores, increase revenue
or deliver high quality customer service. In addition, competition for these
individuals could cause us to offer higher compensation and other benefits in
order to attract and retain them, which could materially and adversely affect
our financial condition and results of operations.
14
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.
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
“Relevant PRC Regulations — Price Controls” below. In addition, the retail
prices of these products are also subject to periodic downward adjustments as
the PRC governmental authorities seek to make pharmaceutical products more
affordable to the general public. Since May 1998, the relevant PRC
governmental authorities have ordered price reductions of thousands of
pharmaceutical products. The latest price reduction occurred in October 2008 and
affected 1,357 different pharmaceutical products. As of December 31, 2009, 1,092
of the 7,530 prescription drugs that we sold were subject to price controls. As
we generally price our product substantially below the price ceilings, only 105
of our prescription drug prices required adjustment for the fiscal year ended
March 31, 2009, the impact of which was negligible. Any future price controls or
government mandated price reductions, however, may have a material adverse
affect on our financial condition and results of operations, including
significantly reducing our revenue and profitability.
15
Our
retail operations require a number of permits and licenses in order to carry on
their business.
Drugstores
in China are required to obtain certain permits and licenses from various PRC
governmental authorities, including GSP certification. We are also required to
obtain food hygiene certificates for the distribution of nutritional supplements
and food products. We cannot assure you that we can maintain all required
licenses, permits and certifications to carry on our business at all times, and
from time to time we may have not been in compliance with all such required
licenses, permits and certifications. Moreover, these licenses, permits and
certifications are subject to periodic renewal and/or reassessment by the
relevant PRC governmental authorities and the standards of such renewal or
reassessment may change from time to time. We intend to apply for the renewal of
these licenses, permits and certifications when required by applicable laws and
regulations. Any failure by us to obtain and maintain all licenses, permits and
certifications necessary to carry on our business at any time could have a
material adverse effect on our business, financial condition and results of
operations. In addition, any inability to renew these licenses, permits and
certifications could severely disrupt our business, and prevent us from
continuing to carry on our business. Any changes in the standards used by
governmental authorities in considering whether to renew or reassess our
business licenses, permits and certifications, as well as any enactment of new
regulations that may restrict the conduct of our business, may also decrease our
revenue and/or increase our costs and materially reduce our profitability and
prospects. Furthermore, if the interpretation or implementation of existing laws
and regulations changes or if new regulations come into effect requiring us to
obtain any additional licenses, permits or certifications that were previously
not required to operate our existing businesses, we cannot assure you that we
may successfully obtain such licenses, permits or certifications.
The
continued penetration of counterfeit products into the retail market in China
may damage our brand and reputation and have a material adverse effect on our
business, financial condition, results of operations and prospects.
There has
been continued penetration of counterfeit products into the pharmaceutical
retail market in China. Counterfeit products are generally sold at lower prices
than the authentic products due to their low production costs, and in some cases
are very similar in appearance to the authentic products. Counterfeit
pharmaceuticals may or may not have the same chemical content as their authentic
counterparts, and are typically manufactured without proper licenses or
approvals as well as fraudulently mislabeled with respect to their content
and/or manufacturer. Although the PRC government has been increasingly active in
combating counterfeit pharmaceutical and other products, there is not yet an
effective counterfeit pharmaceutical product regulation control and enforcement
system in China. Although we have implemented a series of quality control
procedures in our procurement process, we cannot assure you that we would not be
selling counterfeit pharmaceutical products inadvertently. Any unintentional
sale of counterfeit products may subject us to negative publicity, fines and
other administrative penalties or even result in litigation against us.
Moreover, the continued proliferation of counterfeit products and other products
in recent years may reinforce the negative image of retailers among consumers in
China. The continued proliferation of counterfeit products in China could have a
material adverse effect on our business, financial condition, and results of
operation.
We
may be subject to fines and penalties if we fail to comply with the applicable
PRC laws and regulations governing sales of medicines under the PRC National
Medical Insurance Program.
Eligible
participants in the PRC national medical insurance program, mainly consisting of
urban residents in China, are entitled to buy medicines using their medical
insurance cards in an authorized pharmacy, provided that the medicines they
purchase have been included in the national or provincial medical insurance
catalogs. The pharmacy, in turn, obtains reimbursement from the relevant
government social security bureaus. Moreover, the applicable PRC laws, rules and
regulations prohibit pharmacies from selling goods other than pre-approved
medicines when purchases are made with medical insurance cards. We have
established procedures to prohibit our drugstores from selling unauthorized
goods to customers who make purchases with medical insurance cards. However, we
cannot assure you that those procedures will be strictly followed by all of our
employees in all of our stores.
Risks
Relating to Our Medical Services
If
we do not attract and retain qualified physicians and other medical personnel,
our ability to provide medical services would be adversely
affected.
The success
of our medical services will be, in part, dependent upon the number and quality
of doctors, nurses and other medical support personnel that we employ and our
ability to maintain good relations with them. Our medical staff may terminate
their employment with us at any time. If we are unable to successfully maintain
good relationships with them, our ability to provide medical services may be
adversely affected.
16
The
provision of medical services is heavily regulated in the PRC and failure to
comply with those regulations could result in penalties, loss of licensure,
additional compliance costs or other adverse consequences.
Healthcare
providers in China, as in most other populous countries, are required to comply
with many laws and regulations at the national and local government levels.
These laws and regulations relate to: licensing; the conduct of operations; the
ownership of facilities; the addition of facilities and services;
confidentiality, maintenance and security issues associated with medical
records; billing for services; and prices for services. If we fail to comply
with applicable laws and regulations, we could suffer penalties, including the
loss of our licenses to operate. In addition, further healthcare legislative
reform is likely, and could materially adversely affect our business and results
of operations in the event we do not comply or if the cost of compliance is
expensive. The above list of certain regulated areas is not exhaustive and it is
not possible to anticipate the exact nature of future healthcare legislative
reform in China. Depending on the priorities determined by the Chinese Ministry
of Health, the political climate at any given time, the continued development of
the Chinese healthcare system and many other factors, future legislative reforms
may be highly diverse, including stringent infection control policies, improved
rural healthcare facilities, increased regulation of the distribution of
pharmaceuticals and numerous other policy matters. Consequently, the
implications of these future reforms could result in penalties, loss of
licensure, additional compliance costs or other adverse
consequences.
As
a provider of medical services, we are exposed to inherent risks relating to
malpractice claims.
As a
provider of medical services, any misdiagnosis or improper treatment may result
in adverse publicity regarding us, which would harm our reputation. If we are
found liable for malpractice claims, we could be required to pay substantial
monetary damages. Furthermore, even if we successfully defend ourselves against
this type of claim, we could be required to spend significant management,
financial and other resources, which could disrupt our business, and our
reputation as well as our brand name may also suffer. Because malpractice claims
are not common in China, we do not carry malpractice insurance. As a result, any
imposition of malpractice liability could materially harm our business,
financial condition and results of operations.
We
face competition that could adversely affect our results of
operations.
Our
clinics compete with a large number and variety of healthcare facilities in
their respective markets. There are numerous government-run and private
hospitals and clinics available to the general populace. There can be no
assurance that these or other clinics, hospitals or other facilities will not
commence or expand such operations, which would increase their competitive
position. Further, there can be no assurance that a healthcare organization,
having greater resources in the provision or management of healthcare services,
will not decide to engage in operations similar to those being conducted by us
in Hangzhou.
Risks
Related to Our Corporate Structure
Chinese
regulations limit foreign ownership of Chinese pharmacy chain operating 30 or
more stores and limit foreign ownership of Chinese medical clinics to
Sino-foreign joint venture. We conduct our drugstore business through Jiuzhou
Pharmacy and our clinics through Jiuzhou Clinic and Jiuzhou Service by means of
contractual arrangements. None of our businesses are owned and the validity of
our contractual arrangements is uncertain. 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 or in our business
generally, we could be subject to severe penalties. In addition,
changes in such Chinese laws and regulations may materially and adversely affect
our business.
Current
PRC regulations limit any foreign investor’s ownership of drugstores to 49.0% if
the investor owns interests in more than 30 drugstores in China that sell a
variety of branded pharmaceutical products sourced from different suppliers.
Since we do not own any equity interests in Jiuzhou Pharmacy, but controls the
drugstore chain through contractual arrangements with our wholly foreign owned
enterprise (“WFOE”), Jiuxin Management, we have been advised by our PRC counsel,
Allbright Law Offices (“Allbright”), that the regulations on foreign ownership
of drugstores do not apply to us even if our drugstore chain expands beyond 30
stores. Similarly, foreign ownership of medical practice in China is limited to
means of Sino-foreign joint venture. Since we do not have actual equity interest
in Jiuzhou Clinic or Jiuzhou Service, but control these entities through
contractual arrangements, Allbright has advised us that the PRC regulations
restricting foreign ownership of medical practice are not applicable to us or
our structure.
17
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 Allbright, that based on their
understanding of the current PRC laws, rules and regulations, the structure for
operating our business in China (including our corporate structure and
contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service
and their respective owners) comply with all applicable PRC laws, rules and
regulations, and do not violate, breach, contravene or otherwise conflict with
any applicable PRC laws, rules or regulations, we cannot assure you that the PRC
regulatory authorities will not determine that our corporate structure and
contractual arrangements violate PRC laws, rules or regulations. If the PRC
regulatory authorities determine that our contractual arrangements are in
violation of applicable PRC laws, rules or regulations, our contractual
arrangements will become invalid or unenforceable, and we may not be able to
consolidate the operations of the HJ Group with our results of operations. In
addition, new PRC laws, rules and regulations may be introduced from time to
time to impose additional requirements that may be applicable to our contractual
arrangements. For example, the PRC Property Rights Law that became effective on
October 1, 2007 may require us to register with the relevant government
authority the security interests on the equity interests in Jiuzhou Pharmacy,
Jiuzhou Clinic and Jiuzhou Service granted to us under the equity pledge
agreements that are part of the contractual arrangements. If we are required to
register such security interests, failure to complete such registration in a
timely manner may result in such equity pledge agreements to be unenforceable
against third party claims.
The
Chinese government has broad discretion in dealing with violations of laws and
regulations, including levying fines, revoking business and other licenses and
requiring actions necessary for compliance. In particular, licenses and permits
issued or granted to us by relevant governmental bodies may be revoked at a
later time by higher regulatory bodies. We cannot predict the effect of the
interpretation of existing or new Chinese laws or regulations on our businesses.
We cannot assure you that our current ownership and operating structure would
not be found in violation of any current or future Chinese laws or regulations.
As a result, we may be subject to sanctions, including fines, and could be
required to restructure our operations or cease to provide certain services. Any
of these or similar actions could significantly disrupt our business operations
or restrict us from conducting a substantial portion of our business operations,
which could materially and adversely affect our business, financial condition
and results of operations.
If we are
determined to be in violation of any existing or future PRC laws, rules or
regulations or fail to obtain or maintain any of the required governmental
permits or approvals, the relevant PRC regulatory authorities would have broad
discretion in dealing with such violations, including:
|
•
|
revoking the business and
operating licenses of our PRC consolidated
entities;
|
|
•
|
discontinuing or restricting the
operations of our PRC consolidated
entities;
|
|
•
|
imposing conditions or
requirements with which we or our PRC consolidated entities may not be
able to comply;
|
|
•
|
requiring us or our PRC
consolidated entities to restructure the relevant ownership structure or
operations;
|
|
•
|
restricting or prohibiting our
use of the proceeds from our initial public offering to finance our
business and operations in China;
or
|
|
•
|
imposing
fines.
|
The
imposition of any of these penalties would severely disrupt our ability to
conduct business and have a material adverse effect on our financial condition,
results of operations and prospects.
We
may be adversely affected by complexity, uncertainties and changes in Chinese
regulation of drugstores and the practice of medicine.
The
Chinese government regulates drugstores and the practice of medicine including
foreign ownership, and the licensing and permit requirements. These laws and
regulations are relatively new and evolving, and their interpretation and
enforcement involve significant uncertainty. As a result, in certain
circumstances it may be difficult to determine what actions or omissions may be
deemed to be a violation of applicable laws and regulations. Issues, risks and
uncertainties relating to Chinese government regulation of the industry include
the following:
|
•
|
we only have contractual control
over Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service. We do not own
them due to the restriction of foreign investment in pharmacy chains
with 30 or more drugstores and foreign ownership of medical practice;
and
|
|
•
|
uncertainties relating to the
regulation of drugstores and medical practice in China, including evolving
licensing practices, means that permits, licenses or operations at our
company may be subject to challenge. This may disrupt our business, or
subject us to sanctions, requirements to increase capital or other
conditions or enforcement, or compromise enforceability of related
contractual arrangements, or have other harmful effects on
us.
|
18
The
interpretation and application of existing Chinese laws, regulations and
policies and possible new laws, regulations or policies have created substantial
uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, pharmaceutical businesses in China,
including our business
Our
contractual arrangements with Jiuzhou Pharmacy, Jiuzhou Clinic, Jiuzhou Service
and their respective owners may not be as effective in providing control over
these entities as direct ownership.
We have
no equity ownership interest in Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou
Service, and rely on contractual arrangements to control and operate these
companies and their businesses. These contractual arrangements may not be as
effective in providing control over these companies as direct ownership. For
example, Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service could fail to take
actions required for our business despite its contractual obligation to do so.
If Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service fails to perform under
their agreements with us, we may have to rely on legal remedies under Chinese
law, which may not be effective. In addition, we cannot assure you that the
respective owners of Jiuzhou Pharmacy, Jiuzhou Clinic or Jiuzhou Service will
act in our best interests.
Because
we rely on contractual arrangements to control HJ Group and for our revenue, the
termination of such agreements will severely and detrimentally affect our
continuing business viability under our current corporate
structure.
We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Jiuxin Management, our WFOE, and
each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service. All of our
business operations are conducted by, and we derive all of our revenues from,
the three HJ Group companies. Because neither we nor our WFOE own equity
interests of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, the
termination of the contractual arrangements would sever our ability to continue
receiving payments from these companies under our current holding company
structure.
As we do
not have any equity interests in any of the HJ Group companies, in the event the
contractual arrangements terminate, we will lose our control over them and their
business operations, as well as our sole source of revenues. Should this occur,
we may seek to acquire control of the HJ Group companies through other means,
although we cannot guarantee that we will do so, nor can we guarantee that we
will be successful if we do.
We cannot
assure you that there will not be any event or reason that may cause the
contractual arrangements to terminate. In the event that the contractual
arrangements are terminated for any reason, this may have a severe and
detrimental effect on our continuing business viability under our current
corporate structure, which in turn may affect the value of your
investment.
We
rely principally on dividends paid by our consolidated operating entities to
fund any cash and financing requirements we may have, and any limitation on the
ability of our consolidated PRC entities to pay dividends to us could have a
material adverse effect on our ability to conduct our business.
We are a
holding company, and rely principally on dividends paid by our consolidated PRC
operating entities for cash requirements, including the funds necessary to
service any debt we may incur. In particular, we rely on earnings generated by
each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, which are passed
on to us through Jiuxin Management. If any of the consolidated operating
entities incurs debt in its own name in the future, the instruments governing
the debt may restrict dividends or other distributions on its equity interest to
us. In addition, the PRC tax authorities may require us to adjust our taxable
income under the contractual arrangements in a manner that would materially and
adversely affect our ability to pay dividends and other distributions on our
equity interest.
Furthermore,
applicable PRC laws, rules and regulations permit payment of dividends by our
consolidated PRC entities only out of their retained earnings, if any,
determined in accordance with PRC accounting standards. Under PRC laws, rules
and regulations, our consolidated PRC entities are required to set aside at
least 10.0% of their after-tax profit based on PRC accounting standards each
year to their statutory surplus reserve fund until the accumulative amount of
such reserves reach 50.0% of their respective registered capital. As a result,
our consolidated PRC entities are restricted in their ability to transfer a
portion of their net income to us whether in the form of dividends, loans or
advances. As of December 31, 2009, our restricted reserves totaled RMB 9.5
million ($1.3 million) and we had unrestricted retained earnings of RMB
75.1 million ($11.0 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.
19
Management
members of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service have potential
conflicts of interest with us, which may adversely affect our business and your
ability for recourse.
Mr. Lei
Liu, chairman of the board of directors and our chief executive officer, is also
the executive director of Jiuzhou Pharmacy, a general partner of Jiuzhou Clinic,
and the supervising director of Jiuzhou Service. Mr. Chong’an Jin, one of our
directors, is the supervising director of Jiuzhou Pharmacy, the managing general
partner of Jiuzhou Clinic, and the executive director of Jiuzhou Service. Ms. Li
Qi, corporate secretary and also a member of the board of directors, is the
general manager of each of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service
and a general partner of Jiuzhou Clinic. Conflicts of interests between their
respective duties to our company and HJ Group may arise. As our directors and
executive officer (in the case of Mr. Liu), they have a duty of loyalty and care
to us under U.S. and Hong Kong law when there are any potential conflicts of
interests between our company and HJ Group. We cannot assure you, however, that
when conflicts of interest arise, every one of them will act completely in our
interests or that conflicts of interests will be resolved in our favor. For
example, they may determine that it is in HJ Group’s interests to sever the
contractual arrangements with Jiuxin Management, irrespective of the effect such
action may have on us. In addition, any one of them could violate his or her
legal duties by diverting business opportunities from us to others, thereby
affecting the amount of payment that HJ Group is obligated to remit to us under
the consulting services agreement.
In the
event that you believe that your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against HJ Group or
our officers or directors who are members of HJ Group’s management, all of whom
reside within China. Even if you are successful in bringing an action, the laws
of China may render you unable to enforce a judgment against the assets of
Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service and their respective
management, all of which are located in China.
Risks
Related to Doing Business in China
The
three HJ Group companies are subject to restrictions on making payments to
us.
We are a
holding company incorporated in Nevada and do not have any assets or conduct any
business operations other than our indirect investments in the three HJ Group
companies. As a result of our holding company structure, we rely entirely on
payments from these companies under their contractual arrangements with our
WFOE, Jiuxin Management. The Chinese government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. See “Government
control of currency conversion may affect the value of your investment.”
Furthermore, if our affiliated entity in China incurs debt on their own in the
future, the instruments governing the debt may restrict their ability to make
payments. If we are unable to receive all of the revenues from our operations
through these contractual arrangements, we may be unable to pay dividends on our
ordinary shares.
Uncertainties
with respect to the Chinese legal system could adversely affect us.
We
conduct our business primarily through the three HJ Group companies, all of
which are PRC entities. Our operations in China are governed by Chinese laws and
regulations. We are generally subject to laws and regulations applicable to
foreign investments in China and, in particular, laws applicable to wholly
foreign-owned enterprises. The Chinese legal system is based on written
statutes. Prior court decisions may be cited for reference but have limited
precedential value.
