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EX-31.2 - China Yongxin Pharmaceuticals Inc.v177274_ex31-2.htm
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EX-32.1 - China Yongxin Pharmaceuticals Inc.v177274_ex32-1.htm
EX-10.17 - China Yongxin Pharmaceuticals Inc.v177274_ex10-17.htm
EX-10.14 - China Yongxin Pharmaceuticals Inc.v177274_ex10-14.htm
EX-10.13 - China Yongxin Pharmaceuticals Inc.v177274_ex10-13.htm
EX-10.15 - China Yongxin Pharmaceuticals Inc.v177274_ex10-15.htm
EX-10.16 - China Yongxin Pharmaceuticals Inc.v177274_ex10-16.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-K
 
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _______ TO ___________
 
 COMMISSION FILE NO. 000-26293
 
CHINA YONGXIN PHARMACEUTICALS INC.
 
 (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware
 
20-1661391
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
     
927 Canada Court
City of Industry, California
 
91748
(Address of principal executive offices)
 
(Zip Code)
 
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (626) 581-9098
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 None.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   ¨
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x   No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $1.7 million as of June 30, 2009.

There were 57,348,923 shares outstanding of registrant's common stock, par value $0.001 per share, as of March 10, 2010. The shares of the registrant's common stock are currently quoted on the Over-the-Counter Bulletin Board, or OTCBB.

Documents Incorporated by Reference: None.

 
 

 
 
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009

   
Page
PART I
   
     
Item 1. 
Business. 
4
Item 1A.
Risk Factors. 
13
Item 1B.
Unresolved Staff Comments. 
28
Item 2. 
Properties. 
28
Item 3. 
Legal Proceedings. 
29
     
PART II  
   
     
Item 5. 
Market For Common Stock and Related Stockholder Matters
29
Item 6. 
Selected Financial Data 
31
Item 7. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
31
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
40
Item 8. 
Financial Statements and Supplementary Data. 
40
Item 9. 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
40
Item 9A.
Controls and Procedures
40
Item 9B.
Other Information
41
     
PART III
   
     
Item 10. 
Directors, Executive Officers and Corporate Governance
42
Item 11. 
Executive Compensation 
45
Item 12. 
Security Ownership of Certain Beneficial Owners and Management 
47
Item 13. 
Certain Relationships and Related Transactions, and Director Independence 
49
Item 14
Principal Accountant Fees and Services
49
     
PART IV  
   
     
Item 15. 
Exhibits, Financial Statement Schedules. 
50
Signatures
  53

 
2

 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
        The information contained in this annual report on Form 10-K (“Form 10-K”), includes some statements that are not purely historical and that are "forward-looking statements." Such forward-looking statements include, but are not limited to, statements regarding our company's and our management's expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition, results of operations, and the expected impact of the share exchange. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "might," "plans," "possible," "potential," "predicts," "projects," "seeks," "should," "will," "would" and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
 
        The forward-looking statements contained in this Form 10-K are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction. There can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties' control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements, including the following:
 
Ÿ
The market acceptance of the products we sell;
 
Ÿ
Problems that we may face in marketing and distributing the products we sell;
 
Ÿ
Errors in business planning attributable to insufficient market size or segmentation data;
 
Ÿ
Exposure to product liability and defect claims;
 
Ÿ
Changes in the laws of the People's Republic of China that affect our operations;
 
Ÿ
Any recurrence of health epidemics and other outbreaks;
 
Ÿ
Our ability to obtain and maintain all necessary government certifications and/or licenses to conduct our business;
 
Ÿ
Development of a public trading market for our securities;
 
Ÿ
Our inability to raise additional capital when needed;
 
Ÿ
Problems with important suppliers and strategic business partners;
 
Ÿ
The cost of complying with current and future governmental regulations and the impact of any changes in the regulations on our operations; and
 
Ÿ
The other factors referenced in this Prospectus, including, without limitation, under the sections entitled "Risk Factors," "Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business."
 
These risks and uncertainties, along with others, are also described above under the heading "Risk Factors." Should one or more of these risks or uncertainties materialize, or should any of the parties' assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

 
3

 
 
PART I

Item 1. BUSINESS
 
         With respect to this discussion, the terms, "we," "us," "our," and "Company" refer to China Yongxin Pharmaceuticals Inc. (formerly Digital Learning Management Corporation) (the “Company"), and its 80%-owned subsidiary, Changchun Yongxin Dirui Medical Co., Ltd., a company organized under the laws of the PRC ("Yongxin"), and (i) Yongxin's wholly-owned subsidiary Jilin Province Yongxin Chain Drugstore Ltd., a company organized under the laws of the PRC (“Yongxin Drugstore”); (ii) Yongxin Drugstore's 90%-owned subsidiary, Tianjin Jingyongxin Chain Drugstore Ltd., a company organized under the laws of the PRC (“Jingyongxin Drugstore”); and (iii) Yongxin Drugstore's wholly-owned subsidiary, Baishan Caoantang Chain Drugstore Ltd., a company organized under the laws of the PRC (“Caoantang Drugstore”).
 
          Through our Chinese subsidiaries, we are engaged in the wholesale distribution of pharmaceuticals and medical-related products, and the sale and distribution of pharmaceuticals, health and beauty products, ginseng and herbal supplements, and other healthcare products through retail operations in the PRC. Our corporate headquarters are located in City of Industry, California, but the Company’s distribution operations are based in Changchun City, Jilin Province, PRC.   Substantially all of our employees are located in China.  At December 31, 2009, we had approximately 673 full time employees, with 90 employees holding pharmaceutical licenses, and 87 of such licensed pharmacists working at our retail drugstores.  Our business mainly operates in two segments: (i) the wholesale of pharmaceuticals and other medical-related products and (ii) the operation of retail drugstores.

HISTORY AND CORPORATE STRUCTURE
 
The Company was originally incorporated in Delaware on February 18, 1999 under the name of FreePCSQuote.  On December 21, 2006, Changchun Yongxin Dirui Medical Co., Ltd, a Chinese corporation ("Yongxin") and all of the stockholders of Yongxin entered into a share exchange transaction with the Company.  On April 12, 2008, we entered into a second amended Share Exchange Agreement with Yongxin, effective November 16, 2007, in which the Company acquired from the original Yongxin stockholders, and Yongxin stockholders transferred to the Company, 80% of the equity interest of Yongxin in exchange for the issuance by the Company of an aggregate of 21,000,000 shares of newly issued common stock and 5,000,000 shares of Series A Convertible Preferred Stock to the original Yongxin stockholders and/or their designees (the “Share Exchange Transaction”).  The Series A Convertible Preferred Stock is convertible over a 3 year period, into up to 30 million shares of common stock.  For accounting purposes, this Share Exchange Transaction was accounted for as a reverse merger, since the original stockholders of Yongxin became the owners of a majority of the issued and outstanding shares of common stock of the Company, and the directors and executive officers of Yongxin became the directors and executive officers of the Company.  In connection with the Share Exchange Transaction, we changed our name to “Nutradyne Group Inc.”

Yongxin was originally established in 1993.  Yongxin’s business operations consist of wholesale and retail sales of pharmaceuticals, medical equipment and other medical-related products.  Yongxin’s operations are based in Changchun City, Jilin Province, China. In 2004, Yongxin established Jilin Province Yongxin Chain Drugstore Ltd. (“Yongxin Drugstore”) with an investment of RMB 2,500,000 (equivalent to $303,000) to develop a customer-terminal network market.  In July 2005, the Company obtained the franchise rights in Jilin Province from American Medicine Shoppe (Meixin International Medical Chains) and by then had developed 4 chains of “Meixin Yongxin.”  As of March 3, 2010, Yongxin Drugstore has developed 21 retail chains drug stores in the name of Yongxin Drugstore which collectively cover 3,373 M2 of retail space throughout Changchun city in China.  These drugstores sell over-the-counter western and traditional Chinese medicines and other medical-related products.

On March 16, 2007, Yongxin Drugstore entered into various agreements with retail drug stores in Tianjin and established Tianjin Jingyongxin Chain Drugstore Ltd. (“Jinyongxin Drugstore”) with an investment of $116,868, in which the Company has 90% ownership of Jinyongxin Drugstore.  Jinyongxin Drugstore is located in Tianjin City, China.  As of March 3, 2010, Jinyongxin Drugstore has developed 26 retail chain drug stores with total retail space of 3,657 M2 throughout Tianjin City in China.

 
4

 

On May 15, 2007, Yongxin established Jilin Dingjian Natural Health Products Co., Ltd. (“Dingjian”) with an investment of $116,868 whereby Yongxin acquired a 90% ownership interest in Dingjian.  The other 10% of Dingjian was held by an individual named Jianwei Chen.  Dingjian was formed under laws of the People’s Republic of China and is located in Changchun City, Jilin Province. Dingjian’s products include ginseng products, flower-flavored tea, rare raw medicine materials and local specialty products. On November 21, 2009, Yongxin disposed of its entire ownership interest in Dingjian pursuant to an Equity Transfer Agreement (the “Agreement”) with Sun Shi Wei, an individual.  Pursuant to the Agreement, Yongxin transferred its 90% ownership interest in Dingjian to Sun Shi Wei.  No other consideration was exchanged.  As of the date of this Form 10-K, Yongxin holds no ownership interest in Dingjian, and is not subject to any of its liabilities.

On June 15, 2007, Yongxin Drugstore established Baishan Caoantang Chain Drugstore Ltd. (“Caoantang Drugstore”) with a total investment of $408,430.  Caoantang Drugstore is a wholly-owned subsidiary of Yongxin Drugstore.  As of March 3, 2010, Caoantang Drugstore operates a chain of 32 retail drugstores that collectively cover 2,804 M2of retail space and sells over-the-counter western and traditional Chinese medicines and other medical-related products.

On May 5, 2008, the Company changed its name from Nutradyne Group, Inc to China Yongxin Pharmaceuticals Inc.

On March 9, 2009, the Company formally launched its Electronic Diagnosis System (the “System”), which enables its customers to remotely receive a medical diagnosis and conveniently purchase prescription drugs at the store.  To date, the Company has installed 20 Systems in its Yongxin chain drugstores, all located in Changchun, Jilin Province, China.   

Since the beginning of 2009, the Company has also signed 12 exclusive distribution agreements within the Jilin province with several well known pharmaceutical manufacturers including Tianjin Smith Kline & French Laboratones Ltd.  As of March 3, 2010, Yongxin has exclusive distribution rights for approximately 96 drugs in Jilin province.  This portfolio is a key component of its long term growth strategy to leverage the large distribution center and channels established to drive incremental future revenue growth.  These agreements are typically one year in duration and renewable.

On March 1, 2010, the Company sold its digital e-learning business including its wholly-owned subsidiary, Digital Learning Institute Inc., a Delaware corporation (“Digital Learning”); and (i) Digital Learning’s wholly-owned subsidiary Software Education of America, Inc., a California corporation; (ii) Digital Learning’s wholly-owned subsidiary McKinley Educational Services, Inc., a California corporation; (iii) Digital Learning’s wholly-owned subsidiary Digital Knowledge Works, Inc., a Delaware corporation; and (iv) Digital Learning’s wholly-owned subsidiary Coursemate, Inc., a California corporation (referred to collectively herein as the "Digital E-learning Business"). The Digital E-learning Business constituted a minimal portion of our overall business and it has been our intention to divest ourselves of the Digital E-learning Business to focus on the pharmaceutical segment of our business. 

The following diagram illustrates our corporate structure as of the date of this Form 10-K:

 
5

 

 
IMPORTANT DISCLOSURES REGARDING OUR CORPORATE STRUCTURE
 
The Company owns not all, but eighty percent (80%) of the outstanding equity interest of Yongxin, a corporate entity organized and existing under the laws of the PRC, which is a holding company for all other subsidiaries of the Company.  Yongxin Liu and Yongkui Liu individually own 11% and 9% of Yongxin, respectively.  On May 13, 2007, Yongxin Liu, Yongkui Liu and the Company entered into an Equity Cooperative Joint Venture Contract dated May 13, 2007, pursuant to which Yongxin became an 80% subsidiary and a “joint venture” under PRC law.  At the time of formation, the parties sought to form a joint venture as opposed to a wholly foreign owned entity (or WFOE), due to certain PRC laws which made it advantageous for the Company, a pharmaceutical business, to be constituted and classified as a joint venture.  Yongxin was granted a business license by the Administration for Industry and Commerce of Changchun City on September 14, 2007, which recognized and deemed it to be an equity joint venture, with 80% foreign ownership and 20% domestic (PRC) ownership.   Yongxin also received recognition from, and was registered as an equity joint venture, by the Jilin Branch of the State Administration of Foreign Exchange (SAFE) on September 20, 2007.   Yongxin received MOFCOM certification pursuant to the PRC’s Regulation for Mergers with and Acquisitions of Domestic Enterprises by Foreign Investors and other relevant laws on September 8, 2006.
 
As a result of the corporate structure described above, we note several important implications:
 
 
·
The Company may not be able to exercise absolute control over Yongxin, because it is not a 100% equityholder of Yongxin.  The minority shareholders, Yongxin Liu and Yonkui Liu, may hold certain minority rights under PRC corporate law and pursuant to the equity joint venture agreement, with respect to the control and governance of Yongxin.   Specifically, Yongxin Liu and Yongkui Liu have the right to jointly appoint a director and the Company has the right to appoint two directors.   Also, under the equity joint venture agreement, Mr. Yongxin Liu has a contractual right to appoint the General Manager of Yongxin.
 
 
·
Since Yongxin Liu is also the Chief Executive Officer and Chairman of the Company and Yongkui Liu is also the Vice President and former Chief Financial Officer and director of the Company, this may give rise to a conflict of interest with the Company and the Company’s shareholders.  While the Company is not aware of any present situation which involves a conflict of interest, in the future, a conflict of interest may arise from the fact that Yongxin Liu and Yongkui Liu are executive officers of the Company, and are also minority equityholders of Yongxin.  If there should ever be a divergence of interest of the minority equityholders on the one hand, and the Company on the other hand, Mr. Yongxin Liu and Yongkui Liu would have incentives to act to protect their minority interests in Yongxin vis-à-vis the majority controlling interest of the Company.
 
 
·
Although the Company consolidates the financial results of Yongxin and its subsidiaries for financial reporting purposes, the Company will not receive 100% of the economic benefit of the income and assets of Yongxin, and in most cases the Company will receive only 80% of such economic benefit.  For example, if Yongxin were to distribute accumulated earnings or assets, 20% of such distributed assets would be paid to the minority equity holders, and 80% would be paid to the Company.
 
 
·
For financial reporting purposes, the Company also accounts for the 20% interest as a non-controlling interest, which has the effect of lowering reported earnings per share (as compared to a scenario in which the Company owns 100% of Yongxin).
 
Please also review our risk factors for a discussion of these and other factors for your consideration.
 
INDUSTRY

China represents one of the world's largest pharmaceutical markets. With its population of over one billion people and a rapidly growing economy, China presents significant potential for the pharmaceutical and retail drugstore industry. The rise in disposable income of many Chinese residents has resulted in greater demand and affordability of prescription and over-the-counter medicines and other personal care products. The increasing population of people over 65 in China has resulted in a stronger demand for medicines and other healthcare-related products, because this demographic spends more money on these products than younger people, on average. As living standards across China improve and the Chinese population continues to age, we expect the demand for healthcare-related products to continue to rise.  The PRC government has also recently attempted to regulate the pharmaceutical industry by enacting a series of regulatory measures that are expected to favor non-hospital drugstores more than hospital pharmacies.
 
In China, consumers can purchase pharmaceutical and other related products at either hospital pharmacies or non-hospital drugstores, including independent drugstores and drugstore chains.  Because hospital patients usually purchase prescription medicines at hospital pharmacies, sales by hospital pharmacies have traditionally accounted for a larger percentage of retail sales of prescription medicines than non-hospital drugstores.  However, most Chinese people choose to purchase over-the-counter ("OTC"), non-prescription medicines from non-hospital, retail pharmacies. Retail pharmacies in China include pharmacy chains, individual stores, retail stores with OTC counters and other retailers and supermarkets with OTC counters.

 
6

 

The Chinese government owns and operates most of the hospitals throughout China.  The hospitals purchase their supplies of healthcare-related products from wholesalers and distributors. A hospital's decision to purchase individual products is typically based on a number of factors, and is sometimes affected in part by corrupt practices, such as illegal kickbacks.  Recently, the PRC government has stepped-up its efforts to combat corrupt practices, such as amending its criminal code in 2006 to increase the penalties for corrupt business practices.  We expect the increased enforcement of such anti-corruption practices will create growth opportunities for the Company as we can compete for business from hospitals on fair and equal terms with other suppliers. The PRC Ministry of Health proposed regulations in March 2007 to require hospitals to permit prescriptions to be filled at non-hospital pharmacies, which we also expect will increase sales of prescription medications at our retail drugstores.
 
Additionally, reimbursement is available for sales of certain medicines by authorized pharmacies to participants in the PRC national medical insurance program.  The provincial and municipal authorities responsible for the administration of the social medical insurance funds to cover such reimbursements have gradually increased funding in recent years.  We expect the funding to increase significantly in the future, which should help boost our sales of products eligible for such reimbursements.

