China Yongxin Pharmaceuticals Inc. - FORM 10-Q

Attached files

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EX-32.1 - China Yongxin Pharmaceuticals Inc.	v166984_ex32-1.htm
EX-32.2 - China Yongxin Pharmaceuticals Inc.	v166984_ex32-2.htm
EX-31.1 - China Yongxin Pharmaceuticals Inc.	v166984_ex31-1.htm
EX-31.2 - China Yongxin Pharmaceuticals Inc.	v166984_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

o	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

OR

o	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 Number)

927 Canada Court

City of Industry, California 91748

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

(626) 581-9098

(COMPANY’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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 o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 registrant had 35,448,925 shares of common stock, par value $0.001 per share, outstanding as of November 17, 2009.

CHINA YONGXIN PHARMACEUTICALS INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2009

INDEX

			Page
Part I	Financial Information

	Item 1.	Financial Statements	3

		(a) Unaudited Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	4

		(b) Unaudited Consolidated Statements of Income for the Three and Nine Month Periods ended September 30, 2009 and 2008	5

		(c) Unaudited Consolidated Statements of Cash Flows for the Nine Month Periods ended September 30, 2009 and 2008	6

		(d) Notes to Unaudited Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

	Item 4.	Controls and Procedures	30

Part II	Other Information

	Item 1.	Legal Proceedings	30

	Item 1A.	Risk Factors	31

	Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	46

	Item 3.	Default Upon Senior Securities	46

	Item 4.	Submission of Matters to a Vote of Security Holders	47

	Item 5.	Other Information	47

	Item 6.	Exhibits	47

Signatures			48

Part I. Financial Information

Item 1. Financial Statements

CHINA YONGXIN PHARMACEUTICALS INC.

CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2009

(UNAUDITED)

TABLE OF CONTENTS

Unaudited Consolidated Balance Sheets
As at September 30, 2009 and December 31, 2008	4

Unaudited Consolidated Statements of Income
For the three and nine month periods ended September 30, 2009 and 2008	5

Unaudited Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2009 and 2008	6

Notes to Unaudited Consolidated Financial Statements	7

CHINA YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

(UNAUDITED)

	September 30, 2009		December 31, 2008
ASSETS
Current Assets:
Cash and cash equivalents	$	1,371,842	$	609,422
Accounts receivable, net		6,622,395		6,030,874
Notes receivable		3,074,753		1,334,078
Other receivable, net		2,823,356		356,573
Advances to suppliers		6,576,641		6,186,269
Prepaid expenses		-		345,686
Inventory, net		8,747,431		7,864,677
Total Current Assets		29,216,418		22,727,579

Property and Equipment, net		8,733,094		2,680,207

Construction In Progress		913,054		6,066,249

Intangible Assets, net		47,324		73,687
Total Assets	$	38,909,890	$	31,547,722

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable	$	4,923,000	$	3,255,148
Accrued expenses & other payable		4,496,232		2,412,067
Advances from customers		2,901,552		2,580,894
Tax payable		2,183,714		1,240,411
Loans to related parties		184,662		184,662
Short-term loans payable		1,439,578		1,967,185
Deferred income		305,340		273,753
Shares to be issued		47,000		35,000
Net liabilities of discontinued operations		628,837		628,837
Total Current Liabilities		17,109,915		12,577,957

Long term loan		1,320,300		1,320,390

Commitments and Contingency		-		-

Stockholders' Equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized;5,000,000 shares issued and outstanding		5,000		5,000
Common stock; $0.001 par value; 75,000,000 shares authorized;32,110,540 shares issued and outstanding as of September 30, 2009 and 31,400,540 shares issued and outstanding as of December 31, 2008		32,111		31,401
Additional paid in capital		719,536		615,906
Deferred consulting expense - issuance of warrants		(11,850)		(72,815)
Prepaid consulting - issuance of shares		(12,500)		(68,750)
Receivable from a related party		(50,000)		(50,000)
Statutory reserve		2,170,805		1,841,241
Other comprehensive income		1,685,247		1,684,649
Retained earnings		11,171,145		9,563,803
Non-controlling interest		4,770,180		4,098,940
Total Stockholders' Equity		20,479,675		17,649,375
Total Liabilities and Stockholders' Equity	$	38,909,890	$	31,547,722

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

CHINA YONGXIN PHARMACEUTICALS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

	For the Three-Month Periods						For the Nine-Month Periods
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Net Revenues	$	10,844,786		$	15,451,100		$	29,199,325		$	45,025,197
Cost of Goods Sold		(7,685,369	)		(12,412,576	)		(21,090,595	)		(36,602,807	)
Gross profit		3,159,417			3,038,524			8,108,730			8,422,390

Operating Expenses:
Selling expenses		912,094			858,038			2,495,546			2,582,411
General and administrative expenses		2,386,349			369,471			3,908,223			1,482,786
Total operating expenses		3,298,443			1,227,509			6,403,769			4,065,197

Income (Loss) From Operations		(139,026	)		1,811,015			1,704,961			4,357,193

Other Income (Expense):
Other income		1,112,309			683,618			1,906,864			1,517,758
Other expense		(19,981	)		(42,745	)		(40,763	)		(77,651	)
Interest income (expense)		(6,919	)		(55,845	)		1,066			(282,957	)
Total other income		1,085,409			585,028			1,867,166			1,157,150

Operating Income Before Income Tax and Non controlling Interest		946,383			2,396,043			3,572,127			5,514,343

Provision for income tax		(233,908	)		(547,088	)		(964,474	)		(1,487,230	)

Net Income Before Non controlling Interest		712,475			1,848,955			2,607,653			4,027,113

Non controlling interest		(240,362	)		(191,894	)		(670,747	)		(883,775	)

Net Income		472,113			1,657,061			1,936,906			3,143,338

Other Comprehensive Item:
Foreign exchange translation gain		18,938			26,258			598			862,970

Net Comprehensive Income	$	491,051		$	1,683,319		$	1,937,504		$	4,006,308

Earning per share
Basic	$	0.01		$	0.05		$	0.06		$	0.10
Diluted	$	0.01		$	0.05		$	0.06		$	0.10
Weighted average number of shares outstanding
Basic		31,667,062			31,291,845			31,288,904			31,150,819
Diluted		32,125,923			31,291,845			31,747,765			31,150,819

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

CHINA YONGXIN PHARMACEUTICALS INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008

(UNAUDITED)

	2009		2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	1,936,906	$	3,143,338
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for bad debts		1,238,933		-
Issuance of stocks and warrants for services		16,589		283,132
Depreciation and amortization		204,737		228,046
Stocks and warrants issued or to be issued for services		75,400		-
Amortization of prepaid & deferred consulting cost		141,565		-
Non-controlling interest		670,747		883,775
(Increase) / decrease in current assets:
Accounts receivable		(1,830,414)		(621,508)
Notes receivable		(1,739,460)		(1,429,375)
Other receivable		(2,464,957)		(506,881)
Advances to suppliers		(390,501)		1,684,069
Prepaid expenses		345,403		(13,633)
Inventory		(882,627)		(2,146,820)
Increase / (decrease) in current liabilities:
Accounts payable		1,484,728		(673,640)
Accrued expenses and other payable		2,455,696		544,957
Tax payable		942,517		1,575,559
Advances from customers		320,594		1,012,714
Deferred income		31,582		(251,873)
Total Adjustments		620,532		568,522
Net cash provided by operating activities		2,557,438		3,711,860

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment, net		(1,078,011)		(4,451,714)
Contribution from minority shareholders		-		11,513
Net cash used in investing activities		(1,078,011)		(4,440,201)

CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of loan / (payment of loan) from non-related parties		(752,249)		297,481

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		727,178		(430,860	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		35,242		77,505

CASH AND CASH EQUIVALENTS, BEGINNING BALANCE		609,422		1,180,029

CASH AND CASH EQUIVALENTS, ENDING BALANCE	$	1,371,842	$	826,674

SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:	$	126,707	$	223,116
Interest paid	$	21,158	$	983
Income tax paid

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

CHINA YONGXIN PHARMACEUTICALS INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION

China Yongxin Pharmaceuticals Inc. (formerly Digital Learning Management Corporation and Nutradyne Group, Inc.) (the “Company") was incorporated in Delaware on February 18, 1999 under the name of FreePCSQuote. The Company through its Chinese subsidiaries is engaged in the wholesale distribution of pharmaceutical medicines and appliances, pharmacy retail drug stores and ginseng product sales.

