China Jo-Jo Drugstores, Inc. (“Jo-Jo Drugstores” or the “Company”), was incorporated in Nevada on December 19, 2006, originally under the name “Kerrisdale Mining Corporation.” On September 24, 2009, the Company changed its name to “China Jo-Jo Drugstores, Inc.” in connection with a share exchange transaction as described below.

 

The Company is primarily in the Company controls three companies through certain exclusive agreements discussed below, that operate a chain of pharmaciesretail drugstore business in the People’s Republic of China (“PRC”China” or “China”the “PRC”), namely,. As of June 30, 2011, all of the Company’s pharmacies except one were operated by Hangzhou Jiuzhou Grand Pharmacy Chain Co., Ltd. (“Jiuzhou Pharmacy”), a company which the Company controls through contractual arrangements, and Jiuzhou Pharmacy’s wholly-owned subsidiary Shanghai Lydia Grand Pharmacy Co., Ltd. (“Shanghai Lydia”). One drugstore is operated by Hangzhou Quannuo Grand Pharmacy Co., Ltd. (“Hangzhou Quannuo”), a wholly-owned subsidiary of Zhejiang Quannuo Internet Technology Co., Ltd. (“Quannuo Technology”), which is wholly-owned by Shouantang Technology.

The Company also operates two medical clinics through Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine (“Jiuzhou Clinic”) and Hangzhou Jiuzhou Medical and Public Health Service Co., Ltd. (“Jiuzhou Service̶ 1;Service”), both of which are also controlled by the Company through contractual arrangements. In addition, Hangzhou Jiuxin Qianhong Agriculture Development Co., Ltd. (“Jiuxin Qianhong”), which is wholly-owned by Jiuxin Management, is operating a cultivation project of herbal plants used for traditional Chinese medicine (“TCM”), and collectively with Jiuzhou Pharmacy and Jiuzhou Clinic as “HJ Group”Tonglu Lydia Agriculture Development Co., Ltd. (“Tonglu Lydia”).

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United Statesrules and regulations of Americathe Securities and Exchange Commission (“SEC”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q.statements. Accordingly, they do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”)generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying consolidated balance sheets, and related interim consolidated statements of income and other comprehensive income, shareholders’ equity, and cash flows, includemanagement, all adjustments consisting(consisting only of normal recurring items. However, theseadjustments) considered necessary for a fair presentation have been included. These condensed consolidated financial statements are not indicative of a full year of operations. The information included in this Quarterly Report on Form 10-Qand notes should be read in conjunction with the audited consolidated March 31, 2011 financial statements and footnotes for the year ended March 31, 2010 included in the Company’s Annual Reportannual report on Form 10-K.10-K filed with the SEC on June 29, 2011. Operating results for the three months ended June 30, 2011 may not be necessarily indicative of the results that may be expected for the full year.

In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. All VIEs with which the Company is involved must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.

Additionally, as the three HJ Group companiesJiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service are under common control, the consolidated financial statements have been prepared as if the transactions had occurred retroactively as to the beginning of the reporting period of these consolidated financial statements.

Control and common control is defined under the accounting standards as “an individual, enterprise, or immediate family members who hold more than 50 percent of the voting ownership interest of each entity.” Because Lei Liu, Li Qi, and Chong’an Jinthe Owners collectively own 100% of HJ GroupJiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, and have agreed to vote their interests in concert since the establishment of each HJ Group companyof these three companies as memorialized the Voting Rights Proxy Agreement, the Company believes that these three individualsthe Owners collectively have control and common control of HJ Group.the three companies. Accordingly, the Company believes that Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service were constructively held under common control by Jiuxin Management as of the time the Contractual Agreements were entered into, establishing Jiuxin Management as their primary beneficiary. Jiuxin Management, in turn, is owned by Renovation.Renovation, which is owned by the Company.

Although the Company has determined that the accounting standards regarding consolidation of VIEs do not provide for retroactive accounting treatment, HJ GroupJiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service in substance were controlled by the same three individualsOwners on September 9, 2003, October 10, 2003, and November 2, 2005, the establishment dates of Jiuzhou Pharmacy, Jiuzhou Clinic and Jiuzhou Service, respectively. Such common control conditions resulted in the share exchange transaction to be a capital transaction in substance, reflected as a recapitalization, and the Company has accordingly recorded the consolidation of Renovation at its historical cost.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The significant estimates made in the preparation of the accompanying consolidated financial statements relate to the assessment of the carrying values of accounts receivable and related allowance for doubtful accounts, useful lives of property and equipment, and fair value of purchase option derivative liability. Because of the use of estimates inherent in the financial reporting process, actual results could m ateriallymaterially differ from those estimates.

