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China Jo-Jo Drugstores Reports Third Quarter Earnings Results

Our wholesale gross margin for the nine months ended December 31, 2012 was 3.6% as compared to 2.7% for the nine months ended December 31, 2011. Because we introduced very competitive prices to stimulate sales when we started our wholesale business, where we purchase from third-party manufacturers or suppliers and resell, such business has had a low profit margin. We ceased certain low profit margin wholesale business in the three months ended December 31, 2012, and are reconsidering our volume-driven sales strategy. In addition, in our efforts to become first-tier distributor for certain medicines, we advanced payments to certain vendors. As a result, our overall wholesale business profit margin increased.

The gross margin for our farming business is achieved through our ability to control quality through monitoring which, in turn, enables us to command good pricing. In addition, as we are also a drug distributor, we are able to internalize distribution costs more efficiently. As a result, we expect the profit margin for our farming business to remain high.

Selling and Marketing Expenses.  Our sales and marketing expenses increased by $551,327 or 8.4% period over period primarily due to promotional activities and advertising, as well as year-end employee bonuses. We spent approximately $290,000 on promotion activities and approximately $240,000 on related advertising costs. We also awarded approximately $570,000 year-end bonuses to our employees. Such expenses as a percentage of our revenue kept at 9.5% as the same period a year ago.

General and Administrative Expenses. Our general and administrative expenses increased by $2,886,037 or 63.1% period over period. Such expenses as a percentage of our revenue increased to 9.9% from 6.6% for the same period a year ago. The increase in absolute dollars as well as a percentage of revenue relates to professional fees incurred as a U.S. publicly traded company, additional reserves for accounts receivables and advances to suppliers, increased compensation, and administration costs for new businesses such as Jiuxin Medicine. Included in general and administrative expenses is $1,980,318 of bad debt expense related to our wholesale operations. As we have closed store locations and implemented stricter budgets, we anticipate that general and administrative expenses will not increase significantly in the future.

Impairment of Goodwill. During the nine months ended December 31, 2012, we recorded a goodwill impairment charge of $1,473,606 previously recognized in connection with the acquisitions of Jiuxin Medicine and Shanghai Zhongxing. The impairment to goodwill was made after we estimated the fair values of these businesses and determined that the implied fair value of goodwill was lower than the carrying value of goodwill. Accordingly, we fully impaired goodwill by writing down goodwill of $1,403,933 for Jiuxin Medicine and $69,673 for Shanghai Zhongxing.

Income (Loss) from Operations. As a result of lower profit margins, increase in selling and marketing expenses and in general and administration expenses, our income from operations decreased by $11,834,176 period over period, resulting in an operating loss of $3,039,693. Our operating margin for the nine months ended December 31, 2012 and 2011 was (4.0)% and 12.7%, respectively.

Income Taxes. Our income tax expense decreased by $2,778,349 period over period, as a result of lower taxable income and an income tax waiver granted to Qianhong Agriculture.

Net Income. As a result of the foregoing, our net income decreased by $10,930,507 period over period, to a net loss of $(4,480,083).

Balance Sheet Highlights

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