On December 21, 2006, Changchun Yongxin Dirui Medical Co., Ltd, a Chinese corporation ("Yongxin") and all of the shareholders of Yongxin entered into a share exchange agreement (“Share Exchange Agreement”) with the Company. The Share Exchange Agreement was amended on June 15, 2007 (the “Amended Exchange Agreement”).

On November 16, 2007, Yongxin and the Company closed on the share exchange under the Amended Exchange Agreement. However, it was improperly documented in the Share Exchange Agreement, that the Yongxin shareholders and the Company agreed that the Yongxin shareholders sold and the Company acquired 100% of the equity interests of Yongxin. On April 12, 2008, we entered into a second amendment to the Share Exchange Agreement (“Second Amended Exchange Agreement”) with Yongxin, effective November 16, 2007, to reflect that the Company in fact desired to acquire from the Yongxin shareholders, and Yongxin shareholders desired to sell to the Copmany, only 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 Preferred Stock to the Yongxin shareholders and/or their designees. 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 transaction was accounted for as a reverse merger, since the stockholders of Yongxin own 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. This acquisition was accounted for at historical cost in a manner similar to that in pooling of interests method since after the acquisition, the former shareholders of Yongxin Medical acquired majority of the outstanding shares of the Company. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. The historical financial statements are those of "Changchun Yongxin Dirui Medical Co, Inc. & Subsidiaries".

Yongxin was established in 1993. Yongxin is engaged in medicines wholesale and retail. 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 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 now has developed 4 chains of “Meixin Yongxin”. As of September 30, 2009, Yongxin Drugstore has developed 20 retail chains drug stores in the name of Yongxin Drugstore which collectively cover 4,376 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, established Tianjin Jingyongxin Chain Drugstore Ltd. (“Jinyongxin Drugstore”) with an investment of $116,868, in which the Company has the 90% ownership of the Jinyongxin Drugstore. Jinyongxin Drugstore is located in Tianjin City, China. As of September 30, 2009, Jinyongxin Drugstore has developed 22 retail chain drug stores with total retail space of 2,500 M2 throughout Tianjin City in China.

On May 15, 2007, Yongxin established Jilin Dingjian Natural Health Products Co., Ltd. (“Dingjian”) with an investment of $116,868 whereby the shareholders of the company have 90% ownership of Dingjian. Dingjian was formed under laws of the People's Republic of China and is located in Changchun City, Jilin Province.

On June 15 2007, Yongxin Drugstore established Baishan Caoantang Chain Drugstore Ltd. (“Caoantang Drugstore”) with an investment of $328,430, including $144,509 in cash and $183,921 in property and equipment, with an additional $80,000 payment for good will to be evenly paid by Yongxin over 30 months. Caoantang Drugstore is a wholly-owned subsidiary of Yongxin Drugstore. As of September 30, 2009, Caoantang Drugstore operates a chain of 31 retail drugstores that collectively cover 2,435 M2of retail space and selling 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.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

UNAUDITED INTERIM FINANCIAL INFORMATION

The accompanying unaudited consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and generally accepted accounting principles for interim financial reporting. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K. The results of the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year ending December 31, 2009.

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.

TRANSLATION ADJUSTMENT

As of September 30, 2009, the accounts of Yongxin were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars (“USD”) in accordance with Statement of Financial Accounts Standards (“SFAS”) No. 52 (ASC 830), “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 shareholders’ equity.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. Significant estimates include collectability of accounts receivable, accounts payable, sales returns and recoverability of long-term assets.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of China Yongxin Pharmaceuticals Inc. and its subsidiaries collectively referred to within as the “Company”. All material inter-company accounts, transactions and profits have been eliminated in consolidation.

NON-CONTROLLING INTEREST

The Company owns 90% ownership interest in Jinyongxin Drugstore and Dingjian. The remaining 10% interest in each of the entities is owned by third parties. As at September 30, 2009, minority interest in Jinyongxin Drugstore and Dingjian amounted to $32,249 compared to $20,286 as at December 31, 2008. The Company acquired 80% of Yongxin. The remaining 20% represents minority interest amounting to $4,737,931 as at September 30, 2009 compared to $4,078,654 as at December 31, 2008.

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 September 30, 2009 and December 31, 2008, allowance for doubtful debts amounted to $1,372,350 and $112,452, respectively.

ADVANCES TO SUPPLIERS

The Company advances to certain vendors for purchase of its material. The advances to suppliers are interest free and unsecured. As of September 30, 2009 and December 31, 2008, advance to suppliers amounted to $6,576,641 and $6,186,269, respectively.

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.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over useful lives ranging from 5 to 10 years. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Assets held under capital leases are recorded at the lesser of the present value of the future minimum lease payments or the fair value of the leased property. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:

Buildings	20 years
Infrastructures and leasehold improvements	10 years
Equipment (including electronic facilities, sports, education and recreation facilities)	10 years
Automobiles	10 years
Furniture and fixtures	5 years
Computer hardware and software	5 years

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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standard No. 107 (ASC 825), Disclosures about fair value of financial instruments, requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

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 plan s 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.

BASIC AND DILUTED EARNINGS PER SHARE

Earnings per share are calculated in accordance with the Statement of Financial Accounting Standards No. 128 (SFAS No. 128) (ASC 260), “Earnings per share”. SFAS No. 128 (ASC 260) superseded Accounting Principles Board Opinion No.15 (APB 15). Net income (loss) per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares and dilutive common equivalent shares (restricted stock awards and stock options) outstanding during the period. Weighted average number of common shares was calculated in accordance with the Statement of Financial Accounting Standards No. 141R (SFAS No. 141R) (ASC 805), “Business Combinations”. Basic and diluted earning per share was $0.01 and $0.06 for the three and nine month periods ended September 30, 2009, respectively. Basic and diluted earning per share was $0.05 and $0.10 for the three and nine month periods ended September 30, 2008, respectively.

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 19).

RECENT ACCOUNTING PRONOUNCEMENTS

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. The Codification is effective in the third quarter of 2009, and accordingly, the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009 and all subsequent public filings will reference the Codification as the sole source of authoritative literature. The Company does not believe that this will have a material effect on its consolidated financial statements.

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.

NOTE 3 –OTHER RECEIVABLE

Other receivables as of September 30, 2009 and December 31, 2008, are summarized as follows. The receivables are interest free, unsecured, and due on demand.

	September 30, 2009		December 31, 2008
Advance to employees	$	52,961	$	92,368
Advances to store employees		41,350		2,685
Advances to third parties		104,885		93,364
Rent receivable		79,218		79,223
Deposits		25,796		7,619
Sponsorship from customers		687,956		-
Others		794,112		81,314
Total	$	2,823,356	$	356,573

NOTE 4 – PREPAID EXPENSES

The balance of Company prepaid expenses as of September 30, 2009 and December 31, 2008 comprised of the following:

	September 30, 2009		December 31, 2008
Prepaid rent	$	-	$	273,484
Other prepaid expenses		-		72,202
Total	$	-	$	345,686

NOTE 5 – INVENTORIES

As of September 30, 2009 and December 31, 2008, inventory consisted of the following:

	September 30, 2009			December 31, 2009
Raw Materials	$	81,762		$	342,832
Finished Goods		8,725,728			7,521,845
Total inventory		8,807,490			7,864,677
Reserve for obsolescence		(60,059	)		-
Net inventory	$	8,747,431		$	7,864,677

NOTE 6 - PROPERTIES AND EQUIPMENT

As of September 30, 2009 and December 31, 2008 the property and equipment of the Company consisted of the following:

	September 30, 2009			December 31, 2008
Office furniture and fixtures	$	922,165		$	998,730
Vehicles		392,557			441,921
Buildings		8,459,550			2,085,988
Total property and equipment		9,774,272			3,526,639
Less: Accumulated depreciation		(1,041,178	)		(846,432	)
Net value of property and equipment	$	8,733,094		$	2,680,207

The Company had depreciation expense of $198,687 and $209,195 for the nine month periods ended September 30, 2009 and 2008.