Since
1979, Chinese legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the Chinese legal system is
based in part on government policies and internal rules (some of which are not
published on a timely basis or at all) that may have a retroactive effect. As a
result, we may not be aware of our violation of these policies and rules until
some time after the violation. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us or our management.
We are a
holding company and do not have any assets or conduct any business operations
other than the contractual arrangements between Jiuxin Management and the three
HJ Group companies. In addition, all of HJ Group’s assets are located in, and
all of our other senior executive officers (excepting our chief financial
officer) reside within, China. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon our
senior executive officers and directors not residing in the United States,
including with respect to matters arising under U.S. federal securities laws or
applicable state securities laws. Moreover, our Chinese counsel has advised us
that China does not have treaties with the United States or many other countries
providing for the reciprocal recognition and enforcement of judgment of courts.
As a result, our public shareholders may have substantial difficulty in
protecting their interests through actions against our management or directors
than would shareholders of a corporation with assets and management members
located in the United States.
20
We
may need to obtain additional governmental approvals to open new drugstores. Our
inability to obtain such approvals will have a material adverse effect on our
business and growth.
According
to the Measures on the Administration of Foreign Investment in the Commercial
Sector promulgated by the PRC Ministry of Commerce (the “Measures”), which
became effective on June 1, 2004, a company that is directly owned by a
foreign invested enterprise needs to obtain relevant governmental approvals
before it opens new retail stores. However, there are no specific laws, rules or
regulations with respect to whether it is necessary for a company contractually
controlled by a foreign invested enterprise to obtain approvals to open new
retail stores. In addition, the Measures state that PRC Ministry of Commerce
will promulgate a detailed implementation regulation to govern foreign invested
enterprises engaging in drug sale. However, such implementation regulation has
not yet been promulgated. Therefore we cannot assure you that the PRC Ministry
of Commerce will not require that such approvals to be obtained. If additional
governmental approval is deemed to be necessary and we are not able to obtain
such approvals on a timely basis or at all, our business, financial condition,
results of operations and prospects, as well as the trading price of our common
stock, will be materially and adversely affected.
The
advent of recent healthcare reform directives from the PRC government may
increase both competition and our cost of doing business.
Under the
auspices of the Healthy China 2020 program (the “Program”), published by China’s
National Development and Reform Commission in October 2008, the PRC government
has set in motion a series of policies in fairly rapid successions aimed to
improve China’s healthcare system. Such policies include (1) discouraging
hospitals from both prescribing and dispensing medication, (2) the unveiling of
formal healthcare reform guidelines in April 2009, aimed to improve the
availability of and subsidies for “essential” drugs, and (3) the announcement of
China’s National Essential Drugs List (“NEDL”) in August 2009, listing
approximately 300 medicines that are expected to be sold at
government-controlled prices. While an underlying goal of these policies is to
make drugs more accessible to China’s poorer populations, such policy as
discouraging hospitals from both prescribing and dispensing medication also
serve to create opportunities that in turn will intensify business competition
in the Chinese retail drugstore industry, as well as competition for skilled
labor and retail spaces. Additionally, we expect the NEDL to lead to a rise in
the number of government-subsidized community healthcare service centers, which
will erode the convenience and price advantage that our drugstores traditionally
enjoy against hospitals.
Governmental
control of currency conversion may affect the value of your
investment.
The
Chinese government imposes controls on the convertibility of RMB into foreign
currencies and, in certain cases, the remittance of currency out of China. We
receive substantially all of our revenues in RMB. Under our current structure,
our income is primarily derived from payments from the three HJ Group companies.
Shortages in the availability of foreign currency may restrict the ability of
our subsidiaries and our PRC affiliated entities to remit sufficient foreign
currency to pay dividends or other payments to us, or otherwise satisfy their
foreign currency denominated obligations. Under existing Chinese foreign
exchange regulations, payments of current account items, including profit
distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from
China State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The Chinese government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may
not be able to pay dividends in foreign currencies to our
stockholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues, costs, and financial assets are mostly denominated in RMB while
our reporting currency is the U.S. dollar. Accordingly, this may result in gains
or losses from currency translation on our financial statements. We
rely entirely on fees paid to us by our affiliated entities in China. Therefore,
any significant fluctuation in the value of RMB may materially and adversely
affect our cash flows, revenues, earnings and financial position, and the value
of, and any dividends payable on, our stock in U.S. dollars. For example, an
appreciation of RMB against the U.S. dollar would make any new RMB denominated
investments or expenditures more costly to us, to the extent that we need to
convert U.S. dollars into RMB for such purposes. An appreciation of RMB against
the U.S. dollar would also result in foreign currency translation losses for
financial reporting purposes when we translate our U.S. dollar denominated
financial assets into RMB, as RMB is our reporting currency.
Dividends
we receive from our subsidiary located in the PRC may be subject to PRC
withholding tax.
The
recently enacted PRC Enterprise Income Tax Law, or the EIT Law, and the
implementation regulations for the EIT Law issued by the PRC State Council,
became effective as of January 1, 2008. The EIT Law provides that a maximum
income tax rate of 20% is applicable to dividends payable to non-PRC investors
that are “non-resident enterprises,” to the extent such dividends are derived
from sources within the PRC, and the State Council has reduced such rate to 10%
through the implementation regulations. We are a Nevada holding company and
substantially all of our income is derived from the operations of the three HJ
Group companies located in the PRC, who are contractually obligated to pay their
quarterly profits to our WFOE. Therefore, dividends paid to us by our
WFOE in China may be subject to the 10% income tax if we are
considered as a “non-resident enterprise” under the EIT Law. If we are required
under the EIT Law and its implementation regulations to pay income tax for any
dividends we receive from our WFOE, it may have a material and adverse effect on
our net income and materially reduce the amount of dividends, if any, we may pay
to our shareholders.
21
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.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
Risks
Related to an Investment in Our Securities
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for our
operations.
The
application of the "penny stock" rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
As the
anticipated 1-for-2 reverse stock split has not yet occurred, the trading price
of our common stock is currently below $5 per share. As such, 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.
22
Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at the
optimum trading prices.
The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a bid
price for securities bought and sold through the OTC Bulletin Board. Due to the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.
Our
common shares are thinly traded and, you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We
cannot predict the extent to which an active public market for our common stock
will develop or be sustained. We have applied for listing on The NASDAQ
Capital Market, but cannot assure you that this listing or listing on any other
exchange will ever occur.
Our
common shares have historically been sporadically or "thinly-traded" on the OTC
Bulletin Board, meaning that the number of persons interested in purchasing our
common shares at or near bid prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common stock will develop or be sustained, or that
current trading levels will be sustained.
The
market price for our common stock is particularly volatile given our status as a
relatively small company with a small and thinly traded “float” and lack of
current revenues that could lead to wide fluctuations in our share price. The
price at which you purchase our common stock may not be indicative of the price
that will prevail in the trading market. You may be unable to sell your common
stock at or above your purchase price if at all, which may result in substantial
losses to you.
The
market for our common shares is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
lack of revenues or profits to date and uncertainty of future market acceptance
for our current and potential products. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined
to sell their shares on the market more quickly and at greater discounts than
would be the case with the stock of a seasoned issuer. The following factors may
add to the volatility in the price of our common shares: actual or anticipated
variations in our quarterly or annual operating results; adverse outcomes,
additions or departures of our key personnel, as well as other items discussed
under this "Risk Factors" section, as well as elsewhere in this prospectus. Many
of these factors are beyond our control and may decrease the market price of our
common shares, regardless of our operating performance. We cannot make any
predictions or projections as to what the prevailing market price for our common
shares will be at any time, including as to whether our common shares will
sustain their current market prices, or as to what effect that the sale of
shares or the availability of common shares for sale at any time will have on
the prevailing market price.
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.
23
Our
officers and directors own a substantial portion of our outstanding common
stock, which will enable them to influence many significant corporate actions
and in certain circumstances may prevent a change in control that would
otherwise be beneficial to our shareholders.
Our
directors and executive officers collectively control approximately 63.8% of our
outstanding shares of stock that are entitled to vote on all corporate actions.
These stockholders, acting together, could have a substantial impact on matters
requiring the vote of the shareholders, including the election of our directors
and most of our corporate actions. This control could delay, defer or prevent
others from initiating a potential merger, takeover or other change in our
control, even if these actions would benefit our shareholders and us. This
control could adversely affect the voting and other rights of our other
shareholders and could depress the market price of our common
stock.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and employees.
Our
bylaws contain specific provisions that eliminate the liability of our directors
for monetary damages to our company and shareholders, and we are prepared to
give such indemnification to our directors and officers to the extent provided
by Nevada law. We may also have contractual indemnification obligations under
our employment agreements with our officers. The foregoing indemnification
obligations could result in our company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant costs may also
discourage our company from bringing a lawsuit against directors and officers
for breaches of their fiduciary duties, and may similarly discourage the filing
of derivative litigation by our shareholders against our directors and officers
even though such actions, if successful, might otherwise benefit our company and
shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
|
•
|
actual or anticipated
fluctuations in our quarterly operating
results;
|
|
•
|
changes in financial estimates by
securities research
analysts;
|
|
•
|
conditions in the retail pharmacy
markets;
|
|
•
|
changes in the economic
performance or market valuations of other retail pharmacy
operators;
|
24
|
•
|
announcements by us or our
competitors of new products, acquisitions, strategic partnerships, joint
ventures or capital
commitments;
|
|
•
|
addition or departure of key
personnel;
|
|
•
|
fluctuations of exchange rates
between RMB and the U.S.
dollar;
|
|
•
|
intellectual property litigation;
and
|
|
•
|
general economic or political
conditions in China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
Volatility
in our common share price may subject us to securities litigation
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
As an illustration of such volatility, the closing price of our common stock
during the 52 weeks preceding the date of this prospectus ranged from a low
of $0.30 to
a high of $6.40, after giving effect to the anticipated 1-for-2 reverse stock
split. 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.
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
Since HJ
Group operated as a private enterprise without public reporting obligations
prior to the Share Exchange, we have committed limited personnel and resources
to the development of the external reporting and compliance obligations that
would be required of a public company. Recently, we have taken measures to
address and improve our financial reporting and compliance capabilities and we
are in the process of instituting changes to satisfy our obligations in
connection with joining a public company, when and as such requirements become
applicable to us. Prior to taking these measures, we did not believe we had the
resources and capabilities to do so. We plan to obtain additional financial and
accounting resources to support and enhance our ability to meet the requirements
of being a public company. We will need to continue to improve our financial
reporting systems and procedures, and documentation thereof. If our financial
reporting systems or procedures fail, we may not be able to provide accurate
financial statements on a timely basis or comply with the Sarbanes-Oxley Act of
2002 as it applies to us. Any failure of our ability to provide accurate
financial statements could cause the trading price of our common stock to
decrease substantially.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company prior to the Share Exchange. We
will incur costs associated with our public company reporting requirements. We
also anticipate that we will incur costs associated with recently adopted
corporate governance requirements, including certain requirements under the
Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and the
Financial Industry Regulatory Authority (“FINRA”). We expect these rules and
regulations, in particular Section 404 of the Sarbanes-Oxley Act of 2002, to
significantly increase our legal and financial compliance costs and to make some
activities more time-consuming and costly. Like many smaller public companies,
we face a significant impact from required compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies
to evaluate the effectiveness of internal control over financial reporting and
the independent auditors to attest to the effectiveness of such internal
controls and the evaluation performed by management. The SEC has adopted rules
implementing Section 404 for public companies as well as disclosure
requirements. The Public Company Accounting Oversight Board, or PCAOB, has
adopted documentation and attestation standards that the independent auditors
must follow in conducting its attestation under Section 404. We are currently
preparing for compliance with Section 404; however, there can be no assurance
that we will be able to effectively meet all of the requirements of Section 404
as currently known to us in the currently mandated timeframe. Any failure to
implement effectively new or improved internal controls, or to resolve
difficulties encountered in their implementation, could harm our operating
results, cause us to fail to meet reporting obligations or result in management
being required to give a qualified assessment of our internal controls over
financial reporting or our independent auditors providing an adverse opinion
regarding management’s assessment. Any such result could cause investors to lose
confidence in our reported financial information, which could have a material
adverse effect on our stock price.
25
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 10
million shares of our common stock outstanding as of March 15, 2010 (after
giving effect to the anticipated 1-for-2 reverse stock split),
approximately 3.62 million shares are, or will be, freely tradable without
restriction, unless held by our "affiliates", as of such date. Any
substantial sale of our common stock pursuant to Rule 144 or pursuant to any
resale prospectus (including sales by investors of securities acquired in
connection with this Offering) may have a material adverse effect on the market
price of our common stock. Under Rule 144, we estimate that our founders and
service consultants who received shares in September 2009 as a result of the
Share Exchange will be unable to sell these shares until September 2010. If our
founders and service consultants who received shares were to sell their shares,
they would be subject to volume and/or other restrictions imposed by Rule
144.
If
we fail to remain current in our reporting requirements, our securities could be
removed from the OTC Bulletin Board, which would limit the ability of
broker-dealers to sell our securities and the ability of stockholders to sell
their securities in the secondary market.
Companies
trading on the OTC Bulletin Board must be reporting issuers under Section 12 of
the Exchange Act, and must be current in their reports under Section 13, in
order to maintain price quotation privileges on the OTC Bulletin Board. If we
fail to remain current on our reporting requirements, we could be removed from
the OTC Bulletin Board. As a result, the market liquidity for our securities
could be severely adversely affected by limiting the ability of broker-dealers
to sell our securities and the ability of stockholders to sell their securities
in the secondary market.
There
is no guarantee that our shares will be listed on The NASDAQ Capital
Market.
We
have applied for listing of our common stock on The NASDAQ Capital Market. After
the consummation of this offering, we believe that we satisfy the listing
requirements and expect that our common stock will be listed on The NASDAQ
Capital Market. Such listing, however, is not guaranteed. If the application is
not approved, the shares of our common stock will continue to be traded on the
OTC Bulletin Board. Even if such listing is approved, there can be no assurance
any broker will be interested in trading our stock. Therefore, it may be
difficult to sell your shares of common stock if you desire or need to sell
them. Our lead underwriter, Madison Williams and Company, is not
obligated to make a market in our securities, and even after making a market,
can discontinue market making at any time without notice. Neither we nor the
underwriters can provide any assurance that an active and liquid trading market
in our securities will develop or, if developed, that the market will
continue.
Lack
of experience of our lead underwriter could adversely impact this
offering.
While
certain of the officers of Madison Williams, our lead underwriter, have
significant experience in corporate finance and the underwriting of securities,
Madison Williams has previously acted as the lead underwriter in only two other
public offering transactions. There can be no assurance that the lead
underwriter’s lack of experience in this area will not adversely affect this
offering or the subsequent public market for our common stock. In particular,
the lead underwriter is responsible for conducting due diligence of our Company,
reviewing disclosures contained in this prospectus and in determining the
pricing of the common stock to be sold in this offering. The lead underwriter’s
lack of experience in these matters could result in its failure to adequately
detect disclosure contained in this prospectus which is inaccurate or
incomplete.
26
SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, and (e) our anticipated needs for
working capital. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of
these words or other variations on these words or comparable terminology. This
information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to be
materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may be
found under “Prospectus Summary”, “Management's Discussion and Analysis of
Financial Condition and Results of Operations” and “Description of Business,” as
well as in this prospectus generally. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, the risks outlined under “Risk
Factors” and matters described in this prospectus generally. This prospectus may
contain market data related to our business, which may have been included in
articles published by independent industry sources. We are responsible for the
accuracy and completeness of the historical information contained in this market
data as of the date of this prospectus. However, this market data also includes
projections that are based on a number of assumptions. If any one or more of
these assumptions turns out to be incorrect, actual results may differ
materially from the projections based on these assumptions. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this prospectus will in fact occur. In addition to the
information expressly required to be included in this filing, we will provide
such further material information, if any, as may be necessary to make the
required statements, in light of the circumstances under which they are made,
not misleading.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this prospectus as well as other pubic reports which
may be filed with the United States Securities and Exchange Commission. You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances, unless and to the extent required by applicable law. Neither the
Private Securities Litigation Reform Act of 1995 nor Section 27A of the
Securities Act of 1933, as amended, provides any protection for statements made
in this prospectus.
27
DETERMINATION
OF OFFERING PRICE
Although
our common stock is currently traded on the OTC Bulletin Board, we have applied
to have our common stock listed for trading on The NASDAQ Capital Market which
we expect to occur immediately prior to the date of this prospectus. Trading of
a security on The NASDAQ Capital Market is made through a market maker. Our lead
underwriter, Madison Williams, however, is not a market maker on The NASDAQ
Capital Market and is not obligated to make a market in our securities, and even
after making a market, can discontinue market making at any time without notice.
Neither we nor the underwriters can provide any assurance that an active and
liquid trading market in our securities will develop or, if developed, that the
market will continue.
The
public offering price of the shares offered by this prospectus has been
determined by negotiation between us and the underwriters. Among the factors
considered in determining the public offering price of the shares
were:
|
•
|
our history and our
prospects;
|
|
•
|
the industry in which we
operate;
|
|
•
|
our past and present operating
results;
|
|
•
|
the previous experience of our
executive officers; and
|
|
•
|
the general condition of the
securities markets at the time of this
offering.
|
The
offering price stated on the cover page of this prospectus should not be
considered an indication of the actual value of the shares. That price is
subject to change as a result of market conditions and other factors, and we
cannot assure you that the shares can be resold at or above the public offering
price.
28
USE
OF PROCEEDS
Based
on an assumed offering price of $6.00 per share (the midpoint of our expected
offering range of $5.00 to $7.00), we estimate the gross proceeds from the sale
of 4,350,000 shares of common stock, prior to deducting underwriting
discounts and commissions and the estimated offering expenses payable by us,
will be approximately $26.1 million (approximately $30.0 million if
the over-allotment option granted to the underwriters is exercised in
full).