RECENT DEVELOPMENTS

The current economic conditions may affect our operations since many of our products are discretionary and we depend to a significant extent upon a number of factors relating to discretionary consumer spending in China. During economic downturns, consumers tend to spend less on many of our products, including cosmetics, organic products and health and nutritional supplements.  

Previously, management believed that the government would pass certain favorable medical policies (“National Medical Policy”) in the second half of 2009 to extend medical insurance coverage to people who live in the rural areas or countryside of China, which covers approximately 40% of the Chinese population. Management believes the passage of the National Medical Policy would be highly beneficial to our sales and operations.  However, the National Medical Policy has not been passed as of the date of the filing of this Form 10-K, and it is unclear whether this policy will be passed in the near future, if at all.  Due to the uncertainty of the direction of the National Medical Policy, the Company decided to make certain changes to the operation of its business in the second half of 2009, including shifting its focus from the wholesale sector to the retail sector of its business.   The Company will readjust its operations and sales strategy accordingly once the status of the National Medical Policy becomes clear.

Since last year, the Company has added products with higher profit margins to our operations to increase our gross profit, including cosmetics and certain health and nutritional products such as vitamins and supplements.  Management believes that the addition of such products has increased our overall gross profit in 2009 and will increase our gross profit margin for the next few years.
 
MARKET FOCUS 

Our business operates in two segments: the wholesale distribution of pharmaceuticals and other pharmacy-related products and the operation of retail drugstores. Prior to November 2009, we operated another business known as Dingjian which cultivated and processed ginseng. However, we transferred our ownership with all of its assets and liabilities to an individual pursuant to an Equity Transfer Agreement dated November 21, 2009.  The following table reflects the revenue contribution percentage from each of our business operations for the years ended December 31, 2009, 2008 and 2007, respectively:
 
   
For the Years Ended
  
     
December 31, 2009
     
December 31, 2008
     
December 31, 2007
 
Wholesale Operations
   
70.08
%
   
81.6
%
   
84
%
Retail Drugstore Operations
   
          29.2
%
   
18.4
%
   
16
%
Ginseng Processing and Manufacturing Operations
   
        N/A
     
*
     
*
 
Total Revenues
   
           100
%
   
100
%
   
100
%
 
* less than one percent.

Prior to November 2009, we operated and owned 90% of another business known as Dingjian which cultivated and processed ginseng. On November 21, 2009, Yongxin transferred its 90% ownership interest in Dingjian to an individual pursuant to an Equity Transfer Agreement.  As of the date of this Form 10-K, we hold no ownership interest in Dingjian.
 
 
7

 
 
WHOLESALE OPERATIONS
 
Through Yongxin, we engage in the wholesale distribution of pharmaceutical products, medical products and equipment, herbal and nutritional supplements and cosmetics to over 3,500 customers, which include hospitals, large clinics and retail pharmacies.  Yongxin has received the State Food and Drug Administration approval and Good Supply Practices, or GSP, certification.

We opened our Logistics Center in January 2005 in Jilin Province which contains a storage area of over 43,000 square meters, where we have the ability to store our pharmaceutical inventory at various temperatures.  The Logistics Center is able to process over 30,000 orders per day from our customers and our retail outlets.
 
Our wholesale business has relationships with over 760 pharmaceutical and pharmacy product manufacturers throughout China.  Typically, we enter into master agreements with our suppliers at the beginning of each year, which provide the general terms, prices and conditions for transactions for the supplier's products over the year.  We then enter into separate purchase agreements each time we actually purchase products from a supplier. When we purchase the products from our suppliers, we take title to the items and book them as inventory.  We then distribute the products to our wholesale customers.

RETAIL OPERATIONS

               We provide our retail drugstore customers with convenient and professional pharmacy services.  Each of our stores is staffed with a licensed pharmacist and a staff trained to provide pharmacy services to our customers. Additionally, we sell an assortment of other merchandise in our stores, including traditional Chinese medicines, health and natural products, skin care products and cosmetics.  Our stores typically carry over 8,000 different types of products. We frequently review and update the selection of products available in our stores in response to changing consumer preferences.

In July 2005, Yongxin signed an agreement with American Medicine Shoppe International ("AMS") to become AMS' exclusive agent for AMS in the Jilin Province and to develop a drug store franchise system under license from AMS within the Jilin Province.  We operate 4 drugstores pursuant to our relationship with AMS under the "Meixin Yongxin" name.
 
Sales made to retail customers are made by cash or debit or credit cards, or by medical insurance cards under the PRC national medical insurance program.  We obtain reimbursement from the relevant government social security bureaus, for sales made to eligible participants in the PRC national medical insurance program on a monthly basis.  As of March 1, 2010, 29 of our drugstores were designated stores under the PRC national medical insurance program.
 
We currently procure the merchandise for our stores from over 1,500 suppliers, including both manufacturers and wholesalers.  For the years ended December 31, 2009, 2008 and 2007, our largest five suppliers accounted for 6.91%, 8.5% and 8.2% of our total purchases, respectively.  We believe that the products we carry in our stores are readily available from multiple sources and do not anticipate any difficulties in continuing to procure such products.

MARKETING AND SALES

We have a staff of approximately 150 employees dedicated to marketing and sales who design our advertising campaigns and regional promotional activities.  We generate business by marketing directly to hospitals, retail drugstores and medical clinics in China.  Additionally, we advertise our business and products to consumers through marketing activities and print advertisements in newspapers to promote our brand and the other products available for sale in our stores.  In 2009 and 2008, we spent approximately $132,264 and $26,124, respectively, on advertising.

 
8

 

RESEARCH AND DEVELOPMENT
 
The only significant research and development we conducted was in the cultivation and processing of ginseng under Dingjian.  The Company has not conducted any significant research and development since we disposed of our ownership interest in Dingjian in November 2009.
 
QUALITY CONTROL
 
We have stringent quality control systems that are implemented by more than 195 company-trained staff members, which represents approximately a third of our total employees, to ensure quality control over our products, services and production processes. The quality of the products we offer is of utmost importance to our Company.  Each of our suppliers also has its own quality control program pursuant to the rules and regulations under the Good Manufacture Practice (“G.M.P”) mandated by the World Health Organization.
 

We conduct random quality control testing of the products procured from our suppliers in our wholesale and retail operations. We replace suppliers that do not pass our quality inspections.  Additionally, we monitor the services provided in our drugstores by sending inspectors to observe the quality of services provided by our drugstore pharmacists and staff.
 
Our quality control procedures at our facilities are designed to maintain quality standards and execute the following functions at our facilities:

 
·
setting internal controls and regulations for products;
 
 
 
·
implementing sampling systems and sample files;
 
 
 
·
maintaining quality of equipment and instruments;
 
 
 
·
auditing production records to ensure delivery of quality products;
 
 
 
·
evaluating the quality of products; and
 
 
 
·
articulating the responsibilities of the quality control staff.
 
COMPETITION

The pharmaceutical distribution and retail drugstore industries in China are fragmented and intensely competitive.  While our primary competition currently comes from other retail drugstore chains and drugstores, we face increasing competition from discount and convenience stores and supermarkets for our non-pharmaceutical products and services.  We compete for customers based on store location, selection of products and our brand name.
 
Many of our competitors are more established than we are, and have significantly greater financial, technical, marketing and other resources than we do.  Additionally, many of them have greater name recognition and larger customer bases than we do.  These competitors may be able to respond more quickly to changing consumer preferences and new business opportunities than we do.  Moreover, competition is expected to increase due to the expected consolidation of the drugstore industry and new store openings by our competitors.  Our major competitors include: China Nepstar Chain Drugstore Ltd., Shenzhen Accord Pharmacy Co., Ltd., Shenzhen Associate Pharmacy Co., Ltd., Guangzhou Pharmaceutical Company, Jianmin Chain Drugstore, Guangzhou Caizhilin Chain Drugstore, Liaoning Chengda Co., Ltd., Hangzhou Wulin Drugstore Co., Ltd. and Ningbo Siming Dayaofang Co., Ltd.

MAJOR CUSTOMERS

Our major customers include government owned and operated hospitals, large clinics and other retailers. No single customer accounted for 10% or more of the Company’s net sales during the years ended December 31, 2009, 2008 and 2007.  Our top five customers accounted for approximately 14.7%, 15% and 13.9% of our net sales generated for the years ended December 31, 2009, 2008 and 2007, respectively.  None of our directors, their associates or any significant stockholder of the Company has any interest in any of our five largest customers.

 
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INTELLECTUAL PROPERTY
 
                Prior to November 2009, we had four registered trademarks in China, which included Longlife, Zinuo, Yongxintang, Gaoliyuan , under our subsidiary Dingjian.  However, since the discontinuation of Dingjian business operation in November 2009, we no longer own any intellectual property.

GOVERNMENT REGULATIONS
 
 As a business operating in the PRC, we are subject to various regulations and permit systems promulgated by the PRC government.  These regulations cover many of our products, including herbal products, over-the-counter medicines and prescription medications.

Pharmaceutical Product Distribution
 
                We sell and distribute pharmaceuticals, health and beauty products, dietary and herbal supplements, and other healthcare products.  Pharmaceuticals, which have certain identified medical functions and are designed to treat a specific illnesses or symptoms, can be available by prescription only or over-the-counter and require the approval of China's State Food and Drug Administration ("SFDA") before they can be sold.  The herbal products we sell, also known as dietary supplements or nutritional supplements, are basically prophylactic or preventive in nature and are available over-the-counter, and, in China, only require approval of the local government for their production.
 
                We are subject to the Drug Administration Law of China, which governs the licensing, manufacturing, marketing and distribution of pharmaceutical products in China and sets penalties for violations of the law. Distributors of pharmaceutical products are required to obtain permits from the appropriate provincial or county level SFDA where the pharmaceutical distribution enterprise is located.  The granting of such permits is subject to an inspection of a distributor's facilities, warehouses, hygienic environment, quality control systems, personnel and equipment.  Such permits have five year terms and distributors must apply for renewal no later than six months prior to the expiration date of the permit.  We have a wholesale pharmaceutical distribution permit which expires in March 2015.  Each of our retail locations also has a pharmaceutical distribution permit, which expire on various dates.  We do not have a permit to manufacture pharmaceutical products.
      
 Additionally, under the Supervision and Administration Rules on Pharmaceutical Product Distribution disseminated by the SFDA on January 31, 2007, and effective May 1, 2007, a pharmaceutical product distributor is accountable 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.  Retail distributors may not sell prescription pharmaceutical products, or Tier A over-the-counter pharmaceutical products, listed in the national or provincial medical insurance catalogues without a certified in-store pharmacist being present.
 
Foreign Ownership of Wholesale or Retail Pharmaceutical Businesses in China
 
                Under current PRC law on foreign investment, foreign companies are allowed to establish or invest in wholly-owned foreign enterprises or joint ventures that engage in wholesale or retail sales of pharmaceuticals in China.  These regulations limit the number and size of retail pharmacy outlets that a foreign investor may establish. If a foreign investor owns more than 30 outlets that sell a variety of branded pharmaceutical products sourced from different suppliers, the foreign investor's ownership interests in the outlets are limited to 49.0%.
 
Nutritional Supplements and Other Food Products
 
                Distributors of nutritional supplements and other food products must obtain a food hygiene certificate from the appropriate provincial or local health regulatory authorities pursuant to the PRC Food Hygiene Law and Rules on Food Hygiene Certification.  In order to obtain a certificate, a distributor's facilities, warehouses, hygienic environment, quality control systems, personnel and equipment are subject to inspection.  Food hygiene certificates are valid for four years, and must be renewed within six months prior to their expiration.

 
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                The Chinese Food Sanitation Law promulgates food sanitation standards.  In the PRC, only products manufactured at Government Good Manufacturing Practice ("GMP") certified facilities are available for sale in China.  The China Food and Drug Administration conducts the GMP inspections.
  
Good Supply Practice Standards
 
                We are required to operate in accordance with Good Supply Practice (the "GSP") standards that regulate wholesale and retail pharmaceutical product distributors.  The GSP standards ensure the quality of distribution of pharmaceutical products in China.  Pursuant to applicable GSP standards, we must implement strict controls on the distribution of our pharmaceutical products, including those concerning staff qualifications, distribution premises, warehouses, inspection equipment and facilities, management and quality control.  Additionally, we are subject to inspections organized by the local drug regulatory department of the people's government of the province, autonomous region or municipality directly under the PRC central government.  We received a GSP Certificate from the Jilin Province State Food and Drugs Administration Bureau with a term of five years, which expired at the end of 2008.  Such GSP Certificate was renewed at the end of 2008 for another five year term, which shall expire at the end of 2013.
 
Insurance Catalogue
 
 Pursuant to the Decision of the State Council on the Establishment of the State Basic Medical Insurance System for Urban Employees and the Implementation Measures for the Administration of the Scope of Medical Insurance Coverage for Pharmaceuticals for Urban Employees, the Ministry of Labor and Social Security in China established the Insurance Catalogue, in which the retail prices of certain pharmaceutical products are listed and subject to price controls in the form of fixed prices or price ceilings by the Chinese government.  Manufacturers and distributors are not permitted to 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 other medicines that are not subject to price controls are determined by the pharmaceutical manufacturers, subject, in certain cases, to providing notice to the provincial pricing authorities.
 
The Price Control Office of the NDRC, as well as provincial and regional price control authorities, set the retail prices of products that are subject to price controls.  The wholesale price of the pharmaceutical products subject to the price controls are generally determined by the set retail price. The maximum prices of such medicine products are published by the state and provincial administration authorities from time to time. Only the pharmaceutical product manufacturer can apply for an increase in the retail price of the product.  While all of our pharmaceutical products are subject to price controls, because our products are priced below the price control level, price controls currently do not affect our sales of these products.
 
                The medicines included in the Insurance Catalogue are selected by the Chinese government authorities based on various factors including treatment requirements, frequency of use, effectiveness and price.  Medicines included in the Insurance Catalogue are subject to price controls by the Chinese government. The Insurance Catalogue is revised every two years. In connection with each revision, the relevant provincial drug authority collects proposals from relevant enterprises before organizing a comprehensive appraisal.  The SFDA then makes the final decision on any revisions based on the preliminary opinion suggested by the provincial drug administration.
       
 The Insurance Catalogue is divided into Parts A and B.  The medicines included in Part A are designated by the Chinese governmental authorities for general application.  Local governmental authorities may not adjust the content of medicines in Part A. Although the medicines included in Part B are designated by Chinese governmental authorities in the first instance, provincial level authorities may make limited changes to the medicines included in Part B, resulting in some regional variations in the medicines included in Part B from region to region.
 
                Patients purchasing medicines included in Part A are entitled to reimbursement of the costs of such medicines from the social medical fund in accordance with relevant regulations in China.  Patients purchasing medicines included in Part B are required to pay a predetermined proportion of the costs of such medicines.
 
For fiscal years 2008 and 2007, approximately 24% of all the medicines distributed by Yongxin were covered and reimbursable under the Insurance Catalogue issued by the Chinese governmental authorities.  However, the Insurance Catalogue was revised in 2009 to include more categories and types of medicines.  As a result of these revisions, approximately 95.8% of all the medicines distributed by Yongxin became listed in the Insurance Catalogue during the fiscal year ended December 31, 2009, and management attributes part of the Company’s increased revenues to these catalogue revisions.  The revenues attributable to sales of products covered under the Insurance Catalogue during the fiscal years ended December 31, 2009, 2008 and 2007, represented 61.7%, 35% and 35%, respectively, of our total revenues for those periods.
 
 
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PRC National Medical Insurance Program
 
                Eligible participants in the PRC national medical insurance program, mainly consisting of urban residents, can purchase medicines in an authorized pharmacy by presenting their medical insurance cards if the medicines purchased are included in the national or provincial medical insurance catalogues. Authorized pharmacies can generally either sell medicine on credit and obtain reimbursement from relevant government social security bureaus on a monthly basis, or accept payments from the participants at the of the purchase, and the participants in turn obtain reimbursement from relevant government social security bureaus.
 
                Purchases of Tier A pharmaceutical products are generally fully reimbursable, except for certain Tier A pharmaceutical products that are only reimbursable to the extent the medicine is used the purposes stated in the Insurance Catalogue. Only a portion of purchases of Tier-B pharmaceutical are reimbursable; participants purchasing Tier B pharmaceutical products must make a co-payment which is not reimbursable.  Participants have varying amounts in their individual accounts, which vary based on the contributions made by the participants and his or her employer. Different regions in China have different requirements regarding the caps of reimbursements in excess of the amounts in the individual accounts.
 
Pharmaceutical Product Advertisement
 
                The Standards for Examination and Publication of Advertisements of Pharmaceutical Products and Rules for Examination of Advertisement of Pharmaceutical Products, promulgated by the PRC State Administration of Industry and Commerce and the SFDA, prevents the deceptive and misleading advertising of pharmaceutical products. These regulations prohibit the advertisement of certain pharmaceutical products and mandate that prescription pharmaceuticals only be advertised in certain authorized medical magazines upon obtaining proper approval from the local provincial level food and drug administration.
 
Environmental Regulations
 
                The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.
 
                We have not been named as a defendant in any legal proceedings alleging violation of environmental laws and have no reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect on our business, financial condition or results of operations due to any non-compliance with environmental laws.  To the best knowledge of our management, we have been in full compliance with environmental protection regulations during at least the past three years.
 