NOTE 7 CONSTRUCTION IN PROGRESS & SOFTWARE DEVELOPMENT

As of September 30, 2009 and December 31, 2008, construction in progress, representing Infrastructures improvement and software development, amounted to $913,054 and $6,066,249, respectively. The amount of capitalized interest included in construction in progress as of September 30, 2009 and December 31, 2008 is $ 122, 429 and $311,702, respectively. The constructions were finished in end September and were transferred to fixed assets.

As of September 30, 2009 and December 31, 2008, the construction in progress of the Company consisted of the following:

	September 30, 2009		December 31, 2008
Infrastructures improvement	$	-	$	4,841,430
Capitalized interest		-		311,702
Total infrastructures improvement		-		5,754,547
Software development		913,054		913,117
Total construction in progress	$	913,054	$	6,066,249

NOTE 8- INTANGIBLE ASSETS

As of September 30, 2009 and December 31, 2008, the intangible assets of the Company consisted of the following:

	September 30, 2009			December 31, 2008
Trade mark	$	1,174		$	1,174
Software		86,304			109,293
Total intangible assets		87,478			110,467
Less: Accumulated amortization		(40,154	)		(36,780	)
Net value of intangible assets	$	47,324		$	73,687

The amortization expense for the nine month periods ended September 30, 2009 and 2008 amounted to $6,050 and $18,851, respectively.

The amortization expenses for intangible assets for next five years after September 30, 2009 are as follows:

September 30, 2010	$	19,905
September 30, 2011		19,211
September 30, 2012		8,208
Total	$	47,324

NOTE 9 - ACCRUED EXPENSES AND OTHER PAYABLE

The other payable represents the deposits made by the sales representatives and sales distributors for the right to sale products for the Company. Other payables and accrued expenses consist of the following as of September 30, 2009 and December 31, 2008:

	September 30, 2009		December 31, 2008
Accrued compensation	$	1,004,627	$	998,824
Accrued rent expense		204,819		247,573
Accrued professional fees		654,506		60,806
Accrued litigation		1,359,906		311,685
Accrued interest		25,069		78,473
Accrued payable to other companies		1,066,944		435,135
Accrued education& employee funds		70,569		29,088
Other accrued expense		-		48,564
Accrued warrant expense		-		-
Sales agent deposits		109,792		84,668
Other payable		-		117,251
Total	$	4,496,232	$	2,412,067

NOTE 10 - ADVANCE FROM CUSTOMERS

The advances from customers amounted to $2,901,552 and $2,580,894, respectively as of September 30, 2009 and December 31, 2008, represent the deposits made by customers to purchase inventory from the Company.

NOTE 11 - DEFERRED INCOME

A portion of the Company’s net revenue is derived directly from government-sponsored healthcare programs, and the Company is therefore subject to government regulations on reimbursement on the sales made through the healthcare programs. The Jilin Province Social Insurance Bureau and Changchun City Insurance Bureau reimburse 90% of the sales that the Company’s pharmacy retail stores made through the healthcare program networks in the following month, and retain 10% of the sales until the following year. The amount will be repaid proportionally based on the level of evaluation made by the Insurance Bureaus in the following year. The Company classified the 10% of sales that made through the healthcare program networks as deferred income as the collectability of the sales is uncertain. As of September 30, 2009 and December 31, 2008, the Company has deferred income of $305,340 and $273,753, respectively.

NOTE 12 - SHARES TO BE ISSUED

The Company classifies all amounts, against which shares have not been issued, as shares to be issued. Once the Company issues shares, the amounts are classified as Common stock. As of September 30, 2009 the Company has total 500,000 shares to be issued with balance of $35,000 pursuant to an agreement with a software consultant entered into by the Company in 2005, and the amount is included in the accrued expenses.

During the nine month period ended September 30, 2009 the Company entered into an agreement with an investor relation firm for services. The term of the services is one year and the Company is obligated to issue 600,000 shares to the investor relation firms. As of September 30, 2009, only 300,000 shares were issued to the investor relation firm and the balance are still to be issued. The Company has recorded the fair market value of the 300,000 shares of $36,000 as shares to be issued. The unamortized portion of the fee of $24,000 has been recorded as a contra amount and netted out.

NOTE 13 -TAXES PAYABLE

Tax payable comprised of the following taxes as of September 30, 2009 and December 31, 2008:

	September 30, 2009		December 31, 2008
VAT	$	4,561	$	14,247
Business Tax		94,785		166,817
City Construction Tax		6,708		6,660
Education Tax		5,378		5,357
Income Tax		2,071,363		1,046,004
Others		919		1,326
Total	$	2,183,714	$	1,240,411

The Company is registered in the State of Delaware and has operations in primarily two tax jurisdictions; the PRC and the United States. For certain operations in the US, the Company has incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at these locations as of September 30, 2009. Accordingly, the Company has no net deferred tax assets.

The provision for income taxes from continuing operations on income consists of the following for the nine months periods ended September 30, 2009 and 2008:

	2009		2008
Current income tax expense
US Federal		-		-
US State		-		-
PRC current income tax expense	$	964,474	$	1,487,230
Total Provision for Income Tax	$	964,474	$	1,487,230

The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations:

	2009			2008
Tax expense (credit) at statutory rate - federal		34	%		34	%
State tax expense net of federal tax		6	%		6	%
Changes in valuation allowance		(40	)%		(40	)%
Foreign income tax - PRC		25	%		25	%
Exempt from income tax		-			-
Temporary difference		2	%		2	%
Tax expense at actual rate		27	%		27	%

United States of America

The Company has significant income tax net operating losses (“NOL”) carried forward from prior years. Due to the change in ownership of more than fifty percent, the amount of NOL which may be used in any one year will be subject to a restriction under section 382 of the Internal Revenue Code. Due to the uncertainty of the realizability of the related deferred tax assets of $5,224,976, a reserve equal to the amount of deferred income taxes has been established at September 30, 2009.

People’s Republic of China (“PRC”)

Pursuant to the PRC Income Tax Laws, the Company's subsidiary is generally subject to Enterprise Income Taxes ("EIT") at a statutory rate of 25%,

The following table sets forth the significant components of the provision for income taxes for operation in PRC as of September 30, 2009 and 2008.

	2009		2008
Net taxable income	$	5,495,268	$	5,916,664
Income tax @ 27%	$	964,474	$	1,487,230

NOTE 14 - SHORT-TERM LOANS PAYABLE

The Company had loans payable amounting to $1,439,578 as of September 30, 2009 and $1,967,185 as of December 31, 2008. The loans are secured by personal properties of a main shareholder of the Companies. The loans payable at September 30, 2009 comprised of the following:

	September 30, 2009		December 31, 2008
Loan payable to a non-related party, interest free, due by December 31, 2009	$	88,020	$	-

Loan payable to a non-related party, interest free, due by December 31, 2009		262,488		-

Loan payable to a non-related party, interest free, due by December 31, 2009				249,406

Loan payable to a non-related party, interest free, due by December 31, 2009				772,156

Loan payable to a non-related party, interest free, due by December 31, 2009				558,642

Loan payable to a non-related party, interest free, due by December 31, 2009		225,332		234,736

Loan payable to a non-related party, interest free, due by May 1, 2009				22,007

Loan payable to Jilin Bank, interest at 6.9% annually, due by January 22, 2010		733,500

Various loans, interest free, unsecured and due on demand		130,238		130,238

Total	$	1,439,578	$	1,967,185

NOTE 15 - LONG-TERM LOAN PAYABLE

The Company had long term loans payable amounting to $1,320,300 as of September 30, 2009 and $1,320,390 as of December 31, 2008. The loans are secured by personal properties of a significant shareholder of the Company. The loans payable at September 30, 2009 comprised of the following:

The following is the future payment schedule of the long term loan:

		September 30, 2009				December 31, 2008
Loan Payable to Runfeng Agriculture Credit Union, interest at 8.748% and 11.02% annually respectively, due by January 26, 2011		$	1,320,300			$	1,320,390

The following is the future payment schedule of the long term loan

Due January 26, 2011

1,320,300

NOTE 16 LOANS FROM RELATED PARTIES

As of September 30, 2009 and December 31, 2008, the loans from related parties were comprised of the following:

	September 30, 2009		December 31, 2008
Loans payable to officers, interest free, due on demand, and unsecured	$	184,662	$	184,662

Total	$	184,662	$	184,662

Interest expense was $0 and $6,321 for the nine month periods ended September 30, 2009 and 2008.