We
estimate that we will receive net proceeds of $ 23.5 million, after
deducting for underwriting discounts and commissions and our underwriter’s
expense allowance and estimated expenses of approximately $2.6 million,
which includes legal, accounting, printing costs and various fees associated
with the registration and listing of our shares. If the underwriters exercise
their right to purchase an additional 652,500 shares shares of common
stock to cover over-allotments, we will receive an additional
$3.64 million, after deducting $0.27 million for underwriting
discounts and commissions. Assuming no exercise of our underwriters’
over-allotment option, we intend to use the net proceeds of the offering as
follows:
Application of
Net Proceeds
|
Percentage of
Net Proceeds
|
|||||||
Addition
of new stores within Zhejiang Province (1)
|
$
|
8,800,000
|
38
|
%
|
||||
Acquisition
of leaseholds within Zhejiang Province (2)
|
12,700,000
|
54
|
%
|
|||||
General
marketing (3)
|
500,000
|
2
|
%
|
|||||
Working
capital (4)
|
1,500,000
|
6
|
%
|
|||||
Total
|
$
|
23,500,000
|
100
|
%
|
|
(1)
|
We are planning to build
additional drugstores throughout Zhejiang province organically as
well as by acquisition. To build a 3,000 square foot store, we estimate
that our initial cash outlay will be approximately RMB 3.0 million ($0.44
million) which includes initial inventory stocking (approximately 1.2
million RMB), first year lease prepayment (0.7 million RMB), pre-marketing
costs (0.5 million RMB) and leasehold improvements (0.6 million RMB). Note
that these are general estimates and the actual cost may vary depending
upon the location.
|
|
(2)
|
In addition to directly
opening drugstores, we may acquire existing drugstores or other
storefronts that could potentially be converted into drugstores throughout
Zhejiang province. In addition to the costs estimated in (1) we may be
required to make a payment to the existing business owner to purchase the
leasehold rights. As of the date of this prospectus, we have not entered
into any letter of intent with any potential acquisition targets. As the
significant majority of our stores have not been established through
acquisition, our estimate of the costs of doing so may not be
accurate.
|
|
(3)
|
We will increase our spending on
marketing and advertising through various channels to strengthen our brand
in new cities and throughout Zhejiang
Province.
|
|
(4)
|
Working capital will mainly be
used to make advances to suppliers to obtain more favorable costs on the
products that we sell.
|
The
amounts actually spent by us for any specific purpose may vary significantly and
will depend on a number of factors, including the progress of our current
efforts within the city of Hangzhou. Accordingly, our management has broad
discretion to allocate the net proceeds. Pending the uses described above, we
intend to invest the net proceeds of this offering in short-term,
interest-bearing, investment-grade securities.
29
CAPITALIZATION
The
following table sets forth our capitalization as of December 31,
2009:
·
|
on
an actual and pro-forma basis (giving effect to the anticipated 1-for-2
reverse stock split); and
|
·
|
on
a pro forma as adjusted basis to give effect to the sale
of 4,350,000 shares of common stock in this offering at an
assumed public offering price of $6.00 per share, which is the
midpoint of our expected offering range, after deducting the estimated
underwriting discount and commissions and estimated offering expenses
payable by us and application of net
proceeds.
|
The
“pro forma” column represents the capitalization the Company will receive as a
result of this offering assuming that the public offering price is $6.00 per
share and assuming that the total number of shares sold is 4,350,000 shares
(collectively “Pro-Forma Capitalization”) while the “pro forma as adjusted”
column combines the Pro-Forma Capitalization with our capitalization as of
December 31, 2009.
You
should read this table together with “Use of Proceeds,” “Summary Financial
Information,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and the related
notes appearing elsewhere in this prospectus.
As of December 31, 2009
|
||||||||||||
Actual
|
Pro Forma
|
Pro-Forma
As Adjusted (1)
|
||||||||||
Common stock, $0.001 par value, 250,000,000 shares authorized; 10,000,000
shares issued and outstanding.
|
$
|
10,000
|
$
|
4,350
|
$
|
14,350
|
||||||
Paid-in-capital
|
$
|
877,884
|
$
|
26,095,650
|
$
|
26,973,534
|
||||||
Statutory
reserves
|
$
|
1,309,109
|
$
|
—
|
$
|
1,309,109
|
||||||
Retained
earnings
|
$
|
10,982,385
|
$
|
—
|
$
|
10,982,385
|
||||||
Accumulated
other comprehensive income (loss)
|
$
|
(349,746
|
)
|
$
|
—
|
$
|
(349,746)
|
|||||
Total
shareholder’s equity
|
$
|
12,829,632
|
$
|
26,100,000
|
$
|
38,929,632
|
||||||
Total
capitalization
|
$
|
12,829,632
|
$
|
26,100,000
|
$
|
38,929,632
|
(1)
|
A $1.00 increase
(decrease) in the assumed offering price of $6.00 per share would
increase (decrease) by approximately $3.9 million each of pro forma
as adjusted paid-in capital, total stockholder’s equity and total
capitalization, assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and after
deducting the underwriting discounts and commissions payable to the
underwriters and the estimated offering expenses payable by
us.
|
30
DILUTION
As of
December 31, 2009, we had a net tangible book value of $12,829,632 or $1.28 per
share (after giving effect to the anticipated 1-for-2 reverse stock split). Net
tangible book value represents our total tangible assets, less all liabilities,
divided by the number of shares of common stock outstanding. Without taking into
account any changes in such net tangible book value after December 31, 2009,
other than to give effect to our sale of 4,350,000 shares of common
stock offered hereby (based on an assumed offering price of $5.00), as well as
the 130,500 shares underlying the underwriter representative’s common stock
purchase option, the pro forma net tangible book value per share at December 31,
2009 would have been $2.27. This amount represents an immediate increase in net
tangible book value of $0.99 per share to our current shareholders and an
immediate decrease in net tangible book value of $2.73 per share to new
investors purchasing shares in this offering as illustrated in the following
table:
Public
offering price per share (1)
|
$ | 5.00 | ||
Net
tangible book value per share before the offering
|
$ | 1.28 | ||
Increase
in net tangible book value per share to existing shareholders attributable
to new investors (after deduction of the estimated underwriting discount
and other offering expenses to be paid by Company)
|
$ | 0.99 | ||
Pro-forma
net tangible book value per share after the offering
|
$ | 2.27 | ||
Decreased
value per share to new investors (determined by taking the adjusted net
tangible book value after the offering and deducting the amount of cash
paid by a new investor for a share of common stock)
|
$ | 2.73 |
(1)
|
We use an offering price of
$5.00 per share in order give the most dilutive effect to our
existing shareholders with respect to t the
transaction.
|
The
following table sets forth, on a pro forma basis as of December 31, 2009, the
number of shares of common stock purchased from us, the total consideration paid
and the average price per share paid by the existing shareholders and by the new
investors, assuming in the case of new investors a public offering price of
$5.00 per share, before deductions of the underwriting and other offering
expenses:
Shares
Purchased
Number
|
Percent
|
Total
Consideration
Amount
(in 000’s)
|
Percent
|
Average
Price
Per
Share
|
||||||||||||||||
Existing Shareholders
|
10,000,000 | 70 | % | $ | 868 | 4 | % | $ | 0.08 | |||||||||||
New
Investors
|
4,350,000 | 30 | % | $ | 21,750 | 96 | % | $ | 5.00 | |||||||||||
Total
|
14,350,000 | 100 | % | $ | 22,618 | 100 | % |
The
foregoing table does not include the impact of the exercise of the underwriter’s
overallotment option.
31
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our results of operations and financial
condition for the three and nine months ended December 31, 2009 and 2008, and
for the fiscal years ended March 31, 2009 and 2008, should be read in
conjunction with the Summary Financial Information and our financial statements
and the notes to those financial statements that are included elsewhere in this
prospectus. 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
“Description of Business” sections and elsewhere in this prospectus. We use
words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,”
“predict,” and similar expressions to identify forward-looking statements.
Although we believe the expectations expressed in these forward-looking
statements are based on reasonable assumptions within the bound of our knowledge
of our business, our actual results could differ materially from those discussed
in these statements. Factors that could contribute to such differences include,
but are not limited to, those discussed in the “Risk Factors” section of this
prospectus. We undertake no obligation to update publicly any forward-looking
statements for any reason even if new information becomes available or other
events occur in the future.
Our
financial statements are prepared in US$ and in accordance with accounting
principles generally accepted in the United States. See “Exchange Rates” below
for information concerning the exchanges rates at which Renminbi (“RMB”) were
translated into US$ at various pertinent dates and for pertinent
periods.
Overview
China
Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated
in Nevada on December 19, 2006, originally under the name Kerrisdale Mining
Corporation. On September 24, 2009, The Company changed its name to
“China Jo-Jo Drugstores, Inc.” in connection with the share exchange transaction
described below.
On
September 17, 2009, the Company completed a share exchange transaction with
Renovation Investment (Hong Kong) Co., Ltd. (“Renovation HK”) a Hong Kong
company, and Renovation HK became a wholly-owned subsidiary of the Company. On
the closing date, the Company issued 7,900,000 of its common stock (after
giving effect to the anticipated 1-for-2 reverse stock split to
Renovation HK’s stockholders in exchange for 100% of the capital stock of
Renovation HK. Prior to the share exchange transaction, the Company had
2,100,000 shares of common stock issued and outstanding (after
giving effect to the anticipated 1-for-2 reverse stock split). After the
share exchange transaction, the Company had 10,000,000 shares of common stock
outstanding (after
giving effect to the anticipated 1-for-2 reverse stock split) and
Renovation HK’s stockholders owned 79% of the issued and outstanding shares. The
management members of Renovation HK became the directors and officers of the
Company. The share exchange transaction was accounted for as a
reverse acquisition and recapitalization and, as a result, the consolidated
financial statements of the Company (the legal acquirer) is, in substance, those
of Renovation HK (the accounting acquirer), with the assets and liabilities, and
revenues and expenses, of the Company being included effective from the date of
the share exchange transaction.
Renovation
HK is a holding company that, through its wholly-owned PRC subsidiary, Zhejiang
Jiuxin Investment Management Co., Ltd. (“Jiuxin Management”), controls three PRC
companies, namely Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou
Pharmacy”), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western
Medicine General Partnership (“Jiuzhou Clinic”), and Hangzhou Jiuzhou Medical
& Public Health Service Co., Ltd. (“Jiuzhou Service”), by a series of
contractual arrangements. All of our business operations are carried out by HJ
Group. Throughout this prospectus, Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou
Service are sometimes collectively referred to “HJ Group,” and Renovation HK,
Jiuxin Management and HJ Group are sometimes collectively referred to as “Grand
Pharmacy Group.”
The
contractual arrangements with HJ Group are necessary to comply with Chinese laws
limiting foreign ownership of certain companies. Through these contractual
arrangements, we have the ability to substantially influence the daily
operations and financial affairs of the three HJ Group companies, appoint their
senior executives and approve all matters requiring approval of their equity
owners. As a result of these contractual arrangements, which enable us to
control HJ Group, we are considered the primary beneficiary of HJ Group. Please
see Note 1 to our consolidated financial statements for the nine months ended
December 31, 2009, for the impact of the contractual arrangements on our
consolidated financial statements.
On
October 27, 2009, we were made a party to a series of amendments to the
contractual arrangements with HJ Group. Specifically, four of the five
agreements comprising the contractual arrangements – namely, the consulting
services agreement, the operating agreement, the option agreement and the voting
rights proxy agreement – were amended to remove a provision terminating these
agreements on May 1, 2010 unless we complete a financing of at least $25 million
and the listing of our common stock on The NASDAQ Capital Market by
such date. As amended:
32
|
·
|
the consulting services agreement
shall remain in effect for the maximum period of time permitted by law,
unless sooner terminated by Jiuxin Management or if either Jiuxin
Management or an HJ Group company becomes bankrupt or insolvent, or
otherwise dissolves or ceases business
operations;
|
|
·
|
the operating agreement shall
remain in effect unless terminated by Jiuxin
Management;
|
|
·
|
the option agreement shall remain
in effect for the maximum period time permitted by law;
and
|
|
·
|
the voting rights proxy agreement
shall remain in effect for the maximum period of time permitted by
law.
|
Critical
Accounting Policies and Estimates
In
preparing our consolidated financial statements in accordance with accounting
principles generally accepted in the United States, we are required to make
judgments, estimates and assumptions that affect: (i) the reported amounts
of our assets and liabilities; (ii) the disclosure of our contingent assets
and liabilities at the end of each reporting period; and (iii) the reported
amounts of revenue and expenses during each reporting period. We continually
evaluate these estimates based on our own historical experience, knowledge and
assessment of current business and other conditions, our expectations regarding
the future based on available information and reasonable assumptions, which
together form our basis for making judgments about matters that are not
readily apparent from other sources. Since the use of estimates is an integral
component of the financial reporting process, our actual results could differ
from those estimates.
We
believe that any reasonable deviation from those judgments and estimates would
not have a material impact on our financial condition or results of operations.
To the extent that the estimates used differ from actual results, however,
adjustments to the statement of operations and corresponding balance sheet
accounts would be necessary. These adjustments would be made in future financial
statements.
When
reading our financial statements, you should consider: (i) our critical
accounting policies; (ii) the judgment and other uncertainties affecting
the application of such policies; and (iii) the sensitivity of reported
results to changes in conditions and assumptions. We believe the following
accounting policies involve the most significant judgment and estimates used in
the preparation of our financial statements. We have not made any material
changes in the methodology used in these accounting policies during the past
eighteen months.
Revenue
recognition
Revenue
from sales of prescription medicine at the drugstores is recognized when the
prescription is filled and the customer picks up and pays for the
prescription.
Revenue
from sales of other merchandise at the drugstores is recognized at the point of
sale, which is when the customer pays for and receives the
merchandise.
Revenue
from medical services (which is nominal) is recognized after the service has
been rendered to the customer.
Revenue
from sales of merchandise to non-retail customers is recognized when the
following conditions are met: 1) persuasive evidence of an arrangement exists
(sales agreements and customer purchase orders are used to determine the
existence of an arrangement); 2) delivery of goods has occurred and risks and
benefits of ownership have been transferred, which is when the goods are
received by the customer at its designated location in accordance with the sales
terms; 3) the sales price is fixed or determinable; and 4) collectability is
probable. Historically, sales returns have been immaterial.
Our revenue
is net of value added tax (“VAT”) collected on behalf of tax authorities in
respect of the sale of merchandise. VAT collected from customers, net of VAT
paid for purchases, is recorded as a liability in the balance sheet until it is
paid to the tax authorities.
Vendor
allowances
The
Company accounts for vendor allowances according the accounting standards, Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor, and
by Reseller to Sales
Incentives Offered to Consumers by Manufacturers. Vendor allowances
reduce the carrying value of inventories and subsequently transferred to cost of
goods sold when the inventories are sold, unless those allowances are
specifically identified as reimbursements for advertising, promotion and other
services, in which case they are recognized as a reduction of the related
advertising and promotion costs.
Slotting
allowances are a major portion of total allowances. With slotting allowances,
the vendors reimburse the Company for the cost of placing new product on the
shelf. The Company has no obligation or commitment to keep the product on the
shelf for a minimum period.
A small
portion of vendor allowance also includes advertising and promotion allowances
for the promotion of vendors' products in stores. The promotion may be any
combination of a temporary price reduction or a feature in print
ads.
33
Depreciation and
Amortization
Our
non-current assets include property and equipment, including leasehold
improvements, long term deposits and long term advances to suppliers. We
depreciate our equipment assets using the straight-line method over the
estimated useful lives of the assets. We make estimates of the useful lives of
the equipment (including the salvage values), in order to determine the amount
of depreciation expense to be recorded during any reporting period. We amortize
leasehold improvements of our retail drugstores and other business premises over
the shorter of five years or lease term. A majority of our leases have a
five-year term. We estimate the useful lives of our other property and equipment
at the time we acquire the assets based on our historical experience with
similar assets as well as anticipated technological and other changes. If
technological changes were to occur more rapidly than anticipated or in a
different form than anticipated, we may shorten the useful lives assigned to
these assets as appropriate, which will result in the recognition of increased
depreciation and amortization expense in future periods. There has been no
change to the estimated useful lives and salvage values during the nine months
ended December 31, 2009 and 2008.
Impairment of Long-Lived
Assets
We
evaluate our long lived tangible and intangible assets for impairment, at least
annually, but more often whenever events or changes in circumstances indicate
that the carrying value may not be recoverable from its estimated future cash
flows. Recoverability is measured by comparing the asset’s net book value to the
related projected undiscounted cash flows from these assets, considering a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles. If the net book value
of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss. Based on its review, we believe that, as of December 31, 2009,
there was no impairment.
Inventories
We
state our inventory at the lower of cost or market. Cost is determined
using the weighted average cost method. Market is the lower of replacement cost
or net realizable value. We carry out physical inventory counts on a monthly
basis at each store and distribution location to ensure that the amounts
reflected in the consolidated financial statements at each reporting period are
properly stated and valued. We record write-downs to inventory for
shrinkage losses and damaged merchandise that are identified during the
inventory counts. The inventory write downs for the nine months ended December
31, 2009 and 2008 have been immaterial.
Recent
Accounting Pronouncements
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. On July 1, 2009, the Company adopted this
accounting standard, but it did not have a material impact on the disclosures
related to its consolidated financial statements.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This accounting
standard requires greater transparency and additional disclosures for transfers
of financial assets and the entity’s continuing involvement with them and
changes the requirements for derecognizing financial assets. In addition, it
eliminates the concept of a qualifying special-purpose entity (“QSPE”). This
accounting standard is effective for financial statements issued for fiscal
years beginning after November 15, 2009, and the Company does not expect this
standard to have a material effect on its consolidated financial
statements.
In June
2009, the FASB also issued an accounting standard amending the accounting and
disclosure requirements for the consolidation of variable interest entities
(“VIEs”). The elimination of the concept of a QSPE, as discussed above, removes
the exception from applying the consolidation guidance within this accounting
standard. Further, this accounting standard requires a company to perform a
qualitative analysis when determining whether or not it must consolidate a VIE.
It also requires a company to continuously reassess whether it must consolidate
a VIE. Additionally, it requires enhanced disclosures about a company’s
involvement with VIEs and any significant change in risk exposure due to that
involvement, as well as how its involvement with VIEs impacts the company’s
financial statements. Finally, a company will be required to disclose
significant judgments and assumptions used to determine whether or not to
consolidate a VIE. This accounting standard is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and the
Company is currently assessing the impact of adoption this
standard.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The Company is currently evaluating the impact of this ASU on its
consolidated financial statements.
34
In
October 2009, FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The Company is currently assessing the impact of this ASU on its
consolidated financial statements.
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 regarding accounting and reporting for
decreases in ownership of a subsidiary. Under this guidance, an entity is
required to deconsolidate a subsidiary when the entity ceases to have a
controlling financial interest in the subsidiary. Upon deconsolidation of
a subsidiary, and entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value. In
contrast, an entity is required to account for a decrease in its ownership
interest of a subsidiary that does not result in a change of control of the
subsidiary as an equity transaction. This ASU clarifies the scope of the
decrease in ownership provisions, and expands the disclosures about the
deconsolidation of a subsidiary or de-recognition of a group of assets.
This ASU is effective for beginning in the first interim or annual
reporting period ending on or after December 31, 2009. The Company is
currently evaluating the impact of this ASU; however, the Company does not
expect the adoption of this ASU to have a material impact on its consolidated
financial statements.
In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on its consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and describe
the reasons for the transfers. 2) Activity in Level 3 fair
value measurements. In the reconciliation for fair value measurements
using significant unobservable inputs (Level 3), a reporting entity should
present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number).This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3.The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
35
Results
of Operations
Results
of Operations - Three Months ended December 31, 2009 as compared to Three Months
ended December 31, 2008
Revenue.