Tax
 
                Pursuant to the Provisional Regulation of China on Value Added Tax ("VAT") and their implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer.  Further, when exporting goods, the exporter is entitled to a portion of or all the refund of VAT that it has already paid or borne

 
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Foreign Currency Exchange
 
                Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions.  Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange (“SAFE”).  Foreign-invested enterprises may only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from SAFE. Capital investments by foreign-invested enterprises outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, SAFE and the State Reform and Development Commission.

Dividend Distributions
 
                Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital.  These reserves are not distributable as cash dividends.  The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation. To date, we have not paid any dividends and we have no plans to pay any dividends in the foreseeable future.

EMPLOYEES

Substantially all of our employees are located in China. At March 1, 2009, we had approximately 673 full time employees, with 90 employees holding pharmaceutical licenses, and 87 of such licensed pharmacists working at our retail drugstores.  There are no collective bargaining contracts covering any of our employees. We believe our relationship with our employees is good.
 
Yongxin is required to contribute a portion of its employees' total salaries to the Chinese government's social insurance funds, including medical insurance, unemployment insurance and job injuries insurance, and a housing assistance fund, in accordance with relevant regulations.  In the last three years, Yongxin contributed approximately $174,006, $174,567 and $61,918 for the years ended December 31, 2009, 2008 and 2007, respectively.  We expect the amount of Yongxin's contribution to the government's social insurance funds to increase in the future as Yongxin expands its workforce and operations.        

ITEM 1A. RISK FACTORS

               Any investment in our securities involves a high degree of risk. Potential investors should carefully consider the material risks described below and all of the information contained in this Form 10-K before deciding whether to purchase any of our securities. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. The shares of our common stock are currently quoted on the Over-the-Counter Bulletin Board, or OTCBB under the symbol "CYXN." If and when our securities are traded, the trading price could decline due to any of these risks, and an investor may lose all or part of his or her investment. Some of these factors have affected our financial condition and operating results in the past or are currently affecting us. This report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced described below and elsewhere in this Form 10-K.

RISKS RELATED TO OUR BUSINESS
 
THE PURCHASE OF MANY OF OUR PRODUCTS IS DISCRETIONARY, AND MAY BE PARTICULARLY AFFECTED BY ADVERSE TRENDS IN THE GENERAL ECONOMY; THEREFORE CHALLENGING ECONOMIC CONDITIONS WILL MAKE IT MORE DIFFICULT FOR US TO GENERATE REVENUE.
 
The current general economic recession and crisis and any continuing unfavorable economic conditions may affect the success of our operations since many of our products are discretionary and we depend to a significant extent upon a number of factors relating to discretionary consumer spending in China.  These factors include economic conditions and perceptions of such conditions by consumers, employment rates, the level of consumers' disposable income, business conditions, interest rates, consumer debt levels, availability of credit and levels of taxation in regional and local markets in China where we sell our products.  There can be no assurance that consumer spending on many of our products, including cosmetics, organic products and health and nutritional supplements, will not be adversely affected by changes in general economic conditions in China and globally.

 
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THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO MARKET AND ADVERTISE THE PRODUCTS WE SELL EFFECTIVELY.
 
Our ability to establish effective marketing and advertising campaigns is key to our success.  Our advertisements promote our corporate image, our merchandise and the pricing of such products.  If we are unable to increase awareness of our company and our products, we may not be able to attract new customers.  Our marketing activities may not be successful in promoting our products or pricing strategies or in retaining and increasing our customer base.  We cannot assure you that our marketing programs will be adequate to support our future growth, which may result in a material adverse effect on our results of operations.
 
WE MAY BE UNABLE TO IDENTIFY AND RESPOND EFFECTIVELY TO SHIFTING CUSTOMER PREFERENCES, AND WE MAY FAIL TO OPTIMIZE OUR PRODUCT OFFERING AND INVENTORY POSITION.
 
Consumer preferences in the drugstore industry change rapidly and are difficult to predict.  The success of our business depends on our ability to predict accurately and respond to future changes in consumer preferences, carry the inventory demanded by customers, deliver the appropriate quality of products, price products correctly and implement effective purchasing procedures.  We must optimize our product selection and inventory positions based on consumer preferences and sales trends.  If we fail to anticipate, identify or react appropriately to changes in consumer preferences and adapt our product selection to these changing preferences, we could experience excess inventories, higher than normal markdowns or an inability to sell our products, which, in turn, could significantly reduce our revenue and have a material adverse effect on our business, financial condition and results of operations.
 
IF WE FAIL TO MAINTAIN OPTIMAL INVENTORY LEVELS, OUR INVENTORY HOLDING COSTS COULD INCREASE OR CAUSE US TO LOSE SALES, EITHER OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
While we must maintain sufficient inventory levels to operate our business successfully and meet our customers' demands, we must be careful to avoid amassing excess inventory.  Changing consumer demands, manufacturer backorders and uncertainty surrounding new product launches expose us to increased inventory risks.  Demand for products can change rapidly and unexpectedly, including the time between when the product is ordered from the supplier to the time it is offered for sale.  We carry a wide variety of products and must maintain sufficient inventory levels of our products.  We may be unable to sell certain products in the event that consumer demand changes.  Our inventory holding costs will increase if we carry excess inventory.  However, if we do not have a sufficient inventory of a product to fulfill customer orders, we may lose orders or customers, which may adversely affect our business, financial condition and results of operations.  We cannot assure you that we can accurately predict consumer demand and events and avoid over-stocking or under-stocking products.
 
 IF WE ARE UNABLE TO MANAGE THE DISTRIBUTION OF OUR PRODUCTS AT OUR LOGISTICS CENTER, WE MAY BE UNABLE TO MEET CUSTOMER DEMAND.
 
Substantially all of our products are distributed to our stores and our wholesale customers through our "Logistics Center" located in our "Logistics Plaza" in Changchun, PRC.  The efficient operation and management of this facility is essential in order for us to meet customer demands.  Our business would suffer if we do not successfully operate this distribution facility or if the operation of this facility was disrupted for any reason, including disruptions caused by natural disasters.  Our failure to manage this facility properly could result in higher distribution costs, excess or insufficient inventory, or an inability to fulfill customer orders, each of which could result in a material adverse effect on our results of operations.

 
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DUE TO THE GEOGRAPHIC CONCENTRATION OF OUR SALES IN THE NORTHEAST REGION OF CHINA, OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE SUBJECT TO FLUCTUATIONS IN REGIONAL ECONOMIC CONDITIONS.
 
A significant percentage of our total sales are made in the northeast region of China, particularly in Jilin province.  For the years ended December 31, 2009, 2008 and 2007, approximately 86%, 85% and 80% of revenues, respectively, were generated from this area.  Our concentration of sales in this area heightens our exposure to adverse developments related to competition, as well as economic and demographic changes in this region.  Our geographic concentration might result in a material adverse effect on our business, financial condition or results of operations in the future.
 
CERTAIN DISRUPTIONS IN SUPPLY OF AND CHANGES IN THE COMPETITIVE ENVIRONMENT FOR OUR PRODUCTS MAY ADVERSELY AFFECT OUR PROFITABILITY.
 
We carry a broad range of merchandise in our stores, including pharmaceuticals, traditional Chinese medicines, herbal and nutritional supplements and cosmetics.  A significant disruption in the supply of these products could decrease inventory levels and sales, and materially adversely affect our business and financial results.  Shortages of products or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism or other interruptions or difficulties in the employment of labor or transportation in the markets in which we purchase products may adversely affect our ability to maintain sufficient inventories of our products to meet consumer demand.  If we were to experience a significant or prolonged shortage of products from any of our suppliers and could not procure the products from other sources, we would be unable to meet customer demand, which, in turn, would adversely affect our sales, margins and customer relations.
 
OUR OPERATIONS WOULD BE MATERIALLY ADVERSELY AFFECTED IF THIRD-PARTY CARRIERS WERE UNABLE TO TRANSPORT OUR PRODUCTS ON A TIMELY BASIS.
 
All of our products are shipped through third party carriers.  If a strike or other event prevented or disrupted these carriers from transporting our products, other carriers may be unavailable or may not have the capacity to deliver our products to our customers and to our retail stores.  If adequate third party sources to ship our products were unavailable at any time, our business would be materially adversely affected.
 
THE MARKET FOR OUR PRODUCTS AND SERVICES IS VERY COMPETITIVE AND, IF WE CANNOT EFFECTIVELY COMPETE, OUR BUSINESS WILL BE HARMED.
 
The industries in which we operate are highly fragmented and very competitive.  We compete with local drugstores and with large foreign multinational companies that offer products that are similar to ours.  Some of these competitors have larger local or regional customer bases, more locations, more brand equity, and substantially greater financial, marketing and other resources than we have. As a result, our competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer tastes.  We cannot assure you that we will be able to maintain or increase our market share against the emergence of these or other sources of competition. Failure to maintain and enhance our competitive position could materially adversely affect our business and prospects.
 
WE MAY NOT BE SUCCESSFUL IN COMPETING WITH OTHER WHOLESALERS AND DISTRIBUTORS OF PHARMACEUTICAL PRODUCTS IN THE TENDER PROCESSES FOR THE PURCHASE OF MEDICINES BY STATE-OWNED AND STATE-CONTROLLED HOSPITALS.

                Our wholesale business sells various pharmaceutical products to hospitals owned and controlled by government authorities in the PRC.  Government owned hospitals purchase pharmaceutical products by using collective tender processes.  During a collective tender process, a hospital establishes a committee of recognized pharmaceutical experts, which assesses bids submitted by pharmaceutical manufacturers.  The hospitals may only purchase pharmaceuticals that win in collective tender processes.  The collective tender process for pharmaceuticals with the same chemical composition must be conducted at least annually, and pharmaceuticals that have won in the collective tender processes previously must participate and win in the collective tender processes in the following period before hospitals may make new purchases.  If we are unable to win purchase contracts through the collective tender processes in which we decide to participate, we will lose market share to our competitors, and our sales and profitability will be adversely affected.

 
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COUNTERFEIT PRODUCTS SOLD IN CHINA COULD NEGATIVELY IMPACT OUR REVENUES, BRAND REPUTATION, BUSINESS AND RESULTS OF OPERATIONS.
 
Our products are also subject to competition from counterfeit pharmaceuticals, which are pharmaceuticals manufactured without proper licenses or approvals and are fraudulently mislabeled with respect to their content and/or manufacturer.  Counterfeit pharmaceuticals are generally sold at lower prices than authentic products due to their low production costs, and in some cases are very similar in appearance to authentic products.  Counterfeit pharmaceuticals may or may not have the same chemical content as their authentic counterparts.  Although the PRC government has recently been increasingly active in policing counterfeit pharmaceuticals, there is a lack of effective counterfeit pharmaceutical regulation control and enforcement systems in China.  The proliferation of counterfeit pharmaceuticals has grown in recent years and may continue to grow in the future.  Despite our implementation of quality controls, we cannot assure you that we would not be distributing or selling counterfeit products inadvertently.  Any accidental sale or distribution of counterfeit products can subject our company to fines, administrative penalties, litigation and negative publicity, which could negatively impact our revenues, brand reputation, business and results of operations.
 
THE RETAIL PRICES OF SOME OF OUR PRODUCTS ARE SUBJECT TO PRICE CONTROLS BY THE PRC GOVERNMENT, WHICH MAY AFFECT BOTH OUR REVENUES AND NET INCOME.
 
The laws of the PRC permit the PRC government to fix and adjust prices of certain pharmaceutical products, including many of those listed in the Insurance Catalogue.  Through these price controls, the government can fix retail prices and set retail price ceiling for certain of the pharmaceutical products we sell.  Additionally, the PRC government may periodically adjust the retail prices of these products downward in order to make pharmaceuticals more affordable to the general Chinese population.  While our sales of pharmaceutical products are not affected by the price controls because we currently sell such products at prices below the price control level, we cannot guarantee that our sales of these products will not be affected in the future, as price controls may be increased or may affect additional products.  To the extent that we are subject to price controls, our revenue, gross profit, gross margin and net income will be affected because the revenue we derive from our sales will be limited and we may have limited ability to control our costs.  Further, if price controls affect both our revenue and costs, our ability to be profitable and the extent of our profitability will be effectively subject to determination by the applicable regulatory authorities in the PRC.  Any future price controls or price reductions may reduce our revenue and profitability and have a material adverse effect on our financial condition and results of operations.
 
IF WE DO NOT COMPLY WITH THE APPLICABLE PRC LAWS AND REGULATIONS CONTROLLING THE SALE OF MEDICINES UNDER THE PRC NATIONAL MEDICAL INSURANCE PROGRAM, WE MAY BE SUBJECT TO FINES AND OTHER PENALTIES.
 
Persons eligible to participate in the PRC National Medical Insurance Program can buy medicines that have been included in the Insurance Catalogue using a medical insurance card in an authorized pharmacy.  The applicable PRC government social security bureau then reimburses the pharmacy.  PRC law also forbids pharmacies from selling goods other than pre-approved medicines when purchases are made with medical insurance cards.  While we have established procedures to prevent our drugstores from selling unauthorized goods to customers who make purchases with medical insurance cards, we cannot assure you that these procedures will be properly followed at all times in all of our stores.  Violations of this prohibition by any of our drugstores may result in the revocation of such drugstore’s status as an authorized pharmacy.  Additionally, we could be subject to other fines or other penalties, and to negative publicity, which could damage our company's reputation and have a material adverse effect on our results of operations.
 
THE REQUIRED CERTIFICATES, PERMITS, AND LICENSES RELATED TO OUR OPERATIONS ARE SUBJECT TO GOVERNMENTAL CONTROL AND RENEWAL AND FAILURE TO OBTAIN RENEWAL WILL CAUSE ALL OR PART OF OUR OPERATIONS TO BE TERMINATED.
 
We are subject to various PRC laws and regulations pertaining to our wholesale and retail operations.  We have attained certificates, permits, and licenses required for the operation of a pharmaceutical distributor and retailer.  We cannot assure you that we will have all necessary permits, certificates and authorizations for the operation of our business at all times.  Additionally, our certifications, permits and authorizations are subject to periodic renewal by the relevant government authorities.  We intend to apply for renewal of these certificates, permits and authorizations prior to their expiration.  During the renewal process, we will be re-evaluated by the appropriate governmental authorities and must comply with the then prevailing standards and regulations which may change from time to time.  In the event that we are not able to renew the certificates, permits and licenses, all or part of our operations may be terminated.  Furthermore, if escalating compliance costs associated with governmental standards and regulations restrict or prohibit any part of our operations, it may adversely affect our operations and profitability.

 
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WE MAY SUFFER AS A RESULT OF PRODUCT LIABILITY CLAIMS, PERSONAL INJURY CLAIMS OR DEFECTIVE PRODUCTS.
 
Our 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, and the 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 advice given by our in-store pharmacists. Further, we may sell products which inadvertently have an adverse effect on the health of individuals.  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. Any product liability claim, product recall, adverse side effects caused by improper use of the products we sell or manufacturing defects may result in adverse publicity regarding us and the products we sell, which would harm our reputation.  If we are found liable for product liability claims, we could be required to pay substantial monetary damages.  Furthermore, even if we successfully defend ourselves against this type of claim, we could be required to spend significant management, financial and other resources, which could disrupt our business, and our reputation as well as our brand name may also suffer. We, like many other similar companies in China, do not carry product liability insurance. As a result, any imposition of product liability could materially harm our business, financial condition and results of operations. In addition, we do not have any business interruption insurance due to the limited coverage of any business interruption insurance in China, and as a result, any business disruption or natural disaster could severely disrupt our business and operations and significantly decrease our revenue and profitability.
 
IF OUR PRODUCTS ARE ALLEGED OR FOUND TO BE IN CONFLICT WITH PATENTS THAT HAVE BEEN OR MAY BE GRANTED TO COMPETITORS OR OTHERS, OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED.
 
While we currently do not own any patents or license patents from third parties, other parties could bring legal actions against us claiming damages and seeking to enjoin the marketing of our products for allegedly conflicting with patents held by them. Any such litigation could result in substantial cost to us and diversion of effort by our management and technical personnel.  If any such actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to market the affected products.  There can be no assurance that we would prevail in any such action or that any license required under any such patent would be made available on acceptable terms, if at all.  Failure to obtain needed patents, licenses or proprietary information held by others may have a material adverse effect on our business.  In addition, if we were to become involved in such litigation, it could consume a substantial portion of our time and resources.  Also, with respect to licensed technology, there can be no assurance that the licensor of the technology will have the resources, financial or otherwise, or desire to defend against any challenges to the rights of such licensor to its patents.

 
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WE RELY ON TRADE SECRET PROTECTIONS THROUGH CONFIDENTIALITY AGREEMENTS WITH OUR EMPLOYEES, CUSTOMERS AND OTHER PARTIES; THE BREACH OF SUCH AGREEMENTS COULD ADVERSELY AFFECT OUR BUSINESS ANDS RESULTS OF OPERATIONS.
 
We also rely on trade secrets, which we seek to protect, in part, through confidentiality and non-disclosure agreements with our employees, customers and other parties.  There can be no assurance that these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known to or independently developed by competitors. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our proposed projects, disputes may arise as to the proprietary rights to such information that may not be resolved in our favor.  We may be involved from time to time in litigation to determine the enforceability, scope and validity of our proprietary rights. Any such litigation could result in substantial cost and diversion of effort by our management and technical personnel.
 