NOTE 17 - SHAREHOLDERS' EQUITY

The Series A Convertible Preferred Stock is convertible over a 3 year period, into up to 30 million shares of common stock. In particular, the holder of any shares of Series A Convertible Preferred Stock shall have the right, at its option, (i) at any time hereafter (except that upon any liquidation of the Company, the right of conversion shall terminate at the close of business on the business day fixed for payment of the amount distributable on the Series A Convertible Preferred Stock) to convert, any such shares of Series A Convertible Preferred Stock into such number of fully paid and nonassessable shares of Common Stock on a six (6) for one (1) basis. No more than 1,666,666 shares of the Series A Convertible Preferred Stock may be converted in each of the three periods following issuance. The conversion formula is conditioned on the Company earning no less than $3 million of net income in for the fiscal year ending December 31, 2007; $4 million of net income in the fiscal year ending December 31, 2008 and $5 million of net income in the fiscal year ending December 31, 2009. In the event that in any of the three fiscal years, the Company earns less than required net income amounts for conversion, then the conversion right shall be proportionately reduced by the amount of the shortfall below the required net income amount, with the "catch-up" right to convert additional shares to the extent that the net income exceeds $3 million; $4 million and $5 million respectively in each of the three consecutive years. In no event shall this conversion right allow for the conversion of the Series A Preferred Stock into more than 6 common shares for each share of Series A Preferred Stock over the course of the aforementioned three calendar years. The net income requirements shall be based upon an audit of the revenues for each fiscal year. All conversions shall be made within 30 days of the completion of such audit.

As of September 30, 2009 and December 31, 2008, the Company had 32,110,540 and 31,400,540 shares of common stock issued and outstanding, respectively.

During the nine month period ended September 30, 2009, the Company issued 10,000 shares for website designing services and 100,000 shares for legal services. The shares were valued at the fair market value of $9,900 and expensed during the nine month period ended September 30, 2009 in the accompanying consolidated financial statements.

During the nine month period ended September 30, 2009 the Company entered into a consulting agreement with an investor relation firm to provide investor relation and public relation services. The agreement is for a period of 1 year and the Company agreed to issue 300,000 shares of restricted common stock and 300,000 warrants at exercise prices ranging from $1 per share to $2 per share, to the investor relation firm. The Company valued the shares at the fair market value of $30,000 and expensed $17,500 during the nine month period ended September 30, 2009 in the consolidated financial statements.

During the nine month period ended September 30, 2009 the Company entered into a consulting agreement with an investor relation firm to provide investor relation and public relation services. The agreement is for a period of 1 year and the Company agreed to issue 600,000 shares of restricted common stock to the investor relation firm. The Company valued the shares at the fair market value of $72,000 and expensed $48,000 during the nine month period ended September 30, 2009 in the consolidated financial statements. As of September 30, 2009, 300,000 of such shares are still not issued and are included in the shares to be issued. The unamortized part of the fee has been netted out of the amount of shares to be issued.

On April 1, 2008, the Company issued to Investor Relations International (“IRI”) 250,000 restricted common stocks valued at $275,000, to render investor relations and financial communication services. The Company amortized the prepaid consulting over 1 year period based upon the terms of the agreement.

As of October 30, 2008, the Company sold 108,695 shares to an unrelated party for $50,000. The amount was received directly by a related party, and the Company shows a receivable from the related party for such amount. The related party receivable is interest free, due on demand, unsecured and has been reflected in the equity section in the accompanying consolidated financial statements.

NOTE 18 – WARRANTS

Following is a summary of the warrant activity for the period ended September 30, 2009:

Outstanding, December 31, 2008	2,022,080
Granted during the year	300,000-
Expired during the year	( 472,080	)
Exercised during the year	-
Outstanding, September 30, 2009	1,850,000

Following is a summary of the status of warrants outstanding at September 30, 2009:

Outstanding Warrants					Exercisable Warrants
Exercise Price	Number of Warrants		Average Remaining Contractual Life		Average Exercise Price		Number of Warrants		Intrinsic Value

$0.5 - $4		1,850,000		3.37	$	1.01		1,850,000		362,500

The assumptions used in calculating the fair value of options granted using the Black-Scholes option-pricing model are as follows:

The 300,000 warrants granted during the nine month period ended September 30, 2009:

Risk-free interest rate		2.63	%
Expected life of the warrants	5 years
Expected volatility		217	%
Expected dividend yield		0

During the nine month period ended September 30, 2009 the Company granted 300,000 warrants at exercise prices ranging from $1 per share to $2 per share, to an investor relation firm. The Black-Scholes fair market value of the warrants was $51,943. The Company recorded an expense of $30,300 during the nine month period ended September 30, 2009 in the consolidated financial statements for the warrants.

NOTE 19 – COMMITMENTS

Consulting agreements

On April 1, 2008, the Company signed a letter of engagement with Investor Relations International (“IRI”). According to the terms of the agreement, IRI agreed to perform investor relations and financial communication services. The agreement was for a twelve-month period and the Company agreed to pay $10,000 per month to IRI, issue 250,000 shares of restricted common stock, and issue 300,000 warrants at an exercise price from $1.50 to $4.00 per share. During the nine month period ended September 30, 2009, the Company expensed $141,566 in the consolidated financial statements.

During the nine month period ended September 30, 2009 the Company entered into a consulting agreement with an investor relation firm to provide investor relation and public relation services. The agreement is for a period of 1 year and the Company agreed to issue 600,000 shares of restricted common stock to the investor relation firm. The Company recorded an expense of $ 48,000 during the nine month period ended September 30, 2009 in the consolidated financial statements. As of September 30, 2009, 300,000 of such shares are still not issued and are included in the shares to be issued. The unamortized part of the fee has been netted out of the amount of shares to be issued.

On September 25, 2009, the board of the Company approved a private placement of their equity securities. The Company will issue a total of 3,338,385 shares of our common stock, restricted in accordance with Rule 144, to 157 accredited investors, for total consideration of $467,369. In addition, the Company will issue to the investors warrants to acquire another 3,338,385 shares of our common stock at $0.35 per share, exercisable for a period of three years. The issuances were exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, and all of the investors were accredited. As of September 30, 2009, the shares have not been issued.

Leases

The Company leases its operating locations. Initial terms are typically 5 to 10 years, followed by additional terms containing priority of renewal options at the maturity of the lease agreements, and may include rent escalation clauses. The company recognizes rent expense on a straight-line basis over the term of the lease.

Minimum rental commitments at September 30, 2009, under all leases having an initial or remaining non-cancelable term of more than one year are shown:

2010	$	1,017,753
2011		911,218
2012		268,933
2013		60,753
2014		-
Total minimum lease payments	$	2,258,657

The company sub-leases its building to an unrelated company. The lease term is one year. The company recognizes rent income on a straight-line basis over the term of the lease.

Legal proceedings:

On or about October 17, 2008, a former officer initiated an action in the Superior Court for the State of California, County of Los Angeles, 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 disputes the claims and is diligently defending 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 has accrued $641,018 in the accompanying financial statements.

The Company was defending 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. So far, the $50,000 has not been paid the shares have not been issued. The Company has accrued an aggregate sum of $127,397 for the cash to be paid and for the fair market value of the shares to be issued.

The Company was also involved in a legal proceeding 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 or about May 8, 2009, the Orange County Superior Court rendered a decision to enter a judgment of $219,000 against the Company. The Company has accrued $219,000 in the accompanying financial statements.

NOTE 20 – SEGMENT INFORMATION

The Company operates in three business segments: retail drug stores, pharmaceutical medicine wholesales and ginseng product sales. These segments were identified based on their separate and distinct products and services, technology, marketing strategies and management reporting. Management evaluates the segments’ operating performance separately and allocates resources based on their respective financial condition, results of operations and cash flows. Inter-segment transactions and balances are eliminated in consolidation.