The accounting standards regarding fair value of financial instruments and related fair value measurements define fair value, establish a three-level valuation hierarchy for disclosures of fair value measurement and enhance disclosure requirements for fair value measures. The carrying amounts reported in the accompanying consolidated balance sheets for receivables, payables, notes payable and short-term loans qualify as financial instruments and are a reasonable estimate of fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

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

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

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

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

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

Cash consists ofand cash equivalents include cash on hand, cash inon deposit with banks and credit and debit card sales transactions which settle within seven days of the drugstores, andfiscal year-end. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash at banks.equivalents.

The Company’s restricted cash consists of cash in a bank as security for its notes payable. The Company has notes payable outstanding with the bank and is required to keep certain amounts on deposit that are subject to withdrawal restrictions. The notes payable are generally short term in nature due to their short maturity period of six to nine months; thus, restricted cash is classified as a current asset. Restricted cash and notes payable amounted to $1,199,492 and $2,689,880 as of December 31, 2010, respectively, and $746,703 and $1,464,241 as of March 31, 2010, respectively.

Accounts receivable represent amounts due from banks relating to retail sales that are paid or settled by the customers’ debit or credit cards, amounts due from government social security bureaus relating to retail sales of drugs, prescription medicine, and medical services that are paid or settled by the customers’ medical insurance cards, and amounts due from non-retail customers for sales of merchandise.

Accounts receivable are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed. The Company uses the aging method to estimate the allowance for anticipated uncollectible receivable balances. Under the aging method, bad debt percentages determined by management, based on historical experience and current economic climate, are applied to customers’ balances categorized by the number of months the underlying invoices have remained outstanding. At each reporting period, the allowance balance is adjusted to reflect the amount computed as a result of the aging method. When facts subsequently become available to indicate that the allowance provided requires an adjustment, a corresponding adjustment is made to the allowance account as a change in estimate. The ultimate collection of the Company’s accounts receivable may take one year. Delinquent account balances are reserved after management determines that the likelihood of collection is not probable, and known bad debts are written-off against allowance for doubtful accounts when identified. As of December 31,For the three months ended June 30, 2011 and 2010, and March 31, 2010, the allowance for doubtful accounts was $133,100$54,691 and $0 respectively.accounts receivable were written off.

Inventories are stated at the lower of cost or market. Cost is determined using the weighted average cost method.first in first out method (“FIFO”). Market is the lower of replacement cost or net realizable value. The Company carries out physical inventory counts on a monthly basis at each store and warehouse location to ensure that the amounts reflected in the consolidated financial statements at each reporting period are properly stated and valued. The Company records write-downs to inventories for shrinkage losses and damaged merchandise that are identified during the inventory counts.  Historically, these amounts have not been material to the consolidated financial statements.

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

Maintenance, repairs and minor renewals are charged to expense as incurred. Major additions and betterment to property and equipment are capitalized.

During the normal course of business, the Company believes there was no impairmentconstantly issues Bank Acceptance Bills as a payment method to settle down outstanding accounts payables to various material suppliers. The Company recorded such Bank Acceptance Bills as notes payables. The notes payable are generally short term in nature due to their short maturity period of December 31, 2010 and March 31, 2010.six to nine months.

The Company records income taxes pursuant to the accounting standards for income taxes. These standards require the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consists of taxes currently due and the net change in deferred taxes.  A valuation allowance is recognized if it is more likely than not that some portion, or all of, a deferred tax asset will not be realized.  As of December 31, 2010June 30, 2011 and March 31, 2010,2011, the Company did not have any net deferred tax assets or liabilities.

The FASB’s accounting standards clarify the accounting and disclosure for uncertain tax positions and prescribe a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. The accounting standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.  Under these standards, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely th an not” test, no tax benefit is recorded. Penalties or interest incurred relating to underpayment of income taxes are classified as income tax expense in the period incurred.  No significant penalties or interest relating to income taxes have beenwere incurred during the three and nine months ended December 31, 2010June 30, 2011 and 2009.2010.

The charge for taxation is based onAll of the results fortax returns of the year as adjusted for items, whichCompany, since inception, are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enactedsubject to examination by the balance sheet date.tax authorities.

Sales revenue represents the invoiced value of goods, net of a value-addedvalue added tax (“VAT”). All of the Company’s products are sold in the PRC and are subject to a VAT on the gross sales price. The VAT rates vary from 0%range up to 17%, depending on the type of products sold. ThisThe VAT may be offset by VAT paid by the Company on raw materials and other materials included in the cost of producing or acquiring its finished products. The Company recorded a VAT payable and VAT receivable net of payments in the accompanying financial statements. The VAT tax return is filed offsetting the payables against the receivables.

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with the FASB’s accounting standards regarding accounting for stock-based compensation and accounting for equity instruments that are issued to other than employees for acquiring or in conjunction with selling goods or services. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably determinable. The value of equity instruments issued for consideration other than employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services as defined by these accounting standards. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Advertising and promotion costs are expensed as incurred. Advertisingincurred, and promotion costs amounted to $169,609$131,600 and $185,551$39,419 for the three months ended December 31,June 30, 2011 and 2010, and 2009, respectively, and $312,267 and $311,659 for the nine months ended December 31, 2010 and 2009, respectively. Advertising and promotion costs consist primarily of print and television advertisements.