THE FAILURE TO MANAGE GROWTH EFFECTIVELY COULD HAVE AN ADVERSE EFFECT ON OUR EMPLOYEE EFFICIENCY, PRODUCT QUALITY, WORKING CAPITAL LEVELS, AND RESULTS OF OPERATIONS.

Any significant growth in the market for our products or our entry into new markets may require an expansion of our employee base for managerial, operational, financial, and other purposes.  As of March 3, 2010, we had approximately 673 full time employees.  During any growth, we may face problems related to our operational and financial systems and controls, including quality control and delivery and service capacities.  We would also need to continue to expand, train and manage our employee base.  Continued future growth will impose significant added responsibilities upon the members of management to identify, recruit, maintain, integrate, and motivate new employees.
 
Aside from increased difficulties in the management of human resources, we may also encounter working capital issues, as we will need increased liquidity to finance the purchase of raw materials and supplies, development of new products, and the hiring of additional employees.  For effective growth management, we will be required to continue improving our operations, management, and financial systems and controls.  Our failure to manage growth effectively may lead to operational and financial inefficiencies that will have a negative effect on our profitability.  We cannot assure investors that we will be able to timely and effectively meet that demand and maintain the quality standards required by our existing and potential customers.
 
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL AND LOSS OF THESE KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Our success is, to a certain extent, attributable to the management, sales and marketing, and operational and technical expertise of certain key personnel.  Each of the named executive officers, including Mr. Yongxin Liu, our Chief Executive Officer and Chairman and Mr. Ning Liu, our President and Chief Operating Officer, perform key functions in the operation of our business.  The loss of a significant number of these employees could have a material adverse effect upon our business, financial condition, and results of operations.  We do not maintain key-man insurance for members of our management team because it is not a customary practice in China.  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.

WE ARE DEPENDENT ON A TRAINED WORKFORCE AND AN INABILITY TO RETAIN OR EFFECTIVELY RECRUIT SUCH EMPLOYEES, INCLUDING IN-STORE PHARMACISTS FOR OUR STORES, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We must attract, recruit and retain a sizeable workforce of qualified and trained staff, including in-store pharmacists, in order to operate our retail drugstores.  Applicable PRC regulations require at least one qualified pharmacist to be stationed in each drugstore to instruct or advise customers on prescription medications.  A shortage of pharmacists in the past few years has occurred in the past few years due to increasing demand within the drugstore industry as well as demand from other businesses in the healthcare industry. We face competition for personnel from other drugstore chains, supermarkets, retail chains, and pharmaceutical companies.  We cannot assure you that we will be able to attract, hire and retain sufficient numbers of in-store pharmacists and other skilled employees that are necessary to continue to develop and grow our business.

 
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Our ability to implement effectively our business strategy and expand our operations will depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced pharmacists, managers and other technical and marketing personnel.  There is significant competition for technologically qualified personnel in our business and we may not be successful in recruiting or retaining sufficient qualified personnel consistent with our current and future operational needs.
 
OUR QUARTERLY RESULTS MAY FLUCTUATE BECAUSE OF MANY FACTORS AND, AS A RESULT, INVESTORS SHOULD NOT RELY ON OUR OPERATING RESULTS AS INDICATIVE OF FUTURE RESULTS.
 
Fluctuations in operating results or the failure of operating results to meet the expectations of public market analysts and investors may negatively impact the value of our securities.  Quarterly operating results may fluctuate in the future due to a variety of factors that could affect revenues or expenses in any particular quarter.  Fluctuations in quarterly operating results could cause the value of our securities to decline.  Investors should not rely on quarter-to-quarter comparisons of results of operations as an indication of future performance.  As a result of the factors listed below, it is possible that in future periods results of operations may be below the expectations of public market analysts and investors.  This could cause the market price of our securities to decline. Factors that may affect our quarterly results include:
 
·
vulnerability of our business to a general economic downturn in China;

·
fluctuation and unpredictability of the prices of the products we sell;
 
·
seasonality of our business;

·
changes in the laws of the PRC that affect our operations;
 
·
competition from our competitors; and

·
our ability to obtain necessary government certifications and/or licenses to conduct our business.
 
OUR STRATEGY TO ACQUIRE COMPANIES MAY RESULT IN UNSUITABLE ACQUISITIONS OR FAILURE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, WHICH COULD LEAD TO REDUCED PROFITABILITY.
 
We may embark on a growth strategy through acquisitions of companies or operations that complement existing product lines, customers or other capabilities.  We may be unsuccessful in identifying suitable acquisition candidates, or may be unable to consummate a desired acquisition.  To the extent any future acquisitions are completed, we may be unsuccessful in integrating acquired companies or their operations, or if integration is more difficult than anticipated, we may experience disruptions that could have a material adverse impact on future profitability.  Some of the risks that may affect our ability to integrate, or realize any anticipated benefits from, acquisitions include:
 
·
unexpected losses of key employees or customer of the acquired company;

·
difficulties integrating the acquired company's standards, processes, procedures and controls;
 
·
difficulties coordinating new product and process development;

·
difficulties hiring additional management and other critical personnel;
 
·
difficulties increasing the scope, geographic diversity and complexity of our operations;
 
·
difficulties consolidating facilities, transferring processes and know-how;
 
·
difficulties reducing costs of the acquired company's business;
 
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·
diversion of management's attention from our management; and
 
·
adverse impacts on retaining existing business relationships with customers.

RISKS RELATED TO US DOING BUSINESS IN CHINA
 
SUBSTANTIALLY ALL OF OUR ASSETS ARE LOCATED IN THE PRC AND SUBSTANTIALLY ALL OF OUR REVENUES ARE DERIVED FROM OUR OPERATIONS IN CHINA, AND CHANGES IN THE POLITICAL AND ECONOMIC POLICIES OF THE PRC GOVERNMENT COULD HAVE A SIGNIFICANT IMPACT UPON THE BUSINESS WE MAY BE ABLE TO CONDUCT IN THE PRC AND ACCORDINGLY ON THE RESULTS OF OUR OPERATIONS AND FINANCIAL CONDITION.
 
Our business operations may be adversely affected by the current and future political environment in the PRC.  The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities.  Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters.  Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization.  There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
 
OUR OPERATIONS ARE SUBJECT TO PRC LAWS AND REGULATIONS THAT ARE SOMETIMES VAGUE AND UNCERTAIN.  ANY CHANGES IN SUCH PRC LAWS AND REGULATIONS, OR THE INTERPRETATIONS THEREOF, MAY HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS.
 
The PRC's legal system is a civil law system based on written statutes. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade.  However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
Our principal operating subsidiary, Yongxin, is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations, including laws and regulations specifically governing the activities and conduct of foreign invested enterprises.  We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.  If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation, including, without limitation:
 
·
levying fines;

·
revoking our business license, other licenses or authorities;

·
requiring that we restructure our ownership or operations; and 

·
requiring that we discontinue any portion or all of our business.
 
 
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NEW LABOR LAWS IN THE PRC MAY ADVERSLY AFFECT OUR RESULTS OF OPERATIONS.

On January 1, 2008, the PRC government promulgated the Labor Contract Law of the PRC, or the New Labor Contract Law.  The New Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce.  Further, it requires certain terminations to be based upon seniority and not merit.  In the event we decide to significantly change or decrease our workforce, the New Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially and adversely affecting our financial condition and results of operations.
 
THE SCOPE OF OUR BUSINESS LICENSE IN CHINA IS LIMITED, AND WE MAY NOT EXPAND OR CONTINUE OUR BUSINESS WITHOUT GOVERNMENT APPROVAL AND RENEWAL, RESPECTIVELY.
 
Our principal operating subsidiary, Yongxin, is a PRC foreign invested enterprise (“FIE”).  An FIE can only conduct business within its approved business scope, which ultimately appears on its business license.  Our license permits us to design, manufacture, sell and market pharmaceutical products throughout the PRC.  Any amendment to the scope of our business requires further application and government approval.  In order for us to expand our business beyond the scope of our license, it will be required to enter into negotiations with the government authorities to obtain the approval that would be required to expand the scope of our business.  We cannot assure investors that Yongxin will be able to obtain the necessary government approval for any change or expansion of its business.
 
OUR BUSINESS IS SUBJECT TO A VARIETY OF ENVIRONMENTAL LAWS AND REGULATIONS. OUR FAILURE TO COMPLY WITH ENVIRONMENTAL LAWS AND REGULATIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
 
We are subject to various environmental laws and regulations that require us to obtain environmental permits and are subject to registration and inspection by the SFDA.  We have a provincial license issued by the Business Administration Bureau, Jilin Province.  Although we are currently compliant with all provisions of our registrations and licenses, we cannot assure you that at all times we will be in compliance with environmental laws and regulations or our environmental permits or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits. Additionally, we cannot guarantee you that our licenses and registrations will be renewed.  Any non-renewal of any of our required permits and licenses could result in the termination of our business operations.
 
PRC REGULATIONS RELATING TO ACQUISITIONS OF PRC COMPANIES BY FOREIGN ENTITIES MAY CREATE REGULATORY UNCERTAINTIES THAT COULD RESTRICT OR LIMIT OUR ABILITY TO OPERATE, INCLUDING OUR ABILITY TO PAY DIVIDENDS.
 
The PRC State Administration of Foreign Exchange (“SAFE”), issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in China.  The public notice states that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities.  The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC company's assets or equity interests to foreign entities for equity interests or assets of the foreign entities.
 
In April 2005, SAFE issued another public notice further explaining the January notice.  In accordance with the April notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the January notice, the PRC residents must each submit a registration form to the local SAFE branch with respect to their respective ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transaction or use of assets in China to guarantee offshore obligations. The April notice also provides that failure to comply with the registration procedures set forth therein may result in restrictions on our PRC resident stockholders and subsidiaries. Pending the promulgation of detailed implementation rules, the relevant government authorities are reluctant to commence processing any registration or application for approval required under the SAFE notices.  On August 8, 2006, the PRC Ministry of Commerce ("MOFCOM"), joined by the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission and SAFE, released a substantially amended version of the Provisions for Foreign Investors to Merge with or Acquire Domestic Enterprises (the "Revised M&A Regulations"), which took effect September 8, 2006.  These new rules significantly revised China's regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises.  These new rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions.  Further, the new rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries.

 
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These rules may significantly affect the means by which offshore-onshore restructurings are undertaken in China in connection with offshore private equity and venture capital financings, mergers and acquisitions.  It is expected that such transactional activity in China in the near future will require significant case-by-case guidance from MOFCOM and other government authorities as appropriate.  It is anticipated that application of the new rules will be subject to significant administrative interpretation, and we will need to closely monitor how MOFCOM and other ministries apply the rules to ensure its domestic and offshore activities continue to comply with PRC law. Given the uncertainties regarding interpretation and application of the new rules, we may need to expend significant time and resources to maintain compliance.   It is uncertain how our business operations or future strategy will be affected by the interpretations and implementation of the SAFE notices and new rules. Our business operations or future strategy could be adversely affected by the SAFE notices and the new rules.  For example, we may be subject to more stringent review and approval processes with respect to our foreign exchange activities.
 
THE FOREIGN CURRENCY EXCHANGE RATE BETWEEN U.S. DOLLARS AND RENMINBI COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
 
To the extent that we need to convert U.S. Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected should the Renminbi appreciate against the U.S. Dollar at that time.  Conversely, if we decide to convert our Renminbi into U.S. Dollars for the operational needs or paying dividends on our common stock, the dollar equivalent of our earnings from our subsidiaries in China would be reduced should the U.S. Dollar appreciate against the Renminbi.
 
Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system.  Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China's current monetary policies and have pressured China to allow the Renminbi to float freely in world markets.  In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. Dollar.  Under the new policy, the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies.  While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the dollar.
 
FAILURE TO COMPLY WITH THE UNITED STATES FOREIGN CORRUPT PRACTICES ACT COULD SUBJECT US TO PENALTIES AND OTHER ADVERSE CONSEQUENCES.
 
As our ultimate holding company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business.  Foreign companies, including some that may compete with us, are not subject to these prohibitions.  Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC.  Although we specifically forbid our employees from engaging in such corrupt practices, we can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible.  If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 
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IF WE MAKE EQUITY COMPENSATION GRANTS TO PERSONS WHO ARE PRC CITIZENS, THEY MAY BE REQUIRED TO REGISTER WITH THE STATE ADMINISTRATION OF FOREIGN EXCHANGE OF THE PRC (“SAFE”).  WE MAY ALSO FACE REGULATORY UNCERTAINTIES THAT COULD RESTRICT OUR ABILITY TO ADOPT AN EQUITY COMPENSATION PLAN FOR OUR DIRECTORS AND EMPLOYEES AND OTHER PARTIES UNDER PRC LAW.
 
On April 6, 2007, SAFE issued the "Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company, also know as "Circular 78." It is not clear whether Circular 78 covers all forms of equity compensation plans or only those which provide for the granting of stock options.  For any plans which are so covered and are adopted by a non-PRC listed company after April 6, 2007, Circular 78 requires all participants who are PRC citizens to register with and obtain approvals from SAFE prior to their participation in the plan.  In addition, Circular 78 also requires PRC citizens to register with SAFE and make the necessary applications and filings if they participated in an overseas listed company's covered equity compensation plan prior to April 6, 2007.  We intend to adopt an equity compensation plan in the future and make option grants to our officers and directors, most of who are PRC citizens.  Circular 78 may require our officers and directors who receive option grants and are PRC citizens to register with SAFE. We believe that the registration and approval requirements contemplated in Circular 78 will be burdensome and time consuming.  If it is determined that any of our equity compensation plans are subject to Circular 78, failure to comply with such provisions may subject us and participants of our equity incentive plan who are PRC citizens to fines and legal sanctions and prevent us from being able to grant equity compensation to our PRC employees.  In that case, our ability to compensate our employees and directors through equity compensation would be hindered and our business operations may be adversely affected.
 
ANY RECURRENCE OF SEVERE ACUTE RESPIRATORY SYNDROME (SARS), AVIAN FLU, OR ANOTHER WIDESPREAD PUBLIC HEALTH PROBLEM, IN THE PRC COULD ADVERSELY AFFECT OUR OPERATIONS.
 
A renewed outbreak of SARS, Avian Flu or another widespread public health problem in China, where substantially all of our businesses are located and where the substantial all of our sales occur, could have a negative effect on our operations.  Our businesses are dependent upon our ability to continue to efficiently distribute and sell our products. Such an outbreak could have an impact on our operations as a result of:
 
·
quarantines or closures of some of our drugstores or the closure of our Logistics Center, which would severely disrupt our operations,

·
the sickness or death of our key officers and employees, and
 
·
a general slowdown in the Chinese economy.
 
Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.
 
A DOWNTURN IN THE ECONOMY OF THE PRC MAY SLOW OUR GROWTH AND PROFITABILITY.

The growth of the Chinese economy has been uneven across geographic regions and economic sectors.  There can be no assurance that growth of the Chinese economy will be steady or that any further downturn will not have a negative effect on our business, especially if it results in either a decreased use of our products or in pressure on us to lower our prices.

 
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BECAUSE OUR BUSINESS IS LOCATED IN THE PRC, WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL CONTROLS, WHICH ARE REQUIRED IN ORDER TO COMPLY WITH U.S. SECURITIES LAWS.
 
PRC companies have historically not adopted a Western style of management and financial reporting concepts and practices, which includes strong corporate governance, internal controls and, computer, financial and other control systems.  Most of our middle and top management staff are not educated and trained in the Western system, and we may have difficulty hiring new employees in the PRC with such training.  In addition, we may have difficulty in hiring and retaining a sufficient number of qualified employees to work in the PRC.  As a result of these factors, we may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet Western standards.  Therefore, we may, in turn, experience difficulties in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes-Oxley Act of 2002.  This may result in significant deficiencies or material weaknesses in our internal controls which could impact the reliability of its financial statements and prevent us from complying with SEC rules and regulations and the requirements of the Sarbanes-Oxley Act of 2002.  Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our business.
 
INVESTORS MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS, ENFORCING FOREIGN JUDGMENTS OR BRINGING ORIGINAL ACTIONS IN CHINA BASED UPON U.S. LAWS, INCLUDING THE FEDERAL SECURITIES LAWS OR OTHER FOREIGN LAWS AGAINST US OR OUR MANAGEMENT.
 
Most of our current business operations are conducted in China.  Moreover, most of our directors and officers are nationals and residents of China or Hong Kong.  All or substantially all of the assets of these persons are located outside the United States and in the PRC.  As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons.  In addition, uncertainty exists as to whether the PRC courts would recognize or enforce judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United States or any state thereof.
 
IF WE ARE FOUND TO BE IN VIOLATION OF CURRENT OR FUTURE PRC LAWS, RULES OR REGULATIONS REGARDING THE LEGALITY OF FOREIGN INVESTMENT IN THE PRC WITH RESPECT TO OUR OWNERSHIP STRUCTURE, WE COULD BE SUBJECT TO SEVERE PENALTIES.
 
We currently conduct business operations solely in the PRC through our wholly owned subsidiary, Yongxin.  We are a Delaware corporation and most of our direct and indirect subsidiaries are companies organized under the laws of the PRC.  We are considered a foreign person or foreign invested enterprise under PRC law.  As a result, we are subject to PRC law limitations on foreign ownership of Chinese companies.  There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our pharmaceutical distribution and retail drugstore businesses.
 