The retail drug store segment is complemented by such core front-end categories as over-the-counter medications, health and beauty products, and other items. As of September 30, 2009, the retail drug store segment operated 73 retail stores with business area of 9,311 square meters in three cities in China.

The pharmaceutical medicine wholesales segment, operated through Yongxin, provides logistics wholesale distribution of over-the-counter and prescribed medicines to hospitals, clinics, medical institutions and retail drug stores.

The ginseng products segment operated through Dingjian provides processing and manufacturing ginseng electuary, pellets and liquid extracts that are distributed by wholesalers and sold in retail drug stores.

The following table summarizes significant financial information by segment:

		9-30-2009			9-30-2008
Revenues from unaffiliated customers
Retail drug stores	$	10,295,688		$	8,795,741
Pharmaceutical medicine wholesales		22,603,169			39,800,502
Unallocated					1,000
Revenues from inter-company sales		(3,699,532	)		(3,572,046	)
Consolidated Totals	$	29,199,325		$	45,025,197

Net income:
Retail drug stores	$	1,185,445		$	791,482
Pharmacy wholesales		2,069,823			3,709,393
Unallocated		(344,024	)		(402,321	)
Net income from inter-company		(303,591	)		(71,441	)
Consolidated Totals	$	2,607,653		$	4,027,113

Depreciation and amortization:
Retail drug stores	$	109,037		$	139,916
Pharmacy wholesales		95,700			86,595
Unallocated
Consolidated Totals	$	204,737		$	228,046

Capital expenditures:
Retail drug stores	$	135,520		$	789,133
Pharmacy wholesales		942,491			3,662,581
Consolidated Totals	$	1,078,011		$	4,451,714

Identifiable assets:
Retail drug stores	$	9,058,930		$	8,580,006
Pharmacy wholesales		29,850,960			22,461,560
Unallocated					8,258
Consolidated Totals	$	38,909,890		$	31,049,824

NOTE 21 – STATUTORY RESERVE

As stipulated by the Company Law of the People’s Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:

Making up cumulative prior years’ losses, if any;

ii.

Allocations to the “Statutory Surplus Reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;

iii.

Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory Common Welfare Fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and statutory common welfare fund is no longer required per the new cooperation law executed in 2006.

iv.

Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

In accordance with the Chinese Company Law, the Company allocated 10% of its annual net income, amounting to $329,564 and $443,207 as statutory reserve for the nine month periods ended September 30, 2009 and 2008.

NOTE 22 - DISCONTINUED OPERATIONS

On September 30, 2005, Software Education of America, Inc., subsidiary of Nutradyne, filed a petition in bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. The petition was necessitated because SEA was unable to continue to meet its financial obligations. SEA is presented in the accompanying financial statements as a discontinued operation.

Balance Sheet information for the discontinued subsidiaries of Nutradyne, SEA and Global as of September 30, 2009 is as follows:

Assets:
Cash	$	46

Liabilities:
Accounts payable	$	227,636
Accrued expenses		238,581
Notes payable		162,666
Total liabilities	$	628,883

Net liabilities of discontinued operations	$	628,837

Notes payable consist of two unsecured, non-interest bearing notes payable to two former stockholders of SEA totaling $16,666 due January 15, 2005. No payments have been made.

Notes payable also include a $146,000 line of credit acquired from SEA and converted into a term loan payable with interest at the prime rate plus 3.5% secured by all assets of SEA of approximately $83,000 and guaranteed by the former stockholders of SEA. This loan is payable in monthly principal payments of $6,083 plus interest until November 15, 2006, at which time all unpaid principal and accrued interest is due. A technical event of default occurred with this note.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion relates to a discussion of the financial condition and results of operations of China Yongxin Pharmaceuticals Inc. (formerly Digital Learning Management Corporation and Nutradyne Group, Inc.) (the “Company") and its subsidiaries. This management's discussion and analysis of financial condition and results of operations for the three month and nine month periods ending September 30, 2009 and September 30, 2008 should be read in conjunction with its financial statements and the related notes, and the other financial information included in this report.

Forward-Looking Statements

The following discussion should be read in conjunction with our condensed 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 governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond our control. Should one or more of these risks or 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.

Overview

The Company was incorporated in Delaware on February 18, 1999 under the name of FreePCSQuote. The Company through its Chinese subsidiaries is 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.

On December 21, 2006, Changchun Yongxin Dirui Medical Co., Ltd. (“Yongxin”), a company organized in the People’s Republic of China (“China”) and all of the shareholders of Yongxin entered into a share exchange agreement (“Share Exchange Agreement”) with the Company. The Share Exchange Agreement was amended on June 15, 2007 (the “Amended Exchange Agreement”). On November 16, 2007, Yongxin and the Company closed on the share exchange under the Amended Exchange Agreement. However, it was improperly documented in the Share Exchange Agreement, that the Yongxin shareholders and the Company agreed that the Yongxin shareholders sold and the Company acquired 100% of the equity interests of Yongxin. On April 12, 2008, we entered into a second amendment to the Share Exchange Agreement (“Second Amended Exchange Agreement”) with Yongxin, effective November 16, 2007, to reflect that the Company in fact desired to acquire from the Yongxin shareholders, and Yongxin shareholders desired to sell to the Company, only 80% of the equity interest of Yongxin in exchange for the issuance by the Company of an aggregate of 21,000,000 shares of the Company's common stock and 5,000,000 shares of the Company's Series A Preferred Stock to the Yongxin shareholders and/or their designees.

The Series A Convertible Preferred Stock is convertible over a 3-year period, into up to 30 million shares of common stock. In particular, the holder of any shares of Series A Convertible Preferred Stock shall have the right, at its option, (i) at any time hereafter (except that upon any liquidation of the Company, the right of conversion shall terminate at the close of business on the business day fixed for payment of the amount distributable on the Series A Convertible Preferred Stock) to convert, any such shares of Series A Convertible Preferred Stock into such number of fully paid and nonassessable shares of Common Stock on a six (6) for one (1) basis. No more than 1,666,666 shares of the Series A Convertible Preferred Stock may be converted in each of the three periods following issuance as detailed below. The conversion formula is conditioned on the Company earning no less than $3 million of net income in for the fiscal year ending December 31, 2007, $4 million of net income in the fiscal year ending December 31, 2008, and $5 million of net income in the fiscal year ending December 31, 2009. In the event that in any of the three fiscal years, the Company earns less than required net income amounts for conversion, then the conversion right shall be proportionately reduced by the amount of the shortfall below the required net income amount, with the "catch-up" right to convert additional shares to the extent that the net income exceeds $3 million, $4 million and $5 million, respectively, in each of the three consecutive years. In no event shall this conversion right allow for the conversion of the Series A Preferred Stock into more than 6 common shares for each share of Series A Preferred Stock over the course of the aforementioned three fiscal years. The net income requirements shall be based upon an audit of the revenues for each fiscal year. All conversions shall be made within 30 days of the completion of such audit.

For accounting purposes, the share exchange transaction has been accounted for as a reverse merger, since the stockholders of Yongxin own 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. This acquisition was accounted for at historical cost in a manner similar to that in pooling of interests method since after the acquisition, the former shareholders of Yongxin acquired majority of the outstanding shares of the Company. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. The historical financial statements are those of "Changchun Yongxin Dirui Medical Co, Inc. & Subsidiaries."

Yongxin was established in 1993. The Company’s operations are based in Changchun City, Jilin Province, China.

In 2004, Yongxin established Jilin Province Yongxin Chain Durgstore Ltd. (“Yongxin Drugstore”) with an investment of RMB 2,500,000 (equivalent to $303,000) to develop 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 now has developed 4 chains of “Meixin Yongxin.” As of September 30, 2009, Yongxin Drugstore has developed a chain of 20 retail drug stores under the “Yongxin Drugstore” name which collectively cover 4,376 M2 of retail space throughout Changchun, the capital of Jilin Province in northeastern 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, China, and established Tianjin Jingyongxin Chain Drugstore Ltd. (“Jingyongxin Drugstore”) with an investment of $116,868, in which the Company has 90% ownership. As of September 30, 2009, Jinyongxin Drugstore has developed a 22-store retail chain with total retail space of 2,500 M2.

On May 15, 2007, Yongxin established Jilin Dingjian Natural & Health Products Co., Ltd. (“Dingjian”) with an investment of $116,868 whereby the shareholders of the company have 90% ownership of Dingjian. Dingjian was formed under laws of the People's Republic of China and is located in Changchun City, Jilin Province.

On June 15 2007, Yongxin Drugstore established Baishan Caoantang Chain Drugstore Ltd. (“Caoantang Drugstore”) with an investment of $328,430, including $144,509 in cash and $183,921in property and equipment, with an additional $80,076 payment for goodwill to be evenly paid by Yongxin over 30 months. Caoantang Drugstore is a wholly-owned subsidiary of Yongxin Drugstore. As of September 30, 2009, Caoantang Drugstore operates a chain of 31 retail drugstores that collectively cover 2,435 M2 of retail space and selling 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.

2009 Overview

The current general economic recession 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 times of economic downturn, 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 will pass certain favorable medical policies (“National Medical Policy”) in the second half of 2009 which will extend medical insurance coverage to people who live in the rural area or countryside of China, which covers approximately 40% of the Chinese population. Management believes the passage of the National Medical Policy will highly benefit our sales and operations. However, the National Medical Policy has not been passed so far and its direction is unclear. 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 which included 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 direction 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, such products including cosmetics and certain health and organic products. Management believes that the addition of such products will increase our overall gross profit in 2009 and the next few years. Management believes that our sales and gross profit margins will improve with better economic conditions in 2010.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are 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. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in note 2 to our financial statements under the section above titled “Summary of Significant Accounting Policies,” we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

Basis of Presentation

Translation Adjustment

Use of Estimates

Principles of Consolidation

Non-controlling interest

The Company owns 90% ownership interest in Jingyongxin Drugstore and Dingjian. The remaining 10% interest in each of the entities is owned by third parties. As at September 30, 2009, minority interest in Jingyongxin Drugstore and Dingjian amounted to $32,249 compared to $20,286 as at December 31, 2008. The Company acquired 80% of Yongxin. The remaining 20% represents minority interest amounting to $4,737,931 as at September 30, 2009 compared to $4,078,654 as at December 31, 2008.

Inventories

Property and Equipment

Buildings		20 years
Infrastructures and leasehold improvements		10 years
Equipment (including electronic facilities, sports, education and recreation facilities)		10 years
Automobiles		10 years
Furniture and fixtures		5 years
Computer hardware and software		5 years

Impairment of Long-Lived Assets

Revenue Recognition

Fair Value of Financial Instruments

Statement of Financial Accounting Standard No. 107 (ASC 825), “Disclosures about Fair Value of Financial Instruments”, requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Stock Based Compensation

Effective January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment (“SFAS 123R”) (ASC 718), 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 plan s 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.

Recent Accounting Pronouncements

Results of Operations

Comparison of Three and Nine Month Periods Ended September 30, 2009 and 2008.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net Revenues	$	10,844,786		$	15,451,100		$	29,199,325		$	45,025,197
Cost of Goods Sold		(7,685,369	)		(12,412,576	)		(21,090,595	)		(36,602,807	)
Gross profit		3,159,417			3,038,524			8,108,730			8,422,390

Operating Expenses:
Selling expenses		912,094			858,038			2,495,546			2,582,411
General and administrative		2,386,349			369,471			3,908,223			1,482,786
Total operating expenses		3,298,443			1,227,509			6,403,769			4,065,197

Income (loss) from operations		(139,026	)		1,811,015			1,704,961			4,357,193

Other Income (Expense):
Other income		1,112,309			683,618			1,906,864			1,517,758
Other expense		(19,981	)		(42,745	)		(40,763	)		(77,651	)
Interest income (expense)		(6,919	)		(55,845	)		1,066			(282,957	)
Total other income		1,085,409			585,028			1,867,166			1,157,150

Operating income before income tax & non-controlling interest		946,383			2,396,043			3,572,127			5,514,343

Provision for income tax		(233,908	)		(547,088	)		(964,474	)		(1,487,230	)

Net income before non-controlling interest		712,475			1,848,955			2,607,653			4,027,113

Non-controlling interest		(240,362	)		(191,894	)		(670,747	)		(883,775	)

Net income		472,113			1,657,061			1,936,906			3,143,338

Other Comprehensive Item
Foreign exchange translation gain		18,938			26,258			598			862,970

Net Comprehensive Income		491,051			1,683,319			1,937,504			4,006,308

Earning per share
Basic		0.01			0.05			0.06			0.10
Diluted		0.01			0.05			0.06			0.10

Weighted average number of shares outstanding
Basic		31,667,062			31,291,845			31,288,904			31,150,819
Diluted		32,125,923			31,291,845			31,747,765			31,150,819

Comparison of Three Months Ended September 30, 2009 and 2008.

Net Revenues. For the three month period ended September 30, 2009, our net revenues decreased approximately 29.8% from $15,451,100 for the three month period ended September 30, 2008 compared to $10,844,786 for the same period ended September 30, 2009. Our revenues for the three months ended September 30, 2009 are lower due to the transition of the Company’s sales strategy. Due to the uncertainty of the direction of the National Medical Policy, as described in the 2009 overview of our business, we have reduced input into the wholesale sector of our business and we are shifting our focus to increase the retail sector of our business. The overall policy for our drug retail business has not changed. The decrease of sales in our wholesale business is reflected in the decrease of our net revenues. The Company will readjust its operations and sales strategy accordingly once the direction of the National Medical Policy becomes clear.

Cost of Goods Sold. Cost of goods sold, which consists of raw materials, direct labor, and manufacturing overhead, was $12,412,576, or approximately 80.3% of net revenues for the three month period ended September 30, 2008, as compared to $7,685,369, or approximately 70.9% of net revenues for the same period in 2009. The approximate 9.4% decrease in percentage corresponded with the substantial decrease of our sales revenues.

Gross Profit. Our gross profit increased 4.0% from $3,038,524 for the three month period ended September 30, 2008, as compared to $3,159,418 for the same period ended September 30, 2009. This increase in gross profit is due to the adjustment of our products structure with an increase of products with higher gross profit margins. Our gross profit margin has improved from 19.7% in 2008 to 29.1% in 2009.

Selling Expenses. Selling expenses, which consist of advertising and promotion expenses, freight charges and salaries, increased approximately 6.3% from $858,038 for the three month period ended September 30, 2008 to $912,094 or for the same period in 2009. The increase in selling expenses was mainly attributable to cost of opening two new retail stores.

General and Administrative Expenses. General and administrative expenses were $369,471 for the three month period ended September 30, 2008, as compared to $2,386,349 for the three month period ended September 30, 2009, an increase of 545.9%. This substantial increase was primarily due to the increase of allowance for doubtful account for accounts receivable, increase in accrued litigation fees, increase in salaries from hiring additional employees to operate our new retail stores and an increase in auditing expenses.

Other Income. Other income increased 85.5% from $585,028 for the three month period ended September 30, 2008 compared to $1,085,409 for the same period in 2009. Our other income for the three months ended September 30, 2009 was substantial higher due to higher sponsorship and rebates received from our customers and suppliers due to the anniversary celebration of some of our retail stores as well as the wholesale sector of the Company.

Net Income. Net income decreased 71.5% from a net income of $1,657,061 for the three month period ended September 30, 2008 to a net income of $472,113 for the three month period ended September 30, 2009. Such decrease in net income was mainly attributable to the increase of allowance for doubtful acount for acounts receivable, increase in accrued litigation fees, a different collection method utilized this year to collect sponsorships, new product entrance fees and rebates from our customers and suppliers. In the past, we collected sponsorships and rebates from customers and suppliers on an annual basis at the end of third quarter. However, we started to collect these fees on a quarterly basis starting this year, which caused a decrease in our overall net income for the three months ended September 30, 2009.

Comparison of Nine Months Ended September 30, 2009 and 2008.