Our revenue increased by $3,360,944 or 29.1% to $14,923,706 for the three
months ended December 31, 2009 from $11,562,762 for the three months ended
December 31, 2008 due to operating additional store locations. Of this increase,
38.7% or $1,302,166 was from new stores that were opened subsequent to December
31, 2008. We operated 23 stores as of December 31, 2009, as compared to 15
stores as of December 31, 2008. We anticipate that our overall revenue will
continue to increase as we open additional stores.
Gross Profit.
Our gross profit increased by 43.4% to $4,766,835 for the three months
ended December 31, 2009 from $3,324,684 for the three months ended December 31,
2008. Our gross margin slightly increased from 28.8% for the three months ended
December 31, 2008 to 31.9% for the three months ended December 31, 2009. We
anticipate that our overall gross profit will continue to increase as our sales
increase. Additionally, we anticipate that our gross margin will increase as we
will be able to obtain better pricing terms from our suppliers and achieve
further economies of scale as a result of purchasing larger quantities of
products. We presently do not privately label any of our products and are
constantly adjusting our product mix to meet customer demand and to maximize our
gross margin.
Sales and
Marketing Expenses. Our sales and marketing expenses increased by 87.1%
to $912,312 for the three months ended December 31, 2009 from $487,395 for the
three months ended December 31, 2008 and was a primary driver of our increased
revenues during the quarter. The increase in sales and marketing expense was
primarily a result of the continued expansion of our drugstore chain from 15
stores for the three months ended December 31, 2008 to 23 stores for the three
months ended December 31, 2009. Sales and marketing expenses as a percentage of
our revenue increased to 6.1% for the three months ended December 31, 2009 from
4.2% for the three months ended December 31, 2008. We expect that our sales and
marketing expenses will increase as we continue to expand our store
network.
General and
Administrative Expenses. Our general and administrative expenses
increased by 296.7% to $441,861 for the three months ended December 31, 2009
from $111,386 for the three months ended December 31, 2008 as a result of adding
additional infrastructure. General and administrative expenses as a
percentage of our revenue increased to 3.0% for the three months ended
December 31, 2009 from 1.0% for the three months ended December 31, 2008.
As we continue to open drugstores, further develop our infrastructure,
and incur expenses related to being a U.S. public company, we anticipate
that our general and administrative expenses will increase.
Income from
Operations. As a result of the foregoing, our income from operations
increased to $3,412,662 for the three months ended December 31, 2009 from
$2,725,903 for the three months ended December 31, 2008, an increase of 25.2%.
Our operating margin for the three months ended December 31, 2009 and 2008 was
22.9% and 23.6%, respectively.
Results
of Operations - Nine Months ended December 31, 2009 as compared to Nine Months
ended December 31, 2008
Revenue.
Our revenue increased by $5,767,422 or 17.4% to $38,863,743 for the nine
months ended December 31, 2009 from $33,096,321 for the nine months ended
December 31, 2008 due to operating additional store locations. Of this increase,
$2,852,304 is attributable to new stores or 49.5% of the total increase. As of
December 31, 2008 we operated 15 stores, as compared to 23 stores as of December
31, 2009. We anticipate that our overall revenue will continue to increase as we
open additional stores.
Gross Profit.
Our gross profit increased by 26.0% to $11,289,607 for the nine months
ended December 31, 2009 from $8,956,736 for the nine months ended December 31,
2008. Our gross margin slightly increased from 27.1% for the nine months ended
December 31, 2008 to 29.0% for the nine months ended December 31, 2009. We
anticipate that our overall gross profit will continue to increase as our sales
increase. Additionally, we anticipate that our gross margin will increase as we
will be able to obtain better pricing terms from our suppliers and achieve
further economies of scale as a result of purchasing larger quantities of
products. We presently do not privately label any of our products and are
constantly adjusting our product mix to meet customer demand and to maximize our
gross margin.
Sales and
Marketing Expenses. Our sales and marketing expenses increased by 55.1%
to $1,986,471 for the nine months ended December 31, 2009 from $1,280,838 for
the nine months ended December 31, 2008. This increase was primarily a result of
the continued expansion of our drugstore chain from 15 stores for the nine
months ended December 31, 2008 to 23 stores for the nine months ended December
31, 2009. Sales and marketing expenses as a percentage of our revenue increased
slightly to 5.1% for the nine months ended December 31, 2009 from 3.9% for the
nine months ended December 31, 2008. We expect that our sales and marketing
expenses will increase as we continue to expand our store
network.
General and
Administrative Expenses. Our general and administrative expenses
increased by 123.1% to $1,372,205 for the nine months ended December 31, 2009
from $614,987 for the nine months ended December 31, 2008. General and
administrative expenses as a percentage of our revenue increased
to 3.5% for the nine months ended December 31, 2009 from 1.9% for the
nine months ended December 31, 2009. As we continue to open drugstores, further
develop our infrastructure, and incur expenses related to being a U.S.
public company, we anticipate that our general and administrative expenses
will increase.
Income from
Operations. As a result of the foregoing, our income from operations
increased to $7,930,931 for the nine months ended December 31, 2009 from
$7,060,911 for the nine months ended December 31, 2008, an increase of 12.3%.
Our operating margin for the nine months ended December 31, 2009 and 2008 was
20.4% and 21.3%, respectively.
36
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.
Liquidity
Nine
Month Period Ended December 31, 2009
For
the nine months ended December 31, 2009, we generated $903,020 from operating
activities, as compared to $279,657 for the nine months ended December 31, 2008.
The decrease is a result of a greater reduction to accounts payable offset by a
decrease of cash advances to suppliers.
We
used $320,729 in investing activities during the nine months ended December 31,
2009 as compared to $269,346 during the nine months ended December 31, 2008.
This slight increase in investing activities was primarily a result of
purchasing additional equipment.
Cash used
in financing activities was $362,349 for the nine month period ended
December 31, 2009 as compared to cash used in financing activities of $0 for the
nine month period ended December 31, 2008. The increase was the result of
borrowing money that was offset by bank requirements to keep cash deposits with
the bank as security for notes payable outstanding with the
bank.
As of
December 31, 2009, we had unrestricted cash of $1,226,929. Our total current
assets were $17,863,438 and our total current liabilities were $8,271,636 which
resulted in a net working capital of $9,591,802.
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 $1,421,927 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 nine months ended December 31, 2009, we borrowed and repaid $1,466,400. We
have funded our continued expansion from our operating cash flow. However, if we
were to expand more aggressively throughout Hangzhou and other parts of Zhejiang
Province, we will need additional capital.
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
|
$
|
357,795
|
||
2011
|
1,262,525
|
|||
2012
|
991,990
|
|||
2013
|
718,576
|
|||
2014
|
468,814
|
|||
Thereafter
|
70,003
|
38
Logistics
Services Commitments
We use a
third party service provider, Zhejiang Yingte Logistics Co., Ltd., (“Yingte”) to
accept goods from our suppliers and to deliver the goods to our store locations.
On January 1, 2009 we entered into a one year agreement with Yingte and are
obligated to pay 1% of the purchase price of the goods received from our
suppliers by Yingte during the term of the agreement, January 1, 2009 to
December 31, 2009, with a contractual minimum of 2,900,000 RMB.
Off-balance
Sheet Arrangements
We do not
have any outstanding financial guarantees or commitments to guarantee the
payment obligations of any third parties. We have not entered into any
derivative contracts that are indexed to our shares and classified as
stockholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Exchange
Rates
HJ Group
maintains its books and records in Renminbi (“RMB”), the lawful currency of the
PRC. In general, for consolidation purposes, the Company translates
HJ Group’s assets and liabilities into U.S. Dollars using the applicable
exchange rates prevailing at the balance sheet date, and the statement of income
is translated at average exchange rates during the reporting
period. Adjustments resulting from the translation of HJ Group’s
financial statements are recorded as accumulated other comprehensive
income.
Until
July 21, 2005, RMB had been pegged to USD at the rate of RMB8.30:
USD$1.00. On July 21, 2005, the PRC government reformed the exchange
rate system into a managed floating exchange rate system based on market supply
and demand with reference to a basket of currencies. In addition, the exchange
rate of RMB to USD was adjusted to RMB8.11: USD$1.00 as of July 21,
2005. The People’s Bank of China announces the closing price of a
foreign currency such as USD$ traded against RMB in the inter-bank foreign
exchange market after the closing of the market on each working day, which will
become the unified exchange rate for the trading against RMB on the following
working day. The daily trading price of USD against RMB in the
inter-bank foreign exchange market is allowed to float within a band of ±0.3%
around the unified exchange rate published by the People’s Bank of
China. This quotation of exchange rates does not imply free
convertibility of RMB to other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People’s Bank of China. Approval of foreign currency
payments by the Bank of China or other institutions required submitting a
payment application form together with invoices, shipping documents and signed
contracts.
The
exchange rates used to translate amounts in RMB into US Dollars for the purposes
of preparing the consolidated financial statements or otherwise stated in this
report were as follows:
December 31,
2009
|
March 31,
2009
|
December 31,
2008
|
||||
Balance
sheet items, except for the registered and paid-up capital, as of end of
period/year
|
USD1:RMB
0.1467
|
USD1:RMB
0.1465
|
USD1:RMB
0.1467
|
|||
Amounts
included in the statement of operations, statement of changes in
stockholders' equity and statement of cash flows for the period/ year
ended
|
USD1:RMB
0.14664
|
USD1:RMB
0.14582
|
USD1:RMB
0.14559
|
No
representation is made that RMB amounts have been, or would be, converted into
US$ at the above rates.
Inflation
We
believe that inflation has not had a material effect on our operations to
date.
39
BUSINESS
Overview
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 prospectus,
our store network is comprised of 25 directly operated stores.
We
provide our customers with a high-quality, professional and convenient pharmacy
as well as a wide variety of other merchandise, including prescription and
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.
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, our Daguan and Wenhua stores
have adjoining medical clinics that 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 14 physicians and
16 staff at our two clinics. 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.
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
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 Pharmacy. Thus, many of our
patients often need immediate access, do not have a regular physician, or may
lack suitable alternatives. Additionally, because Jiuzhou Pharmacy operates in
various locales, our physicians are adapted in their practice to serve the
local communities in which they are based.
Our
Industry
We
operate in the drugstore industry in China. Below is an overview of our
industry’s background, current environment as well as relevant
trends.
Demographics
China has
1.3 billion people, approximately one-fifth of the world’s population. The
portion of the Chinese population aged 60 and above has been increasing for the
past two decades, both in absolute numbers and as a percentage of the total
population, and this trend is likely to continue in the next decade. According
to the PRC National Bureau of Statistics, the percentage of the total population
that is 65 and older increased from 5.6% in 1990 to 8.5% in 2008. On average,
older people spend more on healthcare, particularly because the prevalence of
several diseases typically increases with age. For instance, urban residents
aged 60 and above in 2000 spent on average five times more than urban residents
below the age of 60 in the same year, according to the China National
Information Center.
40
Economic
Growth
The key
driver of China’s pharmaceutical market over the medium term is the economy,
which has grown significantly in recent years. According to the PRC National
Bureau of Statistics, China’s gross domestic product, or GDP, increased from
RMB 11 trillion in 2001 to RMB 30 trillion in 2008. Over the same
period, the average annual household disposable income of urban residents
increased from RMB 6,860 to RMB 15,781. Despite the global financial crisis
which started in the summer of 2007, the World Bank expects the Chinese economy
to grow at 8% in 2009 and expects the growth to be robust in 2010.
The
significant growth of China’s economy as well as the increase in disposable
income among its consumers have led to increased public health awareness and a
stronger focus on disease prevention, general wellness and the early diagnosis
of medical conditions. This has in turn led to stronger demand for
pharmaceutical and other healthcare related products, including nutritional
supplements, Traditional Chinese Medicine (“TCM”) and herbal products. In
addition, as living standards in China continue to improve, many
lifestyle-related illnesses are also growing rapidly, further contributing to
the growing demand for pharmaceutical and personal care products.
Healthcare
Expenditure
According
to World Health Organization, China’s total expenditure on healthcare was RMB
1.5 trillion in 2008 and is forecasted to grow to RMB 2.5 trillion by the end of
2012, representing a compound annual growth rate, or CAGR, of 14.6%. Health
expenditure per capita was USD $159.1 in 2008 and is forecasted to increase to
USD $303.0 by the end of 2012, representing a CAGR of 17.5%. Health expenditure
as a percentage of GDP was 5.1% in 2008 and is forecasted to grow to 6.4% in
2012, representing a CAGR of 6.0%. While China’s expenditure on healthcare as a
percentage of GDP and healthcare expenditure per capita have increased at a
significant rate, they are both significantly lower when compared to other,
especially developed, countries on an absolute basis. The following charts
compare China’s healthcare expenditure per capita as well as healthcare
expenditure as a percentage of GDP to those of certain other countries in
2006.
According
to Business Monitor International, an independent research firm, China’s
expenditure on drugs was RMB 258.3 billion in 2008 and is forecasted to grow to
RMB 414.0 billion by the end of 2012, representing a CAGR of 12.5%. Expenditures
on drugs per capita was USD $27.6 in 2008 and is forecasted to increase to USD
$48.1 by the end of 2012, representing a CAGR of 14.9%. Expenditure on drugs as
a percent of GDP was 0.97% in 2008 and is forecasted to increase to 1.13% in
2012.
The chart
below provides a breakdown of the Chinese drugs market (excluding TCM) in 2008.
The generic drugs market was 74.4% (RMB 192.1 billion) of the total drugs market
in 2008 and is forecasted to increase to 76.3% (RMB 316.0 billion) by the end of
2012. The over the counter (OTC) market was 22.6% (RMB 58.4 billion) of the
total drugs market in 2008 and is forecasted to decrease to 19.7% (RMB 81.4
billion) by the end of 2012. The patented drugs market was 3.2% (RMB 9.4
billion) of the total drugs market in 2008 and is forecasted to increase to 4.4%
(RMB 20.1 billion) by the end of 2012. According to Business Monitor
International, sales revenue for TCM in China reached approximately $21.0
billion in 2007 and is forecasted to reach $28.0 billion by 2010.
Chinese
Drugs Market in 2008, RMB $260 billion
Source: Business
Monitor International
Urbanization
The
increasing demand for pharmaceutical and other healthcare related products has
been especially strong in China’s urban areas, where residents tend to have more
spending power and are more health-conscious. China has experienced rapid
urbanization over the past eight years. The total urban population in China,
according to the PRC National Bureau of Statistics, increased from
502.1 million as of December 31, 2002 to 606.7 million as of
December 31, 2008, representing an increase of 21%. Urban population as a
percent of total population increased from 39.1% in 2002 to 46.7% in 2008. The
United Nations Population Division estimates that by the end of the next decade,
China’s urban population will increase to about 756 million, representing
approximately 53.2% of the country’s total population. Rapid urbanization is
expected to continue to fuel the rapid growth of urban residential communities
and presents a significant opportunity for drugstore chains’ expansion in large
and fast growing urban markets.
Establishment
of a National Essential Drugs List
The
draft version of the Healthy China 2020 program, published by China’s National
Development and Reform Commission (NDRC) in October 2008, calls for universal
insurance, a change in the way hospitals are funded, more subsidies for
state-run healthcare facilities and the establishment of a national essential
drugs list. The August 2009 publication of China’s National Essential Drugs List
(NEDL) listed approximately 300 medicines that are expected to be sold at
government-controlled prices. Government-controlled pricing of drugs will help
poorer Chinese patients, with significant impact on the lives of rural
residents. The development of the NEDL is in line with China’s goal of
increasing its population’s access to basic medical
infrastructure.
Insurance
Coverage
Eligible
participants in the national medical insurance program, mainly consisting of
urban residents, are entitled to buy medicines when presenting 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. The provincial and municipal authorities who
are responsible for administering social medical insurance funds to cover such
reimbursements have been gradually increasing funding in recent years. The
Healthy China 2020 program aims to provide health insurance coverage to China’s
entire 1.3 billion population by 2020.
Shifting
Market Share due to Regulation
In China,
retail pharmaceutical and other healthcare related products can be purchased at
either hospital pharmacies or non-hospital drugstores, including independent
drugstores and drugstore chains. Historically, sales by hospital pharmacies
accounted for a larger percent of retail sales of pharmaceutical products in
China because patients typically purchase their prescription drugs at hospital
pharmacies in accordance with doctors’ prescriptions. However, if a medical
condition can be treated with OTC drugs, many choose to purchase OTC drugs from
non-hospital drugstores instead of obtaining prescriptions from a hospital due
to the lack of accessible physicians. Business Monitor International, an
independent research firm, estimates that 15% to 30% of all prescription drugs
are currently sold by retail drug stores with the remaining 70% to 85% sold by
state run hospitals.
State-run
hospitals procure pharmaceutical products in bulk from manufacturers or
distributors, and generally decide whether to include a particular medicine on
their formularies based upon a number of factors, including doctors’
preference in prescribing the medicine, the cost of the medicine, the perceived
efficacy of the medicine and a hospital’s budget. Such decisions may also
be affected by corrupt practices, including illegal kickbacks and other benefits
offered by pharmaceutical manufacturers and/or distributors,
which practices may also influence doctors’ decisions regarding which
medicines to prescribe.
In recent
years, the PRC government has strengthened its anti-corruption measures and has
organized a series of government-sponsored anti-corruption campaigns. In
particular, China amended its criminal code in 2006 which, among other
changes, has increased the penalties for corrupt business practices.
Such enhanced criminal measures against corruption are expected to
induce pharmaceutical manufacturers and suppliers to compete more
fairly, which in turn is expected to result in more growth opportunities for
drugstores that are not affiliated with hospitals. According to Snapshots
International Ltd., an independent market research firm, retail sales
by China’s non-hospital drugstores is expected to increase from RMB
101.7 billion in 2008 to RMB 185.1 billion in 2013, representing a CAGR of
approximately 13.0%, and the number of non-hospital drugstores is expected
to increase from 391,500 in 2008 to 569,400 in 2013.
Retail
- Chain Stores versus Independent Stores
China’s
retail drugstore segment is highly fragmented. According to statistics published
by Snapshots International, there were approximately 391,500 non-hospital
drugstores in 2008, from 239,800 in 2004. In comparison, the United
States had 37,800 traditional drugstore retailing units at the end of 2008,
according to the U.S. National Association of Chain Drug Stores. Snapshots
International estimates that, in 2008, independent drugstores accounted for
60.7% of China’s retail pharmaceutical market, while the top 10 retail
drugstore chains combined for 19.0% of the market. As of December 31, 2008,
despite operating 2,709 drug stores, China Nepstar Chain Drugstore Ltd.
accounted for only 2.8% of the market, according to Snapshots
International.
Non-Pharmaceutical
Sales Opportunity at Retail Pharmacies
We
believe that non-pharmaceutical merchandise, combined with physician access
and prescription and non-prescription drugs, provide customers with a complete
wellness solution. Non-pharmaceutical merchandise includes nutrition
supplements, beauty, cosmetics and fragrance products, personal care products,
as well as consumable, seasonal, promotional and other non-prescription
products.
Other
Government Initiatives
Pharmaceutical
Product Labeling and Prescription Management
The PRC
State Food and Drug Administration, or SFDA, promulgated pharmaceutical product
labeling regulations in March 2006, requiring labels to list generic ingredients
and barring brand name registration for any pharmaceutical product which does
not contain active ingredients. In addition, effective May 1, 2007, doctors
are not permitted to include brand names in their prescriptions and are required
to specify the chemical ingredients of the medicines they prescribe in
their prescriptions. These requirements are expected to have the following
positive impacts on the business of non-hospital drugstores:
|
·
|
help curb corrupt practices by
pharmaceutical product manufacturers and
doctors;
|
|
·
|
ensure that patients are given
better information on the medicines they purchase;
and
|
|
·
|
weaken the hospitals’ monopoly on
prescriptions and prescription pharmaceutical
products.
|
Advertising
of Pharmaceutical Products
In 2004,
the PRC government began enforcing its regulation prohibiting mass
media advertising of prescription drugs. However, advertising of OTC drugs
and TCM are not covered by this ban. In March 2007, in order to
curb misleading advertising of pharmaceutical products, the PRC government
prohibited the advertising of certain pharmaceutical products, and also required
that advertising of prescription drugs be limited to authorized medical
magazines. In addition, approval of the provincial SFDA must be obtained before
a pharmaceutical product may be advertised. Such approval, once obtained, is
valid for one year. We believe that Chinese consumers purchase medicines
primarily based upon brand name recognition and price, among others factors.
Consumers typically become familiar with a medicine through advertising and
word-of-mouth recommendations from pharmacy salespeople. With increased
restrictions on advertising of pharmaceutical products, drug manufacturers are
expected to increasingly rely on retail pharmacies to build brand familiarity
among the general public. On the other hand, with continued access to mass media
advertising, sales of OTC drugs are expected to grow at a faster pace than those
of prescription drugs.
Enhanced
Quality Requirements for the Operations of Pharmacies
China
has strengthened its enforcement of Good Supply Practice (“GSP”) standards since
adopting them at the end of December 2004. As a result, many independent
drugstores as well as smaller drugstore chains may have difficulties bringing
their operations on par with these enhanced quality requirements. On the other
hand, all of our 25 locations are GSP certified, and given our experience
with the GSP certification process, we believe that the government’s enhanced
enforcement efforts will not be a significant obstacle to our future
expansion plans.
Zhejiang
Province
We
currently have 25 stores in Hangzhou, the capital of Zhejiang
Province. We plan to increase our store base in Hangzhou and to
expand into other cities within Zhejiang Province upon the completion of a
financing. Zhejiang Province has 47.2 million residents, the eleventh largest
province in terms of population. As of December 31, 2008, there are 10 cities in
Zhejiang Province with populations over 1 million. The cities with the highest
population are: Hangzhou (8.0 million), Wenzhou (7.6 million), Taizhou (5.7
million), Ningbo (5.6 million), Shaoxing (4.3 million), Jiaxing (3.3 million),
and Yiwu (2.0 million).
The
economy of Zhejiang Province has grown significantly in recent years. According
to the Zhejiang Bureau of Statistics, Zhejiang Province’s GDP has increased from
RMB 614.1 billion in 2000 to RMB 2.1 trillion in 2008, representing a CAGR of
16.9%. According to the PRC National Bureau of Statistics, from 2000 to 2008,
the average per capita annual household disposable income of urban residents in
Zhejiang Province increased from RMB 9,279 to RMB 22,727. Zhejiang’s economy was
the fourth largest in China among the provinces in 2008.
The total
urban population in Zhejiang Province, according to the PRC National Bureau of
Statistics, increased from 27.4 million as of December 31, 2005 to 29.5 million
as of December 31, 2008, representing an increase of 7.6%. Urban population as a
percentage of total population in Zhejiang Province increased from 60.0% in 2005
to 63.0% in 2008. Rapid urbanization is expected to continue to fuel the rapid
growth of urban residential communities and presents a significant opportunity
for expansion. Also contributing to the growth of the healthcare
sector in Zhejiang Province is its aging population: the percentage of people
who are 60 and above increased from 13.6% in 2003 to 15.6% in 2008. Urbanization
and population aging are both national-level trends that are evident in Zhejiang
Province.
Our
Competitive Strengths
Onsite
Physicians Provide Invaluable Consulting Service to Customers
We
believe that our drugstores are the only ones in Hangzhou that
have licensed physicians onsite and available at scheduled hours.
Furthermore, our Dagun and Wenhua stores have adjoining medical clinics that
offer our customers health consulting and minor outpatient surgical treatments,
and we are not aware of any other retail drugstores that offer similar
facilities. We believe the customers appreciate the onsite physician services
thereby increasing our customer appeal. Customer feedbacks to this medical
consulting service that we provide have been overwhelmingly positive and
therefore we will continue to integrate this service into our business model
going forward. This is a key distinction between our stores and competitors and
is a service that customers associate with Jo-Jo Drugstores.
Directly
Operated Business to Provide a High Quality Customer Experience
We
operate all of our stores directly, staffed by our employees rather than
franchisees, which we believe is critical in building a strong brand name and
offering a consistent customer experience across our store network. Moreover, we
believe direct operation of our drugstores is critically important to our
success in the retail drugstore chain business in Zhejiang Province, given the
highly fragmented market. We have developed uniform standards among various
aspects of drugstore operations and are able to provide a consistently high
quality of services in all of our stores. Direct operation also enables us to
select store locations that meet the consumer traffic requirements, target new
neighborhoods and allows us to leverage our existing distribution centers. In
addition, our direct operation business model allows us to operate a relatively
centralized and streamlined organizational structure, which enables us to
expedite decision making and thus deploy our financial, operational and
management resources more effectively. Furthermore, our business model also
allows us to address local demand for specific products and services more
accurately, to control our corporate overhead expenses and to provide uniform
and high quality training for our employees.
Optimized,
Diverse and High Quality Product Offerings
We have
developed an optimized and diverse merchandise portfolio. In particular, we have
rigorously analyzed a large quantity of prescription and OTC drugs available for
sale in China, as well as sales data accumulated through our direct operation of
drugstores. Moreover, we monitor product quality and continuously review and
refine our product selection in order to respond to changing demographics,
lifestyles, habits and product preferences of our customers.
Proven
Ability to Expand Rapidly While Increasing Profitability
We
have expanded our store network at a rapid pace in recent years, while
maintaining and increasing our gross margin. In particular, the number of our
directly operated drugstores increased from 9 as of March 31, 2008 to 16 as of
March 31, 2009. As of December 31, 2009, we operated 23 drugstores. Our gross
profit increased from $7.5 million for fiscal year ended March 31, 2008 to $12.2
million for fiscal year ended March 31, 2009. Our gross margin percentage
increased from 23.9% to 27.2% from fiscal year ended March 31, 2008 to fiscal
year ended March 31, 2009. Our gross profit increased from $8.9
million for the nine months ended December 31, 2008 to $11.3 million for the
nine months ended December 31, 2009. Our gross margin percentage increased from
27.1% for the nine months ended December 31, 2008 to 29.0% for the nine months
ended December 31, 2009. Our rapid expansion is supported by our central
third-party distribution center near our headquarters in Hangzhou. We believe
our distribution network enables us to provide effective support to our store
outlets, cope with distinctive regional factors such as local regulatory
requirements and demographics, and reduce the incremental cost of opening
additional outlets in cities close to our existing distribution centers. These
attributes have allowed us to effectively shorten the amount of time required
for us to open new stores and for new stores to become
profitable.
Experienced
Management Team with Proven Track Record
Over the
past few years, Lei Liu, our chief executive officer and chairman, and
other members of our senior management team have successfully led our operations
and increased our revenue and profit. Many members of our senior management team
have worked with us since our inception or otherwise have broad experience in
the retail industry. Mr. Liu has extensive experience in chain store retailing,
gained from his six years service with Tai He Drugstore as a general
manager.
Our
Products
The
products available at our drugstores can be broadly classified into the
following categories:
Prescription
Drugs. We offer approximately 7,530 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 7,530 prescription drug prices for the fiscal year ended
March 31, 2009, 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 for fiscal year ended March 31,
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 for fiscal year ended March 31, 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 for fiscal year ended March 31,
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 for fiscal year ended
March 31, 2009.
Customers
For
fiscal year ended March 31, 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 our 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 25 stores, 16 are licensed to
accept Hangzhou’s medical insurance cards while 9 are awaiting approval as
of the date of this prospectus. Our stores accepting Hangzhou’s medical
insurance are designated as such on our outer signage.
Our
Stores
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 prospectus, we operate a chain of
25 drugstores.
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.
Employees
We had
390 employees as of December 31, 2009, including 278 fulltime and 112 part-time
employees. The following table sets forth the number of our employees for each
of our areas of operations and as a percentage of our total workforce as of
December 31, 2009:
|
As of December 31, 2009
|
|||||||
|
Employees
|
Percentage
|
||||||
|
||||||||
Non-pharmacist
store staff
|
228
|
58.5
|
%
|
|||||
Pharmacists
|
77
|
19.8
|
||||||
Management
|
45
|
11.5
|
||||||
Physicians
|
22
|
5.6
|
||||||
Non-physician
clinic staff
|
18
|
4.6
|
||||||
Total
|
390
|
100
|
%
|
We place
strong emphasis on the quality of our employees at all levels, including
in-store pharmacists and store staff who directly interact with our customers.
We provide extensive training for newly recruited employees in the first three
months of their employment. The training is designed to encompass a number of
areas, such as knowledge about our products and how best to interact with our
customers. In addition, we regularly carry out training programs on medicine
information, nutritional information, selling skills for our store staff and
in-store pharmacists. We believe these programs have played an important role in
strengthening the capabilities of our management team.
In
addition to our employees, there are 300 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.
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.
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
prospectus, 300 manufacturers’ sales personnel are working at our 25 store
locations.
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.
46
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, which was renewed on January 1,
2010, 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 vendors accounted for 32% of our total purchases: Zhejiang Yingte
Pharmaceutical Co., Ltd. and Hunan Yiyang Pharmaceutical Co., Ltd. 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.
Cash
Control
For the
fiscal year ended March 31, 2009, approximately 80% of our sales were made in
cash. 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.
Intellectual
Property
We do not
currently own any patents or trademarks, nor do we have any pending patent or
trademark applications, 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.
Our
History and Corporate Structure
We were
incorporated in Nevada on December 19, 2006, under the name “Kerrisdale Mining
Corporation”, with a principal business objective to acquire and develop mineral
properties. Although we had acquired certain mining claims, we were not
operational.
On July
14, 2008, we amended our Articles of Incorporation to change our authorized
capital stock from 75,000,000 shares of common stock, par value $0.001 per
share, to 500,000,000 shares of common stock, par value $0.001 per share, and
10,000,000 shares of preferred stock, par value $0.001. The preferred
stock is “blank check,” with the right to set its designations, preferences,
limitations, privileges, qualifications, dividend, conversion, voting, and other
special or relative rights, conferred on our board of
directors.
On
September 17, 2009 (the “Closing Date”), we executed the Exchange Agreement with
Renovation and the Renovation Stockholders. Pursuant to the Exchange
Agreement, on the Closing Date, we issued 7,900,000 shares of our common stock
(after
giving effect to the anticipated 1-for-2 reverse stock split) to the
Renovation Stockholders in exchange for 100% of the issued and outstanding
capital stock of Renovation.
The Share
Exchange was accounted for as a reverse merger (recapitalization) with
Renovation deemed to be the accounting acquirer, and us as the legal acquirer.
Accordingly, the historical financial information presented in future financial
statements will be that of Renovation as adjusted to give effect to any
difference in the par value of ours and Renovation’s capital stock with an
offset to capital in excess of par value. The basis of the assets,
liabilities and retained earnings of Renovation, the accounting acquirer, have
been carried over in the recapitalization. In connection with the
Share Exchange, we became a Chinese retail drugstore chain.
On
September 24, 2009, we amended our Articles of Incorporation to change our name
from “Kerrisdale Ming Corporation” to “China Jo-Jo Drugstores, Inc.” to better
reflect our business direction after the Share Exchange.
Renovation
Renovation
is a limited liability company incorporated in Hong Kong 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 Chong’an 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.
Jiuxin
Management
Jiuxin
Management was organized in the PRC on October 14, 2008. Because all
of its issued and outstanding capital stock is held by Renovation, a Hong Kong
company, Jiuxin Management is deemed a “wholly foreign owned enterprise”
(“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 Pharmacy, Jiuzhou Clinic or Jiuzhou Service, but
control and receive the economic benefits of their respective business
operations through contractual arrangements. Each of Jiuzhou 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 .
HJ
Group
Jiuzhou
Pharmacy is a PRC limited liability company established in Zhejiang Province on
September 9, 2003, with registered capital of RMB 5 million which has
been fully paid by its owners. Jiuzhou Pharmacy’s principal offices are in
Hangzhou at Room 507-513, 5th Floor, A Building, Meidu Plaza, Gongshu District.
The three owners of Jiuzhou Pharmacy are Lei Liu (55%), who is also the
executive director of the company, Chong’an Jin (23%) and Li Qi (22%). Jiuzhou
Pharmacy operates a chain of pharmacies in Hangzhou that is presently comprised
of 25 stores, of which 24 are branch stores with no separate corporate existence
and 1 (Kuaileren branch) is a subsidiary of Jiuzhou
Pharmacy. Kuaileren was established on May 9, 2006, with registered
capital of RMB 100,000. Its sole owner transferred all of his ownership interest
to the three owners of HJ Group for no consideration on June 30, 2009, who in
turn transferred the ownership interest to Jiuzhou Pharmacy for no consideration
on August 28, 2009.
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 Chong’an Jin (31%), who is also the
managing partner of the partnership. Jiuzhou Clinic is a medical practice
currently operating adjacent to Jiuzhou 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 Pharmacy stores.
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 Chong’an 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 Pharmacy’s Wenhua branch that provides services similar to
those provided by Jiuzhou Clinic.
Contractual
Arrangements 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 Jiuxin
Management.
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 Pharmacy enable us to bypass
such restrictions, since neither we nor our subsidiaries own equity interests in
Jiuzhou 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, 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 we complete a financing of at least $25 million and our 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.
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.
Amendments
to the Contractual Arrangements
On
October 27, 2009, we were made a party to a series of amendments (collectively
the “Amendments”) amending the terms of the foregoing contractual
arrangements. Specifically, the Amendments remove the automatic
termination provision from four of the five agreements, such that:
|
·
|
the consulting services agreement
shall remain in effect for the maximum period of time permitted by law,
unless sooner terminated by Jiuxin Management or if either Jiuxin
Management or an HJ Group company becomes bankrupt or insolvent, or
otherwise dissolves or ceases business
operations;
|
|
·
|
the operating agreement shall
remain in effect unless terminated by Jiuxin
Management;
|
|
·
|
the option agreement shall remain
in effect for the maximum period time permitted by law;
and
|
|
·
|
the voting rights proxy agreement
shall remain in effect for the maximum period of time permitted by
law.
|
Otherwise,
the terms of these four agreements remain unchanged. The equity
pledge agreement also remains unchanged, and terminates two years after the HJ
Group companies have satisfied their respective obligations under the consulting
services agreement. We were made a party to the Amendments for the
sole purpose of acknowledging the Amendments. The Amendments comply
with applicable PRC law and do not in any way affect our business
operations.
Relevant
PRC 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.
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
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 25 of our locations are GSP
certified.
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.
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.
52
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 required price adjustment to only 105 of our 7,530
prescription drug prices. As of December 31, 2007, 2008 and 2009, 12.7%,
11.8% and 14.5% 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.
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:
|
·
|
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.
54
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.
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.
DESCRIPTION
OF PROPERTY
All of
our current business operations, including our corporate headquarters 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
|
729
|
N/A
|
March
3, 2012
|
||||
Taihe
Branch
|
No.
121 Jiefang Road, Shangcheng District
|
521
|
March
11, 2004
|
July
18, 2011
|
||||
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
|
November
16, 2013
|
||||
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
|
||||
Jinyu
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
|
56
Lin’an
Branch
|
403
Qianwang Road
Lin’an
District
|
364
|
March
7, 2009
|
December
17, 2013
|
||||
Kuaileren
Branch
|
No.
7 Jiubao Street
Jianggan
District
|
220
|
April
30, 2009
|
March
27, 2015
|
||||
Jingfang
Branch
|
No.
2-52 to No. 2-53
Jingfangliuqu,
Tanhua’an Road
Jianggan
District
|
182
|
May
27, 2009
|
March
7, 2014
|
||||
Daguan
No. 2 Branch
|
No.
75 Danguanyuan Road
Gongshu
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
|
||||
Yueming
Branch
|
No.852
to No.854, Yueming Road, Binjiang District
|
94
|
August
18, 2009
|
August
17, 2012
|
||||
Nanhuan
Branch
|
No.
4384 to No. 4386, Nanhuan Road
|
191.4
|
September
1, 2009
|
September
1, 2014
|
||||
Linping
Branch
|
North
Bound, Qiushan Road, Linping Avenue
|
1,360
|
October
1, 2009
|
September
30, 2014
|
||||
Xiawan
Branch
|
No.
80 Desheng Street
Gongshu
District
|
244.6
|
January
10, 2010
|
January
9, 2015
|
||||
Liushuiyuan
Branch
|
No.
63 Zhaohui Road
Xiacheng
District
|
426.61
|
January
15, 2010
|
January
14, 2020
|
We have also entered into leases for
and begun remodeling of the following locations, and anticipate opening these
stores by April 30, 2010:
Store Name
|
Location
|
Approx. Area
(square meters)
|
Lease
Expiration Date
|
|||
Ding’an Branch
|
No.
61 Ding’an Road Hubin Avenue Shangcheng District
|
148.18
|
March
5, 2015
|
|||
Pinghai
Branch
|
No.
47 Pinghai Road Hubin Avenue Shangcheng Distict
|
208.6
|
February
9, 2013
|
|||
Dingqiao
Branch
|
No.
185 Dingxiang Road
Dingqiao
Town, Jianggan District
|
105.56
|
March
9, 2014
|
|||
Gaosha
Branch
|
No.
115 & No. 117 Wenyuan Road Gaosha Community, Xiasha Town Economic
Development Zone
|
79
|
August,
31, 2018
|
|||
Huafeng
Branch
|
No.
296 Huafeng Road
Xiacheng
District
|
186
|
March
31, 2018
|
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.
57
MANAGEMENT
The
following table identifies our current executive officers and directors as of
the date of this prospectus, their respective offices and positions, and their
respective dates of election or appointment:
Name
|
Age
|
Position
|
Date of Appointment
|
|||
Lei
Liu
|
45
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
September
17, 2009
|
|||
Bennet
P. Tchaikovsky
|
40
|
Chief
Financial Officer
|
September
17, 2009
|
|||
Li
Qi
|
37
|
Secretary
and Director
|
October
23, 2009
|
|||
Chong’an
Jin
|
46
|
Director
|
October
23, 2009
|
|||
Shike
Zhu
|
47
|
Director
|
October
23, 2009
|
|||
Marc
Thomas Serrio
|
51
|
Director
|
March
15, 2010
|
|||
Bowen
Zhao
|
74
|
Director
|
March
15, 2010
|
|||
Yuehai
Ke
|
38
|
Director
|
March
15, 2010
|
|||
Shuizhen
Wu
|
60
|
Director
|
March
15, 2010
|
|||
Xiaomeng
Yu
|
31
|
Director
|
March
15,
2010
|
Biographies
Lei
Liu, Chief Executive Officer and Chairman of the Board of Directors
Mr. Liu
is one of the three founders of HJ Group, and has been the executive director of
Jiuzhou 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, Chief Financial Officer
Mr.
Tchaikovsky is presently the chief financial officer of Skystar
Bio-Pharmaceutical Company which he performs on a part-time basis. From March
2008 through November 2009, Mr. Tchaikovsky served as a director of Ever-Glory
International Group. From December 2008 through November 2009, Mr. Tchaikovsky
served as a director of Sino Clean Energy, Inc. 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, Secretary and Director
Ms. Qi is
one of the three founders of HJ Group and is currently the general manager of
both Jiuzhou 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.
Chong’an
Jin, Director
Mr. 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.
Shike
Zhu, Director
Mr. 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.
Marc
Thomas Serrio, Director
Mr.
Serrio is currently chief financial officer of Zeal Corporation, a position he
has held since March 2009. He has also been an independent executive consultant
since January 1996, providing business and financial planning and analysis
services to companies in various industries. Mr. Serrio was interim chief
financial officer and interim chief operating officer of Kate Somerville LLC
from July 2008 to March 2009, chief financial officer of Detection Logic, Inc.
from November 2005 to March 2008, and chief financial officer of TriTech
Software Systems from March 1999 to November 2005. Mr. Serrio is a graduate of
the Marshall School of Business at the University of Southern California, with a
B.S. in business administration in 1981 and a M.B.A. with emphasis on investment
finance and business economics in 1985.
Bowen
Zhao, Director
Mr.
Zhao is a senior economist who has dedicated the past 54 years toward the
development of the pharmaceutical industry in Zhejiang Province. Mr. Zhao is
currently the deputy president of Zhejiang Province Industry and Economic
Association, Zhejiang Province Entrepreneur Association and China Commercial
Pharmacy Association, positions he has held since December 1994. In September
1996, Mr. Zhao was instrumental in organizing Zhejiang Province Commercial
Pharmacy Association (which became Zhejiang Province Pharmaceutical Industry
Association in September 2002), and has served as its president since its
founding. Mr. Zhao has been with Zhejiang Pharmaceutical Co., Ltd. since
September 1983 and is currently its deputy manager, and has been with Zhejiang
Province Pharmaceutical Administration since May 1995, and is currently its
deputy director.
Yuehai
Ke, Director
Dr. Ke
is a professor of molecular genetics and cell signal transduction at the
Department of Basic Medicine at Zhejiang University’s School of Medicine since
September 2007, where he also advices doctorate candidates. Dr. Ke graduated
from Zhejiang University in 1995, where he majored in biochemistry. After
graduation, Dr. Ke joined the Chinese Center for Disease Control and Prevention
from September 1995 to July 1998. Dr. Ke obtained his master degree in medicine
in 1998 from Fudan University, where he studied genetic disease of human
multiple genes, and his doctorate degree in 2001 also from Fudan University. In
2000, Dr. Ke was an exchange student at the School of Public Health at the
University of Texas in Houston. From February 2002 to September 2007, Dr. Ke
studied cell signal transduction at the Cancer and Stem Cell Research Center of
the Burnham Medical Research Institute in California. From September 2005 to
September 2007, Dr. Ke was an associate professor at the Chinese Academy of
Medical Sciences & Peking Union Medical College, focusing his research and
studies on the application development of cell kinetics models and genetic
analysis.
Shuizhen
Wu, Director
Dr. Wu
has been with Zhejiang No. 1 Hospital, which is affiliated with Zhejiang
University’s School of Medicine, since July 2005, where she is currently a
researcher and senior management personnel. From July 1978 to May 1994, Dr. Wu
served as deputy director of the medical faculty at Zhejiang Medical University.
Dr. Wu is a 1978 graduate of Zhejiang Medical University.
Xiaomeng
Yu, Director
Mr. Yu
is president of China Mingsheng Bank’s Xiasha branch in Hangzhou, where he was
previously its senior client manager from October 2005 to July 2008. From
August, 2003 to September 2005, Mr. Yu was translator and site manager for
Hangzhou Road Engineering Equipment Co., Ltd. Mr. Wu graduated from Japan’s
Daito Bunka University in September 2003 with a degree in business
management.
Family
Relationships
There are
no family relationships between or among any of the current directors, executive
officers or persons nominated or charged to become directors or executive
officers. There are no family relationships among our officers and directors and
those of our subsidiaries and affiliated companies.
58
Involvement
in Certain Legal Proceedings
There are
no orders, judgments, or decrees of any governmental agency or administrator, or
of any court of competent jurisdiction, revoking or suspending for cause any
license, permit or other authority to engage in the securities business or in
the sale of a particular security or temporarily or permanently restraining any
of our officers or directors from engaging in or continuing any conduct,
practice or employment in connection with the purchase or sale of securities, or
convicting such person of any felony or misdemeanor involving a security, or any
aspect of the securities business or of theft or of any felony. Nor are any of
the officers or directors of any corporation or entity affiliated with us so
enjoined.
The
Board of Directors and Committees
Our
board of directors formally established separate audit, nominating and
compensation committees comprising of independent directors on March 15,
2010.
Audit
Committee
Our
audit committee is made up of three independent directors: Marc Thomas Serrio,
Yuehai Ke and Shuizhen Wu, who were appointed to the committee on March 15,
2010. Our board of directors has determined, based on information furnished by
Mr. Serrio and other available information, that Mr. Serrio meets the
requirements of an “audit committee financial expert” as such term is defined in
the rules promulgated under the Securities Act and the Exchange Act, and has
accordingly designated him as such as well as chairman of the
committee.
The
responsibilities of our audit committee include:
|
·
|
meeting
with our management periodically to consider the adequacy of our internal
control over financial reporting and the objectivity of our financial
reporting;
|
|
·
|
appointing
the independent registered public accounting firm, determining the
compensation of the independent registered public accounting firm and
pre-approving the engagement of the independent registered public
accounting firm for audit and non-audit
services;
|
|
·
|
overseeing
the independent registered public accounting firm, including reviewing
independence and quality control procedures and experience and
qualifications of audit personnel that are providing us audit
services;
|
|
·
|
meeting
with the independent registered public accounting firm and reviewing the
scope and significant findings of the audits performed by them, and
meeting with management and internal financial personnel regarding these
matters; and
|
|
·
|
reviewing
our financing plans, the adequacy and sufficiency of our financial and
accounting controls, practices and procedures, the activities and
recommendations of the auditors and our reporting policies and practices,
and reporting recommendations to our full board of directors for
approval.
|
Compensation
Committee
Our
compensation committee is made up of three independent directors: Yuehai Ke,
Bowen Zhao and Xiaomeng Yu, who were appointed to the committee on March 15,
2010. Dr. Ke is chairman of the committee. Our compensation committee will
oversee and, as appropriate, making recommendations to the board of directors
regarding the annual salaries and other compensation of our executive officers
and our employees, and other policies, and provide assistance and
recommendations with respect to our compensation policies and
practices.
Nominating
Committee
Our
nominating committee is made up of three independent directors: Shuizhen Wu,
Bowen Zhao and Xiaomeng Yu, who were appointed to the committee on March 15,
2010. Dr. Wu is chairwoman of the committee. Our compensation committee will
oversee and, as appropriate, making recommendations to the board of directors
regarding the annual salaries and other compensation of our executive officers
and our employees, and other policies, and provide assistance and
recommendations with respect to our compensation policies and
practices.
Director
Independence
Based
on the information submitted by Marc Thomas Serrio, Bowen Zhao, Yuehai Ke,
Shuizhen Wu and Xiaomeng Yu, our board of directors has determined that each of
them is independent under Rule 5605(a)(2) of The NASDAQ Listing Rules, even
though such definition does not currently apply to us because we are not listed
on The NASDAQ Capital Market.
Code
of Ethics
We
have adopted a code of ethics that applies to our officers, directors and
employees, including our chief executive officer, senior executive officers,
principal accounting officer, and other senior financial officers. Our code of
ethics will be available on our website at www.jojodrugstores.com. A
copy of our code of ethics will also be provided to any person without charge,
upon written request sent to us at our offices located at Room 507-513, 5th
Floor, A Building, Meidu Plaza, Gongshu District, Hangzhou, Zhejiang Province,
China.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following summary compensation table indicates the cash and non-cash
compensation earned during our fiscal years ended March 31, 2009 and 2008 by our
principal executive officer and each of our other two highest paid
executives.
Name and Position
|
Fiscal Year
ended
March 31,
|
Salary
|
Bonus
|
Total
|
||||||||||||
Lei
Liu (1)
|
2009
|
$
|
10,000
|
$
|
-
|
$
|
10,000
|
|||||||||
Chief
Executive Officer
|
2008
|
-
|
-
|
-
|
||||||||||||
Bennet
P. Tchaikovsky (2)
|
2009
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||
Chief
Financial Officer
|
2008
|
-
|
-
|
-
|
||||||||||||
Li
Qi (3)
|
2009
|
$
|
10,000
|
$
|
-
|
$
|
10,000
|
|||||||||
Secretary
|
2008
|
-
|
-
|
-
|
|
(1)
|
Mr. Liu was appointed as our
chief executive officer on September 17, 2009, in connection with the
Share Exchange. Accordingly, Mr. Liu’s compensation for the periods
reported was paid to him by HJ Group. Mr. Liu’s compensation as
reported is based on interbank exchange rate of RMB 6.83 to $1.00 on March
31, 2009.
|
|
(2)
|
Mr. Tchaikovsky was appointed as
our chief financial officer on September 17, 2009, in connection with the
Share Exchange.
|
|
(3)
|
Ms. Qi was appointed as our
secretary on September 17, 2009, in connection with the Share Exchange.
Accordingly, Ms. Qi’s compensation for the periods reported was paid to
her by HJ Group. Ms. Qi’s compensation as reported is based on
interbank exchange rate of RMB 6.83 to $1.00 on March 31,
2009.
|
Grants
of Plan-Based Awards in Fiscal 2009
There
were no option grants in fiscal 2009.
Outstanding
Equity Awards at 2009 Fiscal Year End
There
were no option exercises or options outstanding in fiscal 2009.
Option
Exercises and Stock Vested in Fiscal 2009
There
were no option exercises or stock vested in fiscal 2009.
Pension
Benefits
There
were no pension benefit plans in effect in fiscal 2009.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
There
were no nonqualified defined contribution or other nonqualified deferred
compensation plans in effect in fiscal 2009.
Employment
Agreements, Termination of Employment and Change-in-Control
Arrangements
Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
60
CFO
Services Agreement for the Services of Bennet P. Tchaikovsky
On July
30, 2009, Jiuzhou Pharmacy entered into a CFO Services Agreement (the “CFO
Agreement”) with Worldwide Officers, Inc., a California corporation (“WOI”), to
retain the services of Bennet P. Tchaikovsky as its chief financial officer
until the completion of a financing. Under the terms of the Loanout Agreement,
Mr. Tchaikovsky performs his duties from the United States for compensation of
$30,000 through the close of a financing.
The CFO
Agreement terminates at the closing of a financing, provided that Jiuzhou
Pharmacy shall enter into a new agreement at that time with WOI to continue Mr.
Tchaikovsky’s engagement as chief financial officer. Jiuzhou Pharmacy 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 Jiuzhou Pharmacy.
Director
Compensation
Four
of our current directors were appointed on or after September 17, 2009 in
connection with the Share Exchange, and accordingly did not receive compensation
from us as directors for the fiscal year ended March 31, 2008. They also did not
receive compensation from us as directors for fiscal year ended March 31, 2009.
The remaining five of our current directors were appointed on March 15, 2010 and
accordingly did not receive compensation from us for fiscal year ended March 31,
2009.
We had
two directors during the fiscal year ended March 31, 2008, Huoqi Chen, who
resigned from the board of directors on September 17, 2009 in connection with
the Share Exchange, and John S. Morita, who resigned from the board of directors
on September 4, 2008. Neither Mr. Chen nor Mr. Morita received compensation as
directors during the fiscal year ended March 31, 2008.
We do
not currently have an established policy to provide compensation to members of
our board of directors for their services in that capacity, although we have
entered into certain agreements with a director as described
below. We intend to develop such a policy in the near
future.
Agreements
with Directors
We
entered into an agreement with Mr. Serrio in the form of a director offer
letter, pursuant to which we have agreed to compensate him $40,000 annually for
his services as a director and audit committee financial expert and chairman.
Mr. Serrio’s compensation will be in the form of 6,897 restricted shares of our
common stock (after
giving effect to the anticipated 1-for-2 reverse stock split), payable in
four quarterly installments beginning with the quarter ending March 31, 2010.
Additionally, we are obligated to obtain and maintain directors and officers
insurance policy, and to include Mr. Serrio as an insured under such
policy.
Concurrently
with the director offer letter, we also entered into an indemnification
agreement with Mr. Serrio, pursuant to which we agree to hold Mr.
Serrio harmless and indemnify him from and against any expense, liability or
loss paid or incurred in connection with any action, suit or proceeding arising
from or related to the fact that Mr. Serrio is or was a director of the Company
or anything done by him in such capacity.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Share
Exchange Agreement
On
September 17, 2009, we executed the Exchange Agreement with Renovation and the
Renovation Stockholders.
On the
Closing Date of the Exchange Agreement, we issued 7,900,000 shares of our
common stock (after
giving effect to the anticipated 1-for-2 reverse stock split) to the
Renovation Stockholders in exchange for 100% of the issued and outstanding
common stock of Renovation. Immediately upon the closing of the Share Exchange,
we had a total of 10,000,000 shares of common stock outstanding (after
giving effect to the anticipated 1-for-2 reverse stock split), with the
Renovation Stockholders collectively owning approximately 79% of our total
issued and outstanding common shares.
As a
result of the Share Exchange, the Renovation Stockholders became our controlling
shareholders and Renovation became our wholly owned subsidiary.
Other
Related Party Transactions
Set forth
below are the related party transactions us and our officers and/or directors as
of the dates set forth on the table:
December 31,
2009
|
March 31,
2009
|
|||||||
(Unaudited)
|
||||||||
Amounts
due from directors (1):
|
$
|
-
|
$
|
2,432
|
||||
Amount
due to director (2):
|
$
|
333,029
|
$
|
326,715
|
||||
Advances
to supplier (3):
|
$
|
2,190,826
|
$
|
1,797,104
|
(1)
|
Represents interest free loans to
two directors of the Company, Li Qi and Chong’an Jin. The loans are due
upon demand. There is no written documentation for these loans, which
represent cash advances for out-of-pocket expenses for Ms. Qi and Mr. Jin,
who are responsible for submitting receipts for these amounts or refunding
the balance.
|
(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 some of
the Company’s directors. The Company will collect inventory from the
supplier. The Company’s purchases from the related party supplier amounted
to $1,254,749 and $108,045 for the three months ended December 31, 2009
and 2008, respectively, and $2,255,817 and $909,314 for the nine months
ended December 31, 2009 and 2008,
respectively.
|
The Company also leases a retail space and the corporate office space from Mr. Liu under long-term operating lease agreements beginning August 2008 to August 2010 and from January 2008 to March 2012, respectively. The rent for the retail and the corporate office space are $44,004 and $29,032 for three months ended December 31, 2009 and 2008, respectively. The rent for the retail and the corporate office space are $131,976 and $130,644 for nine months ended December 31, 2009 and 2008, respectively. For the three months and nine months ended December 31, 2009, $175,968 was paid to Mr. Liu for these leases. For the three months and nine months ended December 31, 2008, no rent was paid to Mr. Liu.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding our common stock
beneficially owned on March 15, 2010 after giving effect to the anticipated
1-for-2 stock split, for (i) each stockholder known to be the beneficial owner
of 5% or more of our outstanding common stock, (ii) each executive officer and
director, and (iii) all executive officers and directors as a group. To the best
of our knowledge, subject to community and marital property laws, all persons
named have sole voting and investment power with respect to such shares, except
as otherwise noted.
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)
|
6,030,000
|
60.3
|
%
|
|||||
Bennet
P. Tchaikovsky, chief financial officer (5)
|
100,000
|
1.0
|
%
|
|||||
Li
Qi, Secretary and Director (4)
|
6,030,000
|
60.3
|
%
|
|||||
Chong’an
Jin, Director (4)
|
6,030,000
|
60.3
|
%
|
|||||
Shike
Zhu, Director (6)
|
250,000
|
2.5
|
%
|
|||||
Marc
Thomas Serrio (7)
|
1,725
|
*
|
||||||
Bowen
Zhao (8)
|
0
|
0
|
%
|
|||||
Yuehai
Ke (9)
|
0
|
0
|
%
|
|||||
Shuizhen
Wu (10)
|
0
|
0
|
%
|
|||||
Xiaomeng
Yu (11)
|
0
|
0
|
%
|
|||||
All
directors and executive officers as a group (5
persons)
|
6,381,725
|
63.8
|
%
|
|||||
5%
Shareholders: (1)
|
||||||||
Super
Marvel Limited (4)
|
6,030,000
|
60.3
|
%
|
|
*
|
Less than
1%.
|
|
(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)
|
Unless otherwise noted, the
number and percentage of outstanding shares of common stock is based upon
10,000,000 shares outstanding as of March 15, 2010 after giving effect to
the anticipated 1-for-2 reverse stock
split.
|
|
(4)
|
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 Chong’an 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 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.
|
|
(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)
|
Marc
Thomas Serrio’s address is: P.O. Box 91836, Pasadena, California 91109.
Includes 3,449 shares to which Mr. Serrio has the right to acquire within
60 days of March 15, 2010.
|
|
(8)
|
Bowen
Zhao’s address is: Room 1315, Hualong Business Building, No. 110 N.
Ganshan Road, Hangzhou, China
310000.
|
|
(9)
|
Yuehai
Ke’s address is: 388 Yuhangtang Road, Hangzhou, China
310058.
|
|
(10)
|
Shuizhen
Wu’s address is: Room 2302, #20 Building, Hanlinguan Daxue Road, Hangzhou,
China 310000.
|
|
(11)
|
Xiaomeng
Yu’s address is: Wen Hui Guan Quen Fang 7-2, No. 3 Street, Baiyang Street,
Economic Commercial and Technological Development Area, Hangzhou, China
310018.
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On May 1,
2008, our shares of common stock commenced trading on the Over-The-Counter
Bulletin Board (the “OTCBB”) under the symbol “KMNG.OB”. On September 24, 2009,
in connection with our name change to “China Jo-Jo Drugstores, Inc.” that went
effective September 24, 2009, our symbol changed to
“CJJD.OB”.
The
following table sets forth the high and low bid information for our common stock
for each quarter within our last two fiscal years and interim periods, as
reported by the OTC Bulletin Board, after giving effect to the anticipated
1-for-2 reverse stock split. The bid prices reflect inter-dealer quotations, do
not include retail markups, markdowns, or commissions, and do not necessarily
reflect actual transactions.
Low
|
High
|
|||||||
2009
|
||||||||
Quarter
ended December 31, 2009
|
$
|
0.10
|
$
|
5.30
|
||||
Quarter
ended September 30, 2009
|
0.00
|
0.00
|
||||||
Quarter
ended June 30, 2009
|
0.00
|
0.00
|
||||||
Quarter
ended March 31, 2009
|
0.00
|
0.00
|
||||||
2008
|
||||||||
Quarter
ended December 31, 2008
|
$
|
1.10
|
$
|
0.30
|
||||
Quarter
ended September 30, 2008
|
2.24
|
0.50
|
||||||
Quarter
ended June 30, 2008
|
2.22
|
0.00
|
Holders
As of
March 15, 2010, there were 21 stockholders of record of our common stock
(not including beneficial owners who hold shares at broker/dealers in “street
name”).
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Island Stock Transfer,
whose address is 100 Second Avenue South, Suite 705S, St. Petersburg, Florida
33701, and whose telephone number is (727) 289-0010.
DIVIDEND
POLICY
While
there are no restrictions that limit our ability to pay dividends, we have not
paid, and do not currently intend to pay cash dividends on our common stock in
the foreseeable future. Our policy is to retain all earnings, if any, to provide
funds for operation and expansion of our business. The declaration of dividends,
if any, will be subject to the discretion of our Board of Directors, which may
consider such factors as our results of operations, financial condition, capital
needs and acquisition strategy, among others.
DESCRIPTION
OF SECURITIES
We are
a Nevada corporation and our affairs are governed by our articles of
incorporation, as amended, our by-laws, as amended, and the Nevada Revised
Statutes (“NRS”). As of the date of this prospectus, we are
authorized to issue 500,000,000 shares of common stock, $0.001 par value per
share, and 10,000,000 shares of preferred stock, $0.001 par value per
share. At March 15, 2010, we would have had 10,000,000 shares of
common stock issued and outstanding, after giving effect to the anticipated
1-for-2 reverse stock split. The following is a description of our capital
stock, including their material terms and provisions and as such terms and
provisions are applied to our articles of incorporation, by-laws, and the
NRS.
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.
Prior
to the effectiveness of the registration statement which this prospectus is a
part of, we anticipate effecting a 1-for-2 reverse stock split and concurrently
reducing the number of authorized shares of common stock from 500,000,000 to
250,000,000. Under NRS Section 78.2055, to decrease the numbers of issued and
outstanding shares of a class or series of a corporation's capital stock
requires the approval of stockholders holding a majority of the voting power of
the affected class or series, or such greater proportion as may be provided in
the articles of incorporation, regardless of limitations or restrictions on the
voting power of the affected class or series. However, under NRS Section 78.207,
a corporation may change the number of shares of a class of its authorized stock
by increasing or decreasing the number of authorized shares of the class and
correspondingly increasing or decreasing the number of issued and outstanding
shares of the same class held by each stockholder of record by a resolution
adopted by the board of directors without obtaining the approval of the
stockholders. Accordingly, we intend to effect the 10-for-1 reverse stock split
without the approval of our stockholders by concurrently effecting a
corresponding reduction in the number of shares of our authorized common stock
pursuant to NRS Section 78.207.
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.
UNDERWRITING
AND PLAN OF DISTRIBUTION
Subject
to the terms and conditions of an underwriting agreement,
dated , 2010,
we have agreed to sell to each of the underwriters named below, and each of the
underwriters, for which Madison Williams is acting as representative, have
severally, and not jointly, agreed to purchase on a firm commitment basis the
number of shares offered in this offering set forth opposite their respective
names below, at the public offering price, less the underwriting discount set
forth on the cover page of this prospectus.
Name
|
Number of
Shares
|
|||
Madison
Williams and Company LLC
|
||||
Rodman
& Renshaw, LLC
|
||||
Total
|
Nature
of Underwriting Commitment
The
underwriting agreement provides that the underwriters are committed to purchase
on a several but not joint basis all shares offered in this offering, other than
those covered by the over-allotment option described below, if the underwriters
purchase any of these securities. The underwriting agreement provides that the
obligations of the underwriters to purchase the shares offered hereby are
conditional and may be terminated at their discretion based on their assessment
of the state of the financial markets. The obligations of the underwriters may
also be terminated upon the occurrence of other events specified in the
underwriting agreement. Furthermore, pursuant to the underwriting agreement, the
underwriters’ obligations are subject to the authorization and the validity of
the shares being accepted for listing on The NASDAQ Capital Market and to
various other customary conditions, representations and warranties contained in
the underwriting agreement, such as receipt by the underwriters of officers’
certificates and legal opinions of our counsel.
Other
than as underwriter in this offering, neither Madison Williams, Rodman &
Renshaw nor any of their affiliates have provided services to us
or our affiliates in the past.
Pricing
of Securities
Madison
Williams has advised us that it proposes to offer the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus, and to certain dealers that are members of the Financial Industry
Regulatory Authority (FINRA), at such price less a concession not in excess of
$ per share.
Madison Williams may allow, and the selected dealers may reallow, a concession
not in excess of
$ per share to
certain brokers and dealers. After this offering, the offering price and
concessions and discounts to brokers and dealers and other selling terms may
from time to time be changed by Madison Williams. These prices should not be
considered an indication of the actual value of our shares and are subject to
change as a result of market conditions and other factors. No variation in those
terms will change the amount of proceeds to be received by us as set forth on
the cover page of this prospectus.
Commencing
on September 24, 2009, our common stock was traded on the OTC Bulletin Board
under the symbol “CJJD.OB”. On March 19, 2010, the closing market price of our
common stock as quoted on the OTC Bulletin Board was $6.40, after giving effect
to the 1-for-2 reverse stock split to be effected prior to the effectiveness of
the registration statement which this prospectus is a part of. The public
offering price for the shares was determined by negotiation between us and
Madison Williams. The principal factors considered in determining the public
offering price of the shares included:
•
|
the
information in this prospectus and otherwise available to the
underwriter;
|
•
|
the
history and the prospects for the industry in which we will
compete;
|
•
|
the
valuation of our company based on, among other
factors;
|
•
|
our
current financial condition and the prospects for our future cash flows
and earnings;
|
•
|
the
general condition of the economy and the securities markets at the time of
this offering;
|
•
|
the
recent market prices of, and the demand for, publicly-traded securities of
generally comparable companies; and
|
•
|
the
public demand for our securities in this
offering.
|
We cannot
be sure that the public offering price will correspond to the price at which our
shares will trade in the public market following this offering or that an active
trading market for our shares will develop and continue after this
offering.
65
Commissions
and Discounts
The
following table summarizes the compensation to be paid to our underwriter by us
and the proceeds, before expenses, payable to us, assuming a
$ offering
price. The information assumes either no exercise or full exercise by the
underwriters of the over-allotment option.
Total
|
||||||||||||
|
Per
Share
|
Without
Over-Allotment
|
With
Over-Allotment
|
|||||||||
Public
offering price
|
$ | $ | $ | |||||||||
Underwriting
discount (1)
|
$ | $ | $ | |||||||||
Non-accountable
expense allowance (2)
|
$ | $ | $ | |||||||||
Proceeds,
before expenses, to us (3)
|
$ | $ | $ |
|
(1)
|
Underwriting discount is
$ per
share (7% of the price of the shares sold in the
offering).
|
|
(2)
|
The expense allowance of 0.5% is
not payable with respect to the shares sold upon exercise of the
underwriter’s over-allotment
option.
|
|
(3)
|
We estimate that the total
expenses of this offering, excluding the underwriter’s discount and
expense allowance, are approximately
$ .
|
Over-allotment
Option
We have
granted the underwriters an option, exercisable for 45 days after the closing
date of this offering, to purchase up to 15% of the shares of common stock sold
in the offering
( additional
shares) solely to cover over-allotments, if any, at the same price as the
initial shares offered.
Underwriter’s
Common Stock Purchase Option
We
have agreed to sell to the underwriter representative, for $100, options to
purchase up to a total
of shares
of common stock (3% of the shares sold). The shares issuable upon exercise of
this option are identical to those offered by this prospectus. This option is
exercisable at
$ per share
(125% of the price of the shares sold in the offering), commencing on a date
which is six months from the effective date of the registration statement and
expiring five years from the effective date of the registration statement. The
option and
the shares
of common stock underlying the option have been deemed compensation by the FINRA
and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of
the FINRA. Madison Williams (or permitted assignees under the Rule) will not
sell, transfer, assign, pledge, or hypothecate this option or the securities
underlying this option, nor will it engage in any hedging, short sale,
derivative, put, or call transaction that would result in the effective economic
disposition of this option or the underlying securities for a period of 180 days
from the date of this prospectus. Additionally, the option may not be sold
transferred, assigned, pledged or hypothecated for a six-month period (including
the foregoing 180 day period) following the effective date of the registration
statement except to any underwriter and selected dealer participating in the
offering and their bona fide officers or partners. The exercise price and number
of shares issuable upon exercise of the option may be adjusted in certain
circumstances including in the event of a stock dividend, extraordinary cash
dividend or our recapitalization, reorganization, merger or consolidation.
However, the option exercise price or underlying shares will not be adjusted for
issuances of common stock at a price below the option exercise
price.
Lock-ups
All of
our officers, directors and shareholders beneficially owning ___% or more of our
common stock have agreed that, for a period of 180 days from the date of this
prospectus, they will not sell, contract to sell, grant any option for the sale
or otherwise dispose of any of our equity securities, or any securities
convertible into or exercisable or exchangeable for our equity securities,
without the consent of the representative except for exercise or conversion of
currently outstanding warrants, options and convertible debentures, as
applicable; and exercise of options under an acceptable stock incentive plan.
The underwriter representative may consent to an early release from the lock-up
periods if, in its opinion, the market for the common stock would not be
adversely impacted by sales and in cases of a financial emergency of an officer,
director or other stockholder. We are unaware of any officer or director who
intends to ask for consent to dispose of any of our equity securities during the
relevant lock-up periods.
66
Other
Terms
In
connection with this offering, Madison Williams or certain of the securities
dealers may distribute prospectuses electronically. No forms of prospectus other
than printed prospectuses and electronically distributed prospectuses that are
printable in Adobe PDF format will be used in connection with this
offering.
Madison
Williams has informed us that it does not expect to confirm sales of shares
offered by this prospectus to accounts over which it exercises discretionary
authority without obtaining the specific approval of the account
holder.
We have
also granted Madison Williams a right of first refusal to conduct future
offerings for us during the 12 months following the closing date of this
offering.
Stabilization
Until the
distribution of the shares of common stock offered by this prospectus is
completed, rules of the SEC may limit the ability of the underwriters to bid for
and to purchase our securities. As an exception to these rules, the underwriters
may engage in transactions effected in accordance with Regulation M under the
Securities Exchange Act of 1934 that are intended to stabilize, maintain or
otherwise affect the price of our common stock. The underwriters may engage in
over-allotment sales, syndicate covering transactions, stabilizing transactions
and penalty bids in accordance with Regulation M.
|
•
|
Stabilizing transactions permit
bids or purchases for the purpose of pegging, fixing or maintaining the
price of the common stock, so long as stabilizing bids do not exceed a
specified maximum.
|
|
•
|
Over-allotment involves sales by
the underwriters of shares in excess of the number of shares the
underwriters are obligated to purchase, which creates a short position.
The short position may be either a covered short position or a naked short
position. In a covered short position, the number of shares over-allotted
by the underwriters is not greater than the number of shares that they may
purchase in the over-allotment option. In a naked short position, the
number of shares involved is greater than the number of shares in the
over-allotment option. The underwriters may close out any covered short
position by either exercising their over-allotment option or purchasing
shares in the open market.
|
|
•
|
Covering transactions involve the
purchase of securities in the open market after the distribution has been
completed in order to cover short positions. In determining the source of
securities to close out the short position, the underwriters will
consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they may
purchase securities through the over-allotment option. If the underwriters
sell more shares of common stock than could be covered by the
over-allotment option, creating a naked short position, the position can
only be closed out by buying securities in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the securities in
the open market after pricing that could adversely affect investors who
purchase in this offering.
|
|
•
|
Penalty bids permit the
underwriters to reclaim a selling concession from a selected dealer when
the shares of common stock originally sold by the selected dealer are
purchased in a stabilizing or syndicate covering
transaction.
|
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common stock. As a
result, the price of our common stock may be higher than the price that might
otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our securities.
These transactions may occur on The NASDAQ Capital Market or on any other
trading market. If any of these transactions are commenced, they may be
discontinued without notice at any time.
Indemnification
The
underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the SEC, indemnification for liabilities under
the Securities Act is against public policy as expressed in the Securities Act,
and is therefore, unenforceable.
Foreign
Regulatory Restrictions on Purchase of the Common Stock
We have
not taken any action to permit a public offering of shares of our common stock
outside the United States or to permit the possession or distribution of this
prospectus outside the United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of common shares and the distribution of
the prospectus outside the United States.
In
addition to the public offering of the shares in the United States, the
underwriters may, subject to the applicable foreign laws, also offer the common
shares to certain institutions or accredited persons in the following
countries:
Italy. This
offering of shares of our common stock has not been cleared by Consob, the
Italian Stock Exchange’s regulatory agency of public companies, pursuant to
Italian securities legislation and, accordingly, no common shares may be
offered, sold or delivered, nor may copies of this prospectus or of any other
document relating to our common stock be distributed in Italy, except (1) to
professional investors ( operatori qualificati ); or
(2) in circumstances which are exempted from the rules on solicitation of
investments pursuant to Decree No. 58 and Article 33, first paragraph, of Consob
Regulation No. 11971 of May 14, 1999, as amended. Any offer, sale or delivery of
our common shares or distribution of copies of this prospectus or any other
document relating to our common stock in Italy under (1) or (2) above must be
(i) made by an investment firm, bank or financial intermediary permitted to
conduct such activities in Italy in accordance with the Decree No. 58 and
Legislative Decree No. 385 of September 1, 1993, or the Banking Act; and (ii) in
compliance with Article 129 of the Banking Act and the implementing guidelines
of the Bank of Italy, as amended from time to time, pursuant to which the issue
or the offer of securities in Italy may need to be preceded and followed by an
appropriate notice to be filed with the Bank of Italy depending, inter alia , on the aggregate
value of the securities issued or offered in Italy and their characteristics;
and (iii) in compliance with any other applicable laws and
regulations.
Germany. The
offering of shares of our common stock is not a public offering in the Federal
Republic of Germany. The common shares may only be acquired in accordance with
the provisions of the Securities Sales Prospectus Act
(Wertpapier-Verkaudfspropsektgestz), as amended, and any other applicable German
law. No application has been made under German law to publicly market our common
shares in or out of the Federal Republic of Germany. Our common shares are not
registered or authorized for distribution under the Securities Sales Prospectus
Act and accordingly may not be, and are not being, offered or advertised
publicly or by public promotion. Therefore, this prospectus is strictly for
private use and the offering is only being made to recipients to whom the
document is personally addressed and does not constitute an offer or
advertisement to the public. Our common shares will only be available to persons
who, by profession, trade or business, buy or sell securities for their own or a
third party’s account.
France. The
shares of our common stock offered by this prospectus may not be offered or
sold, directly or indirectly, to the public in France. This prospectus has not
been or will not be submitted to the clearance procedure of the Autorité des
Marchés Financiers, or the AMF, and may not be released or distributed to the
public in France. Investors in France may only purchase the common shares
offered by this prospectus for their own account and in accordance with articles
L. 411-1, L. 441-2 and L. 412-1 of the Code Monétaire et Financier and decree
no. 98-880 dated October 1, 1998, provided they are “qualified investors” within
the meaning of said decree. Each French investor must represent in writing that
it is a qualified investor within the meaning of the aforesaid decree. Any
resale, directly or indirectly, to the public of the common shares offered by
this prospectus may be effected only in compliance with the above mentioned
regulations. “Les actions offertes par ce document d’information ne
peuvent pas être, directement ou indirectement, offertes ou vendues au public en
France. Ce document d’information n’a pas été ou ne sera pas soumis au visa de
l’Autorité des Marchés Financiers et ne peut être diffusé ou distribué au public
en France. Les investisseurs en France ne peuvent acheter les actions offertes
par ce document d’information que pour leur compte propre et conformément aux
articles L. 411-1, L. 441-2 et L. 412-1 du Code Monétaire et Financier et du
décret no. 98-880 du 1 octobre 1998, sous réserve qu’ils soient des
investisseurs qualifiés au sens du décret susvisé. Chaque investisseur doit
déclarer par écrit qu’il est un investisseur qualifié au sens du décret susvisé.
Toute revente, directe ou indirecte, des actions offertes par ce document
d’information au public ne peut être effectuée que conformément à la
réglementation susmentionnée.”
Greece. The
present prospectus has been submitted for approval by the United States
Securities and Exchange Commission, or the US SEC, and not the Greek Capital
Market Committee. All information contained in the prospectus is true and
accurate. The offering of the shares of common stock of the company does not
constitute an initial public offer in Greece according to CL. 2190/1920 and L.
3401/2005 as amended and in force. This prospectus is strictly for the use of
the entity to which it has been addressed to by the company and not to be
circulated in Greece or any other jurisdiction.
This
information and documentation is true and accurate and in conformity with the
information contained in the prospectus for the offer shares of common stock of
the company, which is being reviewed for approval only by the United States
Securities and Exchange Commission. and does not constitute provision of the
investment service of investment advice according to L. 3606/2007. Any recipient
of this material has stated to be a qualified and experienced investor and will
evaluate the contents and decide on his/her own discretion whether to
participate or not at this offering of shares of common stock of the
company.
Switzerland. This
prospectus may only be used by those persons to whom it has been directly handed
out by the offeror or its designated distributors in connection with the offer
described therein. The shares of common stock are only offered to those persons
and/or entities directly solicited by the offeror or its designated
distributors, and are not offered to the public in Switzerland. This prospectus
constitutes neither a public offer in Switzerland nor an issue prospectus in
accordance with the respective Swiss legislation, in particular but not limited
to Article 652A Swiss Code Obligations. Accordingly, this prospectus may not be
used in connection with any other offer, whether private or public and shall in
particular not be distributed to the public in Switzerland.
68
United Kingdom.
In the United Kingdom, the shares of common stock offered by this prospectus are
directed to and will only be available for purchase to a person who is an exempt
person as referred to at paragraph (c) below and who warrants, represents and
agrees that: (a) it has not offered or sold, will not offer or sell, any common
shares offered by this prospectus to any person in the United Kingdom except in
circumstances which do not constitute an offer to the public in the United
Kingdom for the purposes of the section 85 of the Financial Services and Markets
Act 2000 (as amended), or the FSMA and (b) it has complied and will comply with
all applicable provisions of FSMA and the regulations made thereunder in respect
of anything done by it in relation to the common shares offered by this
prospectus in, from or otherwise involving the United Kingdom; and (c) it is a
person who falls within the exemptions to Section 21 of the FSMA as set out in
The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or
the Order, being either an investment professional as described under Article 19
or any body corporate (which itself has or a group undertaking has a called up
share capital or net assets of not less than £500,000 (if more than 20 members)
or otherwise £5 million) or an unincorporated association or partnership (with
net assets of not less than £5 million) or is a trustee of a high value trust or
any person acting in the capacity of director, officer or employee of such
entities as defined under Article 49(2)(a) to (d) of the Order, or a person to
whom the invitation or inducement may otherwise lawfully be communicated or
cause to be communicated. The investment activity to which this document relates
will only be available to and engaged in only with exempt persons referred to
above. Persons who are not investment professionals and do not have professional
experience in matters relating to investments or are not an exempt person as
described above, should not review nor rely or act upon this document and should
return this document immediately. It should be noted that this document is not a
prospectus in the United Kingdom as defined in the Prospectus Regulations 2005
and has not been approved by the Financial Services Authority or any competent
authority in the United Kingdom.
Sweden. Neither
this prospectus nor the shares of common stock offered hereunder have been
registered with or approved by the Swedish Financial Supervisory Authority under
the Swedish Financial Instruments Trading Act (1991:980) (as amended), nor will
such registration or approval be sought. Accordingly, this prospectus may not be
made available nor may the common shares offered hereunder be marketed or
offered for sale in Sweden other than in circumstances which are deemed not to
be an offer to the public in Sweden under the Financial Instruments Trading Act.
This prospectus may not be distributed to the public in Sweden and a Swedish
recipient of the prospectus may not in any way forward the prospectus to the
public in Sweden.
Norway. This
prospectus has not been produced in accordance with the prospectus requirements
laid down in the Norwegian Securities Trading Act 1997, as amended. This
prospectus has not been approved or disapproved by, or registered with, either
the Oslo Stock Exchange or the Norwegian Registry of Business Enterprises. This
prospectus may not, either directly or indirectly be distributed to Norwegian
potential investors.
Denmark. This
prospectus has not been prepared in the context of a public offering of
securities in Denmark within the meaning of the Danish Securities Trading Act
No. 171 of 17 March 2005, as amended from time to time, or any Executive Orders
issued on the basis thereof and has not been and will not be filed with or
approved by the Danish Financial Supervisory Authority or any other public
authority in Denmark. The offering of the shares of common stock will only be
made to persons pursuant to one or more of the exemptions set out in Executive
Order No. 306 of 28 April 2005 on Prospectuses for Securities Admitted for
Listing or Trade on a Regulated Market and on the First Public Offer of
Securities exceeding EUR 2,500,000 or Executive Order No. 307 of 28 April 2005
on Prospectuses for the First Public Offer of Certain Securities between EUR
100,000 and EUR 2,500,000, as applicable.
The Netherlands.
Underwriters may not offer, distribute, sell, transfer or deliver
any of our securities, directly or indirectly, in The Netherlands, as a part of
their initial distribution or at any time thereafter, to any person other than
our employees or employees of our subsidiaries, individuals who or legal
entities which trade or invest in securities in the conduct of their profession
or business within the meaning of article 2 of the Exemption Regulation issued
under the Securities Transactions Supervision Act 1995 ( Vrijstellingsregeling Wet toezich
teffectenverkeer1995 ), which includes banks, brokers, pension funds,
insurance companies, securities institutions, investment institutions, and other
institutional investors, including, among others, treasuries of large
enterprises who or which regularly trade or invest in securities in a
professional capacity.
Cyprus. Each of the book
running managers has represented, warranted and agreed
that: (i) it will not be providing from or within Cyprus any
“Investment Services”, “Investment Activities” and “Non-Core Services” (as such
terms are defined in the Investment Firms Law 144(I) of 2007, or the IFL, in
relation to the shares of common stock, or will be otherwise providing
Investment Services, Investment Activities and Non-Core Services to residents or
persons domiciled in Cyprus. Each book running manager has represented,
warranted and agreed that it will not be concluding in Cyprus any transaction
relating to such Investment Services, Investment Activities and Non-Core
Services in contravention of the IFL and/or applicable regulations adopted
pursuant thereto or in relation thereto; and (ii)it has not and will not offer
any of the shares of common stock other than in compliance with the provisions
of the Public Offer and Prospectus Law, Law 114(I)/2005.
Israel. The
shares of common stock offered by this prospectus have not been approved or
disapproved by the Israeli Securities Authority (ISA). The common shares may not
be offered or sold, directly or indirectly, to the public in Israel. The ISA has
not issued permits, approvals or licenses in connection with the offering of the
common shares or publishing the prospectus; nor has it authenticated the details
included herein, confirmed their reliability or completeness, or rendered an
opinion as to the quality of the common shares being offered. Any resale,
directly or indirectly, to the public of the common shares offered by this
prospectus is subject to restrictions on transferability and must be effected
only in compliance with the Israeli securities laws and
regulations.
69
Oman. For the
attention of the residents of Oman:
The
information contained in this prospectus neither constitutes a public offer of
securities in the Sultanate of Oman as contemplated by the Commercial
Companies Law of Oman (Sultani Decree 4/74) or the Capital Market Law of Oman
(Sultani Decree 80/98), nor does it constitute an offer to sell, or the
solicitation of any offer to buy non-Omani securities in Oman as contemplated by
Article 6 of the Executive Regulations to the Capital Market Law of Oman (issued
vide Ministerial Decision No 4/2001), and nor does it constitute a distribution
of non-Omani securities in Oman as contemplated under the Rules for Distribution
of Non-Omani Securities in Oman issued by the Capital Market Authority of Oman,
or the CMA. Additionally, this prospectus is not intended to lead to the
conclusion of any contract of whatsoever nature within the territory of
Oman.
This
prospectus has been sent at the request of the investor in Oman, and by
receiving this prospectus, the person or entity to whom it has been issued and
sent understands, acknowledges and agrees that this prospectus has not been
approved by the CMA or any other regulatory body or authority in Oman, nor has
any authorization, license or approval been received from the CMA or any other
regulatory authority in Oman, to market, offer, sell, or distribute the shares
within Oman.
No
marketing, offering, selling or distribution of any financial or investment
products or services has been or will be made from within Oman and no
subscription to any securities, products or financial services may or will be
consummated within Oman. The underwriters are neither companies licensed by the
CMA to provide investment advisory, brokerage, or portfolio management services
in Oman, nor banks licensed by the Central Bank of Oman to provide investment
banking services in Oman. The underwriters do not advise persons or entities
resident or based in Oman as to the appropriateness of investing in or
purchasing or selling securities or other financial products.
Nothing
contained in this prospectus is intended to constitute Omani investment, legal,
tax, accounting or other professional advice. This prospectus is for your
information only, and nothing herein is intended to endorse or recommend a
particular course of action. You should consult with an appropriate professional
for specific advice on the basis of your situation.
United Arab
Emirates. his document has not been reviewed, approved or
licensed by the Central Bank of the United Arab Emirates, or the UAE, Emirates
Securities and Commodities Authority or any other relevant licensing authority
in the UAE including any licensing authority incorporated under the laws and
regulations of any of the free zones established and operating in the territory
of the UAE, in particular the Dubai International Financial Services Authority,
or the DFSA, a regulatory authority of the Dubai International Financial Centre,
or the DIFC. The sale of the shares does not constitute a public offer of
securities in the UAE, DIFC and/or any other free zone in accordance with the
Commercial Companies Law, Federal Law No. 8 of 1984 (as amended), DFSA Offered
Securities Rules and the Dubai International Financial Exchange Listing Rules,
accordingly, or otherwise.
The
shares may not be offered to the public in the UAE and/or any of the free zones
including, in particular, the DIFC. The shares may be offered and this document
may be issued, only to a limited number of investors in the UAE or any of its
free zones (including, in particular, the DIFC) who qualify as sophisticated
investors under the relevant laws and regulations of the UAE or the free zone
concerned. Management of the Company and the representatives represent and
warrant that the shares will not be offered, sold, transferred or delivered to
the public in the UAE or any of its free zones including, in particular, the
DIFC.
People’s Republic of
China. This prospectus may not be circulated or
distributed in the People’s Republic of China, or PRC, and our common stock may
not be offered or sold to any person for re-offering or resale, directly or
indirectly, to any resident of the PRC except pursuant to applicable laws and
regulations of the PRC. For the purpose of this paragraph, PRC does not include
Taiwan and the special administrative regions of Hong Kong and
Macau.
Botswana. The company hereby
represents and warrants that it has not offered for sale or sold, and will not
offer or sell, directly or indirectly the shares of common stock to the public
in the Republic of Botswana, and confirms that the offering will not be subject
to any registration requirements as a prospectus pursuant to the requirements
and/or provisions of the Companies Act, 2003 or the Listing Requirements of the
Botswana Stock Exchange.
Hong Kong. The
shares of common stock have not been offered or sold and will not be offered or
sold in Hong Kong, by means of any document, other than (a) to “professional
investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong
Kong and any rules made under that Ordinance; or (b) in other circumstances
which do not result in the document being a “prospectus” as defined in the
Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer
to the public within the meaning of that Ordinance. No advertisement, invitation
or document, whether in Hong Kong or elsewhere, which is directed at, or the
contents of which are likely to be accessed or read by, the public of Hong Kong
(except if permitted to do so under the securities laws of Hong Kong) has been
issued or will be issued in Hong Kong or elsewhere other than with respect to
the common units or shares of common stock which are or are intended to be
disposed of only to persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures Ordinance (Cap. 571)
of Hong Kong and any rules made under that Ordinance.
The
contents of this document have not been reviewed by any regulatory authority in
Hong Kong. You are advised to exercise caution in relation to the offer. If you
are in any doubt about any of the contents of this document, you should obtain
independent professional advice.
Singapore. This
prospectus has not been registered as a prospectus with the Monetary Authority
of Singapore. Accordingly, this prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase,
of the shares may not be circulated or distributed, nor may the shares be
offered or sold, or be made the subject of an invitation for subscription or
purchase, whether directly or indirectly, to persons in Singapore other than (i)
to an institutional investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person, or any
person pursuant to Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in
accordance with the conditions of, any other applicable provision of the
SFA.
Where the
shares are subscribed or purchased under Section 275 by a relevant person which
is: (a) a corporation (which is not an accredited investor) the sole business of
which is to hold investments and the entire share capital of which is owned by
one or more individuals, each of whom is an accredited investor; or (b) a trust
(where the trustee is not an accredited investor) whose sole purpose is to hold
investments and each beneficiary is an accredited investor, shares, debentures
and units of shares and debentures of that corporation or the beneficiaries’
rights and interest in that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under Section 275 except:
(1) to an institutional investor under Section 274 of the SFA or to a relevant
person, or any person pursuant to Section 275(1A), and in accordance with the
conditions, specified in Section 275 of the SFA; (2) where no consideration is
given for the transfer; or (3) by operation of law.
70
LEGAL
MATTERS
The
validity of the shares sold by us under this prospectus will be passed upon for
us by Richardson & Patel LLP in Los Angeles, California. As of the date of
this prospectus, Richardson & Patel LLP and/or its principals hold Company
securities. Sichenzia Ross Friedman Ference LLP has acted as
counsel for Madison Williams.
EXPERTS
The
financial statements as of and for the years ended March 31, 2009 and 2008
included in this prospectus have been audited by Frazer Frost, LLP (successor
entity of Moore Stephens Wurth Frazer and Torbet, LLP), independent certified
public accountants to the extent and for the periods set forth in their report
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of that firm as experts in auditing and
accounting.
DISCLOSURE
OF COMMISSION POSITION OF
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Pursuant
to Article 9 of our articles of incorporation, as amended, and the NRS, our
by-laws, as amended, contain the following indemnification provisions for our
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.
.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.
71
.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.”
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant's executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, 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. No pending material litigation
or proceeding involving our directors, executive officers, employees or other
agents as to which indemnification is being sought exists, and we are not aware
of any pending or threatened material litigation that may result in claims for
indemnification by any of our directors or executive officers.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURES
As
reported in a Form 8-K Current Report filed with the SEC on December 2, 2009, we
changed our independent accountants from Madsen & Associates CPA’s, Inc. to
Moore Stephens Wurth Frazer and Torbet, LLP (“MSWFT”). effective November 11,
2009.
We
were notified that, effective January 1, 2010, certain partners of MSWFT and
Frost, PLLC (“Frost”) formed Frazer Frost, LLP (“Frazer Frost”), a new
partnership. Pursuant to the terms of a combination agreement by and among
MSWFT, Frazer Frost and Frost (the “Combination Agreement”), each of MSWFT and
Frost contributed substantially all of their assets and certain of their
liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s
engagement letter with us and becoming our new independent accounting
firm. Frazer Frost is registered with the Public Company Accounting
and Oversight Board (PCAOB).
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
with respect to the common stock being offered pursuant to this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and the exhibits and schedules filed as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the filed exhibit.
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. The SEC also
maintains an Internet website that contains reports, proxy statements and other
information about issuers, like us, that file electronically with the SEC. The
address of that website is www.sec.gov.
72
FINANCIAL
STATEMENTS
The
consolidated financial statements as of December 31, 2009 and 2008, and as of
March 31, 2009 and 2008, commence on the following page.
73
Page
|
|||
Consolidated
Balance Sheets as of December 31, 2009 (Unaudited) and March 31,
2009
|
F-1
|
||
Consolidated
Statements of Income and Other Comprehensive Income for the Three and Nine
Months Ended December 31, 2009 and 2008 (Unaudited)
|
F-2
|
||
Consolidated
Statements of Shareholders’ Equity (Unaudited)
|
F-3
|
||
Consolidated
Statements of Cash Flows for the Nine Months Ended December 31, 2009 and
2008 (Unaudited)
|
F-4
|
||
Notes
to Consolidated Financial Statements as of December 31, 2009
(Unaudited)
|
F-5
|
||
F-18
|
|||
Consolidated
Balance Sheets as of March 31, 2009 and 2008
|
F-19
|
||
Consolidated
Statements of Income and other Comprehensive Income (Loss) for the Years
Ended March 31, 2009 and 2008
|
F-20
|
||
Consolidated
Statements of Shareholders’ Equity
|
F-21
|
||
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2009 and
2008
|
F-22
|
||
Notes
to Consolidated Financial Statements as of March 31,
2009
|
F-23
|
74
CHINA
JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY
KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED
BALANCE SHEETS
AS OF
DECEMBER 31, 2009 AND MARCH 31, 2009
December
31,
|
March
31,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$
|
1,226,929
|
$
|
996,302
|
||||
Restricted
cash
|
362,349
|
-
|
||||||
Accounts
receivable, trade
|
1,922,664
|
1,265,110
|
||||||
Inventories
|
3,527,071
|
2,793,101
|
||||||
Other
receivables
|
364,574
|
67,079
|
||||||
Other
receivables - related parties
|
-
|
2,432
|
||||||
Advances
to suppliers
|
6,813,318
|
5,485,113
|
||||||
Advances
to supplier - related party
|
2,190,826
|
1,797,104
|
||||||
Other
current assets
|
1,455,707
|
564,379
|
||||||
Total
current assets
|
17,863,438
|
12,970,620
|
||||||
PROPERTY
AND EQUIPMENT, net
|
911,001
|
979,432
|
||||||
OTHER
ASSETS:
|
||||||||
Long
term deposit
|
2,326,829
|
2,015,149
|
||||||
Total
assets
|
$
|
21,101,268
|
$
|
15,965,201
|
||||
LIABILITIES AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short
term loans
|
$
|
1,467,000
|
$
|
1,465,000
|
||||
Notes
payable
|
720,816
|
-
|
||||||
Accounts
payable, trade
|
3,217,895
|
5,939,237
|
||||||
Other
payables
|
1,158,763
|
404,731
|
||||||
Other
payables - related party
|
333,029
|
326,715
|
||||||
Taxes
payable
|
1,125,652
|
811,316
|
||||||
Accrued
liabilities
|
248,481
|
360,655
|
||||||
Total
liabilities
|
8,271,636
|
9,307,654
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Common
stock; $0.001 par value; 500,000,000 shares
authorized;
|
||||||||
20,000,000
and 15,800,000 shares issued and outstanding
|
||||||||
as
of December 31, 2009 and March 31, 2009, respectively
|
20,000
|
15,800
|
||||||
Additional
paid-in capital
|
867,884
|
661,800
|
||||||
Statutory
reserves
|
1,309,109
|
1,309,109
|
||||||
Retained
earnings
|
10,982,385
|
5,033,275
|
||||||
Accumulated
other comprehensive loss
|
(349,746
|
)
|
(362,437
|
)
|
||||
Total
shareholders' equity
|
12,829,632
|
6,657,547
|
||||||
Total
liabilities and shareholders' equity
|
$
|
21,101,268
|
$
|
15,965,201
|
The
accompanying notes are an integral part of these financial
statements.
F-1
CHINA
JO-JO DRUGSTORES, INC AND SUBSIDIARIES
(FORMERLY
KNOWN AS KERRISDALE MINING CORPORATION)
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR
THREE AND NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008
(Unaudited)
Three
months ended
|
Nine
months ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
REVENUES
|
$
|
14,923,706
|
$
|
11,562,762
|
$
|
38,863,743
|
$
|
33,096,321
|
||||||||
COST
OF GOODS SOLD
|
10,156,871
|
8,238,078
|
27,574,136
|
24,139,585
|
||||||||||||
GROSS
PROFIT
|
4,766,835
|
3,324,684
|
11,289,607
|