Accordingly, it is possible that the relevant PRC authorities could, at any time, assert that any portion of our existing or future ownership structure and businesses violate existing or future PRC laws, regulations or policies.  It is also possible that the new laws or regulations governing our business operations in the PRC that have been adopted or may be adopted in the future will prohibit or restrict foreign investment in, or other aspects of, any of our PRC subsidiaries' and our current or proposed businesses and operations.  The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors.  New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.
 
The PRC government has broad discretion in dealing with violations of laws and regulations, including:
 
·
levying fines;

·
confiscating our income;

·
revoking business and other licenses;

·
requiring us to discontinue any portion or all of our business;
 
·
requiring us to restructure our ownership structure or operations; and
 
 
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·
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 PRC 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 PRC 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, in turn, could materially and adversely affect our business, financial condition and results of operations.
 
WE MAY BE ADVERSELY AFFECTED BY COMPLEXITY, UNCERTAINTIES AND CHANGES IN PRC REGULATION OF PHARMACEUTICAL BUSINESSES AND DRUGSTORE COMPANIES, INCLUDING LIMITATIONS ON OUR ABILITY TO OWN KEY ASSETS.
 
The PRC government regulates the pharmaceutical and drugstore industries including foreign ownership of, and the licensing and permit requirements pertaining to, companies operating in these industries.  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 PRC government regulation of the pharmaceutical industry include those relating evolving licensing practices. Permits, licenses or operations at our company may be subject to challenge, which 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.  Although we believe we comply with current PRC regulations, we cannot assure you that our ownership and operating structure comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.  If the PRC government determines that we do not comply with applicable law, it could take other regulatory or enforcement actions against us that could be harmful to our business.
 
RISKS RELATED TO OUR CAPITAL STRUCTURE
 
IF THE PRC REGULATORY AUTHORITIES DETERMINE THAT OUR CURRENT CORPORATE STRUCTURE FOR OWNERSHIP AND OPERATION OF OUR RETAIL DRUGSTORE BUSINESS IN CHINA DO NOT COMPLY WITH PRC REGULATORY RESTRICTIONS ON FOREIGN INVESTMENT IN THE DRUGSTORE INDUSTRY, WE COULD BE SUBJECT TO SEVERE PENALTIES, OR MAY BE REQUIRED TO UNDERTAKE A COSTLY AND/OR TIME-CONSUMING CORPORATE RESTRUCTURING.

Under current PRC law on foreign investment, foreign companies are allowed to establish or invest in wholly-owned foreign enterprises or joint ventures that engage in wholesale or retail sales of pharmaceuticals in China.  These regulations limit the number and size of retail pharmacy outlets that a foreign investor may establish.  If a foreign investor owns more than 30 outlets that sell a variety of branded pharmaceutical products sourced from different suppliers, the foreign investor's ownership interests in the outlets may be limited to 49.0%.  We currently control more than 30 retail pharmacy outlets through: (1) our 80% equity ownership interest in Yongxin, which directly owns 21 outlets; (2) Yongxin’s 100% equity ownership in Caoantang Drugstore, which, in turn, owns 32 outlets; and (3) Yongxin’s 90% equity ownership interest in Jinyongxin Drugstore, which, in turn, owns 26 outlets.  At the time of the establishment of Yongxin, our PRC equity joint venture entity, in May 2007, Yongxin already controlled in excess of 30 retail pharmacy outlets and with this structure in place we obtained all required approvals from the relevant governmental agencies in Jilin Province for the joint venture.  We have also been advised by our PRC counsel, Jilin Zhong Yan Law Firm, that based on their understanding of the current PRC laws, rules and regulations and the Company’s receipt of all relevant government approvals for the equity joint venture, the structure under which we operate and hold equity ownership in our retail pharmacy businesses (including our corporate structure, our direct equity ownership interest in Yongxin, our indirect equity ownership in Yongxin’s subsidiaries, Jinyongxin Drugstore and Caoantang Drugstore, and the 79 retail pharmacy outlets that we control through this structure) complies with all applicable PRC laws, rules and regulations.  However, there are uncertainties regarding the interpretation and application of PRC laws, rules and regulations by PRC government authorities, and we cannot assure you that such authorities will not later issue a differing interpretation of the law and determine that our corporate and/or ownership structure does not comply with PRC laws, rules and regulations. 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 corporate structure or our business operations.  If we and/or our PRC subsidiaries are determined to be in violation of any existing or future PRC laws, rules or regulations, including laws applicable to foreign investment in retail pharmacy outlets, 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 financings to fund our business and operations in China; or

 
imposing fines.
 
The imposition of any of the above-described penalties and/or a restructuring of our holding structure in order to comply with relevant PRC regulations could severely disrupt our ability to conduct business and could have a material adverse effect on our financial condition, results of operations and prospects.
 
THERE IS CURRENTLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK, AND THERE IS NO ASSURANCE OF A MORE ESTABLISHED PUBLIC TRADING MARKET, WHICH WOULD ADVERSELY AFFECT THE ABILITY OF OUR INVESTORS TO SELL THEIR SECURITIES IN THE PUBLIC MARKET.
 
While our common stock is currently listed on the Over-the-Counter Bulletin Board ("OTCBB"), there is currently a limited trading market for our common stock.  The Financial Industry Regulatory Authority has enacted changes that limit quotations on the OTCBB to securities of issuers that are current in their reports filed with the Securities and Exchange Commission.  The effect on the OTCBB of these rule changes and other proposed changes cannot be determined at this time. The OTCBB is an inter-dealer, over-the-counter market that provides significantly less liquidity than the NASDAQ Global Market (the "NASDAQ Global Market"). Quotes for stocks included on the OTCBB are not listed in the financial sections of newspapers as are those for the NASDAQ Global Market.  Therefore, prices for securities traded solely on the OTCBB may be difficult to obtain and holders of common stock may be unable to resell their securities at or near their original offering price or at any price.
 
The market price for our common stock is influenced by a number of factors, including:

 
·
our ability to obtain additional financing and, if available, the terms and conditions of the financing;

 
·
our financial position and results of operations;

 
·
concern as to, or other evidence of, the reliability and safety of our products and services or our competitors' products and services;

 
·
announcements of innovations or new products or services by us or our competitors;
 
 
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·
U.S. federal and state governmental regulatory actions and the impact of such requirements on our business;

 
·
Chinese governmental regulatory actions and the impact of such requirements on our business;

 
·
the development of litigation against us;
 
 
·
period-to-period fluctuations in our operating results;

 
·
changes in estimates of our performance by any securities analysts;
 
 
·
the issuance of new equity securities pursuant to a future offering or acquisition;

 
·
changes in interest rates and/or foreign currency exchange rates;

 
·
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

 
·
investor perceptions of us; and

 
·
general economic and other national and international conditions.
 
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF OUTSTANDING STOCK IN THE PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF OUR COMMON STOCK.
 
We may file a registration statement to register the shares issued to the Yongxin stockholders pursuant to the Share Exchange Transaction.  All of the shares included in an effective registration statement as described above may be freely sold and transferred except if subject to a lock up agreement.
 
In addition, the stockholders who received shares of our common stock in the Share Exchange Transaction and/or their designees may be eligible to sell all or some of our shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act ("Rule 144"), subject to certain limitations.  In general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities.  Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market price of our common stock by creating an excessive supply.
 
THE COMPANY MAY NOT BE ABLE TO EXERCISE ABSOLUTE CONTROL OVER YONGXIN.
 
The Company may not be able to exercise absolute control over Yongxin, because it is not a 100% equityholder of Yongxin.  The minority shareholders, Yongxin Liu and Yonkui Liu, may hold certain minority rights under PRC corporate law and pursuant to the equity joint venture agreement, with respect to the control and governance of Yongxin. Specifically, Yongxin Liu and Yongkui Liu have the right to jointly appoint a director and the Company has the right to appoint two directors. Also, under the equity joint venture agreement, Mr. Yongxin Liu has a contractual right to appoint the General Manager of Yongxin.

OUR CHIEF EXECUTIVE OFFICER AND CERTAIN RELATED COMPANY OFFICERS AND STOCKHOLDERS HAVE SIGNIFICANT INFLUENCE OVER OUR COMPANYAND OUR CORPORATE ACTIONS.

Our current CEO and Chairman of the Board, Mr. Yongxin Liu and Company’s Vice President Mr. Yongkui Liu (our CEO’s brother) and Ms. Yongmei Wang (spouse of Yongkui Liu) collectively own and control a majority of our outstanding voting capital shares as of December 31, 2009. If these officers and/or stockholders were to act as a group, they would have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, election of directors, and other significant corporate actions. Such officers and/or stockholders may also have the power to prevent or cause a change in control. In addition, without the consent of these stockholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of these stockholders may give rise to a conflict of interest with the Company and the Company’s shareholders.  While the Company is not aware of any present situation which involves a conflict of interest, in the future, a conflict of interest may arise from the fact that Yongxin Liu and Yongkui Liu are executive officers of the Company, and are also minority equityholders of Yongxin.  If there should ever be a divergence of interest of the minority equityholders on the one hand, and the Company on the other hand, Mr. Yongxin Liu and Yongkui Liu would have incentives to act to protect their minority interests in Yongxin vis-à-vis the majority controlling interest of the Company.

THE COMPANY WILL NOT RECEIVE 100% OF THE ECONOMIC BENEFIT OF THE INCOME AND ASSETS OF YONGXIN.

Although the Company consolidates the financial results of Yongxin and its subsidiaries for financial reporting purposes, the Company will not receive 100% of the economic benefit of the income and assets of Yongxin, and in most cases the Company will receive only 80% of such economic benefit.  For example, if Yongxin were to distribute accumulated earnings or assets, 20% of such distributed assets would be paid to the minority equity holders, and 80% would be paid to the Company.  For financial reporting purposes, the Company also accounts for the 20% interest as a non-controlling interest, which has the effect of lowering reported earnings per share (as compared to a scenario in which the Company owns 100% of Yongxin).
 
 
26

 

IF WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
 
We are required to establish and maintain appropriate internal controls over financial reporting.  Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations.  Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds.  Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our independent registered public accountants. The SEC extended the compliance dates for non-accelerated filers, as defined by the SEC.  Accordingly, we believe that the annual assessment of our internal controls requirement has first applied to our annual report for the 2007 fiscal year and the attestation requirement of management's assessment by our independent registered public accountants will be first applied to our annual report for the 2010 fiscal year.  The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards.  We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting.  In addition, the attestation process by our independent registered public accountants is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accountants. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.
 
In addition, management's assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors.  Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management's assessment of our internal controls over financial reporting, or disclosure of our public accounting firm's attestation to or report on management's assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
 
THE FOREIGN CURRENCY EXCHANGE RATE BETWEEN U.S. DOLLARS AND RENMINBI COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
 
To the extent that we need to convert U.S. Dollars into Renminbi for our operational needs, our financial position and the price of our common stock may be adversely affected should the Renminbi appreciate against the U.S. Dollar at that time.  Conversely, if we decide to convert our Renminbi into U.S. Dollars for our operational needs or paying dividends on our common stock, the U.S. Dollar equivalent of our earnings from our subsidiaries in China would be reduced should the U.S. Dollar appreciate against the Renminbi.
 
Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system.  Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. Dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China's current monetary policies and have pressured China to allow the Renminbi to float freely in world markets.  In July 2005, the PRC government changed its policy of pegging the value of the Renminbi to the dollar.  Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the dollar.
 
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE WILL RESULT IN ADDITIONAL EXPENSES.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC regulations, have created uncertainty for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting.  Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

 
27

 
OUR COMMON STOCK IS CONSIDERED A "PENNY STOCK," AND THEREBY IS SUBJECT TO ADDITIONAL SALE AND TRADING REGULATIONS THAT MAY MAKE IT MORE DIFFICULT TO SELL.
 
Our common stock is currently considered to be a "penny stock" because it does not qualify for one of the exemptions from the definition of "penny stock" under Section 3a51-1 of the Securities Exchange Act for 1934, as amended (the "Exchange Act"). Our common stock is considered a "penny stock" because it meets one or more of the following conditions (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a "recognized" national exchange; (iii) it is not quoted on the NASDAQ Capital Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company that has been in business less than three years with net tangible assets less than $5 million.
 
The principal result or effect of being designated a "penny stock" is that securities broker-dealers participating in sales of our common stock will be subject to the "penny stock" regulations set forth in Rules 15-2 through 15g-9 promulgated under the Exchange Act.  For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor's account.  Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives.  Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
 
WE DO NOT FORESEE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE AND, AS A RESULT, OUR INVESTORS' SOLE SOURCE OF GAIN, IF ANY, WILL DEPEND ON CAPITAL APPRECIATION, IF ANY.
 
We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth.  As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income.  Capital appreciation, if any, of our shares may be investors' sole source of gain for the foreseeable future.  Moreover, investors may not be able to resell their shares of our common stock at or above the price they paid for them.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
                None.
 
ITEM 2. PROPERTIES
       
Our corporate headquarters are located in the City of Industry, California at 927 Canada Court, City of Industry, California 91748. We also lease office space in the in the Jilin Province under a lease that expires on June 30, 2020.
 
                We currently operate one national distribution center, the Logistics Center, which is located in Changchun that provides us with 43,000 square meters of storage space.  We lease the Logistics Center under a long-term lease agreement that expires in 2020 and do not anticipate any material difficulties in renewing our lease upon its expiration.

 
28

 

                Currently, all of our retail drugstores are located in the PRC. We lease substantially all of our store locations from various third-parties under a total of 79 leases with terms ranging from month-to-month to 5 years, which are renewed upon expiration. The total combined space for our retail stores consisted of 9,834 square meters.  We must negotiate with the landlords to extend our leases or enter into new leases upon their expiration, at which time the 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. Our retail stores are relatively small in size and are generally easily movable to new locations. We do not expect our drugstore operations to be adversely affected by any failure to renew or enter into new leases.

ITEM 3. LEGAL PROCEEDINGS

 On or about October 17, 2008, in the legal proceeding titled Craig Nagasugi v. Digital Learning Management Corporation, et al., a former officer initiated an action in Los Angeles Superior Court, Central District, against the Company alleging claims for damages related to an alleged employment agreement.  On December 29, 2008, the Company filed an Answer to the Complaint.  The Company strongly disputed the claims and diligently defended against them. The matter went to trial on or about November 2, 2009 and concluded as of November 9, 2009.  The case resulted in a judgment against the Company for $641,018.  The Company anticipates that the court will enter a revised judgment in the amount of $746,000 against the Company in the second quarter of 2010.  So far, the judgment has not been paid.

                Under Allaudin Jinnah v. China Yongxin Pharmaceuticals, Inc., filed in Los Angeles Superior Court, Central District, on or about June 27, 2008, the Company defended itself against claims for open account and intentional misrepresentation.  The Plaintiff sought past due attorneys’ fees for services rendered in the amount of $193,100.  The Plaintiff also sought 67,000 shares of the Company’s common stock. The Plaintiff filed a motion to enforce the Company’s settlement to receive up to $50,000 judgment and 200,000 to 400,000 shares of the Company’s common stock.  At the hearing to enforce the settlement, the court entered judgment against the Company for $50,000 plus 200,000 shares of the Company’s common stock.  The court ordered the Company to issue an additional 200,000 shares of the Company’s common stock as collateral for the $50,000.  The said judgment was satisfied in full by the Company in February 2010.
 
                The Company was also involved in a legal proceeding called Wells Fargo Bank. N.A.. v. Software Education for America Inc. filed in Orange County Superior Court on or about November 9, 2004.  In this action, the Cross-Complainant, Terry Koosed, sought to amend a $219,000 judgment he obtained to include a subsidiary of the predecessor-in-interest of the Company, which was not named or a participant in such lawsuit.  On May 8, 2009, the Orange County Superior Court rendered a decision to enter a judgment of $219,000 against the Company.  This judgment was satisfied in full by the Company in February 2010.
 
 Under Adnan Mann v. China Yongxin Pharmaceuticals, Inc., on or about March 10, 2009, a former employee filed claims for unpaid wages and penalties under the California Labor Code and applicable Industrial Wage Orders.  On July 10, 2009, the Company filed an Answer to the Complaint denying liability.  This matter is presently in the discovery stage and trial has been set for May 10, 2010. 
 
PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is currently quoted on the OTC Bulletin Board under the symbol “CYXN.”  The following table sets forth the high and low bid information for the common stock for each quarter within the last two fiscal years, as reported by the OTC Bulletin Board.  The bid prices reflect inter-dealer quotations, do not include retail markups, markdowns, or commissions, and do not necessarily reflect actual transactions.

 
29

 
    
   
Low
   
High
 
2009
           
Quarter ended December 31, 2009
 
$
0.29
   
$
0.80
 
Quarter ended September 30, 2009
   
0.14
     
0.79
 
Quarter ended June 30, 2009
   
0.11
     
0.32
 
Quarter ended March 31, 2009
   
0.06
     
0.38
 
                 
2008
               
Quarter ended December 31, 2008
 
$
0.05
   
$
0.59
 
Quarter ended September 30, 2008
   
0.41
     
1.40
 
Quarter ended June 30, 2008
   
0.40
     
1.53
 
Quarter ended March 31, 2008
   
0.93
     
1.72
 

The last reported closing sales price for shares of our common stock was $0.61 per share on the OTCBB on March 10, 2010.  As of March 10, 2010, our stock was held by approximately 211 stockholders.  The price of our common stock will likely fluctuate in the future. The stock market in general has experienced extreme stock price fluctuations in the past few years. In some cases, these fluctuations have been unrelated to the operating performance of the affected companies. Many companies have experienced dramatic volatility in the market prices of their common stock. We believe that a number of factors, both within and outside our control, could cause the price of our common stock to fluctuate, perhaps substantially.  Factors such as the following could have a significant adverse impact on the market price of our common stock:

 
·
our ability to obtain additional financing and, if available, the terms and conditions of the financing;
 
·
our financial position and results of operations;
 
·
concern as to, or other evidence of, the reliability and safety of our products and services or our competitors’ products and services;
 
·
announcements of innovations or new products or services by us or our competitors;
 
·
U.S. federal and state governmental regulatory actions and the impact of such requirements on our business;
 
·
Chinese governmental regulatory actions and the impact of such requirements on our business;
 
·
the outcome of legal claims against us;
 
·
period-to-period fluctuations in our operating results;
 
·
changes in estimates of our performance by any securities analysts;
 
·
the issuance of new equity securities pursuant to a future offering or acquisition;
 
·
changes in applicable interest rates;
 
·
competitive developments, including announcements by competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
·
investor perceptions of us; and
 
·
general economic and other national conditions.
 
DIVIDEND POLICY

We do not expect to declare or pay any cash dividends on our common stock in the foreseeable future, and we currently intend to retain future earnings, if any, to finance the expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in its discretion, and will depend on our financial condition, operating results, capital requirements and other factors that the board of directors considers significant.  We did not pay any cash dividends during the years ended December 31, 2009 or 2008.
 
Under applicable PRC regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations.  In addition, a foreign-invested enterprise in China are required to set aside at least 10.0% of their after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital.  These reserves are not distributable as cash dividends.  The board of directors of a foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

 
30

 

RECENT SALES OF UNREGISTERED SECURITIES

The following is a summary of our transactions during the last three years involving sales of our securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”) that have not been included in our quarterly reports on Form 10-Q or in our current reports on Form 8-K:

On March 4, 2010, the Company consummated a private placement of its equity securities with certain accredited investors pursuant to a Subscription Agreement for total consideration of $125,000.  The Company issued to the investors secured convertible notes with a two year term, bearing 10% interest per annum, convertible into common stock of the Company at a conversion price of $0.20 per share, which is subject to adjustment for stock splits, recapitalizations and other similar events, and will also be adjusted on a full-ratchet basis to equal the price per share of any subsequent financing.  The notes are secured by a first priority interest in all current and future assets of the Company, which will be cancelled upon repayment of the notes or upon conversion of at least 50% of the principal amount of the notes into shares of Company common stock.  The notes may be redeemed by the Company at any time for 110% of outstanding principal and interest.  The note investors also received, as a part of the financing, warrants for the purchase of up to 625,000 shares of our common stock with an exercise price $0.50 per share (subject to adjustment for stock splits, recapitalizations and other similar events) exercisable for a period of three years.  The issuance of these securities was exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933.
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
Not applicable.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report.  This report contains forward-looking statements.  The words “anticipated,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements.  These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow.  Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with government regulations, the ability to achieve further market penetration and additional customer, and various other matters, any of which are beyond our control.  Should one or more of these risks and uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated.  Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
 
GENERAL OVERVIEW

Our Company is engaged in the wholesale distribution of pharmaceuticals and medical-related products, and the sale and distribution of pharmaceuticals, beauty products, herbal and nutritional supplements, and other health and medical-related products through retail operations in the People’s Republic of China (“PRC” or “China”).  The products we sell include Western and Chinese traditional medicines, pharmaceutical preparations, natural health products, health foods, cosmetics and medical equipment.  Our PRC operations began retail operations in 2004, and in 2005, we gained franchise rights from one of the world's largest drug chains for China's Jilin Province.  By the end of 2007, the Company had become one of the fastest growing pharmaceutical companies in China through our retail chain of drugstores as well as our wholesale distribution operations in Northeastern China.  Our corporate headquarters are located in City of Industry, California, but the Company’s distribution operations are based in Changchun City, Jilin Province, China, and our retail drugstores are located throughout Jilin Province in Northeastern China.

 
31

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.  The preparation of these consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities at the date of our financial statements.  We base our estimates on historical experience, actuarial valuations and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Some of those judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact the financial statements.  The accounting principles we utilized in preparing our consolidated financial statements conform in all material respects to generally accepted accounting principles in the United States of America.  While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid the reader in fully understanding and evaluating this discussion and analysis:
 
BASIS OF PRESENTATION

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  The functional currency of our operating subsidiary, Changchun Yongxin Dirui Medical Co., Ltd is Chinese Renminbi (CNY); however the accompanying financial statements have been translated and presented in United States Dollars (USD).

TRANSLATION ADJUSTMENT

As of December 31, 2009 and 2008, the accounts of Yongxin were maintained, and its financial statements were expressed, in CNY. Such financial statements were translated into USD in accordance with Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency Translation,” with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with SFAS No. 130 (ASC 220), “Reporting Comprehensive Income” as a component of stockholders’ equity.

NON-CONTROLLING INTEREST

The accompanying consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in accordance with GAAP. The Company acquired 80% of Yongxin, and Yongxin Liu and Yongkui Liu own 11% and 9% of Yongxin, respectively.  The 20% equity interest held by Yongxin Liu and Yongkui Liu represents non-controlling interest amounting to $5,687,633 as at December 31, 2009 compared to $4,078,654 as at December 31, 2008.

The Company owns a 90% ownership interest in Jinyongxin Drugstore. The remaining 10% interest in Jinyongxin Drugstore is owned by third parties.

ACCOUNTS RECEIVABLE

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. As of December 31, 2009, we made no allowance for doubtful accounts. As of December 31, 2008, we made allowance for doubtful debts of $112,452.

 
32

 

INVENTORIES

Inventories are valued on a lower of weighted average cost or market basis.   Inventory includes product cost, inbound freight, warehousing costs and vendor allowances not included as a reduction of advertising expense. The management compares the cost of inventories with the market value and allowance is made for writing down their inventories to market value, if lower.  Work in process inventories include the cost of raw materials and outsource processing fees.

IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) (ASC 360), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144 (ASC 360). SFAS 144 (ASC 360) requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

REVENUE RECOGNITION

The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (“SAB”) 104 (ASC 605). Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. The Company recognizes revenue net of an allowance for estimated returns, at the time the merchandise is sold or services performed. The allowance for sales returns is estimated based on the Company’s historical experience. Sales taxes are presented on a net basis (excluded from revenues and costs). Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

INCOME TAXES

The Company utilizes SFAS No. 109 (ASC 740), "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.
 
The Company records a valuation allowance for deferred tax assets, if any, based on its estimates of its future taxable income as well as its tax planning strategies when it is more likely than not that a portion or all of its deferred tax assets will not be realized. If the Company is able to utilize more of its deferred tax assets than the net amount previously recorded when unanticipated events occur, an adjustment to deferred tax assets would increase the Company net income when those events occur. The Company does not have any significant deferred tax asset or liabilities in the PRC tax jurisdiction.

 
33

 

STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement No. 123R (ASC 718), Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is being applied on the modified prospective basis. Prior to the adoption of SFAS 123R, the Company accounted for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and accordingly, recognized no compensation expense related to the stock-based plans. Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled.

STATEMENT OF CASH FLOWS

In accordance with Statement of Financial Accounting Standards No. 95 (ASC 230), "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

SEGMENT REPORTING

Statement of Financial Accounting Standards No. 131 ("SFAS 131") (ASC 250), "Disclosure about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting.  The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. The Company allocates its resources and assesses the performance of its sales activities based upon its products and services (see Note 20).

CONTINGENCIES

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur.  The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment.  In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements.  If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2009, the Financial Accounting Standards Board (“FASB”) issued guidance related to revenue recognition for multiple element deliverables which eliminates the requirement that all undelivered elements must have objective and reliable evidence of fair value before a company can recognize the portion of the consideration that is attributable to items that already have been delivered. Under the new guidance, the relative selling price method is required to be used in allocating consideration between deliverables and the residual value method will no longer be permitted. This guidance is effective prospectively for revenue arrangements entered into or materially modified in 2011 although early adoption is permitted. A company may elect, but will not be required, to adopt the amendments retrospectively for all prior periods. The Company is currently evaluating this guidance and has not yet determined the impact, if any, that it will have on the consolidated financial statements.

 
34

 

In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP")” - a replacement of FASB Statement No. 162), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities.

In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, “Subsequent Events”), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, “Accounting for Transfers of Financial Assets”), which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements.
 
In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective for us beginning in the fourth quarter of fiscal year 2009 and are not expected to have a significant impact on our consolidated financial statements.
 
RESULTS OF OPERATIONS

Comparison of Years Ended December 31, 2009 and December 31, 2008. 

The following table sets forth the results of our operations for the periods indicated:

 
  
For the Years ended
  
 
  
December 31,
  
  
December 31,
  
 
  
2009
  
  
2008
  
Net Revenue
 
$
47,589,280
   
  
$
59,116,534
   
Cost of Revenue
   
31,271,463
     
47,226,275
 
Gross Profit
   
16,317,817
     
11,890,259
 
Selling Expenses
   
3,543,383
     
3,521,147
 
General & Administrative Expenses
   
3,575,059
     
2,500,366
 
Total Operating Expenses
   
7,118,442
     
6,021,513
 
Income  from Operations
   
9,199,376
     
5,868,745
 
Other Income
   
278,846
     
690,516
 
Operating Income Before Tax and Non-Controlling Interest
   
9,349,545
     
6,400,113
 
Provision for Income Tax
   
(2,594,483
)    
(1,009,643
Net Income Before Non-Controlling Interest
 
$
6,724,111
   
$
5,305,619
 
Non-Controlling Interest
   
(1,599,122
   
(1,239,480
)
Net Income
   
5,124,989
     
4,066,139
 
Basic Earnings Per Share
   
0.15
     
0.13
 
Diluted Earnings Per Share
   
0.15
     
0.13
 
Basic Weighted Average Shares Outstanding
   
33,240,797
     
31,150,819
 
Diluted Weighted Average Shares Outstanding
   
35,070,051
     
31,150,819
 
 
 
35

 

NET REVENUES. For the year ended December 31, 2009, our net revenues decreased approximately 19.5% from $59,116,534 in 2008 to $47,589,280 in 2009.  The decrease was attributable to a decrease of sales from the wholesale sector of our business, which included sales to hospitals, medical facilities and other retailers which represented approximately 70% of our total net revenues.  Sales volume from the wholesale sector of our business decreased due to the uncertainty of the direction of the National Medical Policy, as described in the recent development section of this Form 10-K.  And as a result, we have reduced our focus on the wholesale sector of our business and we are shifting our focus to increase the retail sector of our business, which currently represents approximately 30% of our total net revenues.  The overall policy for our drug retail business has not changed.   The Company will readjust its operations and sales strategy accordingly once the direction of the National Medical Policy becomes clear. The revenues for our retail operations, increased from $10,865,100 in 2008 to 13,898,110 in 2009, or approximately 27.9%.  The increase in our retail segment is attributable to the addition of seven new retail drugstores in 2009.  These new retail stores are located in prime locations in the center of the city and each generates a high volume of sales.  As of November 2009, we discontinued our ginseng and health products sector because we want to focus on the retail segment of our business.
 
COST OF SALES. Cost of sales to net sales percentage decreased from $47,226,275, or approximately 79.9% of net revenues for the year ended December 31, 2008, to $31,271,463, or approximately 65.7% of net sales for the year ended December 31, 2009.  The cost of sales decreased by $15,954,812 or approximately 33.8%, and such decrease corresponded with the decrease in sales volume.  However, we were able to reduce the cost of sales to net sales percentage from 79.9% in 2008 to 65.7% in 2009 due to a restructure of our product mix.  We increased the proportion of products, brands and types of medicines which had lower actual costs and higher gross profit margins which resulted in a lower cost of sales for the Company.  Our other operating costs, such as utilities, labor and transportation remained stable and only decreased in proportion to the decrease of our sales.  
 
GROSS PROFIT. Gross profit increased approximately 37.2% from $11,890,259 for the year ended December 31, 2008 to $16,317,817 for the year ended December 31, 2009.  This increase in gross profit was primarily due to the change of our product mix in which the proportion of products with higher profit margins increased, such as cosmetics and certain health and nutritional products.  Management believes that the addition of such products will increase our overall gross profit margin for the next few years.
 
SELLING EXPENSES. Selling expenses, which consist of advertising and promotion expenses, freight charges and salaries, stayed approximately the same from $3,521,147 for the year ended December 31, 2008 to $3,543,383 for the same period in 2009.  Even though we opened seven new stores in 2009, our selling expenses remained approximately unchanged because we controlled our selling expenses through certain cost-cutting efforts such as the reduction of utilities usage, cutback of office supplies and changes in the packaging of our supplies.   
 
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were $3,575,059 for the year ended December 31, 2009, as compared to $2,500,366 for the year ended December 31, 2008, an increase of 43.0%.  This increase was largely due to an increase in bad debt expense and increases in accrued litigation fees.
 
OTHER INCOME.  Other income decreased 59.6% from $690,516 in 2008 to $278,846 in 2009.  The Company received approximately $180,000 in government subsidies in 2008, which were not received in 2009.  The decrease was also attributable to the change of our accounting method at the end of fiscal 2008.  With the new accounting method in 2009, Yongxin Drugstore calculated its cost by the actual cost instead of the sales price so the cost was recorded at a lower price under other income.

 
36

 

NET INCOME. Net income increased approximately 26.0% from a net income of $4,066,139 for the year ended December 31, 2008 to a net income of $5,124,989 for the year ended December 31, 2009.  The increase was largely due to the increase in our gross profit due to the change of our product mix, in which the proportion of products with higher profit margins increased, which resulted in higher gross profit margins for the company.
 
 
37

 
 
LIQUIDITY
 
Cash Flows
 
Net cash flow provided by operating activities was $4.3 million for the year ended December 31, 2009 and $5.9 million in operating activities for the year ended December 31, 2008.  For the year ended December 31, 2009, the increase in cash flows provided by operating activities was primarily attributable to net income and increase in accrued expenses offset by increases in accounts receivable and other receivables.  For the year ended December 31, 2008, the net cash flows provided by operating activities was attributable to a decrease in accounts receivable of $954,908, an increase in advances to suppliers of $53,084, an increase in notes receivable by $1.3 million, an increase in inventory by $1.1 million, a decrease in accounts payable by $2.2 million, an increase in advance from customers by $1.8 million, and an increase in taxes by $0.9 million. 

The Company incurred cash outflows of $3.0 million from investing activities during the year ended December 31, 2009, as compared to cash outflows of $6.7 million for the same period in 2008.  The significant decrease in cash outflows was mainly attributable to the purchase of fixed assets and increase in the amounts due from related parties.  The cash outflows of $6.7 million in investing activities during the year ended December 31, 2008 was mainly attributable to remodeling and construction expenses.  In conjunction with the 2008 Olympics, certain governmental policies were enacted in an effort to make the commercial areas of Beijing more environmentally friendly and improve the appearance and function of retail stores.  We renovated our offices and retail drugstores to comply with these governmental policies in 2008.  We also remodeled some of our stores to sublet to other tenants to bring in extra income.  We also invested in the development of ERP software to link sales to our accounting and finance department in 2008.

Net cash flows provided by financing activities was $201,153 for the year ended December 31, 2008 compared to net cash flows used in financing activities of $367,325 for the year ended December 31, 2009.  The decrease was mainly attributable to a decrease in financing activities in 2009 as compared to 2008.

 
38

 

CAPITAL RESOURCES

The Company believes that the existing cash and cash equivalents, and cash generated from operating activities will be sufficient to meet the needs of its current operations, including anticipated capital expenditures and scheduled debt repayments, for the next twelve months.  The Company may also seek additional financing to meet the needs of its long-term strategic plan.

We had certain material commitments for capital expenditures due to the remodeling and construction of our offices and retail drugstores and the development of our ERP software in 2009.  The total capital expenditure budget for 2009 was $6,477,630, and the full expenditure has been paid as of December 31, 2009.  Other than working capital and loans, we presently have no other alternative source of working capital. We may need to raise additional working capital to complete the projects.  We may seek to raise additional capital through the sale of equity securities.  No assurances can be given that we will be successful in obtaining additional capital, or that such capital will be available in terms acceptable to our company. At this time, we have no commitments or plans to obtain additional capital.

Notwithstanding the above, we may seek to raise additional cash to fund future investments or acquisitions we may decide to pursue.  To the extent it becomes necessary to raise additional cash in the future, we may seek to raise it through the sale of debt or equity securities, funding from joint-venture or strategic partners, debt financing or loans, issuance of common stock, or a combination of the foregoing.  We currently do not have any binding commitments for, or readily available sources of, additional financing.  We cannot provide any assurances that we will be able to secure the additional cash or working capital we may require to continue our operations.
 
CONTRACTUAL OBLIGATIONS

This table summarizes our known contractual obligations and commercial commitments at December 31, 2009.

   
 
Payments Due by Period
 
   
 
Total
   
Less than 1
year
   
1-3 Years
   
3-5 Years
   
5 Years +
 
                               
Contractual Obligations :
 
 
   
 
   
 
   
 
   
 
 
Bank Indebtedness  
 
$
2,421,184
   
$
1,100,884
   
$
1,320,300
   
$
-
   
$
-
 
Other Indebtedness  
 
$
13,992,257
   
$
13,992,257
   
$
-
   
$
-
   
$
-
 
Capital Lease Obligations  
 
$
105,559
   
$
105,559
   
$
-
   
$
-
   
$
-
 
Operating Leases  
 
$
2,401,718
   
$
1,058,624
   
$
1,247,543
   
$
95,551
   
$
-
 
Purchase Obligations  
 
$
4,151,219
   
$
4,151,219
   
$
-
   
$
-
   
$
-
 
Total Contractual Obligations:  
 
$
23,021,937
   
$
20,408,543
   
$
2,567,843
   
$
95,551
   
$
-
 
 
Off-Balance Sheet Arrangements

We have not entered into any other financial guarantees or other 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 or hedging services with us.

 
39

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly-liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents.
 
Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to our short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At December 31, 2009, we had approximately $1,805,271 in cash and cash equivalents. A hypothetical 10% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.
 
Foreign Exchange Rate. We use the United States Dollar (“U.S. Dollars”) for financial reporting purposes but all of our sales and inputs are transacted in Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. However, since we conduct our sales and purchase inputs in RMB, fluctuations in exchange rates are not expected to significantly affect our financial stability, or gross and net profit margins. We do not currently expect to incur significant foreign exchange gains or losses, or gains or losses associated with any foreign operations.  During the years ended December 31, 2009 and 2008, we recorded net foreign currency gains of $123,209 and $824,961, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information required by this Item 8 is incorporated by reference to information begins on Page F-1 of this Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
As of the end of the period covered by this Form 10-K, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act).  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.

 
40

 

Management’s Annual Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
 
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
     
 
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that as of December 31, 2009, our internal control over financial reporting is effective based on those criteria.
 
This Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management's report in this Form 10-K.
 
Changes in Internal Control
 
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our international control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.

 
41

 

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Departure and Appointment of Officers and Directors

Departure of Officers

Effective December 4, 2009, Yongkui Liu voluntarily resigned as the Chief Financial Officer of the Company.  The decision by Mr. Liu to resign from his position was not the result of any material disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

Appointment of Officers

Effective December 4, 2009, Harry Zhang was appointed as the Chief Financial Officer of the Company.
 
Departure of Directors

Effective November 8, 2009, Umesh Patel voluntarily resigned as a director on the board of directors of the Company.  Effective March 3, 2010, Mr. Yongkui Liu and Ms. Yongmei Wang each voluntarily resigned as directors on the board of directors of the Company.  The decision by each of these directors to resign from their positions was not the result of any material disagreement with the Company on any matter relating to the Company’s operations, policies or practices.  Mr. Yongkui Liu is presently the Vice President of the Company, and will continue to serve in this position.  Ms. Yongmei Wang is presently the Vice President and Treasurer of the Company, and continues to serve in this position.
 
Appointment of Directors
 
Effective November 8, 2009, the board of directors of the Company appointed Mr. Harry Zhang to fill the vacancy created by the resignation of Mr. Umesh Patel.  Effective March 3, 2010, the board of directors of the Company appointed Mr. Hal Lieberman, Dr. Laura Philips, Mr. Jingang Wang and Mr. Bing Li to fill the vacancies created by the resignations of Mr. Yongkui Liu and Ms. Yongmei Wang. Based upon information submitted to the board by Mr. Hal Lieberman, Dr. Laura Philips, Mr. Jingang Wang and Mr. Bing Li, the board of Directors has determined that they are each “independent” under the listing standards of both the NYSE Amex Exchange and the NASDAQ Stock Market.  None of the four appointees has participated in the preparation of the Company’s financial statements or any current subsidiary at any time during the past three years and each of them are able to read and understand fundamental financial statements.

Current Management  

        The following table identifies our current executive officers and directors, their respective offices and positions, and their respective dates of election or appointment:

Name
 
Age
 
Position
 
Effective Date of Appointment
Yongxin Liu
 
41
 
Chairman of the Board and Chief Executive Officer
 
November 16, 2007
Harry Zhang
 
46
 
Chief Financial Officer and Director
 
December 4, 2009 (CFO)
November 8, 2009 (Director)
Ning Liu
 
47
 
President, Chief Operating Officer and Director
 
November 16, 2007
Hal Lieberman
 
60
 
Director
 
March 3, 2010
Laura Philips
 
52
 
Director
 
March 3, 2010
Jingang Wang
 
41
 
Director
 
March 3, 2010
Bing Li
 
43
 
Director
 
March 3, 2010
 
Each director will hold office until the next annual meeting of stockholders and until his or her successor has been elected and qualified.

Yongxin Liu has been the Chairman of Changchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”) since 2003 and Jilin Province Yongxin Chain Drugstore Co., Ltd. (“Yongxin Drugstore”) since 2001.  From August 1998 to 2003, Mr. Liu served as the General Manager of Yongxin Drugstore.  From 1984 to June 2006, Mr. Liu was employed by Changchun Medical Materials Marketing Co., Ltd. (“Changchun Medical”), serving as the Assistant Manager of Business and Vice-manager.  From July 1991 to July 1994, Mr. Liu studied at Northeast Normal University, majoring in Management.  In August 2004, he received an MBA from Beijing University.

 
42

 

Harry Zhang also serves as the chief Financial officer and vice president of Surplus Elegant Investment Ltd. in addition to being our Chief Financial Officer and member of our board of directors.  From March 2004 to August 2006, Mr. Zhang served as the Chief Financial Officer of AXM Pharma, Inc.  Mr. Zhang worked as an auditor at Deloitte Touche Tohmatsu from May 1995 to March 2004.  Mr. Zhang worked at the Beijing Municipal Audit Bureau from 1988 to 1995.  Mr. Zhang earned his Bachelor’s degree from Nanjing Agricultural University in 1988 and received his Master of Business Administration degree from University of Northern Virginia in June 2007.  Mr. Zhang is also a certified public accountant in China.

Ning Liu has been the president of Succeed Group Inc., a media company, since 2003.  Prior to his service at Succeed Group, Inc., Mr. Liu was the president of Super Nu-Life Products Inc., a nutraceuticals manufacturer from 1994 to 2003.  From 1992 to 1994, Mr. Liu was the president of Goldenrise Development Inc.  Additionally, from 1986 TO 2002, Mr. Liu served as president of Accords System Inc.  Mr. Liu is active in founding, organizing and managing a number of foreign investment projects in China, and he counsels Chinese companies in doing business in the United States, and in mergers with public companies in the United States.  Mr. Liu graduated from Beijing University with a Masters of Arts degree in 1985.

Hal Lieberman also serves as the president and chief executive officer of HemoTherapeutics, Inc., and has held such position from 2006 to the present.  From 1998 to 2006, Mr. Lieberman acted as a consultant, provided interim management and served on the boards of a variety of health care and medical device companies.  In 1988, Mr. Lieberman served as the president and chief executive officer of HemaCare Corporation.  Mr. Lieberman acted as the vice president for MEDIQ Imaging Services from 1981 to 1988.  Mr. Lieberman earned his Master’s degree in Health Care Administration from George Washington University.  Mr. Lieberman is also a member of American College of Health Care Administrators, The Entrepreneurship Institute, Southern California Biomedical Council and served as an advisor to U.S. Defense Advanced Research Projects Agency (DARPA).

Laura Philips also serves on the Boards of Directors of Delcath Systems, Inc, Wellgen Inc., and the Boyce Thompson Institute. From 2003 to 2006, she was Chief Operating Officer and Acting Chief Financial Officer of NexGenix Pharmaceuticals. Prior to that, she was Vice President, Program Management for the AMDeC Foundation. Dr. Philips worked at Corning Incorporated from 1997 to 2002, where she held several positions including Program Director of the Fuel Cells Division. From 1994 to 1996 Dr. Philips held various government positions in Washington, D.C., most recently in a Presidential appointment as Senior Policy Advisor to Secretary of Commerce Ronald Brown. Dr. Philips was on the faculty of Cornell University in the Department of Chemistry from 1987 to 1994 and was an NIH Post-Doctoral Fellow at the University of Chicago. She received a B.A. in Chemistry from Williams College, a Ph.D. in Physical Chemistry from the University of California Berkeley and an MBA with Distinction from Cornell University’s Johnson School of Management.

Jingang Wang also serves as the executive director for CoSci Med-Tech Co., Ltd., and has held such position since May 2003 to the present.  From June 2002 to May 2003, Mr. Wang worked as the executive director in Beijing Lingtainbicheng Medicine Technology Co., Ltd.  Mr. Wang served as the deputy general manager and assistant general manager of Mudanjiang Lingtai Pharmaceuticals Co., Ltd from October 1998 to June 2002.  Mr. Wang acted as the deputy chief in Mudanjiang’s Food and Drugs Administration from August 1990 to October 1998.  Mr. Wang was an assistant engineer in Mudanjiang No. 3 Pharmaceutical Factory from September 1998 to August 1990.  Mr. Wang received his Bachelor’s degree in Medical Research and Development from Heilongjian Chinese Medical University in 1998.

Bing Li also serves as the general manager of Jilin Province Fire Fighting Engineering Co., Ltd., the general manager of Jilin Province Yinjian Small & Medium Enterprises Credit Guaranty Co., Ltd., the vice-chairman of the board of directors of Changchun JLU Technology Park Construction and Development Co., Ltd, the deputy managing director of Jilin Province Intelligentization Committee, and the general manager of Beijing Kunshanjinhai Film & TV Cultural Investment Co., Ltd, and has held such positions from 1999 to the present.  From March 1990 to June 1990, Mr. Li served as the manager of Export Department of Jilin Provincial Forestry Import & Export Company.  Prior to March 1990, Mr. Li worked on various foreign affairs for Jilin Provincial Forestry Department.  Mr. Li received his Bachelor’s degree in English from Changchun University in 1988.

 
43

 

Family Relationships

Mr. Yongxin Liu and Mr. Yongkui Liu are brothers.  Additionally, Mr. Yongkui Liu, our Vice President and former Chief Financial Officer and director, is the spouse of Ms. Yongmei Wang, our Treasurer and Vice President and former director.

Involvement in Certain Legal Proceedings

None.

Board Committees
 
Effective March 3, 2010, the board established an audit committee, a nominating committee and a compensation committee and has adopted charters for these committees.  The board has determined that in its judgment, Mr. Hal Lieberman, Ms. Laura Philips, Mr. Jingang Wang and Mr. Bing Li are each “independent” under the listing standards of both the  NYSE Amex Exchange and the NASDAQ Stock Market .

 Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the Company's Common Stock, to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of Common Stock of the Company. Officers, directors and greater than 10% stockholders are required by the SEC to furnish the Company with copies of all section 16(a) reports they file.  Based solely on our review of the Section 16 filings furnished to us, Yongkui Liu and Yongxin Liu filed delinquent Form 4 reports on January 5, 2010 for transactions that occurred on December 16, 2009, Yongxin Liu, Yongkui Liu and Yongmei Wang filed delinquent Form 3 reports on March 12, 2010 for transactions that occurred on November 16, 2007, and Ning Liu filed a delinquent Form 3 report on March 11, 2010 for a transaction that occurred on November 16, 2007.

Code of Conduct

We adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions.  Anyone who would like a copy of our Code of Conduct may do so by writing to the Company at its principal place of business at 927 Canada Court, City of Industry, California 91748.

Audit Committee
 
The board of directors adopted and approved a charter for the Audit Committee on March 3, 2010.  Currently, three directors comprise the Audit Committee: Hal Lieberman, Jingang Wang and Bing Li.  Mr. Lieberman serves as Chairman of the Audit Committee. The members of the Audit Committee are currently “independent directors” as that term is defined under the listing standards of both the  NYSE Amex Exchange and the NASDAQ Stock Market .  Mr. Lieberman also qualifies as an “audit committee financial expert” as defined by the rules of the SEC.  Mr. Hal Lieberman has the requisite attributes of an “audit committee financial expert” as defined by regulations promulgated by the SEC and that such attributes were acquired through relevant education and experience.

Our Audit Committee is responsible, in accordance with the Audit Committee charter, recommending our independent auditors, and overseeing our audit activities and certain financial matters to protect against improper and unsound practices and to furnish adequate protection to all assets and records.

Our Audit Committee pre-approves all audit and non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date.

 
44

 

Compensation Committee

The board of directors adopted and approved a charter for the Compensation Committee on March 3, 2010.  The Compensation Committee currently consists of Jingang Wang, Bing Li and Laura Philips. Mr. Wang serves as Chairman of the Compensation Committee. The members of the Compensation Committee are currently “independent directors” under the listing standards of both the  NYSE Amex Exchange and the NASDAQ Stock Market .

In accordance with the Compensation Committee’s charter, the Compensation Committee is responsible for overseeing and, and as appropriate, making recommendations to the board regarding the annual salaries and other compensation of the Company’s executive officers and general employees and other polices, providing assistance and recommendations with respect to the compensation policies and practices of the Company.

Nominating Committee

The board of directors adopted and approved a charter for the Nominating Committee on March 3, 2010.  The Nominating Committee currently consists of Bing Li, Jingang Wang and Hal Lieberman.  Mr. Li serves as the Chairman of the Nominating Committee.  The members of the Nominating Committee are currently “independent directors” under the listing standards of both the  NYSE Amex Exchange and the NASDAQ Stock Market .

In accordance with the Nominating Committee’s charter, the Nominating Committee is responsible for proposing to the board a slate of nominees for election by the stockholders at the Annual Meeting of Stockholders, to periodically review and develop criteria for selection of new directors and nominees for vacancies on the board, to review the desired experience and qualities to assure appropriate board composition, and to recommend to the board qualified candidates for the board.

 ITEM 11.   EXECUTIVE COMPENSATION

Summary Compensation Tables

The following table sets forth information concerning the compensation for the fiscal years ended December 31, 2009 and 2008 of the principal executive officer, principal financial officer, in addition to our three most highly compensated officers whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer of the registrant at the end of the last fiscal year.

Name and Position
 
Year
 
Salary
   
Bonus
   
Total
 
Yongxin Liu,
 
  2009
 
$
87,976
   
$
0
   
$
87,976
 
Chief Executive Officer and Chairman of the Board
 
  2008
 
$
82,392
   
$
5,633
   
$
88,025
 
Yongkui Liu,
 
  2009
 
$
70,381
   
$
0
   
$
70,381
 
Former Chief Financial Officer and Director
 
  2008
 
$
64,787
   
$
5,633
   
$
70,420
 

Grants of Plan-Based Awards in 2009
 
There were no option grants as of December 31, 2009.

Outstanding Equity Awards at 2009 Fiscal Year End
 
                   There were no outstanding equity awards as of December 31, 2009.

 
45

 

Option Exercises and Stock Vested in Fiscal 2009
  
There were no option exercises or stock vested as of December 31, 2009.

Pension Benefits

There were no pension benefit plans in effect as of December 31, 2009.

Nonqualified defined contribution and other nonqualified deferred compensation plans

There was no nonqualified defined contribution or other nonqualified deferred compensation plans in effect as of December 31, 2009.

Employment Agreements

We have no employment agreements with any of our executive officers as of December 31, 2009.

Director Compensation
 
For the year ended December 31, 2009, none of the members of our board of directors received compensation for his or her service as a director.  Effective March 3, 2010, Hal Lieberman, Laura Philips, Jingang Wang and Bing Li have each have executed and delivered a director offer letter with the Company. Under the terms of the agreements, Ms. Philips, Mr. Wang and Mr. Li shall be entitled to the annual compensation of $20,000 and eligible to receive either restricted stock or a stock option award for the purchase of up to 200,000 shares (subject to appropriate adjustment in the event of reverse stock splits or similar events) of the Company’s common stock through an incentive stock option plan to be adopted by the Company.  Mr. Hal Lieberman, who will not only serve as a director, but also as Audit Committee Chairman, shall be entitled to the annual compensation of $30,000 and eligible to receive a stock option award for the purchase of up to 200,000 shares of the Company’s common stock.

Outstanding Equity Awards at Fiscal Year-End
 
None of our executive officers were granted or otherwise received any option, stock or equity incentive plan awards during 2009 and there were no outstanding unexercised options previously awarded to our officers and directors, at the fiscal year end, December 31, 2009.
 
Indemnifications of Directors And Executive Officers And Limitations of Liability

Under Section 145 of the General Corporation Law of the State of Delaware, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Our certificate of incorporation provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of nonmonetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of the law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.

Our bylaws provide for the indemnification of our directors to the fullest extent permitted by the Delaware General Corporation Law. Our bylaws further provide that our board of directors has discretion to indemnify our officers and other employees. We are required to advance, prior to the final disposition of any proceeding, promptly on request, all expenses incurred by any director or executive officer in connection with that proceeding on receipt of an undertaking by or on behalf of that director or executive officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under the bylaws or otherwise. We are not, however, required to advance any expenses in connection with any proceeding if a determination is reasonably and promptly made by our board of directors by a majority vote of a quorum of disinterested board members that (i) the party seeking an advance acted in bad faith or deliberately breached his or her duty to us or our stockholders and (ii) as a result of such actions by the party seeking an advance, it is more likely than not that it will ultimately be determined that such party is not entitled to indemnification pursuant to the applicable sections of our bylaws.

 
46

 

We have been advised that in the opinion of the SEC, 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, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

We may enter into indemnification agreements with each of our directors and officers that are, in some cases, broader than the specific indemnification provisions permitted by Delaware law, and that may provide additional procedural protection. We have not entered into any indemnification agreements with our directors or officers, but may choose to do so in the future. Such indemnification agreements may require us, among other things, to:

 
·
indemnify officers and directors against certain liabilities that may arise because of their status as officers or directors;

 
·
advance expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to limited exceptions; or

 
·
obtain directors’ and officers’ insurance.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
       
The following table sets forth information regarding the beneficial ownership of our common stock as of March 10, 2010 for each of our directors and officers; all directors and officers as a group; and each person known by us to beneficially own five percent or more of our common stock.

Beneficial ownership is determined in accordance with SEC rules.  Unless otherwise indicated in the table, the persons and entities named in the table have sole voting and sole investment power with respect to the shares set forth opposite the stockholder’s name.   Unless otherwise indicated, the address of each stockholder listed in the table is c/o China Yongxin Pharmaceuticals Inc., 927 Canada Court, City of Industry, California 91748.
 
47

 
Name and Address
of Beneficial Owner
 
Title
 
Beneficially
Owned
   
Percent of
Class
 
                 
Directors and Executive Officers
               
Yongxin Liu
 
Chief Executive Officer and Chairman of the Board
   
12,000,000
(1)
   
20.9
%
                     
Ning Liu (2)
 
President, Chief Operating Officer and Director
   
     
 
                     
Harry Zhang
 
Chief Financial Officer and Director
   
     
 
                     
Hal Lieberman
 
Director
   
     
 
                     
Laura Philips
 
Director
   
     
 
                     
Jingang Wang
 
Director
   
     
 
                     
Harry Zhang
 
Director
   
     
 
                     
Officers and Directors as a Group (total of 7 persons)
       
12,000,000
     
20.9
%
                     
5% Holders
                   
Accord Success Ltd., BVI
       
5,400,000
(3)
   
9.4
%
                     
Boom Day Investments, Ltd., BVI
       
13,399,998
(4)
   
23.4
%
                     
Yongkui Liu
       
14,599,998
(5)
   
25.5
%
                     
Yongmei Wang
       
14,599,998
(5)
   
25.5
%
                     
Master Power Holdings Coup Ltd., BVI
       
4,200,000
(6)
   
7.3
%
                     
Misala Holdings Inc., BVI
       
12,000,000
(1)
   
20.9
%
 


 
 
(1)
Represents shares of common stock in our company held by Misala Holdings Inc., a British Virgin Islands corporation (“Misala Holdings”), over which Mr. Yongxin Liu may be deemed to have voting and investment control.  The 12,000,000 shares of common stock were converted from 2,000,000 shares of Series A Convertible Preferred Stock, which were each convertible into 6 shares of common stock, upon the Company meeting certain required net income amounts for conversion for the fiscal years ending 2007 and 2008, held by Misala Holdings Inc.  Misala Holdings also holds an additional 1,000,000 shares of Series A Preferred Stock, each share of which is convertible into six shares of common stock upon certain conditions being met pursuant to the Certificate of Incorporation.

 
(2) 
Mr. Ning Liu’s address is 22128 Steeplechase Lane, Diamond Bar, CA 91765.
 
 
(3) 
Mr. Tao Wang has voting and investment control over the shares owned by this entity.

 
(4) 
Mr. Yongkui Liu has voting and investment control over the shares owned by this entity.  Includes 5,400,000 shares of common stock held by Boom Day Investments Ltd., British Virgin Islands corporation (“Boom Day Investments”) over which Mr. Yongkui Liu may be deemed to have voting and investment control, and 7,999,998 shares of common stock converted from 1,333,333 shares of Series A Convertible Preferred Stock, which were each convertible into 6 shares of common stock, upon the Company meeting certain required net income amounts for conversion for the fiscal years ending 2007 and 2008, held by Boom Day Investments. Boom Day Investments also holds an additional 666,667 shares of Series A Preferred Stock, each share of which is convertible into six shares of common stock upon certain conditions being met pursuant to the Certificate of Incorporation.

 
48

 

 
(5)
Includes 13,399,998 shares held directly by Boom Day Investments, over which Mr. Yongkui Liu, the sole director and sole shareholder of Boom Day Investments, has voting and investment control, and over which Mrs. Yongmei Wang, the spouse of Mr. Yongkui Liu, may be deemed to have shared voting and investment control.  Also includes 1,200,000 shares of common stock held by Perfect Sum Investment Ltd., a British Virgin Islands corporation (“Perfect Sum”), over which Mr. Yongkui Liu’s spouse, Mrs. Yongmei Wang, may be deemed to have voting and investment control and over which Mr. Yongkui Liu may be deemed to have shared voting and dispositive control.
     
 
(6) 
Mr. Yong Liu has voting and investment control over the shares owned by this entity.

Equity Compensation Plan Information
 
We have not adopted any equity compensation plan as of December 31, 2009.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

Changchun Yongxin Dirui Medical Co., Ltd.

Changchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”) and all of the shareholders of Yongxin entered into an amended share exchange agreement with the Company on June 15, 2007.  On November 16, 2007, Yongxin and the Company closed on the share exchange under the Amended Exchange Agreement. In accordance with the Amended Exchange Agreement, the Company issued 21,000,000 shares of newly issued common stock and 5,000,000 shares of Series A Preferred Stock to the Yongxin shareholders or their designees, representing, immediately following closing, 70% of the total issued and outstanding shares of common stock of the Company in exchange for 80% shares of Yongxin. Yongxin is our 80%-owned subsidiary and has interlocking executive and director positions with us.  Mr. Yongxin Liu, the Chairman and Chief Executive Officer of the Company, is also the President of Yongxin.  Mr. Yongkui Liu, the Vice President of the Company, is also the Vice President of Yongxin.

Loans from Related Parties

On December 1, 2005, Mr. Aurangzeb Bhatti, the former Chief Executive Officer of our predecessor company, Digital Learning Management Corporation, made an unsecured loan to the Company with a principal of US$184,662 interest free and due on demand.  As of the date of this Form 10-K, such loan is still outstanding.

Director Independence

                  See Item 10, “Directors, Executive Officers and Corporation Governance” for a discussion of board member independence.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
       
 The following table sets forth fees billed to us by our independent registered accounting firm, Kabani & Company, Inc. during the fiscal years ended December 31, 2009 and 2008 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, and (iii) services rendered in connection with tax compliance, tax advice and tax planning.  We did not engage our auditors for any other services during 2009 and 2008.

 
49

 
 
   
December 31,
2009
   
December 31,
2008
 
(i)      Audit Fees(1)
 
$
160,000
(2)
 
$
115,000
(2)
(ii)     Audit Related Fees
   
-
     
-
 
(iii)    Tax Fees
   
-
     
-
 
(iv)    All Other Fees
   
-
     
-
 
                 
Total fees
 
$
160,000
(2)
 
$
115,000
(2)
 
 
(1)
These are fees for professional services performed by Kabani & Company, Inc. for the audit of our annual financial statements and review of our quarterly reports.

 
(2)  
Includes $40,000 in fees related to services provided to Digital Learning Management Corporation and $75,000 in fees related to services provided to Yongxin.

Pre-Approval Policy

Effective March 3, 2010, our Audit Committee pre-approves all audit and non-audit services provided by our independent auditors.  These services may include audit services, audit-related services, tax services and other services.  Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget.  The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary.  The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date.
 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statements and Schedules

Our consolidated financial statements for the fiscal years ending December 31, 2009 and 2008 begin on page F-1 of this Form 10-K.  We are not required to file any financial statement schedules.

Exhibits

The Exhibit Index lists those documents that we are required to file with this Form 10-K.
 
EXHIBIT INDEX
 
Exhibit
   
Number
 
Description
     
2.1
 
Exchange Agreement by and between Digital Learning Management Corporation and Changchun Yongxin Dirui Medical Co., Ltd dated December 21, 2006 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on December 28, 2006).
     
2.2
 
First Amendment to Share Exchange Agreement, dated as of June 15, 2007, by and among Digital Learning Management Corporation, Chanchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”) and the stockholders of Yongxin (incorporated by reference to Exhibit B to the Definitive Proxy Statement on Schedule 14A filed with the SEC on September 14, 2007)
     
2.3
 
Second Amendment to the Share Exchange Agreement, dated as of April 12, 2008,and effective as of November 16, 2007, by and among Nutradyne Group, Inc., Chanchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”) and the stockholders of Yongxin (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on April 15, 2008)
 
 
50

 

3.1
 
Certificate of Incorporation (incorporated by reference to Exhibit 3 to the Company’s General Form For Registration of Securities of Small Business Issuers on Form 10-SB, filed with the SEC on November 5, 1999).
     
3.2
 
Certificate of Amendment of Articles of Incorporation of the Company (incorporated by reference to Exhibit A of the Company’s definitive information statement on Schedule 14C filed with the SEC on February 25, 2004).
     
3.3
 
Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 27, 2004).
     
3.4
 
Certificate of Ownership and Merger Merging China Yongxin Pharmaceuticals Inc. and Nutradyne Group, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K Filed with the SEC on May 9, 2008).
     
10.1
 
Summary English Translation of the Company’s Form Lease Agreement for its Retail Drugstores (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K Filed with the SEC on April 15, 2009).
     
10.2
 
Stock Purchase Warrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on September 25, 2009).
     
10.3
 
Corporate Communications Consulting Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on December 23, 2009).
     
10.4
 
Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.5
 
Form of Note (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.6
 
Form of Warrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.7
 
Form of Stock Pledge Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.8
 
Form of Subsidiary Guaranty Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.9
 
Form of Lock Up Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.10
 
Form of Leakout Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.11
 
Form of Collateral Agent Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on January 26, 2010).
     
10.12
 
Form of Director Offer and Acceptance Letter (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K Filed with the SEC on March 4, 2010).
     
10.13
 
Equity Transfer Agreement by and between Yongxin and Sun Shi Wei dated November 21, 2009.*
     
10.14
 
Stock Purchase Agreement between the Company and PmMaster Beijing Software Co., Ltd. dated March 1, 2010.*

 
51

 

10.15
 
Amended and Restated Director’s Offer and Acceptance Letter dated March 15, 2010.*
     
10.16   
Share Purchase Agreement by and among Digital Learning Management Corp., Yongxin Liu and Yongkui Liu dated May 13, 2007.* 
     
10.17   
Sino-Foreign Joint Venture Operation Agreement by and among Digital Learning Management Corp., Yongxin Liu and Yongkui Liu dated May 13, 2007.*  
     
21.1
 
List of Subsidiaries.*
     
31.1
 
Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
31.2
 
Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
32.1
 
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 
*           Filed herewith.
 
 
52

 

SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Changchun, People’s Republic of China, on March 30, 2010.
 
 
CHINA YONGXIN PHARMACEUTICALS INC.
 
 
(Registrant)
 
       
Dated: March 30, 2010 
By:
/s/ Yongxin Liu
 
   
By:  Yongxin Liu
 
   
Chief Executive Officer and
 
   
Chairman of the Board
 
   
(Principal Executive Officer)
 
       
 Dated: March 30, 2010
 By:
 /s/ Harry Zhang
 
   
By:  Harry Zhang
 
   
Chief Financial Officer
 
   
(Principal Financial and Accounting Officer)
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
 
Signature
 
Capacity
 
Date
         
 /s/ Yongxin Liu
 
Chief Executive Officer and
 
March 30, 2010
By: Yongxin Liu
 
Chairman of the Board
(Principal Executive Officer)
   
         
 /s/ Harry Zhang
 
Chief Financial Officer and Director
 
March 30, 2010
By: Harry Zhang
 
(Principal Financial and Accounting Officer)
   
         
/s/  Ning Liu
 
President, Chief Operating Officer and Director
 
March 30, 2010
By: Ning Liu
       
         
/s/   Hal Lieberman
 
Director
 
March 30, 2010
By: Hal Lieberman
       
         
/s/  Laura Philips
 
Director
 
March 30, 2010
By: Laura Philips
       
 
/s/   Jingang Wang
 
Director
 
March 30, 2010
By: Jingang Wang
       

/s/   Bing Li
 
Director
 
March 30, 2010
By: Bing Li
       
 
 
53

 
 
CHINA YONGXIN PHARMACEUTICALS INC.
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2009

TABLE OF CONTENTS

 
F-2
     
Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008
 
F-3
     
Consolidated Statements of Income for the years ended December 31, 2009 and 2008
 
F-4
     
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
 
F-5
     
 
F-6
     
Notes to Consolidated Financial Statements
 
F-7 – F-24

 
F-1

 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders
China Yongxin Pharmaceuticals Inc.
 
We have audited the accompanying consolidated balance sheets of China Yongxin Pharmaceuticals Inc. and its subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Yongxin Pharmaceuticals Inc. and its subsidiaries as of December 31, 2009 and 2008, and the results of its consolidated statements of operations, stockholders' equity, and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
 /s/ KABANI & COMPANY, INC.
 
CERTIFIED PUBLIC ACCOUNTANTS
 
Los Angeles, California
March 30, 2010

 
F-2

 
 
CHINA YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008

   
2009
   
2008
 
ASSETS
 
Current Assets:
           
Cash and cash equivalents
  $ 1,805,271     $ 600,432  
Restricted cash
    467,369       -  
Accounts receivable, net
    12,305,103       6,027,340  
Notes receivable
    903,867       1,334,078  
Other receivable, net
    1,931,084       351,488  
Advances to suppliers
    5,056,246       6,185,388  
Prepaid expenses
    534,769       342,441  
Inventory, net
    7,811,628       7,713,209  
Due from related party
    1,199,628       -  
Current assets of discontinued operations
    -       173,201  
Total Current Assets
    32,014,966       22,727,579  
                 
Property and Equipment, net
    8,751,813       2,673,909  
                 
Construction In Progress
    1,551       6,066,249  
                 
Intangible Assets, net
    987,332       72,680  
                 
Non-current assets of Discontinued Operations
    -       7,305  
Total Assets
  $ 41,755,662     $ 31,547,722  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
                 
Current Liabilities:
               
Accounts payable
  $ 4,151,219     $ 3,171,826  
Accrued expenses & other payable
    5,170,786       2,406,602  
Advances from customers
    2,055,602       2,579,997  
Taxes payable
    1,421,434       1,245,649  
Loans from related parties
    184,662       184,662  
Short-term loan payable
    1,100,884       1,945,179  
Deferred income
    419,277       273,753  
Shares to be issued
    65,000       35,000  
Liabilities of discontinued operations
    628,837       735,289  
Total Current Liabilities
    15,197,700       12,577,957  
                 
Long term loan
    1,320,300       1,320,390  
                 
Commitments and Contingencies
    -       -  
                 
Stockholders' Equity:
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,666,667 shares issued and outstanding as of December 31, 2009 and 5,000,000 shares issued and outstanding as of December 31, 2008
    1,667       5,000  
Common stock; $0.001 par value; 75,000,000 shares authorized; 56,448,923 shares issued and outstanding as of December 31, 2009 and 31,400,540 shares issued and outstanding as of December 31, 2008
    56,449       31,401  
Additional paid in capital
    1,165,899       615,906  
Deferred consulting expense - issuance of warrants
    (4,740 )     (72,815 )
Prepaid consulting - issuance of shares
    (5,000 )     (68,750 )
Receivable from a related party
    (50,000 )     (50,000 )
Statutory reserve
    2,630,329       1,841,241  
Other comprehensive income
    1,807,859       1,684,649  
Retained earnings
    13,920,649       9,563,803  
Non-controlling interest
    5,714,550       4,098,940  
Total Stockholders' Equity
    25,237,662       17,649,375  
Total Liabilities and Stockholders' Equity
  $ 41,755,662     $ 31,547,722  

The accompanying notes are an integral part of these consolidated financial statements

 
F-3

 

CHINA YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008

   
2009
   
2008
 
Net Revenues
  $ 47,589,280     $ 59,116,534  
Cost of Goods Sold
    (31,271,463 )     (47,226,275 )
Gross profit
    16,317,817       11,890,259  
                 
Operating Expenses:
               
Selling expenses
    3,543,383       3,521,147  
General and administrative expenses
    3,575,059       2,500,366  
Total operating expenses
    7,118,442       6,021,513  
                 
Income From Operations
    9,199,376       5,868,745  
                 
Other Income (Expense):
               
Other income
    278,846       690,516  
Other expense
    (137,849 )     (152,469 )
Interest income (expense)
    9,173       (6,679 )
Total other income
    150,170       531,368  
                 
Operating Income Before Income Tax and Non controlling Interest
    9,349,545       6,400,113  
                 
Provision for income tax
    (2,594,483 )     (1,009,643 )
                 
Net Income Before Non controlling Interest and Discontinued operations
    6,755,062       5,390,470  
                 
Loss from discontinued operations
    (30,951 )     (84,850 )
                 
Net Income Before Non controlling Interest
    6,724,111       5,305,619  
                 
Non controlling interest
    (1,599,122 )     (1,239,480 )
                 
Net Income
    5,124,989       4,066,139  
                 
Other Comprehensive Item:
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