Net Revenues. For the nine month period ended September 30, 2009, our net revenues decreased approximately 35.1% from $45,025,197 for the nine months ended September 30, 2008 to $29,199,325 for the same period ended September 30, 2009. The decrease in our net revenues was attributable to a downturn in the economy. The difficult economic conditions affected our revenues in the first half of 2009 significantly. During times of economic downturn, consumers tend to spend less on many of our products which are discretionary, such as cosmetics, organic products and health and nutritional supplements. Our revenues for the nine months ended September 30, 2009 are also lower due to the transition of the Company’s sales strategy. Due to the uncertainty of the direction of the National Medical Policy, as described in the 2009 overview of our business, the Company has reduced input into the wholesale sector of its business and is shifting its focus to increase the retail sector of its business. The overall policy for our drug retail business has not changed. The decrease of sales in our wholesale business is also reflected in the decrease of our net revenues. The Company will readjust its operations and sales strategy accordingly once the direction of the National Medical Policy becomes clear.

Cost of Goods Sold. Cost of goods sold, which consist of raw materials, direct labor, and manufacturing overhead, decreased from $36,602,807, or approximately 81.3% of net revenues for the nine month period ended September 30, 2008, to $21,090,595, or approximately 72.2% of net sales for the nine month period ended September 30, 2009. The approximate 9.1% decrease in percentage corresponded with the decrease of our sales revenues.

Gross Profit. Gross profit decreased approximately 3.7% from $8,422,390 for the nine month period ended September 30, 2008 to $8,108,729 for the nine month period ended September 30, 2009. This decrease in gross profit corresponded with the decrease of our sales. Management believes that consumers are more inclined to cut down on discretionary products during an economic recession such as cosmetics, health and organic products. Even though our gross profit decreased slightly for the nine months ended September 30, 2009 compared to the same period in 2008, our gross profit margin actually improved from 18.7% for the nine months ended September 30, 2008 compared with 27.8% for the same period in 2009. This increase in gross profit margin is due to the adjustment of our products structure with an increase of products with higher gross profit margins.

Selling Expenses. Selling expenses, which consist of advertising and promotion expenses, freight charges and salaries, decreased approximately 3.4% from $2,582,411 for the nine month period ended September 30, 2008 to $2,495,546 for the same period in 2009. This decrease in selling expenses was mainly due to certain business cost-cutting efforts such as reduction of utilities usage, cutback of office supplies and packaging of our supplies.

General and Administrative Expenses. General and administrative expenses were $1,482,786 for the nine month period ended September 30, 2008, as compared to $3,908,223 for the nine month period ended September 30, 2009, an increase of 163.6%. This increase was largely due to an increase in allowance for doubtful accounts for accounts receivable and increase in accrued litigation fees.

Other Income. Other income increased 25.6% from $1,157,150 for the nine month period ended September 30, 2008 compared to $1,906,864 in the same period in 2009. The increase in other income was mainly attributable to higher sponsorship and rebates received from our customers and suppliers due to the anniversary celebration of some of our retail stores as well as our wholesale business.

Net Income. Net income decreased 38.4% from a net income of $3,143,338 for the nine month period ended September 30, 2008 to a net income of $1,936,906 for the nine month period ended September 30, 2009. Such decrease in net income was mainly attributable to the decrease of sales due to a downturn in the economy and the increase in allowance for doubtful accounts for accounts receivable.

Liquidity

Cash Flow

Net cash flow provided by operating activities was $2,557,438 for the nine month period ended September 30, 2009 and $3,711,860 provided by operating activities for the nine month period ended September 30, 2008. For the nine months ended September 30, 2009, the decrease in net cash flow provided by operating activities was mainly due to an increase of inventory.

The Company incurred cash outflow of $1,078,011 from investing activities during the nine months ended September 30, 2009, as compared to cash outflow of $4,440,201 for the same period in 2008. For the nine months ended September 30, 2009, the net cash outflow for investing activities decreased substantially because we spent less on the remodeling and construction of our offices and retail drugstores and the development of our ERP software.

Net cash flow provided by financing activities decreased from $297,481 for the nine months ended September 30, 2008 to a net cash flow of $752,249 used in financing activities for the nine months ended September 30, 2009. The decrease was mainly due to the return of a loan in the approximate amount of $454,768.

Capital Resources

At September 30, 2009, we had cash and cash equivalents of $1,371,842, other current assets of $29,216,418 and current liabilities of $17,109,915. We presently finance our operations primarily from the cash flow from our operations, and we anticipate that this will continue to be our primary source of funds to finance our short-term cash needs. 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.

We currently have 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. The total capital expenditure budget for 2008 was $8.1 million, of which $1.39 million is still unpaid as of September 30, 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.

Contractual Obligations and Off Balance-Sheet Arrangements

Contractual Obligations

This table summarizes our known contractual obligations and commercial commitments at September 30, 2009.

	Payments Due by Period
	Total		Less than 1 year		1-3 Years		3-5 Years		5 Years +

Contractual Obligations :
Bank Indebtedness	$	2,053,800	$	733,500	$	1,320,300	$	-	$	-
Other Indebtedness	$	350,508	$	350,508	$	-	$	-	$	-
Capital Lease Obligations	$	-	$	-	$	-	$	-	$	-
Operating Leases	$	3,220,705	$	1,022,801	$	2,197,904	$	-	$	-
Purchase Obligations	$	4,133,454	$	4,133,454	$	-	$	-	$	-
Total Contractual Obligations:	$	9,758,467	$	6,240,263	$	3,518,204	$	-	$	-

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.

Item 3. Quantitative and Qualitative Discloses About Market Risk

Derivative Financial Instruments. 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 September 30, 2009, we had approximately $1,371,842 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 nine months ended September 30, 2009, we recorded a net foreign currency gain of $598 compared to a net foreign currency gain of $862,970 for the same period in 2008.

Item 4. 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 Securities and Exchange Commission'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 quarterly report, 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.

Changes in Internal Control Over Financial Reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

On or about October 17, 2008, in a case called 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.

Under Allaudin Jinnah v. China Yongxin Pharmaceuticals, Inc., filed in Los Angeles Superior Court, Central District, on or about June 27, 2008, the Company was defending 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. So far, the $50,000 has not been paid and the shares have not been issued.

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. So far, the judgment has not been paid.

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.

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-Q 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-Q.

RISKS RELATED TO OUR BUSINESS

PURCHASES OF MANY OF OUR PRODUCTS ARE DISCRETIONARY, MAY BE PARTICULARLY AFFECTED BY ADVERSE TRENDS IN THE GENERAL ECONOMY, AND CHALLENGING ECONOMIC CONDITIONS WILL MAKE IT MORE DIFFICULT 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 manufacture and 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.

THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO MARKET AND ADVERTISE OUR PRODUCTS EFFECTIVELY.

Our ability to establish effective marketing and advertising campaigns is key to our success. Our advertisements promote our merchandise and our proprietary brand of ginseng-based products, 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. 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 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, uncertainty surrounding new product launches and our increased offering of our proprietary ginseng-based products 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.

OUR BUSINESS AND THE SUCCESS OF OUR PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO MAINTAIN OUR BRAND IMAGE.

We believe that establishing and strengthening our proprietary brands is critical to achieving widespread acceptance of our products and to establishing key strategic relationships. The importance of brand recognition will increase as current and potential competitors enter the Chinese pharmaceutical market with competing products. Our ability to promote and position our brands depends largely on the success of our marketing efforts and our ability to provide high quality products and customer service. These activities are expensive and we may not generate a corresponding increase in sales to justify these costs. If we fail to establish and maintain our brand, or if our brand value is damaged or diluted, we may be unable to maintain or increase our sales or revenue.

IF WE ARE UNABLE TO MANAGE THE DISTRIBUTION OF OUR PRODUCTS AT OUR DISTRIBUTION CENTERS, 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" located in Changchun. The efficient operation and management of this facility is essential to our meeting customer demands ability to meet customer demand. Our business would suffer if the operation of this facility were disrupted. Our failure to manage this facility properly could result in higher distribution costs, excess or sufficient inventory, or an inability to fulfill customer orders, each of which could result in a material adverse effect on our results of operations.

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 the Jilin province. For the years ended December 31, 2008, 2007 and 2006, approximately 85%, 85% and 80% of revenues, respectively, was 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.

WE HAVE HISTORICALLY DEPENDED ON A LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THIS DEPENDENCE IS LIKELY TO CONTINUE.

We have historically depended on a limited number of customers for a significant portion of our revenues. We anticipate that a limited number of customers will continue to contribute to a significant portion of our revenues in the future. Maintaining the relationships with these significant customers is vital to the expansion and success of our business, as the loss of a major customer could expose us to risk of substantial losses. Our sales and revenue could decline and our results of operations could be materially adversely affected if one or more of these significant customers stops or reduces its purchasing of our products, or if we fail to expand our customer base for our products.

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. Shortages of products or interruptions in transportation systems, labor strikes, work stoppages, war, acts of terrorism or other interruptions to 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 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 other local manufacturers of herbal products 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.

COUNTERFEIT PRODUCTS 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 the authentic products due to their low production costs, and in some cases are very similar in appearance to the authentic products. Counterfeit pharmaceuticals may or may not have the same chemical content as their authentic counterparts. Although the PRC government has recently been increasingly active in policing counterfeit pharmaceuticals, there is not yet an effective counterfeit pharmaceutical regulation control and enforcement system 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 Medical Insurance Catalog. 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 are 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 face no limitation on 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 medical insurance catalog 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-proved 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 its 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.

OUR 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, retail and manufacturing operations. We have attained certificates, permits, and licenses required for the operation of a pharmaceutical distributor and retailer and the manufacture of herbal and nutritional products in the PRC. 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.

WE MAY SUFFER AS A RESULT OF PRODUCT LIABILITY OR DEFECTIVE PRODUCTS.

We may produce or sell products which inadvertently have an adverse effect on the health of individuals despite proper testing which may expose us to potential product liability claims. Such claims may arise despite our quality controls, proper testing and instruction for use of our products, either due to a defect during manufacturing or due to the individual's improper use of the product. In addition, we may be required to participate in a recall of defective products. Adverse side effects or manufacturing problems could also result in adverse publicity which could harm our business.

Existing PRC laws and regulations do not require us to maintain third party liability insurance to cover product liability claims. However, if a product liability claim is brought against us, it may, regardless of merit or eventual outcome, result in damage to our reputation, breach of contract with our customers, decreased demand for our products, costly litigation, product recalls, loss of revenue, and the inability to commercialize some products.

WE CANNOT GUARANTEE THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS AND IF INFRINGEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS OCCURS, INCLUDING COUNTERFEITING OF OUR PRODUCTS, OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED.

To protect the reputation of our products, we have sought to file or register our intellectual property, as appropriate, in the PRC where we have our primary business presence. As of December 31, 2008, we had registered 4 trademarks. Our products are currently sold under these trademarks in the PRC, and we plan to expand the sale and distribution of our products to other international markets. We plan to apply for trademark protection of these and other marks in the United States in connection with the expansion of our retail drugstores into California. There is no assurance that there will not be any infringement of our brand name or other registered trademarks or counterfeiting of our products in the future, in China, the U.S. or elsewhere. Should any such infringement and/or counterfeiting occur, our reputation and business may be adversely affected. We may also incur significant expenses and substantial amounts of time and effort to enforce our trademark rights in the future. Such diversion of our resources may adversely affect our existing business and future expansion plans.

IF OUR PRODUCTS ARE ALLEGED TO OR FOUND TO CONFLICT WITH PATENTS THAT HAVE BEEN OR MAY BE GRANTED TO COMPETITORS OR OTHERS, OUR REPUTATION AND BUSINESS MAY BE ADVERSELY AFFECTED.

The competitive nature of the nutritional and herbal products market make the patent position of the manufacturers of such products subject to numerous uncertainties related to complex legal and factual issues. 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 manufacturing and 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 manufacture or 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.

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 and expansion of our employee base for managerial, operational, financial, and other purposes. As of December 31, 2008, we had approximately 642 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 control. 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 performs 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 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 necessary to continue to develop and grow our business.

Additionally, we must recruit and retain technically competent employees to develop and manufacture our pharmaceutical products. 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 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 operational needs.

OUR QUARTERLY RESULTS MAY FLUCTUATE BECAUSE OF MANY FACTORS AND, AS A RESULT, INVESTORS SHOULD NOT RELY ON QUARTERLY 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 costs related to the raw materials used to manufacture our products;

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;

diversion of management's attention from our management; and

adverse impacts on 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.

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 wholly foreign-owned enterprise, commonly known as a WFOE. A WFOE 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 a negotiation with the authorities for the approval 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.

RECENT 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, or 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 shareholders 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.

These new 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 process 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 United States 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. We can make no assurance, however, 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.

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, OR 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 all of our manufacturing facilities are located and where the substantial portion of our sales occur, could have a negative effect on our operations. Our business is dependent upon its ability to continue to manufacture products. Such an outbreak could have an impact on our operations as a result of:

quarantines or closures of some of our manufacturing facilities, 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.

BECAUSE OUR BUSINESS IS LOCATED IN THE PRC, WE MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL CONTROLS, WHICH IT IS REQUIRED TO DO 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 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 operations, including the manufacturing and distribution of our products, are conducted in China. Moreover, all but one 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 courts of China 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.

RISKS RELATED TO OUR CAPITAL STRUCTURE

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 conduct business operations solely in the PRC through our wholly owned subsidiary, Yongxin, and our 90% owned subsidiary, Dingjian. We are a Delaware corporation, 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

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 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.

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 very 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.

Market prices for our common stock after the Share Exchange will be 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;

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 shareholders pursuant to the Share Exchange. 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.

The shareholders who received shares of our common stock in the Share Exchange 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.

FOLLOWING THE SHARE EXCHANGE, THE FORMER PRINCIPAL SHAREHOLDERS OF YONGXIN HAVE SIGNIFICANT INFLUENCE OVER US.

The former shareholders of Yongxin and their designees beneficially own or control a majority of our outstanding shares as of December 31, 2008. If these 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 shareholders may also have the power to prevent or cause a change in control. In addition, without the consent of the former Yongxin shareholders, we could be prevented from entering into transactions that could be beneficial to us. The interests of the former Yongxin shareholders may differ from the interests of our other stockholders.

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 has first applied to our annual report for the 2008 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.

WE MAY NOT BE ABLE TO ACHIEVE THE FULL EXTENT OF THE BENEFITS WE EXPECT FROM THE SHARE EXCHANGE.

On April 12, 2008, we entered into the Second Amended Exchange Agreement to the Share Exchange Agreement with Yongxin, effective November 16, 2007, and all of the shareholders of Yongxin, pursuant to which we agreed to acquire 80% of the issued and outstanding equity interest of Yongxin in exchange for shares of our common stock. On November 16, 2007, the Share Exchange closed, Yongxin became our 80%-owned subsidiary and we assumed the business operations Yongxin. We also have a new Board of Directors and management consisting of persons from Yongxin and changed our corporate name from "Digital Learning Management Corporation" to "Nutradyne Group, Inc."

We may not realize the benefits that we hoped to receive as a result of the Share Exchange, which include:

access to the capital markets of the United States;

the increased market liquidity expected to result from exchanging stock in a private company for securities of a public company;

the ability to use registered securities to make acquisitions of assets or businesses;

increased visibility in the financial community;

enhanced access to the capital markets;

improved transparency of operations; and

perceived credibility and enhanced corporate image of being a publicly traded company.

There can be no assurance that any of the anticipated benefits of the Share Exchange will be realized in respect to our new business operations. In addition, the attention and effort devoted to achieving the benefits of the Share Exchange and attending to the obligations of being a public company, such as reporting requirements and securities regulations, could significantly divert management's attention from other important issues, which could materially and adversely affect our operating results or stock price in the future.

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.

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 2. Unregistered Sale of Equity Securities and Use of Proceeds

Reference is made to the Current Report on Form 8-K filed with the Securities Exchange Commission on September 30, 2009.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following exhibits are included in this report or incorporated by reference into this report:

Exhibit
Number		Description
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		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2		Certification of 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CHINA YONGXIN PHARMACEUTICALS INC.

Dated: November 19, 2009		/s/ Yongxin Liu
		Yongxin Liu
		Chairman of the Board and Chief Executive Officer

		/s/ Yongkui Liu
		Yongkui Liu
		Chief Financial Officer

Attached files

China Yongxin Pharmaceuticals Inc. Reports

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