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

The Company accounts for vendor allowances by reducing the carrying value of inventories which are subsequently transferred to cost of goods sold when the inventories are sold, unless those allowances are specifically identified as reimbursements for advertising, promotion and other services, in which case they are recognized as a reduction of the related advertising and promotion or other service costs.

The Company recognized vendor allowances of $102,883$72,805 and $81,498$269,979 in cost of goods sold for the three months ended December 31,June 30, 2011 and 2010, and 2009, respectively, and $484,521 and $188,278 for the nine months ended December 31, 2010 and 2009, respectively.

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

The Company leases premises for retail drugstores warehouse,and offices and land under non-cancelable operating leases. Operating lease payments are expensed on a straight-line basis over the term of lease. A majority of the Company’s retail drugstore leases have a 3 to 10-year term with a renewal option upon the expiration of the lease. The Company has historically been able to renew a majority of its drugstores leases. Under the terms of the lease agreements, the Company has no legal or contractual asset retirement obligations at the end of the lease. Land leased from government is amortized on a straight-line basis over a 30-year term.

The Company uses the United States dollar (“U.S. dollars” or “USD”) for financial reporting purposes. The Company’s subsidiaries and VIEs maintain their books and records in their functional currency the Renminbi (“RMB”), being the primary currency of the economic environment in which their operations are conducted.People’s Republic of China.

In general, for consolidation purposes, the Company translates the subsidiaries' and VIEs’ assets and liabilities of its subsidiaries and VIEs into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statements of income and cash flows are translated at average exchange rates during the reporting period. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the subsidiaries’financial statements of the subsidiaries and VIEs’ financial statementsVIEs are recorded as accumulated other comprehensive income.

The accounting standard, “Reporting Comprehensive Income”, requires disclosure of all components of comprehensive income and loss on an annual and interim basis. Comprehensive income and loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s accumulated other comprehensive income and loss consist only of changes in foreign currency exchange rates. Accumulated other comprehensive income in the statement of shareholders’ equity amounted to $805,942 as of December 31, 2010.  Accumulated other comprehensive loss in the statement of shareholders’ equity amounted to $362,260 as of March 31, 2010. The balance sheet amounts with the exception of equity at December 31, 2010June 30, 2011 and March 31, 20 102011 were translated at 1 RMB to $0.1517$0.1547 USD and at 1 RMB to $0.1467$0.1527 USD, respectively. The average translation rates applied to income and cash flow statement amounts for the ninethree months ended December 31,June 30, 2011 and 2010 and 2009 were at 1 RMB to $0.14836$0.1539 USD and at 1 RMB to $0.14664 USD, respectively.  The average translation rates applied to income statement amounts for the three months ended December 31, 2010 and 2009 were at 1 RMB to $0.15042 USD and at 1 RMB to $0.14667$0.1467 USD, respectively.

The Company’s operations are all carried out in the PRC.PRC, with over 95% of the sales coming from Hangzhou. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC’s economy. The Company’s operations in the PRC are also subject to specific considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Certain financial instruments, which subject the Company to concentration of credit risk, consist of cash and restricted cash. The Company has cash balances at financial institutions located in Hong Kong and PRC. Balances at financial institutions in Hong Kong may, from time to time, exceed Hong Kong Deposit Protection BoardBoard’s insured limits. Balances at financial institutions orand state-owned banks within the PRC are not covered by insurance. As of December 31, 2010June 30, 2011 and March 31, 2010,2011, the Company had deposits totaling $8,053,878$5,406,511 and $1,533,175$7,068,093 that were not covered by insurance, respectively. To date, the Company has not experienced any losses in such accounts.

For the ninethree months ended December 31,June 30, 2011 and 2010, and 2009, all of the Company’s sales and purchases arose in the PRC. No single customer accounted for 10% or more of the Company’s total revenues for the three and nine months ended December 31, 2010 and 2009, respectively.

For the three months ended December 31, 2010,June 30, 2011, three vendors collectively accounted for 28%40% of the Company’s total purchases, 40% of accounts payable and 14% of total purchase deposits. For the three months ended June 30, 2010, two vendors collectively accounted for 32% of the Company’s total purchases and 11% of total inventory prepayment as of December 31, 2010. For the three months ended December 31, 2009, two vendors collectively accounted for 24% of the Company’s total purchases and 32% of total accounts payable, and 16%26% of total purchase deposits as of December 31, 2009.

ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s risk exposures and evaluatingOther accounting standards that have been issued or proposed by the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending onFASB or after December 15, 2010. The disclosures about activityother standards-setting bodies that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in this ASU encourage, but do not require comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company doesadoption until a future date are not expect this ASU to have a material impact on it s consolidated financial statements.

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications hadhave no effect on net income or cash flows as previously reported.flows.

Other current assets consist of the following: